##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K





|                                            |  |                                                                                             
|------------------------------------------- |  | --------------------------------------------------------------------------------------------
|þ                                           |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|                                           
|For the Fiscal Year Ended December 31, 2005
|                                           
|o                                           |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|                                            |  | For the Transition Period
    From           to           .                                 

Commission file number: 0-26820


CRAY INC.


(Exact name of registrant as specified in its charter)


|                                                                                                      |  |                                                        
|----------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------
|Washington
    (State or Other Jurisdiction of
    Incorporation or Organization)                     |  | 93-0962605
    (I.R.S. Employer
    Identification No.)
|                                                                                                     
|411 First Avenue South, Suite 600
    Seattle, Washington
    (Address of Principal Executive Office) |  | 98104-2860
    (Zip Code)                              

Registrants telephone number, Including Area Code:
(206) 701-2000


Securities Registered Pursuant to Section 12(b) of the
Exchange Act: NONE


Securities Registered Pursuant to Section 12(g) of the
Exchange Act:


Common Stock, $.01 par value


o þ


o þ


þ o


S-K 10-K 10-K. þ


12b-2 o þ o


12b-2 o þ






DOCUMENTS INCORPORATED BY REFERENCE












---



##### 










CRAY INC.


FORM 10-K


For Fiscal Year Ended December 31, 2005


INDEX


|             |  |                                                                                                                         |  |      |    |  |  | 
|------------ |  | ----------------------------------------------------------------------------------------------------------------------- |  | ---- | -- |  |  | 
|             |  |                                                                                                                         |  | Page |   
|             |  |                                                                                                                         |  |      |   
|PART I      
|Item 1.      |  | Business                                                                                                                |  |      | 1  | 
|Item 1A.     |  | Risk Factors                                                                                                            |  |      | 13 | 
|Item 1B.     |  | Unresolved Staff Comments                                                                                               |  |      | 29 | 
|Item 2.      |  | Properties                                                                                                              |  |      | 29 | 
|Item 3.      |  | Legal Proceedings                                                                                                       |  |      | 29 | 
|Item 4.      |  | Submission of Matters to a Vote of Security
    Holders                                                                 |  |      | 30 | 
|Item E.O.    |  | Executive Officers of the Company                                                                                       |  |      | 31 | 
|            
|PART II     
|Item 5.      |  | Market for the Companys Common
    Equity, Related Shareholder Matters and
    Issuer Repurchases of Equity Securities |  |      | 33 | 
|Item 6.      |  | Selected Financial Data                                                                                                 |  |      | 34 | 
|Item 7.      |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                               |  |      | 35 | 
|Item 7A.     |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                          |  |      | 50 | 
|Item 8.      |  | Financial Statements and Supplementary
    Data                                                                         |  |      | 51 | 
|Item 9.      |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                                |  |      | 53 | 
|Item 9A.     |  | Controls and Procedures                                                                                                 |  |      | 53 | 
|Item 9B.     |  | Other Information                                                                                                       |  |      | 57 | 
|            
|PART III    
|Item 10.     |  | Directors and Executive Officers of the
    Company                                                                     |  |      | 58 | 
|Item 11.     |  | Executive Compensation                                                                                                  |  |      | 58 | 
|Item 12.     |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Shareholder
    Matters                  |  |      | 58 | 
|Item 13.     |  | Certain Relationships and Related
    Transactions                                                                      |  |      | 58 | 
|Item 14.     |  | Principal Accountant Fees and Services                                                                                  |  |      | 58 | 
|            
|PART IV     
|Item 15.     |  | Exhibits and Financial Statement
    Schedules                                                                          |  |      | 59 | 
|EXHIBIT 21.1
|EXHIBIT 23.1
|EXHIBIT 23.2
|EXHIBIT 31.1
|EXHIBIT 31.2
|EXHIBIT 32.1






Cray-1, Y-MP,




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Forward-Looking Statements


10-K









PART I







|        |         
|------- | --------
|Item 1. | Business

General




processor-to




1



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10-K


Our History




Y-MP,




| |                          
| | -------------------------
| | Cray Research Acquisition





| |                 
| | ----------------
| | Post-Acquisition



2



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easy-to




The High Performance Computing Industry


Cray-1


3



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| |                                          
| | -----------------------------------------
| | Increasing Demand for Supercomputer Power











| |                            
| | ---------------------------
| | The Advantages of Bandwidth



off-the off-the




4



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| |                                      
| | -------------------------------------
| | The High Performance Computing Market





| |   |                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Capability. Systems configured and purchased to solve the
    largest, most demanding problems, and generally priced at
    $1 million or more. The size of the capability segment has
    ranged in recent years from about $800 million to
    $1.2 billion, with 2005 estimated revenue of
    $870 million.
|
| |  | Enterprise. Systems purchased to support technical
    applications in throughput environments and sold for
    $1.0 million or more, with 2005 estimated revenue of
    $1.2 billion.                                                                                                                         
|
| |  | Divisional. Systems purchased to support technical
    applications in throughput environments and sold for $250,000 to
    $999,999, with 2005 estimated revenue of $1.9 billion.                                                                                                                             
|
| |  | Departmental. Systems purchased to support technical
    applications in throughput environments and sold for $50,000 to
    $250,000, with 2005 estimated revenue of $2.9 billion.                                                                                                                            
|
| |  | Workgroup. Systems purchased to support technical
    applications in throughput environments and sold for less than
    $50,000, with 2005 estimated revenue of $2.2 billion.                                                                                                                                 



5



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Our Target Market and Customers






| |                      
| | ---------------------
| | Government/Classified





| |                    
| | -------------------
| | Scientific Research





| |                      
| | ---------------------
| | Weather/Environmental





| |                                        
| | ---------------------------------------
| | Automotive, Aerospace and Manufacturing



6



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Product Offerings, Projects and Services




Current Products




| |                
| | ---------------
| | Cray XT3 System

tm




| |                
| | ---------------
| | Cray X1E System





| |                
| | ---------------
| | Cray XD1 System



7



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| |                                      
| | -------------------------------------
| | Resale of Products of Other Companies



Current Projects




| |                
| | ---------------
| | Cascade Project





| |          
| | ---------
| | Red Storm





| |                                          
| | -----------------------------------------
| | Other Research and Development Activities



8



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Services






Technology






| |             
| | ------------
| | Architecture









9



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| |         
| | --------
| | Hardware





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Integrated circuit design  we have experience in
    designing custom and standard cell integrated circuits. Our
    processors and other integrated circuits have special features
    that let them use the high available memory bandwidth
    efficiently.                                                                                                                                                    
|
| |  | High speed interconnect systems  we design high speed
    interconnect systems using a combination of custom I/ O
    circuits, high density connectors and carefully chosen
    transmission media together with complex memory and cache
    controls to operate with our network protocols and highly
    optimized logic design. We are investigating the use of optical
    interconnects for future systems.
|
| |  | Printed circuit board design  our printed circuit
    boards are some of the most sophisticated in the world, some
    with more than 40 layers packed with wires and inter-layer
    connections.                                                                                                                                                                                                                
|
| |  | System I/ O  we design high performance I/ O
    interfaces that deliver high-bandwidth transfer rates and large
    capacity storage capabilities using low cost devices in highly
    reliable configurations.                                                                                                                                                                                                  
|
| |  | Packaging and cooling  we use very dense packaging in
    order to produce systems with the necessary bandwidth at
    reasonable costs. This generates more heat per unit volume. We
    use specialized cooling techniques to address this issue,
    including immersion, conductive and spray cooling using various
    liquids and high volume air cooling.                                                  





| |         
| | --------
| | Software





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Operating Systems  For our Cray XT3 and Cray XD1
    systems, we exploit and enhance commercially available versions
    of the Linux operating system. Additionally, on our Cray XT3
    systems, we develop and support a micro-kernel for the compute
    resources. On the Cray X1E, multithreading and NEC SX systems,
    we currently provide and support separate UNIX-based operating
    systems. In the future, we anticipate that all of our systems
    will exploit commercial versions of Linux for all nodes.
|
| |  | Hardware Supervisory Systems (HSS)  For all of our
    systems, we provide a scalable hardware control infrastructure
    for managing hardware, including power control, monitoring of
    environmental data and hardware diagnostics. In the future, we
    anticipate providing a common HSS infrastructure for all of our
    systems.                                                                                                                                                                                  
|
| |  | Programming Environment  For our Cray XT3 and Cray
    XD1 systems, we exploit commercially available compilers and
    tools. We also provide Cray developed tools that make our
    systems easier to optimize. For our Cray X1E and multithreading
    systems, we develop our own compilers and tools.                                                                                                                                                                                                                   

10



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Sales and Marketing




Segment Information


Manufacturing and Procurement


-off-the build-to




11



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Competition










Intellectual Property








12



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Employees




Available Information


10-K, 10-Q, 8-K







|         |              
|-------- | -------------
|Item 1A. | Risk Factors.



Risk Factors Pertaining to Our Business and Operations


Our operating results may fluctuate significantly.






| |   |                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | successfully selling the Cray XT3, Cray X1E and Cray XD1
    systems, including upgrades and successor systems, new products,
    and the timing and funding of government purchases, especially
    in the United States;                                                                              
|
| |  | the level of product margin contribution in any given period;                                                                                                                                                                                                                                           
|
| |  | maintaining our other product development projects on schedule
    and within budgetary limitations;                                                                                                                                                                                                    
|
| |  | the level of revenue recognized in any given period,
    particularly for the high average sales prices and limited
    number of sales of our larger systems in any quarter, including
    the timing of product acceptances by customers and contractual
    provisions affecting revenue recognition;
|
| |  | revenue delays or losses due to customers postponing purchases
    to await future upgraded or new systems, delays in delivery of
    upgraded or new systems and longer than expected customer
    acceptance cycles;                                                                                  
|
| |  | our expense levels, including research and development net of
    government funding, which may be affected by the timing of such
    funding;                                                                                                                                                          

13



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| |   |                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the terms and conditions of sale or lease for our products;                                                                                                                                                                                                                     
|
| |  | whether we conclude that all or some part of our recorded
    goodwill has been impaired, which may be due to changes in our
    business plans and strategy and/or a decrease in our fair value
    (i.e., the market value of our outstanding shares of common
    stock); and
|
| |  | the impact of expensing our stock-based compensation under
    Statement of Financial Accounting Standards No. 123(R),
    Share-Based Payment,
    (SFAS No. 123(R)).                                                                                                        





| |   |                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------
| |  | the timely availability of acceptable components in sufficient
    quantities to meet customer delivery schedules;
|
| |  | timing of government funding for products and research and
    development contracts;                             
|
| |  | changes in levels of customer capital spending;                                                                   
|
| |  | the introduction or announcement of competitive products;                                                         
|
| |  | the receipt and timing of necessary export licenses; and                                                          
|
| |  | currency fluctuations, international conflicts or economic
    crises.                                            



Failure to sell Cray XT3 and upgrade systems in planned
quantities and margins would adversely affect 2006 revenue and
earnings.


Improved future performance is highly dependent on increased
product revenue and margins.




14



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Our inability to overcome the technical challenges of
completing the development of our supercomputer systems would
adversely affect our revenue and earnings in 2006 and
beyond.


If we lose government support for development of our
supercomputer systems, our research and development expenses and
capital requirements would increase and our ability to conduct
research and development would decrease.


We will be adversely affected if we are not awarded a
contract for phase 3 of the DARPA HPCS Program.


We face last-time buy decisions affecting all of our
products, which may adversely affect our revenue and
earnings.


15



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To be successful we need to establish the value of our
high-bandwidth sustained performance systems, increase
differentiation of our massively parallel commodity
processor-products and reduce doubts about our long-term
viability. off-the


Our reliance on third-party suppliers poses significant risks
to our business and prospects.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | if a supplier did not provide components that met our
    specifications in sufficient quantities, then production and
    sale of our systems would be delayed;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | if a reduction or an interruption of supply of our components
    occurred, either because of a significant problem with a
    supplier not providing parts on time or providing parts that
    later prove to be defective or a single-source supplier deciding
    to no longer provide those components to us, it could take us a
    considerable period of time to identify and qualify alternative
    suppliers to redesign our products as necessary and to begin
    manufacture of the redesigned components or we may not be able
    to so redesign such components; see also We face last-time
    buy decisions affecting all of our products, which may adversely
    affect our earnings and prospects, above;
|
| |  | if we were unable to locate a supplier for a key component, we
    would be unable to complete and deliver our products;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | one or more suppliers could make strategic changes in their
    product offerings, which might delay, suspend manufacture or
    increase the cost of our components or systems; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | some of our key suppliers are small companies with limited
    financial and other resources, and consequently may be more
    likely to experience financial and operational difficulties than
    larger, well-established companies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

16



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Lower than anticipated sales of new supercomputers and the
termination of maintenance contracts on older and/or
decommissioned systems would further reduce our service revenue
and margins from maintenance service contracts.


We face increased liquidity risk if we do not receive cash
flow from operating activities as planned.


17



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We may not meet the covenants imposed by our current credit
agreement.


We were not successful in completing the Red Storm project on
time and on budget, which adversely affected our 2004 and 2005
earnings and could adversely affect our future earnings and
financial condition.


If the U.S. government purchases fewer supercomputers,
our revenue would be reduced and our earnings would be adversely
affected.


If we are unable to compete successfully in the high
performance computer market, our revenue will decline.






18



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If we cannot retain, attract and motivate key personnel, we
may be unable to effectively implement our business plan.




New European environmental rules may adversely affect our
operations.


19



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Class action and derivative lawsuits are pending and
additional lawsuits may be filed.


We are subject to the risk of additional litigation and
regulatory proceedings or actions in connection with the
restatement of prior period financial statements.


The adoption of SFAS 123(R) will lower our earnings and
may adversely affect the market price of our common stock.


20



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U.S. export controls could hinder our ability to make
sales to foreign customers and our future prospects.


We incorporate software licensed from third parties into the
operating systems for our products and any significant
interruption in the availability of these third-party software
products or defects in these products could reduce the demand
for our products.




We have recently formed a new senior management team that
must work together effectively for us to be successful.


While we believe that we have adequate internal control over
financial reporting as of December 31, 2005, as of the end
of each subsequent fiscal year we are required to evaluate our
internal control over financial reporting under Section 404
of the Sarbanes-Oxley Act of 2002 and any adverse results from
such future evaluations could result in a loss of investor
confidence in our financial reports and have an adverse


21



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effect on our stock price. 10-K 10-K/




We may infringe or be subject to claims that we infringe the
intellectual property rights of others.


We may not be able to protect our proprietary information and
rights adequately.


Risk Factors Pertaining to our Notes and Our Common Stock


Our indebtedness may adversely affect our financial
strength. Subsequent Events


22



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| |   |                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | make it difficult or impossible for us to make payments on the
    Notes;                                                                                                                                            
|
| |  | increase our vulnerability to general economic and industry
    conditions, including recessions;                                                                                                                    
|
| |  | require us to use cash flow from operations to service our
    indebtedness, thereby reducing our ability to fund working
    capital, capital expenditures, research and development efforts
    and other expenses;
|
| |  | limit our flexibility in planning for, or reacting to, changes
    in our business and the industry in which we operate;                                                                                             
|
| |  | place us at a competitive disadvantage compared to competitors
    that have less indebtedness; and                                                                                                                  
|
| |  | limit our ability to borrow additional funds that may be needed
    to operate and expand our business.                                                                                                              

Our existing and any future credit facilities may adversely
affect our ability to make payments under the Notes.


We will require a significant amount of cash to service our
indebtedness and to fund planned capital expenditures, research
and development efforts and other corporate expenses.






| |   |                                                                           
| | - | --------------------------------------------------------------------------
| |  | reducing our operating expenses;                                          
|
| |  | reducing or delaying capital expenditures or research and
    development;
|
| |  | selling assets;                                                           
|
| |  | raising additional equity capital and/or debt; and                        
|
| |  | seeking legal protection from our creditors.                              



There are no covenants in the indenture for the Notes
restricting our ability or the ability of our subsidiaries to
incur future indebtedness or restricting the terms of any such
indebtedness.


23



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The Notes are subordinated in right of payment to our
existing and future senior indebtedness.


The Notes are effectively subordinated to our secured
indebtedness and are structurally subordinated to all
indebtedness and other liabilities of our current and future
subsidiaries.






In certain circumstances, holders of senior debt can require
us to suspend or defer cash payments due in respect of the
Notes.


24



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Unless a condition to conversion is met prior to the maturity
of the Notes, the Notes will not be convertible at any time.


Upon conversion of the Notes, we may pay cash or a
combination of cash and shares of our common stock in lieu of
issuing shares of our common stock. Therefore, Note holders may
receive no shares of our common stock or fewer shares than the
number into which their Notes are convertible.


If a principal conversion settlement election is made, we may
not have sufficient funds to pay the cash settlement upon
conversion.


The conversion rate of the Notes may not be adjusted for all
dilutive events, including third-party tender or exchange
offers, that may adversely affect the trading price of the Notes
or our common stock issuable upon conversion of the Notes.


If we pay cash dividends on our common stock, Note holders
may be deemed to have received a taxable dividend without the
receipt of cash.


If we elect to settle upon conversion in cash or a
combination of cash and shares of common stock, there will be a
delay in settlement.


Some significant corporate transactions may not constitute a
fundamental change, in which case we would not be obligated to
offer to repurchase the Notes.


25



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Our Notes may not be rated or may receive a lower rating than
investors anticipate, which could cause a decline in the trading
volume and market price of the Notes and our common stock.


We may not have the funds necessary to purchase the Notes
upon a fundamental change or other purchase date and our ability
to purchase the Notes in such events may be limited.


The make whole premium payable on Notes that are converted in
connection with certain fundamental changes may not adequately
compensate Note holders for the lost option time value of the
Notes as a result of that fundamental change.


There are restrictions on the Note holders ability to
transfer or resell the Notes without registration under
applicable securities laws, and if we fail to fulfill our
obligations to keep effective the registration


26



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statement covering the resale of the Notes, we will be
required to pay additional interest on the Notes affected by
that failure and to issue additional shares of common stock on
Notes converted during such failure and satisfied by us in
common stock.


There is no active market for the Notes and if an active
trading market does not develop for these Notes, the holders of
the Notes may be unable to resell them.




Our stock price is volatile.


A substantial number of our shares are eligible for future
sale and may depress the market price of our common stock and
may hinder our ability to obtain additional financing.




| |   |                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 90,973,506 shares of common stock, and 78,840 shares
    of common stock issuable upon exchange of certain exchangeable
    securities issued in connection with the acquisition of
    OctigaBay Systems Corporation in April 2004 (all 78,840
    exchangeable shares were exchanged for an equivalent number of
    shares of our common stock in January 2006);
|
| |  | warrants to purchase 5,634,049 shares of common stock;                                                                                                                                                                                                                                                                                                             

27



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| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | stock options to purchase an aggregate of 18,000,580 shares
    of common stock, of which 17,982,045 options were then
    exercisable; and
|
| |  | Notes convertible into up to 22,792,016 shares of common
    stock.                                                                        



Provisions of our Articles of Incorporation and Bylaws could
make a proposed acquisition that is not approved by our Board of
Directors more difficult.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | removal of a director only in limited circumstances and only
    upon the affirmative vote of not less than two-thirds of the
    shares entitled to vote to elect directors;                                                                                                                                                                                                                                                           
|
| |  | the ability of our board of directors to issue preferred stock,
    without shareholder approval, with rights senior to those of the
    common stock;                                                                                                                                                                                                                                                                                  
|
| |  | no cumulative voting of shares;                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | calling a special meeting of the shareholders only upon demand
    by the holders of not less than 30% of the shares entitled to
    vote at such a meeting;                                                                                                                                                                                                                                                                            
|
| |  | amendments to our Restated Articles of Incorporation require the
    affirmative vote of not less than two-thirds of the outstanding
    shares entitled to vote on the amendment, unless the amendment
    was approved by a majority of our continuing directors, who are
    defined as directors who have either served as a director since
    August 31, 1995, or were nominated to be a director by the
    continuing directors;
|
| |  | special voting requirements for mergers and other business
    combinations, unless the proposed transaction was approved by a
    majority of continuing directors;                                                                                                                                                                                                                                                                    
|
| |  | special procedures to bring matters before our shareholders at
    our annual shareholders meeting; and                                                                                                                                                                                                                                                                                                                                
|
| |  | special procedures to nominate members for election to our board
    of directors.                                                                                                                                                                                                                                                                                                                                                      



28



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We do not anticipate declaring any cash dividends on our
common stock.





Item 1B.     Unresolved
Staff Comments









|        |           
|------- | ----------
|Item 2. | Properties



|                     |  |                                                                               |  |                |         | 
|-------------------- |  | ----------------------------------------------------------------------------- |  | -------------- | ------- | 
|                     |  |                                                                               |  | Approximate    |        
|Location of Property |  | Uses of Facility                                                              |  | Square Footage |        
|                     |  |                                                                               |  |                |        
|Chippewa Falls, WI   |  | Manufacturing, hardware development, central service and
    warehouse        |  |                | 228,000 | 
|Seattle, WA          |  | Executive offices, hardware and software development, sales and
    marketing |  |                | 59,600  | 
|Mendota Heights, MN  |  | Software development, sales and marketing operations                          |  |                | 55,000  | 

Convertible Notes Payable and Lines of Credit









|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings





29



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|        |                                                    
|------- | ---------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security Holders



30



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|          |                                  
|--------- | ---------------------------------
|Item E.O. | Executive Officers of the Company



|                     |  |     |    |  |          |                                                               
|-------------------- |  | --- | -- |  | -------- | --------------------------------------------------------------
|Name                 |  | Age |    |  | Position
|                     |  |     |    |  |         
|Peter J. Ungaro      |  |     | 37 |  |          | Chief Executive Officer and President                         
|Brian C. Henry       |  |     | 49 |  |          | Executive Vice President and Chief Financial Officer          
|Christopher Jehn     |  |     | 63 |  |          | Vice President                                                
|Kenneth W. Johnson   |  |     | 64 |  |          | Senior Vice President, General Counsel and Corporate Secretary
|Steven L. Scott      |  |     | 40 |  |          | Senior Vice President and Chief Technology Officer            
|Jan C. Silverman     |  |     | 55 |  |          | Senior Vice President                                         
|Margaret A. Williams |  |     | 48 |  |          | Senior Vice President                                         

Peter J. Ungaro


Brian C. Henry e-markets


Christopher Jehn


Kenneth W. Johnson


Steven L. Scott


31



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Jan C. Silverman


Margaret A. Peg Williams


32



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PART II







|        |                                                                                                                        
|------- | -----------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for the Companys Common Equity, Related
    Shareholder Matters and Issuer Repurchases of Equity
    Securities

Price Range of Common Stock and Dividend Policy






|               |  |      |       |  |      |   |      |      |  |   |      |  |  |   |      | 
|-------------- |  | ---- | ----- |  | ---- | - | ---- | ---- |  | - | ---- |  |  | - | ---- | 
|               |  | 2004 |       |  | 2005 |  
|               |  |      |       |  |      |  
|               |  | High |       |  | Low  |   |      | High |  |   | Low  | 
|               |  |      |       |  |      |   |      |      |  |   |      | 
|First Quarter  |  | $    | 11.75 |  |      | $ | 6.06 |      |  | $ | 4.91 |  |  | $ | 2.08 | 
|Second Quarter |  |      | 8.03  |  |      |   | 5.84 |      |  |   | 2.75 |  |  |   | 1.18 | 
|Third Quarter  |  |      | 6.68  |  |      |   | 2.85 |      |  |   | 1.41 |  |  |   | 0.85 | 
|Fourth Quarter |  |      | 4.83  |  |      |   | 3.02 |      |  |   | 1.73 |  |  |   | 0.89 | 



Unregistered Sales of Securities








Issuer Repurchases




33



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##### Table of Contents








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data



|                                                                       |                                            |                                            |               |         |         |         |         |        |        |         |               |         |         |         |         |          |         |         |         |         |         |         | 
|---------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------------ | ------------- | ------- | ------- | ------- | ------- | ------ | ------ | ------- | ------------- | ------- | ------- | ------- | ------- | -------- | ------- | ------- | ------- | ------- | ------- | ------- | 
|                                                                       |                                            | Years Ended December 31,                   |              
|                                                                       |                                            |                                            |              
|                                                                       |                                            |                                            |               | 2004    |         |         |        
|                                                                       |                                            | 2001                                       |               |         | 2002    |         |         | 2003   |        |         | (Restated)(2) |         |         | 2005    |        
|                                                                       |                                            |                                            |               |         |         |         |         |        |        |         |               |         |         |         |        
|                                                                       |                                            | (In thousands, except for per share data)  |              
|Operating Data:                                                        |                                            |                                            |               |         |         |         |         |        |        |         |               |         |         |         |         |          |         |         |         |        
|                                                                       | Revenue:                                   |                                            |               |         |         |         |         |        |        |         |               |         |         |         |         |          |         |         |         |         |        
|                                                                       |                                            | Product                                    |               | $       | 51,105  |         |         | $      | 76,519 |         |               | $       | 175,004 |         |         | $        | 95,901  |         |         | $       | 152,098 |        
|                                                                       |                                            | Service                                    |               |         | 82,502  |         |         |        | 78,550 |         |               |         | 61,958  |         |         |          | 49,948  |         |         |         | 48,953  |        
|                                                                       |                                            |                                            |               |         |         |         |         |        |        |         |               |         |         |         |        
|                                                                       |                                            |                                            | Total revenue |         |         | 133,607 |         |        |        | 155,069 |               |         |         | 236,962 |         |          |         | 145,849 |         |         |         | 201,051 | 
|                                                                       | Operating Expenses:                        |                                            |               |         |         |         |         |        |        |         |               |         |         |         |         |          |         |         |         |         |        
|                                                                       |                                            | Cost of product revenue                    |               |         | 30,657  |         |         |        | 41,187 |         |               |         | 97,354  |         |         |          | 104,196 |         |         |         | 139,518 |        
|                                                                       |                                            | Cost of service revenue                    |               |         | 41,181  |         |         |        | 42,581 |         |               |         | 40,780  |         |         |          | 30,338  |         |         |         | 29,032  |        
|                                                                       |                                            | Research and development                   |               |         | 53,926  |         |         |        | 32,861 |         |               |         | 37,762  |         |         |          | 53,266  |         |         |         | 41,711  |        
|                                                                       |                                            | Marketing and sales                        |               |         | 19,961  |         |         |        | 20,332 |         |               |         | 27,038  |         |         |          | 34,948  |         |         |         | 25,808  |        
|                                                                       |                                            | General and administrative                 |               |         | 9,226   |         |         |        | 8,923  |         |               |         | 10,908  |         |         |          | 19,451  |         |         |         | 16,145  |        
|                                                                       |                                            | In-process research and development charge |               |         |        |         |         |        |       |         |               |         |        |         |         |          | 43,400  |         |         |         |        |        
|                                                                       |                                            | Restructuring, severance and impairment    |               |         | 3,802   |         |         |        | 1,878  |         |               |         | 4,019   |         |         |          | 8,182   |         |         |         | 9,750   |        
|                                                                       |                                            | Amortization of goodwill                   |               |         | 6,981   |         |         |        |       |         |               |         |        |         |         |          |        |         |         |         |        |        
|                                                                       |                                            |                                            |               |         |         |         |         |        |        |         |               |         |         |         |        
|                                                                       | Income (loss) from operations              |                                            |               | (32,127 | )       |         |         | 7,307  |        |         |               | 19,101  |         |         |         | (147,932 | )       |         |         | (60,913 | )      
|                                                                       | Other income (expense), net                |                                            |               | (336    | )       |         |         | 3,104  |        |         |               | 1,496   |         |         |         | (699     | )       |         |         | (1,421  | )      
|                                                                       | Interest income (expense), net             |                                            |               | (1,771  | )       |         |         | (2,832 | )      |         |               | 444     |         |         |         | 365      |         |         |         | (3,462  | )      
|                                                                       |                                            |                                            |               |         |         |         |         |        |        |         |               |         |         |         |        
|                                                                       | Income (loss) before income taxes          |                                            |               | (34,234 | )       |         |         | 7,579  |        |         |               | 21,041  |         |         |         | (148,266 | )       |         |         | (65,796 | )      
|                                                                       | Provision (benefit) for income taxes       |                                            |               | 994     |         |         |         | 2,176  |        |         |               | (42,207 | )       |         |         | 59,092   |         |         |         | (1,488  | )      
|                                                                       |                                            |                                            |               |         |         |         |         |        |        |         |               |         |         |         |        
|                                                                       | Net income (loss)                          |                                            | $             | (35,228 | )       |         | $       | 5,403  |        |         | $             | 63,248  |         |         | $       | (207,358 | )       |         | $       | (64,308 | )      
|                                                                       |                                            |                                            |               |         |         |         |         |        |        |         |               |         |         |         |        
|                                                                       | Basic net income (loss) per common share   |                                            | $             | (0.87   | )       |         | $       | 0.11   |        |         | $             | 0.94    |         |         | $       | (2.49    | )       |         | $       | (0.73   | )      
|                                                                       |                                            |                                            |               |         |         |         |         |        |        |         |               |         |         |         |        
|                                                                       | Diluted net income (loss) per common share |                                            | $             | (0.87   | )       |         | $       | 0.10   |        |         | $             | 0.81    |         |         | $       | (2.49    | )       |         | $       | (0.73   | )      
|                                                                       |                                            |                                            |               |         |         |         |         |        |        |         |               |         |         |         |        
|Cash Flow Data:                                                        |                                            |                                            |               |         |         |         |         |        |        |         |               |         |         |         |         |          |         |         |         |        
|                                                                       | Cash provided by (used in):                |                                            |               |         |         |         |         |        |        |         |               |         |         |         |         |          |         |         |         |         |        
|                                                                       |                                            | Operating activities                       |               | $       | (26,641 | )       |         | $      | (8,689 | )       |               | $       | (8,713  | )       |         | $        | (52,656 | )       |         | $       | (36,705 | )      
|                                                                       |                                            | Investing activities                       |               |         | (9,472  | )       |         |        | (5,992 | )       |               |         | (41,169 | )       |         |          | (29,908 | )       |         |         | 41,731  |        
|                                                                       |                                            | Financing activities                       |               |         | 44,045  |         |         |        | 25,335 |         |               |         | 65,079  |         |         |          | 84,153  |         |         |         | (137    | )      
|                                                                       | Depreciation and amortization              |                                            |               | 14,157  |         |         |         | 15,364 |        |         |               | 15,860  |         |         |         | 17,179   |         |         |         | 19,578  |        
|                                                                       | Purchases of property and equipment        |                                            |               | 9,472   |         |         |         | 6,038  |        |         |               | 6,599   |         |         |         | 12,518   |         |         |         | 3,982   |        
|Other Data:                                                            |                                            |                                            |               |         |         |         |         |        |        |         |               |         |         |         |         |          |         |         |         |        
|                                                                       | Ratio of earnings to fixed charges (1)     |                                            |               |        |         |         |         | 3.4    |        |         |               | 52.6    |         |         |         |         |         |         |         |        |        
|Balance Sheet Data:                                                    |                                            |                                            |               |         |         |         |         |        |        |         |               |         |         |         |         |          |         |         |         |        
|Cash, cash equivalents, restricted cash and short-term
    investments |                                            | $                                          | 12,377        |         |         | $       | 23,916  |        |        | $       | 74,343        |         |         | $       | 87,422  |          |         | $       | 46,026  |        
|Total assets                                                           |                                            |                                            | 127,087       |         |         |         | 145,245 |        |        |         | 291,589       |         |         |         | 310,504 |          |         |         | 273,005 |        
|Obligations under capital leases                                       |                                            |                                            | 768           |         |         |         | 393     |        |        |         | 152           |         |         |         | 823     |          |         |         | 154     |        

34



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|                     |  |                                           |        |      |      |  |        |      |  |  |               |  |  |      |         |  |  |  |        | 
|-------------------- |  | ----------------------------------------- | ------ | ---- | ---- |  | ------ | ---- |  |  | ------------- |  |  | ---- | ------- |  |  |  | ------ | 
|                     |  | Years Ended December 31,                  |       
|                     |  |                                           |       
|                     |  |                                           |        | 2004 |      |  |       
|                     |  | 2001                                      |        |      | 2002 |  |        | 2003 |  |  | (Restated)(2) |  |  | 2005 |        
|                     |  |                                           |        |      |      |  |        |      |  |  |               |  |  |      |        
|                     |  | (In thousands, except for per share data) |       
|Total debt           |  |                                           | 14,944 |      |      |  | 4,144  |      |  |  |              |  |  |      | 80,000  |  |  |  | 80,000 | 
|Shareholders equity |  |                                           | 14,804 |      |      |  | 58,615 |      |  |  | 222,633       |  |  |      | 121,965 |  |  |  | 65,947 | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The ratio of earnings to fixed charges is computed by dividing
    earnings by fixed charges. Earnings consist of net income (loss)
    plus provision (benefit) for income taxes and fixed charges.
    Fixed charges consist of interest expense, including
    amortization of fees paid for the line of credit and Convertible
    Senior Subordinated Note offering, plus the portion of operating
    rental expense management believes represents the interest
    component of rent expense. The pretax net loss for the years
    ended December 31, 2001, 2004 and 2005 was not sufficient
    to cover fixed charges by approximately $34.2 million,
    $148.3 million and $65.8 million, respectively. As a
    result, the ratio of earnings to fixed charges has not been
    computed for these periods.
|   
|(2) | See Note 2  Restatement of Previously Issued
    Financial Statements of the Notes to the Consolidated
    Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        




Item 7.     Managements
Discussion and Analysis of Financial Condition and Results of
Operations


Forward-Looking Statements




Restatement of Consolidated Financial Statements






Restatement of Previously Issued
Financial Statements


Overview and Executive Summary




35



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processor-to




| |                
| | ---------------
| | Strategic Focus

quarter-to


co-processing




| |                        
| | -----------------------
| | Summary of 2005 Results









| |                               
| | ------------------------------
| | Market Overview and Challenges



36



---



##### Table of Contents







co-development


co-funding




Critical Accounting Policies and Estimates


10-K Summary of Significant Accounting
Policies


37



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| |                    
| | -------------------
| | Revenue Recognition



Products:




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Cray X1/X1E and Cray XT3 Product Lines: We
    recognize revenue from product sales upon customer acceptance of
    the system, when we have no significant unfulfilled obligations
    stipulated by the contract that affect the customers final
    acceptance, the price is determinable and collection is
    reasonably assured. A customer-signed notice of acceptance or
    similar document is required from the customer prior to revenue
    recognition.                                                  
|
| |  | Cray XD1 Product Line: We recognize revenue from
    product sales of Cray XD1 systems upon shipment to, or
    delivery to, the customer, depending upon contract terms, when
    we have no significant unfulfilled obligations stipulated by the
    contract, the price is determinable and collection is reasonably
    assured. If there is a contractual requirement for customer
    acceptance, revenue is recognized upon receipt of the notice of
    acceptance and when we have no unfulfilled obligations.

81-1, Accounting for
Performance of
Construction-Type and
Certain Production-Type
Contracts


Services:


Multiple-Element Arrangements. 00-21, Revenue Arrangements with Multiple Deliverables




| |   |                                      
| | - | -------------------------------------
| |  | The element could be sold separately;

38



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| |   |                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------
| |  | The fair value of the undelivered element is
    established; and                                                                             
|
| |  | In cases with any general right of return, our performance with
    respect to any undelivered element is within our control and
    probable.





| |                    
| | -------------------
| | Inventory Valuation







| |                                     
| | ------------------------------------
| | Goodwill and Other Intangible Assets







39



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| |                            
| | ---------------------------
| | Accounting for Income Taxes

Accounting for Income Taxes






| |                              
| | -----------------------------
| | Accounting for Loss Contracts





| |                         
| | ------------------------
| | Stock-Based Compensation

Accounting
for Stock Issued to Employees (APB No. 25)


40



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out-of Share-Based Payment






| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements

APB No. 25


Stock Based
Compensation




41



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Summary of Significant Accounting
Policies, Stock-Based Compensation


Accounting for Conditional Asset Retirement
Obligations Accounting for Asset Retirement Obligations


Accounting Changes and Error Corrections Accounting Changes, Reporting Accounting Changes in Interim Financial Statements


143-1, Accounting for Electronic Equipment Waste Obligations 143-1 Accounting for
Asset Retirement Obligations Accounting for Conditional Asset Retirement Obligations


124-1, The Meaning
of Other-Than-Temporary Impairment and Its Application to
Certain Investments 115-1). 115-1 115-1 115-1


42



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Results of Operations


Revenue




|                |                             |              |         |         |            |   |        |         |  |   |         |         | 
|--------------- | --------------------------- | ------------ | ------- | ------- | ---------- | - | ------ | ------- |  | - | ------- | ------- | 
|                |                             | December 31, |        
|                |                             |              |        
|                |                             |              |         | 2004    |            |   |       
|                |                             | 2003         |         |         | (Restated) |   |        | 2005    | 
|                |                             |              |         |         |            |   |        |         | 
|Product Revenue |                             | $            | 175,004 |         |            | $ | 95,901 |         |  | $ | 152,098 |        
|                | Percentage of total revenue |              |         | 74%     |            |   |        | 66%     |  |   |         | 76%     | 
|Service Revenue |                             | $            | 61,958  |         |            | $ | 49,948 |         |  | $ | 48,953  |        
|                | Percentage of total revenue |              |         | 26%     |            |   |        | 34%     |  |   |         | 24%     | 
|                |                             |              |         |         |            |   |        |         | 
|                | Total Revenue               |              | $       | 236,962 |            |   | $      | 145,849 |  |   | $       | 201,051 | 
|                |                             |              |         |         |            |   |        |         | 



| |                
| | ---------------
| | Product Revenue

ramp-up






| |                
| | ---------------
| | Service Revenue





43



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Operating Expenses


Cost of Revenue




|                        |                               |              |        |      |            |   |         |      |  |   |         |     | 
|----------------------- | ----------------------------- | ------------ | ------ | ---- | ---------- | - | ------- | ---- |  | - | ------- | --- | 
|                        |                               | December 31, |       
|                        |                               |              |       
|                        |                               |              |        | 2004 |            |   |        
|                        |                               | 2003         |        |      | (Restated) |   |         | 2005 | 
|                        |                               |              |        |      |            |   |         |      | 
|Cost of Product Revenue |                               | $            | 97,354 |      |            | $ | 104,196 |      |  | $ | 139,518 |    
|                        | Percentage of product revenue |              |        | 56%  |            |   |         | 109% |  |   |         | 92% | 
|Cost of Service Revenue |                               | $            | 40,780 |      |            | $ | 30,338  |      |  | $ | 29,032  |    
|                        | Percentage of service revenue |              |        | 66%  |            |   |         | 61%  |  |   |         | 59% | 

Cost of Product Revenue.




Cost of Service Revenue.


44



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Research and
Development




|                                                                            |                             |              |         |      |            |   |         |      |  |   |         |     | 
|--------------------------------------------------------------------------- | --------------------------- | ------------ | ------- | ---- | ---------- | - | ------- | ---- |  | - | ------- | --- | 
|                                                                            |                             | December 31, |        
|                                                                            |                             |              |        
|                                                                            |                             |              |         | 2004 |            |   |        
|                                                                            |                             | 2003         |         |      | (Restated) |   |         | 2005 | 
|                                                                            |                             |              |         |      |            |   |         |      | 
|Gross research and development expenses                                     |                             | $            | 68,801  |      |            | $ | 98,843  |      |  | $ | 96,257  |    
|Less: Amounts included in cost of product revenue                           |                             |              | (18,714 | )    |            |   | (22,970 | )    |  |   | (19,724 | )  
|Less: Reimbursed research and development (excludes amounts in
    revenue) |                             |              | (12,325 | )    |            |   | (22,607 | )    |  |   | (34,822 | )  
|                                                                            |                             |              |         |      |            |   |         |      | 
|Net research and development expenses                                       |                             | $            | 37,762  |      |            | $ | 53,266  |      |  | $ | 41,711  |    
|                                                                            |                             |              |         |      |            |   |         |      | 
|                                                                            | Percentage of total revenue |              |         | 16%  |            |   |         | 37%  |  |   |         | 21% | 



co-funding






45



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##### Table of Contents



Other Operating
Expenses




|                                        |                             |              |        |     |      |   |        |      |  |   |        |     | 
|--------------------------------------- | --------------------------- | ------------ | ------ | --- | ---- | - | ------ | ---- |  | - | ------ | --- | 
|                                        |                             | December 31, |       
|                                        |                             |              |       
|                                        |                             | 2003         |        |     | 2004 |   |        | 2005 | 
|                                        |                             |              |        |     |      |   |        |      | 
|Marketing and sales                     |                             | $            | 27,038 |     |      | $ | 34,948 |      |  | $ | 25,808 |    
|                                        | Percentage of total revenue |              |        | 11% |      |   |        | 24%  |  |   |        | 13% | 
|General and administrative              |                             | $            | 10,908 |     |      | $ | 19,451 |      |  | $ | 16,145 |    
|                                        | Percentage of total revenue |              |        | 5%  |      |   |        | 13%  |  |   |        | 8%  | 
|Restructuring, severance and impairment |                             | $            | 4,019  |     |      | $ | 8,182  |      |  | $ | 9,750  |    
|                                        | Percentage of total revenue |              |        | 2%  |      |   |        | 6%   |  |   |        | 5%  | 

Marketing and sales.


General and administrative. reduction-in


Restructuring, severance and impairment.






46



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In-Process
Research and Development Charge




Other Income (Expense),
net




Interest Income (Expense),
net






Taxes


Accounting for Income Taxes




Net Income (Loss)






47



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##### Table of Contents









Liquidity and Capital Resources












48



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|                                   |  |                           |        |  |      |   |        |      |  |   |       |  |  |      |       |  |  |   |     | 
|---------------------------------- |  | ------------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ----- |  |  | ---- | ----- |  |  | - | --- | 
|                                   |  | Amounts Committed by Year |       
|                                   |  |                           |       
|Contractual Obligations            |  | Total                     |        |  | 2006 |   |        | 2007 |  |   | 2008  |  |  | 2009 |      
|                                   |  |                           |        |  |      |   |        |      |  |   |       |  |  |      |      
|Development agreements             |  | $                         | 15,170 |  |      | $ | 13,100 |      |  | $ | 2,027 |  |  | $    | 43    |  |  | $ |    | 
|Capital lease obligations          |  |                           | 154    |  |      |   | 123    |      |  |   | 31    |  |  |      |      |  |  |   |    | 
|Operating leases                   |  |                           | 9,807  |  |      |   | 3,473  |      |  |   | 2,950 |  |  |      | 2,534 |  |  |   | 850 | 
|                                   |  |                           |        |  |      |   |        |      |  |   |       |  |  |      |      
|Total contractual cash obligations |  | $                         | 25,131 |  |      | $ | 16,696 |      |  | $ | 5,008 |  |  | $    | 2,577 |  |  | $ | 850 | 
|                                   |  |                           |        |  |      |   |        |      |  |   |       |  |  |      |      

two-year




quarter-to






49



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##### Table of Contents










|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk



Interest Rate Risk:


Foreign Currency Risk:


50



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##### Table of Contents








|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS*


|                                                                                                                                                            |  |     
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Consolidated Balance Sheets at
    December 31, 2004 (Restated) and December 31, 2005                                                                       |  | F-1 
|Consolidated Statements of Operations for
    the years ended December 31, 2003, 2004 (Restated) and
    2005                                               |  | F-2 
|Consolidated Statements of
    Shareholders Equity and Comprehensive Income (Loss) for
    the years ended December 31, 2003, 2004 (Restated) and
    2005 |  | F-3 
|Consolidated Statements of Cash Flows for
    the three years ended December 31, 2003, 2004 (Restated)
    and 2005                                         |  | F-4 
|Notes to Consolidated Financial
    Statements                                                                                                              |  | F-5 
|Reports of Independent Registered Public
    Accounting Firms                                                                                               |  | F-32






|  |                                                        
|- | -------------------------------------------------------
|* | The Financial Statements are located following page 65.

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QUARTERLY FINANCIAL DATA


(Unaudited, in thousands, except per share data)


Restatement of Previously Issued Financial Statements Quarter-to


|                                             |  |                               |        |   |                 |   |         |      |  |   |          |   |  |      |         |   |      |   |        |      |  |   |         |   |  |   |          |   |  |   |         |  
|-------------------------------------------- |  | ----------------------------- | ------ | - | --------------- | - | ------- | ---- |  | - | -------- | - |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ------- | - |  | - | -------- | - |  | - | ------- | -
|                                             |  | 2004 (As Previously Reported) |        |   | 2004 (Restated) |  
|                                             |  |                               |        |   |                 |  
|For the Quarter Ended                        |  | 3/31                          |        |   | 6/30            |   |         | 9/30 |  |   | 12/31    |   |  | 3/31 |         |   | 6/30 |   |        | 9/30 |  |   | 12/31   |  
|                                             |  |                               |        |   |                 |   |         |      |  |   |          |   |  |      |         |   |      |   |        |      |  |   |         |  
|Revenue                                      |  | $                             | 42,135 |   |                 | $ | 21,710  |      |  | $ | 45,924   |   |  | $    | 39,415  |   |      | $ | 41,781 |      |  | $ | 21,152  |   |  | $ | 44,821   |   |  | $ | 38,095  |  
|Cost of revenue                              |  |                               | 28,336 |   |                 |   | 17,066  |      |  |   | 52,961   |   |  |      | 39,239  |   |      |   | 28,010 |      |  |   | 16,552  |   |  |   | 51,946   |   |  |   | 38,026  |  
|                                             |  |                               |        |   |                 |   |         |      |  |   |          |   |  |      |         |   |      |   |        |      |  |   |         |  
|Gross margin                                 |  |                               | 13,799 |   |                 |   | 4,644   |      |  |   | (7,037   | ) |  |      | 176     |   |      |   | 13,771 |      |  |   | 4,600   |   |  |   | (7,125   | ) |  |   | 69      |  
|Research and development                     |  |                               | 9,042  |   |                 |   | 12,393  |      |  |   | 13,344   |   |  |      | 15,419  |   |      |   | 9,368  |      |  |   | 12,907  |   |  |   | 14,359   |   |  |   | 16,632  |  
|Marketing and sales                          |  |                               | 7,646  |   |                 |   | 8,584   |      |  |   | 8,720    |   |  |      | 9,998   |   |      |   | 7,646  |      |  |   | 8,584   |   |  |   | 8,720    |   |  |   | 9,998   |  
|General and administrative                   |  |                               | 2,873  |   |                 |   | 4,507   |      |  |   | 4,974    |   |  |      | 7,097   |   |      |   | 2,873  |      |  |   | 4,507   |   |  |   | 4,974    |   |  |   | 7,097   |  
|Restructuring, severance and impairment      |  |                               |       |   |                 |   |        |      |  |   | 7,129    |   |  |      | 1,053   |   |      |   |       |      |  |   |        |   |  |   | 7,129    |   |  |   | 1,053   |  
|In-process research and development          |  |                               |       |   |                 |   | 43,400  |      |  |   |         |   |  |      |        |   |      |   |       |      |  |   | 43,400  |   |  |   |         |   |  |   |        |  
|Net loss                                     |  |                               | (3,843 | ) |                 |   | (54,504 | )    |  |   | (110,999 | ) |  |      | (34,677 | ) |      |   | (4,097 | )    |  |   | (54,862 | ) |  |   | (112,402 | ) |  |   | (35,997 | )
|Net loss per common share, basic and diluted |  | $                             | (0.05  | ) |                 | $ | (0.64   | )    |  | $ | (1.27    | ) |  | $    | (0.40   | ) |      | $ | (0.06  | )    |  | $ | (0.64   | ) |  | $ | (1.29    | ) |  | $ | (0.41   | )

|                                             |  |      |         |   |      |   |         |      |  |   |         |   |  |   |        |  
|-------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | - | ------ | -
|                                             |  | 2005 |        
|                                             |  |      |        
|For the Quarter Ended                        |  | 3/31 |         |   | 6/30 |   |         | 9/30 |  |   | 12/31   |  
|                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Revenue                                      |  | $    | 37,634  |   |      | $ | 53,419  |      |  | $ | 44,741  |   |  | $ | 65,257 |  
|Cost of revenue                              |  |      | 33,927  |   |      |   | 48,741  |      |  |   | 36,551  |   |  |   | 49,331 |  
|                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Gross margin                                 |  |      | 3,707   |   |      |   | 4,678   |      |  |   | 8,190   |   |  |   | 15,926 |  
|Research and development                     |  |      | 13,032  |   |      |   | 13,427  |      |  |   | 6,472   |   |  |   | 8,780  |  
|Marketing and sales                          |  |      | 6,599   |   |      |   | 7,574   |      |  |   | 5,778   |   |  |   | 5,857  |  
|General and administrative                   |  |      | 4,267   |   |      |   | 4,607   |      |  |   | 3,617   |   |  |   | 3,654  |  
|Restructuring, severance and impairment      |  |      | (215    | ) |      |   | 1,947   |      |  |   | 1,201   |   |  |   | 6,817  |  
|In-process research and development          |  |      |        |   |      |   |        |      |  |   |        |   |  |   |       |  
|Net loss                                     |  |      | (21,035 | ) |      |   | (23,796 | )    |  |   | (10,250 | ) |  |   | (9,227 | )
|Net loss per common share, basic and diluted |  | $    | (0.24   | ) |      | $ | (0.27   | )    |  | $ | (0.12   | ) |  | $ | (0.10  | )







52



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##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures



| |                                   
| | ----------------------------------
| | Disclosure Controls and Procedures





| |                                                         
| | --------------------------------------------------------
| | Changes in Internal Control over Financial
    Reporting

10-K/ 10-Q




Control Environment.


Remediation:




Risk Assessment.


Remediation:




Segregation of Duties.


53



---



##### Table of Contents





Remediation:






Inadequate Staffing and Training in Finance and
Accounting.


Remediation:




Inadequate Oversight of Accounting Transactions.


Remediation:




Inadequate Controls Over Journal Entry Approvals.


54



---



##### Table of Contents





Remediation:




Complex Contract Accounting Procedures.


Remediation:




Tax Controls.


Remediation:








55



---



##### Table of Contents





| |                                                                     
| | --------------------------------------------------------------------
| | Managements Report on Internal Control Over
    Financial Reporting

13a-15(f)










REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


ON INTERNAL CONTROL OVER FINANCIAL REPORTING





Internal Control 
Integrated Framework




56



---



##### Table of Contents







Internal
Control  Integrated Framework Internal Control  Integrated
Framework




Peterson Sullivan PLLC










|         |                  
|-------- | -----------------
|Item 9B. | Other Information



57



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##### Table of Contents






PART III









|         |                                                
|-------- | -----------------------------------------------
|Item 10. | Directors and Executive Officers of the Company










|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation








|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Shareholder Matters








|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services



58



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##### Table of Contents






PART IV







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules

Financial Statements




| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | Consolidated Balance Sheets at December 31, 2004 (Restated)
    and December 31, 2005                                                                  
|
| | Consolidated Statements of Operations for the years ended
    December 31, 2003, 2004 (Restated) and 2005                                              
|
| | Consolidated Statements of Shareholders Equity and
    Comprehensive Income (Loss) for the years ended
    December 31, 2003, 2004 (Restated) and 2005
|
| | Consolidated Statements of Cash Flows for the years ended
    December 31, 2003, 2004 (Restated) and 2005                                              
|
| | Notes to Consolidated Financial Statements                                                                                                             
|
| | Reports of Independent Registered Public Accounting Firms                                                                                              

Financial Statement Schedules


10-K.




Exhibits


10-K.


59



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##### Table of Contents



SIGNATURES






| |          
| | ---------
| | CRAY INC.



| |    |                    
| | -- | -------------------
| | By | /s/ Peter J. Ungaro



| |                                      
| | -------------------------------------
| |                                      
| | Peter J. Ungaro                      
| | Chief Executive Officer and President

attorney-in 10-K attorneys-in attorneys-in attorney-in




|                                                          |  |                                                
|--------------------------------------------------------- |  | -----------------------------------------------
|Signature                                                 |  | Title                                          
|                                                          |  |                                                
|                                                         
|By /s/
    Peter J. UngaroPeter J. Ungaro                 |  | Chief Executive Officer, President and Director
|                                                         
|By /s/
    Brian C. HenryBrian C. Henry                   |  | Principal Financial Officer                    
|                                                         
|By /s/
    Kenneth D. RoselliKenneth D. Roselli           |  | Principal Accounting Officer                   
|                                                         
|By /s/
    John B. Jones, Jr.John B. Jones, Jr.           |  | Director                                       
|                                                         
|By /s/
    Kenneth W. Kennedy, Jr.Kenneth W. Kennedy, Jr. |  | Director                                       
|                                                         
|By /s/
    Stephen C. KielyStephen C. Kiely               |  | Director                                       
|                                                         
|By /s/
    Frank L. LedermanFrank L. Lederman             |  | Director                                       
|                                                         
|By /s/
    Sally G. NarodickSally G. Narodick             |  | Director                                       

60



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|                                                  |  |         
|------------------------------------------------- |  | --------
|Signature                                         |  | Title   
|                                                  |  |         
|                                                 
|By /s/
    Daniel C. RegisDaniel C. Regis         |  | Director
|                                                 
|By /s/
    Stephen C. RichardsStephen C. Richards |  | Director

61



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##### Table of Contents



EXHIBIT INDEX


|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .1          |  | Restated Articles of Incorporation(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 3  | .2          |  | Amended and Restated Bylaws(9)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 4  | .1          |  | Form of Common Stock Purchase Warrants due August 30,
    2006(16)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 4  | .2          |  | Form of Common Stock Purchase Warrants due June 21, 2009(17)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 4  | .3          |  | Indenture dated as of December 6, 2004, by and between the
    Company and The Bank of New York Trust Company, N.A. as
    Trustee(14)                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 4  | .4          |  | Common Stock Purchase Warrant due May 30, 2009(23)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 10 | .1          |  | 2000 Non-Executive Employee Stock Option Plan(5)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 10 | .2          |  | 2001 Employee Stock Purchase Plan(13)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 10 | .3          |  | 2003 Stock Option Plan(2)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | 10 | .4          |  | 2004 Long-Term Equity Compensation Plan(15)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10 | .5          |  | Cray Canada Inc. Amended and Restated Key Employee Stock Option
    Plan(21)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10 | .6          |  | Form of Management Continuation Agreement between the Company
    and its Executive Officers and certain other Employees(10)*                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 10 | .7          |  | Executive Severance Policy, as amended(24)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 10 | .8          |  | Lease Agreement between Merrill Place, LLC and the Company,
    dated November 21, 1997(6)                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | 10 | .9          |  | FAB I Building Lease Agreement between Union Semiconductor
    Technology Corporation and the Company, dated as of June 1,
    2000(7)                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 10 | .10         |  | Amendment No. 1 to the FAB Building Lease Agreement between
    Union Semiconductor Technology Corporation and the Company,
    dated as of August 19, 2002(3)                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10 | .11         |  | Conference Center Lease Agreement between Union Semiconductor
    Technology Corporation and the Company, dated as of June 1,
    2000(7)                                                                                                                                                                                                                                                                                                                                                                                                                               
|        | 10 | .12         |  | Amendment No. 1 to the Conference Center Lease Agreement
    between Union Semiconductor Technology Corporation and the
    Company dated as of August 19, 2002(3)                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 10 | .13         |  | Mendota Heights Office Lease Agreement between the
    Teachers Retirement System of the State of Illinois and
    the Company, dated as of August 10, 2000(7)                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10 | .14         |  | First Amendment to the Mendota Heights Office Lease Agreement
    between the Teachers Retirement System of the State of
    Illinois and the Company, dated as of January 17, 2003(3)                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10 | .15         |  | Sublease Agreement between Trillium Digital Systems Canada, Ltd.
    and OctigaBay Systems Corporation, dated as of January 13,
    2003, with Consent to Subletting by and among 391102 B.C, Ltd.
    and Dominion Construction and Development Inc., Trillium Digital
    Systems Canada, Ltd., OctigaBay Systems Corporation and Intel
    Corporation, dated January 20, 2003, and Lease Agreement
    between Dominion Construction Company Inc. and 391102 B.C. Ltd.,
    Trillium Digital Systems Canada, Ltd. and Intel Corporation,
    dated March 5, 2001(22)
|        | 10 | .16         |  | Credit Agreement between Wells Fargo Bank, N.A. and the Company,
    dated April 10, 2003, and Related Revolving Line of Credit
    Note(8)                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 10 | .17         |  | First Amendment to Credit Agreement between Wells Fargo Bank,
    N.A. and the Company, dated March 5, 2004(22)                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10 | .18         |  | Second Amendment to Credit Agreement between Wells Fargo Bank,
    N.A. and the Company, dated June 7, 2004(22)                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10 | .19         |  | Third Amendment to Credit Agreement between Wells Fargo Bank,
    N.A. and the Company, dated November 29, 2004(22)                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .20         |  | Fourth Amendment to Credit Agreement between Wells Fargo Bank,
    N.A. and the Company, dated December 15, 2004(22)                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10 | .21         |  | Securities Account Control Agreement, with Addendum, by and
    among Wells Fargo Bank, N.A. and the Company, dated as of
    December 15, 2004(22)                                                                                                                                                                                                                                                                                                                                                                                                                     

62



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##### Table of Contents



|        |    |             |  |                                                                                                                                                               
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .22         |  | Technology Agreement between Silicon Graphics, Inc. and the
    Company, effective as of March 31, 2000(4)                                                    
|        | 10 | .23         |  | Distribution Agreement between NEC Corporation and the Company,
    dated as of February 28, 2001(12)+                                                        
|        | 10 | .24         |  | Sales and Marketing Services Agreement among NEC Corporation,
    HNSX Supercomputers, Inc. and Cray Inc., dated as of
    February 28, 2001(12)+             
|        | 10 | .25         |  | Maintenance Agreement between NEC Corporation and the Company,
    dated as of February 28, 2001(12)+                                                         
|        | 10 | .26         |  | Amendment to Maintenance Agreement between NEC Corporation and
    the Company, dated June 9, 2003(11)+                                                       
|        | 10 | .27         |  | Letter from NEC Corporation notifying the Company that its
    distribution rights in North America will be non-exclusive,
    dated April 24, 2003(11)       
|        | 10 | .28         |  | Arrangement Agreement, dated as of February 25, 2004, by
    and among the Company, 3084317 Nova Scotia Limited and OctigaBay
    Systems Corporation(18)     
|        | 10 | .29         |  | Purchase Agreement, dated December 1, 2004, by and between
    the Company and Bear, Stearns & Co. Inc. as Initial
    Purchaser(14)                          
|        | 10 | .30         |  | Registration Rights Agreement dated December 6, 2004, by
    and between the Company and Bear, Stearns & Co. Inc.,
    as Initial Purchaser(14)               
|        | 10 | .31         |  | 2005 Executive Bonus Plan*(20)                                                                                                                                
|        | 10 | .32         |  | Form of Officer Non-Qualified Stock Option Agreement*(22)                                                                                                     
|        | 10 | .33         |  | Form of Officer Incentive Stock Option Agreement*(22)                                                                                                         
|        | 10 | .34         |  | Form of Director Stock Option Agreement*(22)                                                                                                                  
|        | 10 | .35         |  | Form of Director Stock Option, immediate vesting*(22)                                                                                                         
|        | 10 | .36         |  | Fourth Amendment to the Lease between Merrill Place LLC and the
    Company, dated as of October 31, 2005(25)                                                 
|        | 10 | .37         |  | Letter Agreement between the Company and Peter J. Ungaro,
    effective March 7, 2005*(19)                                                                    
|        | 10 | .38         |  | Offer Letter between the Company and Margaret A. Williams, dated
    April 14, 2005*(26)                                                                      
|        | 10 | .39         |  | Offer Letter between the Company and Brian C. Henry, dated
    May 16, 2005*(27)                                                                              
|        | 10 | .40         |  | Senior Secured Credit Agreement among the Company, Cray Federal
    Inc. and Wells Fargo Foothill, Inc., dated May 31, 2005(23)                               
|        | 10 | .41         |  | Amendment No. 1 to the Senior Secured Credit Agreement
    among the Company, Cray Federal Inc. and Wells Fargo Foothill,
    Inc., dated November 9, 2005(28)
|        | 10 | .42         |  | Form of Restricted Stock Agreement(29)                                                                                                                        
|        | 10 | .43         |  | Retention Agreement between the Company and Peter J. Ungaro,
    dated December 20, 2005*(29)                                                                 
|        | 10 | .44         |  | Retention Agreement between the Company and Brian C. Henry,
    dated December 20, 2005*(29)                                                                  
|        | 10 | .45         |  | Retention Agreement between the Company and Margaret A.
    Williams, dated December 20, 2005*(29)                                                            
|        | 21 | .1          |  | Subsidiaries of the Company                                                                                                                                   
|        | 23 | .1          |  | Consent of Deloitte & Touche LLP, Independent
    Registered Public Accounting Firm                                                                           
|        | 23 | .2          |  | Consent of Peterson Sullivan PLLC, Independent Registered Public
    Accounting Firm                                                                          
|        | 24 | .1          |  | Power of Attorney (included on the signature page of this report)                                                                                             
|        | 31 | .1          |  | Rule 13a-14(a)/15d-14(a) Certification of Mr. Ungaro,
    Chief Executive Officer                                                                             
|        | 31 | .2          |  | Rule 13a-14(a)/15d-14(a) Certification of Mr. Henry,
    Chief Financial Officer                                                                              
|        | 32 | .1          |  | Certification pursuant to 18 U.S.C. Section 1350 by
    the Chief Executive Officer and the Chief Financial Officer                                           

63



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| |   |                                                         
| | - | --------------------------------------------------------
| | * | Management contract or compensatory plan or arrangement.



| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| | + | Subject to confidential treatment. The omitted confidential
    information has been filed with the Securities and Exchange
    Commission.



| |     |                                                                                                                                                                   
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to the Companys Current Report
    on Form 8-K, as
    filed with the Commission on May 14, 2004.                                      
|
| | (2) | Incorporated by reference to the Companys definitive Proxy
    Statement for the 2003 Annual Meeting, as filed with the
    Commission on March 31, 2003.        
|
| | (3) | Incorporated by reference to the Companys Annual Report on
    Form 10-K, as
    filed with the Commission for the fiscal year ended
    December 31, 2002.      
|
| | (4) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q, as
    filed with the Commission on May 15, 2000.                                   
|
| | (5) | Incorporated by reference to the Companys Registration
    Statement on
    Form S-8 (SEC
    No. 333-57970), as
    filed with the Commission on March 30, 2001.
|
| | (6) | Incorporated by reference to the Companys Annual Report on
    Form 10-K, as
    filed with the Commission for the fiscal year ended
    December 31, 1997.      
|
| | (7) | Incorporated by reference to the Companys Annual Report on
    Form 10-K, as
    filed with the Commission for the fiscal year ended
    December 31, 2000.      
|
| | (8) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q, as
    filed with the Commission on May 15, 2003.                                   
|
| | (9) | Incorporated by reference to the Companys Current Report
    on Form 8-K, as
    filed with the Commission on February 21, 2006.                                 



|     |                                                                                                                                                                   
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q, as
    filed with the Commission on May 17, 1999.                                   
|    
|(11) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q, as
    filed with the Commission on August 14, 2003.                                
|    
|(12) | Incorporated by reference to the Companys Current Report
    on Form 8-K, as
    filed with the Commission on May 14, 2001.                                      
|    
|(13) | Incorporated by reference to the Companys Registration
    Statement on
    Form S-8 (SEC
    No. 333-70238),
    filed on September 26, 2001.                   
|    
|(14) | Incorporated by reference to the Companys Current Report
    on Form 8-K, as
    filed with the Commission on December 7, 2004.                                  
|    
|(15) | Incorporated by reference to the Companys definitive Proxy
    Statement for the 2004 Annual Meeting, as filed with the
    Commission on March 24, 2004.        
|    
|(16) | Incorporated by reference to the Companys Current Report
    on Form 8-K, as
    filed with the Commission on September 4, 2002.                                 
|    
|(17) | Incorporated by reference to the Companys Registration
    Statement on
    Form S-3 (SEC
    No. 333-57972), as
    filed with the Commission on March 30, 2001.
|    
|(18) | Incorporated by reference to the Companys Current Report
    on Form 8-K, as
    filed with the Commission on April 2, 2004.                                     
|    
|(19) | Incorporated by reference to the Companys Current Report
    on Form 8-K, as
    filed with the Commission on March 8, 2005.                                     
|    
|(20) | Incorporated by reference to the Companys Current Report
    on Form 8-K, as
    filed with the Commission on March 25, 2005.                                    
|    
|(21) | Incorporated by reference to the Companys Registration
    Statement on
    Form S-8 (SEC
    No. 333-114243),
    filed on April 6, 2004.                       

64



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##### Table of Contents





|     |                                                                                                                                                             
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|(22) | Incorporated by reference to the Companys Annual Report on
    Form 10-K, as
    filed with the Commission for the fiscal year ended
    December 31, 2004.
|    
|(23) | Incorporated by reference to the Companys Current Report
    on Form 8-K, as
    filed with the Commission on June 1, 2005.                                
|    
|(24) | Incorporated by reference to the Companys Current Report
    on Form 8-K, as
    filed with the Commission on August 10, 2005.                             
|    
|(25) | Incorporated by reference to the Companys Current Report
    on Form 8-K, as
    filed with the Commission on November 15, 2005.                           
|    
|(26) | Incorporated by reference to the Companys Current Report
    on Form 8-K, as
    filed with the Commission on May 9, 2005.                                 
|    
|(27) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q, as
    filed with the Commission on November 9, 2005.                         
|    
|(28) | Incorporated by reference to the Companys Current Report
    on Form 8-K, as
    filed with the Commission on November 16, 2005.                           
|    
|(29) | Incorporated by reference to the Companys Current Report
    on Form 8-K, as
    filed with the Commission on December 22, 2005.                           

65



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS


(In thousands, except share data)


|                                        |                                                                                                                                                                                            |                                            |        |          |              |  |        |          |         | 
|--------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------ | -------- | ------------ |  | ------ | -------- | ------- | 
|                                        |                                                                                                                                                                                            | December 31, 2004                          |        |          | December 31, | 
|                                        |                                                                                                                                                                                            | (Restated-See Note 2)                      |        |          | 2005         | 
|                                        |                                                                                                                                                                                            |                                            |        |          |              | 
|ASSETS                                 
|Current assets:                         |                                                                                                                                                                                            |                                            |        |          |              |  |        |         
|                                        | Cash and cash equivalents                                                                                                                                                                  |                                            | $      | 41,732   |              |  | $      | 46,026   |        
|                                        | Restricted cash                                                                                                                                                                            |                                            |        | 11,437   |              |  |        |         |        
|                                        | Short-term investments, available-for-sale                                                                                                                                                 |                                            |        | 34,253   |              |  |        |         |        
|                                        | Accounts receivable, net                                                                                                                                                                   |                                            |        | 33,185   |              |  |        | 55,064   |        
|                                        | Inventory                                                                                                                                                                                  |                                            |        | 71,521   |              |  |        | 67,712   |        
|                                        | Prepaid expenses and other current assets                                                                                                                                                  |                                            |        | 5,613    |              |  |        | 2,909    |        
|                                        |                                                                                                                                                                                            |                                            |        |          |              | 
|                                        |                                                                                                                                                                                            | Total current assets                       |        |          | 197,741      |  |        |          | 171,711 | 
|Property and equipment, net             |                                                                                                                                                                                            |                                            | 36,875 |          |              |  | 31,292 |         
|Service inventory, net                  |                                                                                                                                                                                            |                                            | 3,590  |          |              |  | 3,285  |         
|Goodwill                                |                                                                                                                                                                                            |                                            | 55,644 |          |              |  | 56,839 |         
|Deferred tax asset                      |                                                                                                                                                                                            |                                            |       |          |              |  | 575    |         
|Intangible assets, net                  |                                                                                                                                                                                            |                                            | 7,294  |          |              |  | 1,113  |         
|Other non-current assets                |                                                                                                                                                                                            |                                            | 9,360  |          |              |  | 8,190  |         
|                                        |                                                                                                                                                                                            |                                            |        |          |              | 
|                                        |                                                                                                                                                                                            | TOTAL ASSETS                               |        | $        | 310,504      |  |        | $        | 273,005 | 
|                                        |                                                                                                                                                                                            |                                            |        |          |              | 
|                                       
|LIABILITIES AND SHAREHOLDERS EQUITY   
|Current liabilities:                    |                                                                                                                                                                                            |                                            |        |          |              |  |        |         
|                                        | Accounts payable                                                                                                                                                                           |                                            | $      | 23,875   |              |  | $      | 14,911   |        
|                                        | Accrued payroll and related expenses                                                                                                                                                       |                                            |        | 14,970   |              |  |        | 12,145   |        
|                                        | Other accrued liabilities                                                                                                                                                                  |                                            |        | 8,726    |              |  |        | 10,702   |        
|                                        | Deferred revenue                                                                                                                                                                           |                                            |        | 56,554   |              |  |        | 81,749   |        
|                                        |                                                                                                                                                                                            |                                            |        |          |              | 
|                                        |                                                                                                                                                                                            | Total current liabilities                  |        |          | 104,125      |  |        |          | 119,507 | 
|Long-term deferred tax liability        |                                                                                                                                                                                            |                                            | 1,538  |          |              |  |       |         
|Long-term deferred revenue              |                                                                                                                                                                                            |                                            | 1,027  |          |              |  | 5,234  |         
|Other non-current liabilities           |                                                                                                                                                                                            |                                            | 1,849  |          |              |  | 2,317  |         
|Convertible notes payable               |                                                                                                                                                                                            |                                            | 80,000 |          |              |  | 80,000 |         
|                                        |                                                                                                                                                                                            |                                            |        |          |              | 
|                                        |                                                                                                                                                                                            | TOTAL LIABILITIES                          |        |          | 188,539      |  |        |          | 207,058 | 
|Commitments and Contingencies (Note 12) |                                                                                                                                                                                            |                                            |        |          |              |  |        |         
|Shareholders equity:                   |                                                                                                                                                                                            |                                            |        |          |              |  |        |         
|                                        | Preferred Stock  Authorized and undesignated,
    5,000,000 shares; no shares issued or outstanding                                                                                       |                                            |        |         |              |  |        |         |        
|                                        | Common Stock and additional paid-in capital, par value
    $.01 per share  Authorized,
    150,000,000 shares; issued and outstanding, 87,348,641 and
    90,973,506 shares, respectively |                                            |        | 413,911  |              |  |        | 422,691  |        
|                                        | Exchangeable shares, no par value  Unlimited shares
    authorized; 570,963 and 78,840 shares outstanding,
    respectively                                                               |                                            |        | 4,173    |              |  |        | 576      |        
|                                        | Deferred compensation                                                                                                                                                                      |                                            |        | (4,220   | )            |  |        | (2,811   | )      
|                                        | Accumulated other comprehensive income                                                                                                                                                     |                                            |        | 4,560    |              |  |        | 6,258    |        
|                                        | Accumulated deficit                                                                                                                                                                        |                                            |        | (296,459 | )            |  |        | (360,767 | )      
|                                        |                                                                                                                                                                                            |                                            |        |          |              | 
|                                        |                                                                                                                                                                                            | TOTAL SHAREHOLDERS EQUITY                 |        |          | 121,965      |  |        |          | 65,947  | 
|                                        |                                                                                                                                                                                            |                                            |        |          |              | 
|                                        |                                                                                                                                                                                            | TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |        | $        | 310,504      |  |        | $        | 273,005 | 
|                                        |                                                                                                                                                                                            |                                            |        |          |              | 

See accompanying notes


F-1



---



##### Table of Contents



CRAY INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF OPERATIONS


(In thousands, except per share data)


|                                              |                                            |                          |         |         |                       |   |          |         |         |   |         |         |         | 
|--------------------------------------------- | ------------------------------------------ | ------------------------ | ------- | ------- | --------------------- | - | -------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                              |                                            | Years Ended December 31, |        
|                                              |                                            |                          |        
|                                              |                                            |                          |         | 2004    |                       |   |         
|                                              |                                            | 2003                     |         |         | (Restated-See Note 2) |   |          | 2005    |        
|                                              |                                            |                          |         |         |                       |   |          |         |        
|Revenue:                                      |                                            |                          |         |         |                       |   |          |         |         |   |         |        
|                                              | Product                                    |                          | $       | 175,004 |                       |   | $        | 95,901  |         |   | $       | 152,098 |        
|                                              | Service                                    |                          |         | 61,958  |                       |   |          | 49,948  |         |   |         | 48,953  |        
|                                              |                                            |                          |         |         |                       |   |          |         |        
|                                              |                                            | Total revenue            |         |         | 236,962               |   |          |         | 145,849 |   |         |         | 201,051 | 
|                                              |                                            |                          |         |         |                       |   |          |         |        
|Operating expenses:                           |                                            |                          |         |         |                       |   |          |         |         |   |         |        
|                                              | Cost of product revenue                    |                          |         | 97,354  |                       |   |          | 104,196 |         |   |         | 139,518 |        
|                                              | Cost of service revenue                    |                          |         | 40,780  |                       |   |          | 30,338  |         |   |         | 29,032  |        
|                                              | Research and development                   |                          |         | 37,762  |                       |   |          | 53,266  |         |   |         | 41,711  |        
|                                              | Marketing and sales                        |                          |         | 27,038  |                       |   |          | 34,948  |         |   |         | 25,808  |        
|                                              | General and administrative                 |                          |         | 10,908  |                       |   |          | 19,451  |         |   |         | 16,145  |        
|                                              | Restructuring, severance and impairment    |                          |         | 4,019   |                       |   |          | 8,182   |         |   |         | 9,750   |        
|                                              | In-process research and development charge |                          |         |        |                       |   |          | 43,400  |         |   |         |        |        
|                                              |                                            |                          |         |         |                       |   |          |         |        
|                                              |                                            | Total operating expenses |         |         | 217,861               |   |          |         | 293,781 |   |         |         | 261,964 | 
|                                              |                                            |                          |         |         |                       |   |          |         |        
|Income (loss) from operations                 |                                            |                          | 19,101  |         |                       |   | (147,932 | )       |         |   | (60,913 | )      
|                                             
|Other income (expense), net                   |                                            |                          | 1,496   |         |                       |   | (699     | )       |         |   | (1,421  | )      
|Interest income (expense), net                |                                            |                          | 444     |         |                       |   | 365      |         |         |   | (3,462  | )      
|                                              |                                            |                          |         |         |                       |   |          |         |        
|Income (loss) before income taxes             |                                            |                          | 21,041  |         |                       |   | (148,266 | )       |         |   | (65,796 | )      
|Income tax expense (benefit)                  |                                            |                          | (42,207 | )       |                       |   | 59,092   |         |         |   | (1,488  | )      
|                                              |                                            |                          |         |         |                       |   |          |         |        
|Net income (loss)                             |                                            | $                        | 63,248  |         |                       | $ | (207,358 | )       |         | $ | (64,308 | )      
|                                              |                                            |                          |         |         |                       |   |          |         |        
|                                             
|Basic net income (loss) per common share      |                                            | $                        | 0.94    |         |                       | $ | (2.49    | )       |         | $ | (0.73   | )      
|                                              |                                            |                          |         |         |                       |   |          |         |        
|Diluted net income (loss) per common share    |                                            | $                        | 0.81    |         |                       | $ | (2.49    | )       |         | $ | (0.73   | )      
|                                              |                                            |                          |         |         |                       |   |          |         |        
|                                             
|Weighted average shares outstanding  basic   |                                            |                          | 67,098  |         |                       |   | 83,387   |         |         |   | 88,499  |        
|                                              |                                            |                          |         |         |                       |   |          |         |        
|Weighted average shares outstanding  diluted |                                            |                          | 77,861  |         |                       |   | 83,387   |         |         |   | 88,499  |        
|                                              |                                            |                          |         |         |                       |   |          |         |        

See accompanying notes


F-2



---



##### Table of Contents



CRAY INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY


AND COMPREHENSIVE INCOME (LOSS)


(In thousands)


|                           |                                                                                      |                                                                                             |        |       |              |   |         |           |   |               |        |          |   |              |        |         |               |             |        |         |      |   |        |   |       |        |          |   |          |   |         |        |          |   |          |   |          |  
|-------------------------- | ------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------- | ------ | ----- | ------------ | - | ------- | --------- | - | ------------- | ------ | -------- | - | ------------ | ------ | ------- | ------------- | ----------- | ------ | ------- | ---- | - | ------ | - | ----- | ------ | -------- | - | -------- | - | ------- | ------ | -------- | - | -------- | - | -------- | -
|                           |                                                                                      | Common Stock                                                                                |        |       |              |   |         |           |   |               |        |          |   |              |       
|                           |                                                                                      | and Additional                                                                              |        |       | Exchangeable |   |         |           |   | Accumulated   |        |          |   |              |        |         |              
|                           |                                                                                      | Paid In Capital                                                                             |        |       | Shares       |   |         |           |   | Other         |        |          |   |              |        |         |              
|                           |                                                                                      |                                                                                             |        |       |              |   |         |           |   | Comprehensive |        |          |   |              |        |         | Comprehensive |            
|                           |                                                                                      | Number                                                                                      |        |       |              |   | Number  |           |   |               |        | Deferred |   |              | Income |         |               | Accumulated |        |         |      |   | Income |  
|                           |                                                                                      | of Shares                                                                                   |        |       | Amount       |   |         | of Shares |   |               | Amount |          |   | Compensation |        |         | (Loss)        |             |        | Deficit |      |   | Total  |   |       | (Loss) |         
|                           |                                                                                      |                                                                                             |        |       |              |   |         |           |   |               |        |          |   |              |        |         |               |             |        |         |      |   |        |   |       |        |         
|BALANCE, December 31, 2002 |                                                                                      |                                                                                             | 56,250 |       |              | $ | 211,255 |           |   |               |       |          |   | $            |       |         |               | $           |       |         |      | $ | (291   | ) |       | $      | (152,349 | ) |          | $ | 58,615  |        |          | $ |         |  
|                           | Common stock issued, less issuance costs of $3,165                                   |                                                                                             |        | 7,355 |              |   |         | 42,500    |   |               |        |         |   |              |        |        |               |             |        |        |      |   |        |  |       |        |          |  |          |   |         | 42,500 |          |   |          |  |         
|                           | Exercise of underwriter over-allotment option                                        |                                                                                             |        | 1,125 |              |   |         | 6,559     |   |               |        |         |   |              |        |        |               |             |        |        |      |   |        |  |       |        |          |  |          |   |         | 6,559  |          |   |          |  |         
|                           | Common stock issued in conversion of Series A Preferred
    stock                    |                                                                                             |        | 3,269 |              |   |         | 24,946    |   |               |        |         |   |              |        |        |               |             |        |        |      |   |        |  |       |        |          |  |          |   |         | 24,946 |          |   |          |  |         
|                           | Issuance of shares under Company 401(k) Plan match                                   |                                                                                             |        | 76    |              |   |         | 550       |   |               |        |         |   |              |        |        |               |             |        |        |      |   |        |  |       |        |          |  |          |   |         | 550    |          |   |          |  |         
|                           | Issuance of shares under Employee Stock Purchase Plan                                |                                                                                             |        | 243   |              |   |         | 1,646     |   |               |        |         |   |              |        |        |               |             |        |        |      |   |        |  |       |        |          |  |          |   |         | 1,646  |          |   |          |  |         
|                           | Exercise of stock options                                                            |                                                                                             |        | 2,752 |              |   |         | 12,019    |   |               |        |         |   |              |        |        |               |             |        |        |      |   |        |  |       |        |          |  |          |   |         | 12,019 |          |   |          |  |         
|                           | Exercise of warrants, less issuance costs of $397                                    |                                                                                             |        | 1,722 |              |   |         | 6,665     |   |               |        |         |   |              |        |        |               |             |        |        |      |   |        |  |       |        |          |  |          |   |         | 6,665  |          |   |          |  |         
|                           | Issuance of restricted stock                                                         |                                                                                             |        | 20    |              |   |         | 180       |   |               |        |         |   |              |        |        |               |             |        | (180    | )    |   |        |  |       |        |          |  |          |   |         |       |          |   |          |  |         
|                           | Compensation expense on restricted stock                                             |                                                                                             |        |      |              |   |         |          |   |               |        |         |   |              |        |        |               |             |        | 75      |      |   |        |  |       |        |          |  |          |   |         | 75     |          |   |          |  |         
|                           | Tax benefit on non-qualified stock options                                           |                                                                                             |        |      |              |   |         | 6,326     |   |               |        |         |   |              |        |        |               |             |        |        |      |   |        |  |       |        |          |  |          |   |         | 6,326  |          |   |          |  |         
|                           | Other comprehensive income:                                                          |                                                                                             |        |       |              |   |         |           |   |               |        |          |   |              |        |         |               |             |        |         |      |   |        |   |       |        |          |   |          |   |         |        |          |   |          |   |         
|                           |                                                                                      | Unrealized gain on available-for-sale investments                                           |        |       |             |   |         |           |  |               |        |          |  |              |        |         |              |             |        |         |     |   |        |   | 9     |        |          |   |         |   |         |        | 9        |   |          |   |         |  
|                           |                                                                                      | Currency translation adjustment                                                             |        |       |             |   |         |           |  |               |        |          |  |              |        |         |              |             |        |         |     |   |        |   | (525  | )      |          |   |         |   |         |        | (525     | ) |          |   | (525     | )
|                           |                                                                                      | Net income                                                                                  |        |       |             |   |         |           |  |               |        |          |  |              |        |         |              |             |        |         |     |   |        |   |      |        |          |   | 63,248   |   |         |        | 63,248   |   |          |   | 63,248   |  
|                           |                                                                                      |                                                                                             |        |       |              |   |         |           |   |               |        |          |   |              |        |         |               |             |        |         |      |   |        |   |       |        |         
|BALANCE, December 31, 2003 |                                                                                      |                                                                                             | 72,812 |       |              |   | 312,646 |           |   |               |       |          |   |              |       |         |               |             | (105   | )       |      |   | (807   | ) |       |        | (89,101  | ) |          |   | 222,633 |        |          | $ | 62,723   |  
|                           |                                                                                      |                                                                                             |        |       |              |   |         |           |   |               |        |          |   |              |        |         |               |             |        |         |      |   |        |   |       |        |         
|                           | Common stock issued in acquisition of OctigaBay                                      |                                                                                             |        | 7,382 |              |   |         | 56,756    |   |               |        |         |   |              |        |        |               |             |        |        |      |   |        |  |       |        |          |  |          |   |         | 56,756 |          |   | $        |  |         
|                           | Exchangeable shares issued in acquisition of OctigaBay                               |                                                                                             |        |      |              |   |         |          |   |               |        | 3,158    |   |              |        | 24,207  |               |             |        |        |      |   |        |  |       |        |          |  |          |   |         | 24,207 |          |   |          |  |         
|                           | Deferred compensation related to acquisition of OctigaBay                            |                                                                                             |        | 179   |              |   |         | 1,190     |   |               |        | 1,682    |   |              |        | 11,185  |               |             |        | (14,599 | )    |   |        |  |       |        |          |  |          |   |         | (2,224 | )        |   |          |  |         
|                           | Exchangeable shares converted into common shares                                     |                                                                                             |        | 4,269 |              |   |         | 31,219    |   |               |        | (4,269   | ) |              |        | (31,219 | )             |             |        |        |      |   |        |  |       |        |          |  |          |   |         |       |          |   |          |  |         
|                           | Acquisition-related stock-based compensation expense                                 |                                                                                             |        |      |              |   |         |          |   |               |        |         |   |              |        |        |               |             |        | 11,134  |      |   |        |  |       |        |          |  |          |   |         | 11,134 |          |   |          |  |         
|                           | Fair value of OctigaBay options acquired                                             |                                                                                             |        |      |              |   |         | 2,579     |   |               |        |         |   |              |        |        |               |             |        |        |      |   |        |  |       |        |          |  |          |   |         | 2,579  |          |   |          |  |         
|                           | Issuance of shares under Employee Stock Purchase Plan                                |                                                                                             |        | 404   |              |   |         | 1,796     |   |               |        |         |   |              |        |        |               |             |        |        |      |   |        |  |       |        |          |  |          |   |         | 1,796  |          |   |          |  |         
|                           | Exercise of stock options                                                            |                                                                                             |        | 876   |              |   |         | 2,841     |   |               |        |         |   |              |        |        |               |             |        |        |      |   |        |  |       |        |          |  |          |   |         | 2,841  |          |   |          |  |         
|                           | Issuance of shares under Company 401(k) Plan match                                   |                                                                                             |        | 94    |              |   |         | 645       |   |               |        |         |   |              |        |        |               |             |        |        |      |   |        |  |       |        |          |  |          |   |         | 645    |          |   |          |  |         
|                           | Exercise of warrants, less issuance costs of $191                                    |                                                                                             |        | 1,279 |              |   |         | 3,634     |   |               |        |         |   |              |        |        |               |             |        |        |      |   |        |  |       |        |          |  |          |   |         | 3,634  |          |   |          |  |         
|                           | Common stock issued for bonus                                                        |                                                                                             |        | 54    |              |   |         | 374       |   |               |        |         |   |              |        |        |               |             |        |        |      |   |        |  |       |        |          |  |          |   |         | 374    |          |   |          |  |         
|                           | Compensation expense on restricted stock                                             |                                                                                             |        |      |              |   |         |          |   |               |        |         |   |              |        |        |               |             |        | 105     |      |   |        |  |       |        |          |  |          |   |         | 105    |          |   |          |  |         
|                           | Compensation expense on modification of stock options                                |                                                                                             |        |      |              |   |         | 196       |   |               |        |         |   |              |        |        |               |             |        |        |      |   |        |  |       |        |          |  |          |   |         | 196    |          |   |          |  |         
|                           | Compensation expense on stock options issued to contractors                          |                                                                                             |        |      |              |   |         | 35        |   |               |        |         |   |              |        |        |               |             |        |        |      |   |        |  |       |        |          |  |          |   |         | 35     |          |   |          |  |         
|                           | Other comprehensive income:                                                          |                                                                                             |        |       |              |   |         |           |   |               |        |          |   |              |        |         |               |             |        |         |      |   |        |   |       |        |          |   |          |   |         |        |          |   |          |   |         
|                           |                                                                                      | Unrealized loss on available-for-sale investments                                           |        |       |             |   |         |           |  |               |        |          |  |              |        |         |              |             |        |         |     |   |        |   | (33   | )      |          |   |         |   |         |        | (33      | ) |          |   | (33      | )
|                           |                                                                                      | Currency translation adjustment                                                             |        |       |             |   |         |           |  |               |        |          |  |              |        |         |              |             |        |         | (755 | ) |        |   | 5,400 |        |          |   |         |   |         |        | 4,645    |   |          |   | 5,400    |  
|                           |                                                                                      | Net loss (Restated-See Note 2)                                                              |        |       |             |   |         |           |  |               |        |          |  |              |        |         |              |             |        |         |     |   |        |   |      |        |          |   | (207,358 | ) |         |        | (207,358 | ) |          |   | (207,358 | )
|                           |                                                                                      |                                                                                             |        |       |              |   |         |           |   |               |        |          |   |              |        |         |               |             |        |         |      |   |        |   |       |        |         
|BALANCE, December 31, 2004 |                                                                                      |                                                                                             | 87,349 |       |              |   | 413,911 |           |   |               | 571    |          |   |              | 4,173  |         |               |             | (4,220 | )       |      |   | 4,560  |   |       |        | (296,459 | ) |          |   | 121,965 |        |          | $ | (201,991 | )
|                           |                                                                                      |                                                                                             |        |       |              |   |         |           |   |               |        |          |   |              |        |         |               |             |        |         |      |   |        |   |       |        |         
|                           | Exchangeable shares converted into common shares                                     |                                                                                             |        | 492   |              |   |         | 3,597     |   |               |        | (492     | ) |              |        | (3,597  | )             |             |        |        |      |   |        |  |       |        |          |  |          |   |         |       |          |   | $        |  |         
|                           | Issuance of shares under Employee Stock Purchase Plan                                |                                                                                             |        | 802   |              |   |         | 1,211     |   |               |        |         |   |              |        |        |               |             |        |        |      |   |        |  |       |        |          |  |          |   |         | 1,211  |          |   |          |  |         
|                           | Exercise of stock options                                                            |                                                                                             |        | 89    |              |   |         | 138       |   |               |        |         |   |              |        |        |               |             |        |        |      |   |        |  |       |        |          |  |          |   |         | 138    |          |   |          |  |         
|                           | Issuance of shares under Company 401(k) Plan match                                   |                                                                                             |        | 207   |              |   |         | 770       |   |               |        |         |   |              |        |        |               |             |        |        |      |   |        |  |       |        |          |  |          |   |         | 770    |          |   |          |  |         
|                           | Warrants issued in connection with financing                                         |                                                                                             |        |      |              |   |         | 219       |   |               |        |         |   |              |        |        |               |             |        |        |      |   |        |  |       |        |          |  |          |   |         | 219    |          |   |          |  |         
|                           | Restricted shares issued for compensation                                            |                                                                                             |        | 1,965 |              |   |         | 2,881     |   |               |        |         |   |              |        |        |               |             |        | (2,881  | )    |   |        |  |       |        |          |  |          |   |         |       |          |   |          |  |         
|                           | Amortization of deferred compensation                                                |                                                                                             |        |      |              |   |         |          |   |               |        |         |   |              |        |        |               |             |        | 4,106   |      |   |        |  |       |        |          |  |          |   |         | 4,106  |          |   |          |  |         
|                           | Reversal of deferred compensation for stock options due to
    employee terminations |                                                                                             |        |      |              |   |         | (116      | ) |               |        |         |   |              |        |        |               |             |        | 116     |      |   |        |  |       |        |          |  |          |   |         |       |          |   |          |  |         
|                           | Common shares issued in exchange for lease amendment                                 |                                                                                             |        | 70    |              |   |         | 80        |   |               |        |         |   |              |        |        |               |             |        |        |      |   |        |  |       |        |          |  |          |   |         | 80     |          |   |          |  |         
|                           | Other comprehensive income:                                                          |                                                                                             |        |       |              |   |         |           |   |               |        |          |   |              |        |         |               |             |        |         |      |   |        |   |       |        |          |   |          |   |         |        |          |   |          |   |         
|                           |                                                                                      | Reclassification adjustment for available-for-sale realized
    losses included in net loss |        |       |             |   |         |           |  |               |        |          |  |              |        |         |              |             |        |         |     |   |        |   | 24    |        |          |   |         |   |         |        | 24       |   |          |   | 24       |  
|                           |                                                                                      | Currency translation adjustment                                                             |        |       |             |   |         |           |  |               |        |          |  |              |        |         |              |             |        |         | 68   |   |        |   | 1,674 |        |          |   |         |   |         |        | 1,742    |   |          |   | 1,674    |  
|                           |                                                                                      | Net loss                                                                                    |        |       |             |   |         |           |  |               |        |          |  |              |        |         |              |             |        |         |     |   |        |   |      |        |          |   | (64,308  | ) |         |        | (64,308  | ) |          |   | (64,308  | )
|                           |                                                                                      |                                                                                             |        |       |              |   |         |           |   |               |        |          |   |              |        |         |               |             |        |         |      |   |        |   |       |        |         
|BALANCE, December 31, 2005 |                                                                                      |                                                                                             | 90,974 |       |              | $ | 422,691 |           |   |               | 79     |          |   | $            | 576    |         |               | $           | (2,811 | )       |      | $ | 6,258  |   |       | $      | (360,767 | ) |          | $ | 65,947  |        |          | $ | (62,610  | )
|                           |                                                                                      |                                                                                             |        |       |              |   |         |           |   |               |        |          |   |              |        |         |               |             |        |         |      |   |        |   |       |        |         

See accompanying notes


F-3



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands)


|                                                                                                                             |                                                                                  |                          |         |         |                       |   |          |         |   |   |         |         |  
|---------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ------------------------ | ------- | ------- | --------------------- | - | -------- | ------- | - | - | ------- | ------- | -
|                                                                                                                             |                                                                                  | Years Ended December 31, |        
|                                                                                                                             |                                                                                  |                          |        
|                                                                                                                             |                                                                                  |                          |         | 2004    |                       |   |         
|                                                                                                                             |                                                                                  | 2003                     |         |         | (Restated-See Note 2) |   |          | 2005    |  
|                                                                                                                             |                                                                                  |                          |         |         |                       |   |          |         |  
|Operating activities:                                                                                                        |                                                                                  |                          |         |         |                       |   |          |         |   |   |         |        
|Net income (loss)                                                                                                            |                                                                                  | $                        | 63,248  |         |                       | $ | (207,358 | )       |   | $ | (64,308 | )      
|Adjustments to reconcile net income (loss) to net cash used in
    operating activities:                                     |                                                                                  |                          |         |         |                       |   |          |         |   |   |         |        
|                                                                                                                             | Depreciation and amortization                                                    |                          |         | 15,860  |                       |   |          | 17,179  |   |   |         | 19,578  |  
|                                                                                                                             | Stock-based compensation expense                                                 |                          |         | 75      |                       |   |          | 11,844  |   |   |         | 4,106   |  
|                                                                                                                             | In-process research and development charge                                       |                          |         |        |                       |   |          | 43,400  |   |   |         |        |  
|                                                                                                                             | Inventory write-down                                                             |                          |         |        |                       |   |          | 8,513   |   |   |         | 5,751   |  
|                                                                                                                             | Impairment of core technology intangible asset                                   |                          |         |        |                       |   |          |        |   |   |         | 4,912   |  
|                                                                                                                             | Tax benefit on stock options                                                     |                          |         | 6,326   |                       |   |          |        |   |   |         |        |  
|                                                                                                                             | Amortization of issuance costs, convertible notes payable and
    line of credit |                          |         |        |                       |   |          |        |   |   |         | 1,008   |  
|                                                                                                                             | Deferred income taxes                                                            |                          |         | (48,996 | )                     |   |          | 59,188  |   |   |         | (2,260  | )
|                                                                                                                             | Other                                                                            |                          |         | 231     |                       |   |          |        |   |   |         | 80      |  
|Cash provided by (used in) changes in operating assets and
    liabilities, net of the effects of the OctigaBay acquisition: |                                                                                  |                          |         |         |                       |   |          |         |   |   |         |        
|                                                                                                                             | Accounts receivable                                                              |                          |         | (18,553 | )                     |   |          | 15,471  |   |   |         | (21,623 | )
|                                                                                                                             | Inventory                                                                        |                          |         | (27,084 | )                     |   |          | (47,443 | ) |   |         | (10,628 | )
|                                                                                                                             | Prepaid expenses and other assets                                                |                          |         | (11,893 | )                     |   |          | 11,555  |   |   |         | 3,908   |  
|                                                                                                                             | Service inventory                                                                |                          |         | (180    | )                     |   |          | (58     | ) |   |         | 141     |  
|                                                                                                                             | Accounts payable                                                                 |                          |         | (678    | )                     |   |          | 9,609   |   |   |         | (8,422  | )
|                                                                                                                             | Accrued payroll and related expenses and other accrued
    liabilities           |                          |         | (1,897  | )                     |   |          | 1,061   |   |   |         | 833     |  
|                                                                                                                             | Other non-current liabilities                                                    |                          |         |        |                       |   |          |        |   |   |         | 473     |  
|                                                                                                                             | Deferred revenue                                                                 |                          |         | 14,828  |                       |   |          | 24,383  |   |   |         | 29,746  |  
|                                                                                                                             |                                                                                  |                          |         |         |                       |   |          |         |  
|Net cash used in operating activities                                                                                        |                                                                                  |                          | (8,713  | )       |                       |   | (52,656  | )       |   |   | (36,705 | )      
|Investing activities:                                                                                                        |                                                                                  |                          |         |         |                       |   |          |         |   |   |         |        
|                                                                                                                             | Sales/maturities of short-term investments                                       |                          |         | 14,563  |                       |   |          | 68,635  |   |   |         | 44,437  |  
|                                                                                                                             | Purchases of short-term investments                                              |                          |         | (49,133 | )                     |   |          | (68,318 | ) |   |         | (10,161 | )
|                                                                                                                             | Acquisition of OctigaBay, net of cash acquired                                   |                          |         |        |                       |   |          | (6,270  | ) |   |         |        |  
|                                                                                                                             | (Increase) decrease in restricted cash                                           |                          |         |        |                       |   |          | (11,437 | ) |   |         | 11,437  |  
|                                                                                                                             | Purchases of property and equipment                                              |                          |         | (6,599  | )                     |   |          | (12,518 | ) |   |         | (3,982  | )
|                                                                                                                             |                                                                                  |                          |         |         |                       |   |          |         |  
|Net cash provided by (used in) investing activities                                                                          |                                                                                  |                          | (41,169 | )       |                       |   | (29,908  | )       |   |   | 41,731  |        
|Financing activities:                                                                                                        |                                                                                  |                          |         |         |                       |   |          |         |   |   |         |        
|                                                                                                                             | Sale of common stock, net of issuance costs                                      |                          |         | 49,059  |                       |   |          |        |   |   |         |        |  
|                                                                                                                             | Proceeds from issuance of common stock through employee stock
    purchase plan  |                          |         | 1,646   |                       |   |          | 1,796   |   |   |         | 1,211   |  
|                                                                                                                             | Proceeds from exercise of options                                                |                          |         | 12,094  |                       |   |          | 2,841   |   |   |         | 138     |  
|                                                                                                                             | Proceeds from exercise of warrants                                               |                          |         | 6,665   |                       |   |          | 3,634   |   |   |         |        |  
|                                                                                                                             | Proceeds from issuance of convertible notes payable                              |                          |         |        |                       |   |          | 80,000  |   |   |         |        |  
|                                                                                                                             | Convertible notes payable and line of credit issuance costs                      |                          |         |        |                       |   |          | (3,376  | ) |   |         | (755    | )
|                                                                                                                             | Principal payments on debt                                                       |                          |         | (4,144  | )                     |   |          |        |   |   |         |        |  
|                                                                                                                             | Principal payments on capital leases                                             |                          |         | (241    | )                     |   |          | (742    | ) |   |         | (731    | )
|                                                                                                                             |                                                                                  |                          |         |         |                       |   |          |         |  
|Net cash provided by (used in) financing activities                                                                          |                                                                                  |                          | 65,079  |         |                       |   | 84,153   |         |   |   | (137    | )      
|                                                                                                                             |                                                                                  |                          |         |         |                       |   |          |         |  
|Effect of foreign exchange rate changes on cash and cash
    equivalents                                                     |                                                                                  |                          | 660     |         |                       |   | 370      |         |   |   | (595    | )      
|                                                                                                                             |                                                                                  |                          |         |         |                       |   |          |         |  
|Net increase in cash and cash equivalents                                                                                    |                                                                                  |                          | 15,857  |         |                       |   | 1,959    |         |   |   | 4,294   |        
|Cash and cash equivalents                                                                                                    |                                                                                  |                          |         |         |                       |   |          |         |   |   |         |        
|                                                                                                                             | Beginning of period                                                              |                          |         | 23,916  |                       |   |          | 39,773  |   |   |         | 41,732  |  
|                                                                                                                             |                                                                                  |                          |         |         |                       |   |          |         |  
|                                                                                                                             | End of period                                                                    |                          | $       | 39,773  |                       |   | $        | 41,732  |   |   | $       | 46,026  |  
|                                                                                                                             |                                                                                  |                          |         |         |                       |   |          |         |  
|Supplemental disclosure of cash flow information:                                                                            |                                                                                  |                          |         |         |                       |   |          |         |   |   |         |        
|                                                                                                                             | Cash paid for interest                                                           |                          | $       | 213     |                       |   | $        | 153     |   |   | $       | 2,972   |  
|                                                                                                                             | Cash paid for income taxes                                                       |                          |         | 2,741   |                       |   |          | 590     |   |   |         | 312     |  
|Non-cash investing and financing activities:                                                                                 |                                                                                  |                          |         |         |                       |   |          |         |   |   |         |        
|                                                                                                                             | Inventory transfers to fixed assets and service inventory                        |                          |         | 8,095   |                       |   |          | 11,281  |   |   |         | 8,703   |  
|                                                                                                                             | Preferred stock converted to common stock                                        |                          |         | 24,946  |                       |   |          |        |   |   |         |        |  
|                                                                                                                             | Shares issued in acquisition                                                     |                          |         |        |                       |   |          | 83,542  |   |   |         |        |  
|                                                                                                                             | Warrants issued in connection with line of credit arrangement                    |                          |         |        |                       |   |          |        |   |   |         | 219     |  

See accompanying notes


F-4



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|       |                        
|------ | -----------------------
|NOTE 1 | DESCRIPTION OF BUSINESS







|       |                                                      
|------ | -----------------------------------------------------
|NOTE 2 | RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS



F-5



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                            |  |                                      |          |   |             |   |          |        |  |   |        |  
|------------------------------------------- |  | ------------------------------------ | -------- | - | ----------- | - | -------- | ------ |  | - | ------ | -
|                                            |  | Consolidated Statement of Operations |         
|                                            |  |                                      |         
|                                            |  | As Previously                        |          |   |            
|                                            |  | Reported                             |          |   | As Restated |   |          | Change | 
|                                            |  |                                      |          |   |             |   |          |        | 
|Year Ended December 31, 2004:               |  |                                      |          |   |             |   |          |        |  |   |        |  
|Product revenue                             |  | $                                    | 99,236   |   |             | $ | 95,901   |        |  | $ | (3,335 | )
|Total revenue                               |  | $                                    | 149,184  |   |             | $ | 145,849  |        |  | $ | (3,335 | )
|Cost of product revenue                     |  | $                                    | 107,264  |   |             | $ | 104,196  |        |  | $ | (3,068 | )
|Research and development (a)                |  | $                                    | 50,198   |   |             | $ | 53,266   |        |  | $ | 3,068  |  
|Net loss                                    |  | $                                    | (204,023 | ) |             | $ | (207,358 | )      |  | $ | (3,335 | )
|Basic and diluted net loss per common share |  | $                                    | (2.45    | ) |             | $ | (2.49    | )      |  | $ | (0.04  | )

|                             |  |                            |          |   |             |   |          |        |  |   |        |  
|---------------------------- |  | -------------------------- | -------- | - | ----------- | - | -------- | ------ |  | - | ------ | -
|                             |  | Consolidated Balance Sheet |         
|                             |  |                            |         
|                             |  | As Previously              |          |   |            
|                             |  | Reported                   |          |   | As Restated |   |          | Change | 
|                             |  |                            |          |   |             |   |          |        | 
|As of December 31, 2004:     |  |                            |          |   |             |   |          |        |  |   |        |  
|Current deferred revenue (b) |  | $                          | 53,219   |   |             | $ | 56,554   |        |  | $ | 3,335  |  
|Accumulated deficit          |  | $                          | (293,124 | ) |             | $ | (296,459 | )      |  | $ | (3,335 | )








| |     |                                                                                                                                                                                       
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Previously reported amount was increased by $5,068 to conform to
    2005 financial statement presentation. Amount was reclassified
    from Acquisition-related Compensation Expense.
|
| | (b) | Previously reported amount was decreased by $1,027 to conform to
    2005 financial statement presentation. Amount was reclassified
    to Long-term Deferred Revenue.                



|       |                                           
|------ | ------------------------------------------
|NOTE 3 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting Principles




Principles of Consolidation




Reclassifications




Use of Estimates




F-6



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Cash and Cash Equivalents



Convertible Notes Payable and Lines of Credit. Convertible Notes Payable
and Lines of Credit


Short-term Investments




Concentration of Credit Risk


 Segment Information




Accounts Receivable


 Convertible
Notes Payable and Lines of Credit.


Fair Values of Financial Instruments




F-7



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Inventories


first-in,  Convertible Notes Payable
and Lines of Credit.




Property and Equipment, net


 Convertible
Notes Payable and Lines of Credit.


Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use


Service Inventory


 Convertible Notes Payable and
Lines of Credit.


F-8



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Goodwill and Other Intangible Assets


Goodwill and Other
Intangible Assets




Impairment of Long-Lived Assets


Accounting for the
Impairment or Disposal of Long-Lived Assets


Revenue Recognition


Revenue Recognition in Financial
Statements


Products:




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Cray X1/X1E and Cray XT3 Product Lines: The
    Company recognizes revenue from product sales upon customer
    acceptance of the system, when there are no significant
    unfulfilled Company obligations stipulated by the contract that
    affect the customers final acceptance, the price is
    determinable and collection is reasonably assured. A
    customer-signed notice of acceptance or similar document is
    required from the customer prior to revenue recognition.                                                        
|
| |  | Cray XD1 Product Line: The Company recognizes
    revenue from product sales of Cray XD1 systems upon
    shipment to, or delivery to, the customer, depending upon
    contract terms, when there are no significant unfulfilled
    Company obligations stipulated by the contract, the price is
    determinable and collection is reasonably assured. If there is a
    contractual requirement for customer acceptance, revenue is
    recognized upon receipt of the notice of acceptance and when
    there are no unfulfilled obligations.

F-9



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts




Services:


Multiple-Element Arrangements. 00-21, Revenue Arrangements with Multiple Deliverables




| |   |                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------
| |  | The element could be sold separately;                                                                                                         
|
| |  | The fair value of the undelivered element is
    established; and                                                                             
|
| |  | In cases with any general right of return, our performance with
    respect to any undelivered element is within our control and
    probable.



Foreign Currency Translation




F-10



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Research and Development


Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed




Income Taxes


Accounting for Income Taxes


Stock-Based Compensation


Accounting for Stock
Issued to Employees


F-11



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Accounting for Stock-based
Compensation


|                                                        |  |      |            |  |      |  |            |      |  |  |            | 
|------------------------------------------------------- |  | ---- | ---------- |  | ---- |  | ---------- | ---- |  |  | ---------- | 
|                                                        |  | 2003 |            |  | 2004 |  |            | 2005 | 
|                                                        |  |      |            |  |      |  |            |      | 
|Risk-free interest rate                                 |  |      | 4.3%       |  |      |  | 4.2%       |      |  |  | 4.1%       | 
|Expected dividend yield                                 |  |      | 0%         |  |      |  | 0%         |      |  |  | 0%         | 
|Volatility                                              |  |      | 84%        |  |      |  | 82%        |      |  |  | 85%        | 
|Expected life                                           |  |      | 7.1  years |  |      |  | 6.9  years |      |  |  | 4.6  years | 
|Weighted average Black-Scholes value of options granted |  |      | $8.43      |  |      |  | $3.75      |      |  |  | $1.36      | 





|                               |                                                                                                                                                 |      |        |         |            |   |          |         |   |   |         |         |  
|------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------- | ---- | ------ | ------- | ---------- | - | -------- | ------- | - | - | ------- | ------- | -
|                               |                                                                                                                                                 |      |        | 2004    |            |   |         
|                               |                                                                                                                                                 | 2003 |        |         | (Restated) |   |          | 2005    |  
|                               |                                                                                                                                                 |      |        |         |            |   |          |         |  
|Net income (loss), as reported |                                                                                                                                                 | $    | 63,248 |         |            | $ | (207,358 | )       |   | $ | (64,308 | )      
|Add:                           |                                                                                                                                                 |      |        |         |            |   |          |         |   |   |         |        
|                               | Stock-based employee compensation included in reported net
    income (loss), net of related tax effects                                        |      |        | 75      |            |   |          | 11,844  |   |   |         | 4,106   |  
|Less:                          |                                                                                                                                                 |      |        |         |            |   |          |         |   |   |         |        
|                               | Amortized stock-based employee compensation expense determined
    under fair value based method for all awards, net of related tax
    effects |      |        | (10,207 | )          |   |          | (19,423 | ) |   |         | (30,524 | )
|                               |                                                                                                                                                 |      |        |         |            |   |          |         |  
|Pro forma net income (loss)    |                                                                                                                                                 | $    | 53,116 |         |            | $ | (214,937 | )       |   | $ | (90,726 | )      
|                               |                                                                                                                                                 |      |        |         |            |   |          |         |  

Shareholders Equity, Stock Option Plans


F-12



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|         |             |      |   |      |            |  |   |       |   |  |   |       |  
|-------- | ----------- | ---- | - | ---- | ---------- |  | - | ----- | - |  | - | ----- | -
|         |             |      |   | 2004 |            |  |  
|         |             | 2003 |   |      | (Restated) |  |   | 2005  |  
|         |             |      |   |      |            |  |   |       |  
|Basic:   |             |      |   |      |            |  |   |       |   |  |   |      
|         | As reported |      | $ | 0.94 |            |  | $ | (2.49 | ) |  | $ | (0.73 | )
|         | Pro forma   |      | $ | 0.79 |            |  | $ | (2.58 | ) |  | $ | (1.03 | )
|Diluted: |             |      |   |      |            |  |   |       |   |  |   |      
|         | As reported |      | $ | 0.81 |            |  | $ | (2.49 | ) |  | $ | (0.73 | )
|         | Pro forma   |      | $ | 0.68 |            |  | $ | (2.58 | ) |  | $ | (1.03 | )

Shipping and Handling Costs




Advertising Costs




Earnings (Loss) Per Share (EPS)






|                                                                                                       |                            |                          |        |        |      |  |        |      |  |  |        |   | 
|------------------------------------------------------------------------------------------------------ | -------------------------- | ------------------------ | ------ | ------ | ---- |  | ------ | ---- |  |  | ------ | - | 
|                                                                                                       |                            | Years Ended December 31, |       
|                                                                                                       |                            |                          |       
|                                                                                                       |                            | 2003                     |        |        | 2004 |  |        | 2005 | 
|                                                                                                       |                            |                          |        |        |      |  |        |      | 
|Weighted average number of shares used in basic EPS                                                    |                            |                          | 67,098 |        |      |  | 83,387 |      |  |  | 88,499 |  
|Effect of dilutive securities:                                                                         |                            |                          |        |        |      |  |        |      |  |  |        |  
|                                                                                                       | Stock options and warrants |                          |        | 10,763 |      |  |        |     |  |  |        |  | 
|                                                                                                       |                            |                          |        |        |      |  |        |      | 
|Weighted average number of common shares and potentially
    dilutive common stock used in diluted EPS |                            |                          | 77,861 |        |      |  | 83,387 |      |  |  | 88,499 |  
|                                                                                                       |                            |                          |        |        |      |  |        |      | 
|Potentially dilutive securities excluded from computations
    because they are antidilutive           |                            |                          | 8,654  |        |      |  | 36,300 |      |  |  | 48,392 |  
|                                                                                                       |                            |                          |        |        |      |  |        |      | 

F-13



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Accumulated Other Comprehensive Income (Loss)




|                                                                         |                                               |      |      |      |      |   |       |       |  |   |       |       | 
|------------------------------------------------------------------------ | --------------------------------------------- | ---- | ---- | ---- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                                                                         |                                               | 2003 |      |      | 2004 |   |       | 2005  | 
|                                                                         |                                               |      |      |      |      |   |       |       | 
|Accumulated unrealized gain (loss) on available-for-sale
    investments |                                               | $    | 9    |      |      | $ | (24   | )     |  | $ |      |      
|Accumulated currency translation adjustment                              |                                               |      | (816 | )    |      |   | 4,584 |       |  |   | 6,258 |      
|                                                                         |                                               |      |      |      |      |   |       |       | 
|                                                                         | Accumulated other comprehensive income (loss) |      | $    | (807 | )    |   | $     | 4,560 |  |   | $     | 6,258 | 
|                                                                         |                                               |      |      |      |      |   |       |       | 

Recent Accounting Pronouncements


Share-Based Payment


Stock-Based
Compensation




Accounting for Conditional Asset
Retirement Obligations Accounting for Asset Retirement
Obligations


Accounting Changes and Error Corrections Accounting Changes Reporting Accounting


F-14



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Changes in Interim Financial Statements


143-1, Accounting for Electronic Equipment Waste Obligations
Pursuant to a European Union Directive 143-1). 143-1 Accounting for
Asset Retirement Obligations Accounting for Conditional Asset Retirement Obligations


The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments 115-1). 115-1 115-1 115-1




|       |                       
|------ | ----------------------
|NOTE 4 | SHORT-TERM INVESTMENTS



|                                      |                              |           |        |        |            |   |   |            |  |   |            |     |   |   |        |        | 
|------------------------------------- | ---------------------------- | --------- | ------ | ------ | ---------- | - | - | ---------- |  | - | ---------- | --- | - | - | ------ | ------ | 
|                                      |                              | Amortized |        |        | Gross      |   |   | Gross      |  |   |           
|                                      |                              | Cost      |        |        | Unrealized |   |   | Unrealized |  |   |           
|                                      |                              | Basis     |        |        | Gains      |   |   | Losses     |  |   | Fair Value |    
|                                      |                              |           |        |        |            |   |   |            |  |   |            |    
|Commercial paper                      |                              | $         | 1,294  |        |            |   |  |            |  |   |           |     |   | $ | 1,294  |       
|U.S. government and agency securities |                              |           | 18,026 |        |            | $ | 3 |            |  | $ | (9         | )   |   |   | 18,020 |       
|Asset-backed securities               |                              |           | 2,515  |        |            |   |  |            |  |   | (2         | )   |   |   | 2,513  |       
|Corporate notes and bonds             |                              |           | 12,442 |        |            |   |  |            |  |   | (16        | )   |   |   | 12,426 |       
|                                      |                              |           |        |        |            |   |   |            |  |   |            |    
|                                      | Total short-term investments |           | $      | 34,277 |            |   | $ | 3          |  |   | $          | (27 | ) |   | $      | 34,253 | 
|                                      |                              |           |        |        |            |   |   |            |  |   |            |    



F-15



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|       |                         
|------ | ------------------------
|NOTE 5 | ACCOUNTS RECEIVABLE, NET



|                                |  |              |        |   |      |   |        |  
|------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                                |  | December 31, |       
|                                |  |              |       
|                                |  | 2004         |        |   | 2005 |  
|                                |  |              |        |   |      |  
|Trade accounts receivable       |  | $            | 23,737 |   |      | $ | 14,547 |  
|Unbilled receivables            |  |              | 6,770  |   |      |   | 12,340 |  
|Government funding pass-through |  |              | 4,015  |   |      |   | 8,476  |  
|Advance billings                |  |              | 102    |   |      |   | 19,894 |  
|                                |  |              |        |   |      |  
|                                |  |              | 34,624 |   |      |   | 55,257 |  
|Allowance for doubtful accounts |  |              | (1,439 | ) |      |   | (193   | )
|                                |  |              |        |   |      |  
|Accounts receivable, net        |  | $            | 33,185 |   |      | $ | 55,064 |  
|                                |  |              |        |   |      |  









|       |          
|------ | ---------
|NOTE 6 | INVENTORY



|                             |  |              |        |  |      |   |        | 
|---------------------------- |  | ------------ | ------ |  | ---- | - | ------ | 
|                             |  | December 31, |       
|                             |  |              |       
|                             |  | 2004         |        |  | 2005 |  
|                             |  |              |        |  |      |  
|Components and subassemblies |  | $            | 24,615 |  |      | $ | 10,706 | 
|Work in process              |  |              | 19,541 |  |      |   | 8,314  | 
|Finished goods               |  |              | 27,365 |  |      |   | 48,692 | 
|                             |  |              |        |  |      |  
|                             |  | $            | 71,521 |  |      | $ | 67,712 | 
|                             |  |              |        |  |      |  



F-16



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|       |                            
|------ | ---------------------------
|NOTE 7 | PROPERTY AND EQUIPMENT, NET



|                                          |  |              |         |   |      |   |         |  
|----------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                          |  | December 31, |        
|                                          |  |              |        
|                                          |  | 2004         |         |   | 2005 |  
|                                          |  |              |         |   |      |  
|Land                                      |  | $            | 131     |   |      | $ | 131     |  
|Building                                  |  |              | 9,590   |   |      |   | 9,638   |  
|Furniture and equipment                   |  |              | 8,971   |   |      |   | 14,161  |  
|Computer equipment                        |  |              | 66,305  |   |      |   | 70,704  |  
|Leasehold improvements                    |  |              | 3,854   |   |      |   | 3,046   |  
|                                          |  |              |         |   |      |  
|                                          |  |              | 88,851  |   |      |   | 97,680  |  
|Accumulated depreciation and amortization |  |              | (51,976 | ) |      |   | (66,388 | )
|                                          |  |              |         |   |      |  
|Property and equipment, net               |  | $            | 36,875  |   |      | $ | 31,292  |  
|                                          |  |              |         |   |      |  





|       |                       
|------ | ----------------------
|NOTE 8 | SERVICE INVENTORY, NET



|                         |  |              |         |   |      |   |         |  
|------------------------ |  | ------------ | ------- | - | ---- | - | ------- | -
|                         |  | December 31, |        
|                         |  |              |        
|                         |  | 2004         |         |   | 2005 |  
|                         |  |              |         |   |      |  
|Service inventory        |  | $            | 29,899  |   |      | $ | 26,201  |  
|Accumulated depreciation |  |              | (26,309 | ) |      |   | (22,916 | )
|                         |  |              |         |   |      |  
|Service inventory, net   |  | $            | 3,590   |   |      | $ | 3,285   |  
|                         |  |              |         |   |      |  



|       |                               
|------ | ------------------------------
|NOTE 9 | GOODWILL AND INTANGIBLE ASSETS



|                                                   |  |      |        |  |      |   |        | 
|-------------------------------------------------- |  | ---- | ------ |  | ---- | - | ------ | 
|                                                   |  | 2004 |        |  | 2005 |  
|                                                   |  |      |        |  |      |  
|Goodwill, at January 1                             |  | $    | 13,344 |  |      | $ | 55,644 | 
|Acquisition                                        |  |      | 38,836 |  |      |   |       | 
|Foreign currency translation adjustments and other |  |      | 3,464  |  |      |   | 1,195  | 
|                                                   |  |      |        |  |      |  
|Goodwill, at December 31                           |  | $    | 55,644 |  |      | $ | 56,839 | 
|                                                   |  |      |        |  |      |  

F-17



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                                                          |  |              |       |  |      |   |       | 
|--------------------------------------------------------------------------------------------------------- |  | ------------ | ----- |  | ---- | - | ----- | 
|                                                                                                          |  | December 31, |      
|                                                                                                          |  |              |      
|                                                                                                          |  | 2004         |       |  | 2005 |  
|                                                                                                          |  |              |       |  |      |  
|Core technology acquired in OctigaBay acquisition, net of
    accumulated amortization of $503,000 and $0 |  | $            | 6,197 |  |      | $ |      | 
|Capitalized patent costs, net                                                                             |  |              | 1,097 |  |      |   | 1,113 | 
|                                                                                                          |  |              |       |  |      |  
|Intangible assets, net                                                                                    |  | $            | 7,294 |  |      | $ | 1,113 | 
|                                                                                                          |  |              |       |  |      |  





|        |                 
|------- | ----------------
|NOTE 10 | DEFERRED REVENUE



|                                |                                         |              |        |        |      |   |        |        | 
|------------------------------- | --------------------------------------- | ------------ | ------ | ------ | ---- | - | ------ | ------ | 
|                                |                                         | December 31, |       
|                                |                                         |              |       
|                                |                                         | 2004         |        |        |     
|                                |                                         | (Restated)   |        |        | 2005 |  
|                                |                                         |              |        |        |      |  
|Deferred product revenue        |                                         | $            | 36,824 |        |      | $ | 58,593 |       
|Deferred service revenue        |                                         |              | 20,636 |        |      |   | 28,390 |       
|Other deferred revenue          |                                         |              | 121    |        |      |   |       |       
|                                |                                         |              |        |        |      |  
|                                | Total deferred revenue                  |              |        | 57,581 |      |   |        | 86,983 | 
|Less long-term deferred revenue |                                         |              | (1,027 | )      |      |   | (5,234 | )     
|                                |                                         |              |        |        |      |  
|                                | Deferred revenue in current liabilities |              | $      | 56,554 |      |   | $      | 81,749 | 
|                                |                                         |              |        |        |      |  





|        |                                    
|------- | -----------------------------------
|NOTE 11 | RESTRUCTURING AND SEVERANCE CHARGES


Summary of Significant Accounting Policies, Impairment of
Long-Lived Assets.






F-18



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                                         |                                                      |      |       |        |      |   |       |        |   |   |       |        |  
|-------------------------------------------------------- | ---------------------------------------------------- | ---- | ----- | ------ | ---- | - | ----- | ------ | - | - | ----- | ------ | -
|                                                         |                                                      | 2003 |       |        | 2004 |   |       | 2005   |  
|                                                         |                                                      |      |       |        |      |   |       |        |  
|Balance, January 1                                       |                                                      | $    | 866   |        |      | $ | 3,069 |        |   | $ | 4,690 |       
|                                                         | Additional restructuring charge                      |      |       | 3,298  |      |   |       | 8,077  |   |   |       | 5,092  |  
|                                                         | Payments                                             |      |       | (1,097 | )    |   |       | (6,420 | ) |   |       | (5,724 | )
|                                                         | Adjustments to previously accrued amounts            |      |       |       |      |   |       | (91    | ) |   |       | (255   | )
|                                                         | Foreign currency translation adjustment              |      |       | 2      |      |   |       | 55     |   |   |       | (221   | )
|                                                         |                                                      |      |       |        |      |   |       |        |  
|Total restructuring and severance liability, December 31 |                                                      |      | 3,069 |        |      |   | 4,690 |        |   |   | 3,582 |       
|                                                         | Less long-term restructuring and severance liability |      |       |       |      |   |       |       |   |   |       | (362   | )
|                                                         |                                                      |      |       |        |      |   |       |        |  
|Current restructuring and severance liability            |                                                      | $    | 3,069 |        |      | $ | 4,690 |        |   | $ | 3,220 |       
|                                                         |                                                      |      |       |        |      |   |       |        |  



|        |                              
|------- | -----------------------------
|NOTE 12 | COMMITMENTS AND CONTINGENCIES





Convertible Notes Payable and Lines of Credit


|                                   |                                   |         |     |    |           |   |       |             |  |   |        |  | 
|---------------------------------- | --------------------------------- | ------- | --- | -- | --------- | - | ----- | ----------- |  | - | ------ |  | 
|                                   |                                   | Capital |     |    | Operating |   |       | Development | 
|                                   |                                   | leases  |     |    | leases    |   |       | agreements  | 
|                                   |                                   |         |     |    |           |   |       |             | 
|2006                               |                                   | $       | 128 |    |           | $ | 3,473 |             |  | $ | 13,100 | 
|2007                               |                                   |         | 31  |    |           |   | 2,950 |             |  |   | 2,027  | 
|2008                               |                                   |         |    |    |           |   | 2,534 |             |  |   | 43     | 
|2009                               |                                   |         |    |    |           |   | 850   |             |  |   |       | 
|                                   |                                   |         |     |    |           |   |       |             | 
|Minimum contractual commitments    |                                   |         | 159 |    |           | $ | 9,807 |             |  | $ | 15,170 | 
|                                   |                                   |         |     |    |           |   |       |             | 
|                                   | Less amount representing interest |         |     | (5 | )         |   |       |             |  |   |        |  | 
|                                   |                                   |         |     |    |           |   |       |             | 
|Recorded capital lease obligations |                                   | $       | 154 |    |           |   |       |             |  |   |        | 
|                                   |                                   |         |     |    |           |   |       |             | 





F-19



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Litigation










Other




F-20



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |             
|------- | ------------
|NOTE 13 | INCOME TAXES

Accounting for Income
Taxes




|              |  |                         |         |      |            |   |          |      |  |   |         |  
|------------- |  | ----------------------- | ------- | ---- | ---------- | - | -------- | ---- |  | - | ------- | -
|              |  | Year Ended December 31, |        
|              |  |                         |        
|              |  |                         |         | 2004 |            |   |         
|              |  | 2003                    |         |      | (Restated) |   |          | 2005 | 
|              |  |                         |         |      |            |   |          |      | 
|United States |  | $                       | 31,202  |      |            | $ | (92,654  | )    |  | $ | (63,304 | )
|International |  |                         | (10,161 | )    |            |   | (55,612  | )    |  |   | (2,492  | )
|              |  |                         |         |      |            |   |          |      | 
|Total         |  | $                       | 21,041  |      |            | $ | (148,266 | )    |  | $ | (65,796 | )
|              |  |                         |         |      |            |   |          |      | 



|                                           |                                    |                         |         |         |            |   |        |        |   |   |        |        |  
|------------------------------------------ | ---------------------------------- | ----------------------- | ------- | ------- | ---------- | - | ------ | ------ | - | - | ------ | ------ | -
|                                           |                                    | Year Ended December 31, |        
|                                           |                                    |                         |        
|                                           |                                    |                         |         | 2004    |            |   |       
|                                           |                                    | 2003                    |         |         | (Restated) |   |        | 2005   |  
|                                           |                                    |                         |         |         |            |   |        |        |  
|Current provision (benefit):               |                                    |                         |         |         |            |   |        |        |   |   |        |       
|                                           | Federal                            |                         | $       | 134     |            |   | $      |       |   |   | $      |       |  
|                                           | State                              |                         |         | (44     | )          |   |        |       |   |   |        | 128    |  
|                                           | Foreign                            |                         |         | 294     |            |   |        | 581    |   |   |        | 644    |  
|                                           |                                    |                         |         |         |            |   |        |        |  
|                                           | Total current provision            |                         |         | 384     |            |   |        | 581    |   |   |        | 772    |  
|Deferred provision (benefit):              |                                    |                         |         |         |            |   |        |        |   |   |        |       
|                                           | Federal                            |                         |         | (42,012 | )          |   |        | 61,906 |   |   |        |       |  
|                                           | State                              |                         |         | (482    | )          |   |        | (3,466 | ) |   |        |       |  
|                                           | Foreign                            |                         |         | (97     | )          |   |        | 71     |   |   |        | (2,260 | )
|                                           |                                    |                         |         |         |            |   |        |        |  
|                                           | Total deferred provision (benefit) |                         |         | (42,591 | )          |   |        | 58,511 |   |   |        | (2,260 | )
|                                           |                                    |                         |         |         |            |   |        |        |  
|Total provision (benefit) for income taxes |                                    | $                       | (42,207 | )       |            | $ | 59,092 |        |   | $ | (1,488 | )     
|                                           |                                    |                         |         |         |            |   |        |        |  

F-21



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                               |  |      |        |      |            |  |       |      |  |  |       |   
|-------------------------------------------------------------- |  | ---- | ------ | ---- | ---------- |  | ----- | ---- |  |  | ----- | --
|                                                               |  |      |        | 2004 |            |  |      
|                                                               |  | 2003 |        |      | (Restated) |  |       | 2005 | 
|                                                               |  |      |        |      |            |  |       |      | 
|Federal statutory income tax rate                              |  |      | 35.0   | %    |            |  | (35.0 | )%   |  |  | (35.0 | )%
|State taxes, net of federal effect                             |  |      | 2.2    |      |            |  | (2.4  | )    |  |  | (3.1  | ) 
|Impact of change in state rate                                 |  |      | (1.4   | )    |            |  |      |      |  |  |      |   
|Foreign taxes                                                  |  |      | (5.2   | )    |            |  | (0.3  | )    |  |  | 1.0   |   
|In-process research and development write-off                  |  |      |       |      |            |  | 10.6  |      |  |  |      |   
|Permanent differences                                          |  |      |       |      |            |  | 3.9   |      |  |  | 1.5   |   
|Foreign tax credit                                             |  |      |       |      |            |  | (0.3  | )    |  |  |      |   
|Research and development tax credit                            |  |      | (5.3   | )    |            |  | (1.0  | )    |  |  | (2.1  | ) 
|Other                                                          |  |      | 1.2    |      |            |  | (0.1  | )    |  |  | (0.4  | ) 
|Effect of change in valuation allowance on deferred tax assets |  |      | (227.1 | )    |            |  | 64.5  |      |  |  | 35.8  |   
|                                                               |  |      |        |      |            |  |       |      | 
|Effective income tax rate                                      |  |      | (200.6 | )%   |            |  | 39.9  | %    |  |  | (2.3  | )%
|                                                               |  |      |        |      |            |  |       |      | 



|           |                                     |              |   |         |      |  |   |          |  
|---------- | ----------------------------------- | ------------ | - | ------- | ---- |  | - | -------- | -
|           |                                     | December 31, |  
|           |                                     |              |  
|           |                                     | 2004         |   |         |     
|           |                                     | (Restated)   |   |         | 2005 | 
|           |                                     |              |   |         |      | 
|Assets    
|Current:   |                                     |              |   |         |      |  |   |         
|           | Inventory                           |              | $ | 2,714   |      |  | $ | 2,840    |  
|           | Accrued compensation                |              |   | 2,731   |      |  |   | 1,876    |  
|           | Deferred service revenue            |              |   | 1,452   |      |  |   | 684      |  
|           |                                     |              |   |         |      | 
|           | Gross current deferred tax assets   |              |   | 6,897   |      |  |   | 5,400    |  
|           | Valuation allowance                 |              |   | (6,848  | )    |  |   | (5,377   | )
|           |                                     |              |   |         |      | 
|           | Net current deferred tax assets     |              |   | 49      |      |  |   | 23       |  
|           |                                     |              |   |         |      | 
|Long-Term: |                                     |              |   |         |      |  |   |         
|           | Property and equipment              |              |   | 1,724   |      |  |   | 709      |  
|           | Research and experimentation        |              |   | 6,681   |      |  |   | 12,447   |  
|           | Net operating loss carryforwards    |              |   | 88,826  |      |  |   | 115,110  |  
|           | Accrued restructuring charge        |              |   | 801     |      |  |   | 764      |  
|           | Other                               |              |   | 568     |      |  |   | 576      |  
|           |                                     |              |   |         |      | 
|           | Gross long-term deferred tax assets |              |   | 98,600  |      |  |   | 129,606  |  
|           | Valuation allowance                 |              |   | (97,931 | )    |  |   | (129,031 | )
|           |                                     |              |   |         |      | 
|           | Net long-term deferred tax assets   |              |   | 669     |      |  |   | 575      |  
|           |                                     |              |   |         |      | 
|           | Total net deferred tax assets       |              |   | 718     |      |  |   | 598      |  
|           |                                     |              |   |         |      | 

F-22



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                               |                                          |              |        |        |      |   |     |   | 
|---------------------------------------------- | ---------------------------------------- | ------------ | ------ | ------ | ---- | - | --- | - | 
|                                               |                                          | December 31, |       
|                                               |                                          |              |       
|                                               |                                          | 2004         |        |        |     
|                                               |                                          | (Restated)   |        |        | 2005 |  
|                                               |                                          |              |        |        |      |  
|Liabilities                                    |                                          |              |        |        |      |   |     |  
|Current:                                       |                                          |              |        |        |      |   |     |  
|                                               | Other                                    |              |        | (173   | )    |   |     |  | 
|Long-Term:                                     |                                          |              |        |        |      |   |     |  
|                                               | Core technology intangible asset         |              |        | (2,028 | )    |   |     |  | 
|                                               | Other                                    |              |        | (179   | )    |   |     |  | 
|                                               |                                          |              |        |        |      |  
|                                               | Gross long-term deferred tax liabilities |              |        | (2,207 | )    |   |     |  | 
|                                               |                                          |              |        |        |      |  
|                                               | Total deferred tax liabilities           |              |        | (2,380 | )    |   |     |  | 
|                                               |                                          |              |        |        |      |  
|Net deferred tax asset (liability)             |                                          | $            | (1,662 | )      |      | $ | 598 |  
|                                               |                                          |              |        |        |      |  
|Net current deferred tax asset (liability)     |                                          | $            | (124   | )      |      | $ | 23  |  
|Net non-current deferred tax asset (liability) |                                          |              | (1,538 | )      |      |   | 575 |  
|                                               |                                          |              |        |        |      |  
|Net deferred tax asset (liability)             |                                          | $            | (1,662 | )      |      | $ | 598 |  
|                                               |                                          |              |        |        |      |  









|        |                                              
|------- | ---------------------------------------------
|NOTE 14 | CONVERTIBLE NOTES PAYABLE AND LINES OF CREDIT





F-23



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










Lines of Credit




F-24



---



##### Table of Contents



CRAY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Subsequent Events










|        |                     
|------- | --------------------
|NOTE 15 | SHAREHOLDERS EQUITY

Common Stock:


OctigaBay
Acquisition.


Exchangeable Shares:


F-25



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Preferred Stock:


Shareholder Warrants:


|             |           |                |  |                  |      |  |  |                  
|------------ | --------- | -------------- |  | ---------------- | ---- |  |  | -----------------
|Shares of    |           | Exercise Price |  | Expiration      
|Common Stock |           | per share      |  | Date of Warrants
|             |           |                |  |                 
|             | 524       |                |  | $                | 6.00 |  |  | May 21, 2006     
|             | 294,117   |                |  | $                | 4.50 |  |  | September 3, 2006
|             | 200,000   |                |  | $                | 1.65 |  |  | May 30, 2009     
|             | 5,139,408 |                |  | $                | 2.53 |  |  | June 21, 2009    
|             |           |                |  |                  |      |  |  |                  
|             | 5,634,049 |                |  |                  |      |  |  |                  
|             |           |                |  |                  |      |  |  |                  

Restricted Stock: 18-month


Stock Option Plans:


Accounting for Certain Transactions Involving Stock
Compensation




F-26



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                                         |           |                     |            |            |                     |   |      |             |          |  |            |  |  |   |      |  | 
|---------------------------------------- | --------- | ------------------- | ---------- | ---------- | ------------------- | - | ---- | ----------- | -------- |  | ---------- |  |  | - | ---- |  | 
|                                         |           | Outstanding Options |            |            | Exercisable Options |  
|                                         |           |                     |            |            |                     |  
|                                         |           |                     |            | Weighted   |                     |   |      |             | Weighted | 
|                                         |           |                     |            | Average    |                     |   |      |             | Average  | 
|                                         |           | Options             |            |            | Exercise            |   |      | Options     |          |  | Exercise   | 
|                                         |           | Outstanding         |            |            | Price               |   |      | Exercisable |          |  | Price      | 
|                                         |           |                     |            |            |                     |   |      |             |          |  |            | 
|Balance, January 1, 2003                 |           |                     | 13,380,602 |            |                     | $ | 4.52 |             |          |  | 6,811,975  |  |  | $ | 5.36 | 
|                                         |           |                     |            |            |                     |   |      |             |          |  |            | 
|                                         | Granted   |                     |            | 1,637,465  |                     |   |      | 9.63        |          |  |            |  |  |   |      |  | 
|                                         | Exercised |                     |            | (2,759,187 | )                   |   |      | 4.37        |          |  |            |  |  |   |      |  | 
|                                         | Canceled  |                     |            | (118,748   | )                   |   |      | 4.07        |          |  |            |  |  |   |      |  | 
|                                         |           |                     |            |            |                     |   |      |             |          |  |            | 
|Balance, December 31, 2003               |           |                     | 12,140,132 |            |                     |   | 5.23 |             |          |  | 7,380,453  |  |  | $ | 5.14 | 
|                                         |           |                     |            |            |                     |   |      |             |          |  |            | 
|                                         | Granted   |                     |            | 4,019,830  |                     |   |      | 4.59        |          |  |            |  |  |   |      |  | 
|                                         | Exercised |                     |            | (875,856   | )                   |   |      | 3.23        |          |  |            |  |  |   |      |  | 
|                                         | Canceled  |                     |            | (999,715   | )                   |   |      | 5.52        |          |  |            |  |  |   |      |  | 
|                                         |           |                     |            |            |                     |   |      |             |          |  |            | 
|Balance, December 31, 2004               |           |                     | 14,284,391 |            |                     |   | 5.16 |             |          |  | 8,857,598  |  |  | $ | 5.01 | 
|                                         |           |                     |            |            |                     |   |      |             |          |  |            | 
|                                         | Granted   |                     |            | 5,114,270  |                     |   |      | 2.14        |          |  |            |  |  |   |      |  | 
|                                         | Exercised |                     |            | (89,180    | )                   |   |      | 1.56        |          |  |            |  |  |   |      |  | 
|                                         | Canceled  |                     |            | (1,308,901 | )                   |   |      | 4.15        |          |  |            |  |  |   |      |  | 
|                                         |           |                     |            |            |                     |   |      |             |          |  |            | 
|Balance, December 31, 2005(a)            |           |                     | 18,000,580 |            |                     |   | 4.14 |             |          |  | 17,982,045 |  |  | $ | 4.14 | 
|                                         |           |                     |            |            |                     |   |      |             |          |  |            | 
|Available for grant at December 31, 2005 |           |                     | 733,419    |            |                     |   |      |             |          |  |            |  |  |   |      | 
|                                         |           |                     |            |            |                     |   |      |             |          |  |            | 






|    |                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The weighted average exercise price of outstanding options at
    December 31, 2005 includes the impact of the 2005 repricing
    of 1,274,260 options, as described above.

F-27



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                    |       |          |                     |         |          |              |         |  |          |          |            |             |  |  |          |  |  |   |       |  |  |  |            |  |  |   |       | 
|------------------- | ----- | -------- | ------------------- | ------- | -------- | ------------ | ------- |  | -------- | -------- | ---------- | ----------- |  |  | -------- |  |  | - | ----- |  |  |  | ---------- |  |  | - | ----- | 
|Outstanding Options |       |          | Exercisable Options |        
|                    |       |          |                     |        
|                    |       | Weighted |                     |         | Weighted |              |         |  |          | Weighted |           
|                    |       |          |                     | Average |          |              | Average |  |          |          |            | Average     | 
|Range of Exercise   |       |          | Number              |         |          | Remaining    |         |  | Exercise |          |            | Number      |  |  | Exercise | 
|Prices Per Share    |       |          | Outstanding         |         |          | Life (Years) |         |  | Price    |          |            | Exercisable |  |  | Price    | 
|                    |       |          |                     |         |          |              |         |  |          |          |            |             |  |  |          | 
|$                   | 0.26  |          |                     |        |          | $            | 1.00    |  |          |          | 386,452    |             |  |  | 9.4      |  |  | $ | 0.92  |  |  |  | 386,452    |  |  | $ | 0.92  | 
|$                   | 1.01  |          |                     |        |          | $            | 2.00    |  |          |          | 4,281,445  |             |  |  | 7.7      |  |  | $ | 1.55  |  |  |  | 4,281,445  |  |  | $ | 1.55  | 
|$                   | 2.01  |          |                     |        |          | $            | 3.00    |  |          |          | 3,318,953  |             |  |  | 5.9      |  |  | $ | 2.54  |  |  |  | 3,318,953  |  |  | $ | 2.54  | 
|$                   | 3.01  |          |                     |        |          | $            | 4.00    |  |          |          | 3,912,043  |             |  |  | 5.2      |  |  | $ | 3.71  |  |  |  | 3,911,661  |  |  | $ | 3.71  | 
|$                   | 4.01  |          |                     |        |          | $            | 6.00    |  |          |          | 1,566,132  |             |  |  | 2.2      |  |  | $ | 5.16  |  |  |  | 1,559,960  |  |  | $ | 5.16  | 
|$                   | 6.01  |          |                     |        |          | $            | 8.00    |  |          |          | 2,904,209  |             |  |  | 3.3      |  |  | $ | 7.10  |  |  |  | 2,892,542  |  |  | $ | 7.10  | 
|$                   | 8.01  |          |                     |        |          | $            | 11.00   |  |          |          | 1,050,426  |             |  |  | 4.8      |  |  | $ | 8.90  |  |  |  | 1,050,426  |  |  | $ | 8.90  | 
|$                   | 11.01 |          |                     |        |          | $            | 13.69   |  |          |          | 580,920    |             |  |  | 7.1      |  |  | $ | 11.18 |  |  |  | 580,606    |  |  | $ | 11.18 | 
|                    |       |          |                     |         |          |              |         |  |          |          |            |             |  |  |         
|$                   | 0.26  |          |                     |        |          | $            | 13.69   |  |          |          | 18,000,580 |             |  |  | 5.5      |  |  | $ | 4.14  |  |  |  | 17,982,045 |  |  | $ | 4.14  | 
|                    |       |          |                     |         |          |              |         |  |          |          |            |             |  |  |         



|                                               |  |      |   |      |  |   |        |  |  |   |       | 
|---------------------------------------------- |  | ---- | - | ---- |  | - | ------ |  |  | - | ----- | 
|                                               |  | 2003 |   | 2004 |  |   | 2005   | 
|                                               |  |      |   |      |  |   |        | 
|Research and development                       |  | $    |  |      |  | $ | 5,068  |  |  | $ | 3,444 | 
|Sales and marketing                            |  |      |  |      |  |   | 2,837  |  |  |   | 579   | 
|General and administrative                     |  |      |  |      |  |   | 3,229  |  |  |   | 13    | 
|                                               |  |      |   |      |  |   |        |  | 
|Total acquisition-related compensation expense |  | $    |  |      |  | $ | 11,134 |  |  | $ | 4,036 | 
|                                               |  |      |   |      |  |   |        |  | 

Employee Stock Purchase Plan:






|        |              
|------- | -------------
|NOTE 16 | BENEFIT PLANS

401(k) Plan




F-28



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|        |                    
|------- | -------------------
|NOTE 17 | SEGMENT INFORMATION

Disclosure about Segments of an
Enterprise and Related Information




|                                      |  |               |         |  |  |       |           |  |  |       |        |  |  |   |         | 
|------------------------------------- |  | ------------- | ------- |  |  | ----- | --------- |  |  | ----- | ------ |  |  | - | ------- | 
|                                      |  |               |         |  |  | Other |           |  | 
|                                      |  | United States |         |  |  |       | Countries |  |  | Total |       
|                                      |  |               |         |  |  |       |           |  |  |       |       
|For the year ended December 31, 2003: |  |               |         |  |  |       |           |  |  |       |        |  |  |   |         | 
|Product revenue                       |  | $             | 155,941 |  |  |       |           |  |  | $     | 19,063 |  |  | $ | 175,004 | 
|                                      |  |               |         |  |  |       |           |  |  |       |        | 
|Service revenue                       |  | $             | 38,117  |  |  |       |           |  |  | $     | 23,841 |  |  | $ | 61,958  | 
|                                      |  |               |         |  |  |       |           |  |  |       |        | 
|Long-lived assets                     |  | $             | 44,348  |  |  |       |           |  |  | $     | 3,875  |  |  | $ | 48,223  | 
|                                      |  |               |         |  |  |       |           |  |  |       |        | 

|                                                 |  |               |         |  |        |       |        |           |  |   |        |  |  |   |         | 
|------------------------------------------------ |  | ------------- | ------- |  | ------ | ----- | ------ | --------- |  | - | ------ |  |  | - | ------- | 
|                                                 |  |               |         |  |        | Other |        |           | 
|                                                 |  | United States |         |  | Canada |       |        | Countries |  |   | Total  | 
|                                                 |  |               |         |  |        |       |        |           |  |   |        | 
|For the year ended December 31, 2004 (Restated): |  |               |         |  |        |       |        |           |  |   |        |  |  |   |         | 
|Product revenue                                  |  | $             | 86,067  |  |        | $     | 352    |           |  | $ | 9,482  |  |  | $ | 95,901  | 
|                                                 |  |               |         |  |        |       |        |           |  |   |        | 
|Service revenue                                  |  | $             | 34,800  |  |        | $     | 1,297  |           |  | $ | 13,851 |  |  | $ | 49,948  | 
|                                                 |  |               |         |  |        |       |        |           |  |   |        | 
|Long-lived assets                                |  | $             | 54,306  |  |        | $     | 51,792 |           |  | $ | 5,338  |  |  | $ | 111,436 | 
|                                                 |  |               |         |  |        |       |        |           |  |   |        | 
|For the year ended December 31, 2005:            |  |               |         |  |        |       |        |           |  |   |        |  |  |   |         | 
|Product revenue                                  |  | $             | 104,274 |  |        | $     | 213    |           |  | $ | 47,611 |  |  | $ | 152,098 | 
|                                                 |  |               |         |  |        |       |        |           |  |   |        | 
|Service revenue                                  |  | $             | 33,377  |  |        | $     | 1,542  |           |  | $ | 14,034 |  |  | $ | 48,953  | 
|                                                 |  |               |         |  |        |       |        |           |  |   |        | 
|Long-lived assets                                |  | $             | 50,410  |  |        | $     | 44,311 |           |  | $ | 5,944  |  |  | $ | 100,665 | 
|                                                 |  |               |         |  |        |       |        |           |  |   |        | 





|        |                      
|------- | ---------------------
|NOTE 18 | OCTIGABAY ACQUISITION



F-29



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Business
Combinations


|                                           |                     |   |        |        | 
|------------------------------------------ | ------------------- | - | ------ | ------ | 
|Fair value of net tangible assets acquired |                     | $ | 10,521 |       
|Core technology                            |                     |   | 6,700  |       
|In-process research and development        |                     |   | 43,400 |       
|Goodwill                                   |                     |   | 38,836 |       
|                                           |                     |   |       
|                                           | Net assets acquired |   | $      | 99,457 | 
|                                           |                     |   |       

Shareholders Equity,




|        |                          
|------- | -------------------------
|NOTE 19 | INTEREST INCOME (EXPENSE)



|                              |  |      |      |   |      |   |      |      |  |   |        |  
|----------------------------- |  | ---- | ---- | - | ---- | - | ---- | ---- |  | - | ------ | -
|                              |  | 2003 |      |   | 2004 |   |      | 2005 | 
|                              |  |      |      |   |      |   |      |      | 
|Interest income               |  | $    | 657  |   |      | $ | 666  |      |  | $ | 741    |  
|Interest expense              |  |      | (213 | ) |      |   | (301 | )    |  |   | (4,203 | )
|                              |  |      |      |   |      |   |      |      | 
|Net interest income (expense) |  | $    | 444  |   |      | $ | 365  |      |  | $ | (3,462 | )
|                              |  |      |      |   |      |   |      |      | 





F-30



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##### Table of Contents



CRAY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                  
|------- | -----------------
|NOTE 20 | SUBSEQUENT EVENTS



F-31



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##### Table of Contents






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM














Internal Control 
Integrated Framework








F-32



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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
















| |                          
| | -------------------------
| | /s/ DELOITTE & TOUCHE LLP







F-33



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##### Table of Contents



Schedule II  Valuation and Qualifying
Accounts


December 31, 2005


|                                |  |            |       |  |            |   |     |            |  |            |        |      |  |   |       | 
|------------------------------- |  | ---------- | ----- |  | ---------- | - | --- | ---------- |  | ---------- | ------ | ---- |  | - | ----- | 
|                                |  | Balance at |       |  | Additions  |   |     |            |  | Balance at |       
|                                |  | Beginning  |       |  | Charged    |   |     |            |  | End of     |       
|Description                     |  | of Period  |       |  | to Expense |   |     | Deductions |  |            | Period |     
|                                |  |            |       |  |            |   |     |            |  |            |        |     
|Year ended December 31, 2003:   |  |            |       |  |            |   |     |            |  |            |        |      |  |   |       | 
|Allowance for doubtful accounts |  | $          | 1,098 |  |            | $ | 113 |            |  | $          | (86    | )(1) |  | $ | 1,125 | 
|                                |  |            |       |  |            |   |     |            |  |            |        |     
|Warranty accrual                |  | $          | 5,599 |  |            | $ | 380 |            |  | $          | (5,324 | )(2) |  | $ | 655   | 
|                                |  |            |       |  |            |   |     |            |  |            |        |     
|Year ended December 31, 2004:   |  |            |       |  |            |   |     |            |  |            |        |      |  |   |       | 
|Allowance for doubtful accounts |  | $          | 1,125 |  |            | $ | 373 |            |  | $          | (59    | )(1) |  | $ | 1,439 | 
|                                |  |            |       |  |            |   |     |            |  |            |        |     
|Warranty accrual                |  | $          | 655   |  |            | $ |    |            |  | $          | (655   | )(2) |  | $ |      | 
|                                |  |            |       |  |            |   |     |            |  |            |        |     
|Year ended December 31, 2005:   |  |            |       |  |            |   |     |            |  |            |        |      |  |   |       | 
|Allowance for doubtful accounts |  | $          | 1,439 |  |            | $ | 165 |            |  | $          | (1,411 | )(1) |  | $ | 193   | 
|                                |  |            |       |  |            |   |     |            |  |            |        |     
|Warranty accrual                |  | $          |      |  |            | $ |    |            |  | $          |       | (2)  |  | $ |      | 
|                                |  |            |       |  |            |   |     |            |  |            |        |     






|    |                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------
|(1) | Represents uncollectible accounts written off, net of recoveries.                                             
|   
|(2) | Represents warranty work performed on the T90 product line, and
    related reduction of the warranty accrual.

F-34