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                                                                    Exhibit 10.3

                                                            December 20, 2005

Brian C. Henry

Dear Brian:

      Cray Inc. (the "Company") considers it essential to the best interests of
the Company and its shareholders to attract the best talent and foster the
continuous employment of key personnel. In order to induce you to remain in the
employ of the Company and in consideration of your further services to the
Company, the Company agrees that you shall receive the benefits set forth in
this letter agreement ("Agreement") if you remain in the employment of the
Company through December 31, 2006, and December 31, 2007, as set forth below.

      1.    Bonus Amount.

                  a.    If you remain an employee of the Company through
                        December 31, 2006, you shall receive a cash payment
                        equal to 100% of the total of (a) your annual base
                        salary for 2006, exclusive of any bonus, variable pay
                        component or other amounts, and (b) the bonus you would
                        have earned under the Executive Bonus Plan for 2006
                        assuming 100% of the target is reached.

                  b.    If you remain an employee of the Company through
                        December 31, 2007, you shall receive a cash payment
                        equal to 50% of the total of (a) your annual base salary
                        for 2007, exclusive of any bonus, variable pay component
                        or other amounts, and (b) the bonus you would have
                        earned under the Executive Bonus Plan for 2007 assuming
                        100% of the target is reached.

      2.    Payment. The bonus payment earned pursuant to Section 1 above shall
            be paid in a lump sum as soon as is practicable after the
            determination of bonuses for the applicable year and in any event on
            or before March 15 of the year immediately following the end of the
            applicable year.

      3.    Vesting. The amounts to be paid under this Agreement shall vest in
            full as of December 31, 2006, and December 31, 2007, as applicable,
            or, subject to the provisions of Section 4 below, immediately upon
            the earlier termination of your employment by the Company without
            Cause or your termination of employment for Good Reason, as such
            terms are defined below. If your employment is terminated for Cause,
            death, Disability, retirement or resignation other than for Good
            Reason, then you shall receive no payments hereunder.

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      4.    Other Agreements and Policies.

            a. Change of Control. You are party to a letter agreement dated
            May 23 2005, with the Company regarding termination of employment
            following a Change of Control, as defined therein. If there occurs a
            Change of Control, as defined therein, while this Agreement is in
            effect, then the Board of Directors shall determine, prior to the
            Change of Control becoming effective, whether, in addition to the
            provisions of such letter agreement, the provisions of this
            Agreement shall also be applicable.

            b. Executive Severance Policy. If while this Agreement is in effect
            your employment is terminated by the Company without Cause or you
            terminate your employment for Good Reason, then you shall be
            eligible to receive both the payment pursuant to this Agreement and
            payment under the Company's Executive Severance Policy.

            c. Other Benefits. This Agreement does not affect any benefit plan
            of the Company in which you participate.

      5.    Definitions. As used in this Agreement, the following terms have the
            indicated meanings:

            "Cause" means a termination of employment resulting from a good
            faith determination by the Board of Directors that:

            a. you have willfully failed or refused in a material respect to
            follow reasonable policies or directives established by the Board of
            Directors or the President or willfully failed to attend to material
            duties or obligations of your office (other than any such failure
            resulting from your incapacity due to physical or mental illness),
            which you have failed to correct within a reasonable period
            following written notice to you; or

            b. there has been an act by you involving wrongful misconduct which
            has a demonstrably adverse impact on or material damage to the
            Company or its subsidiaries, or which constitutes a misappropriation
            of the assets of the Company; or

            c. you have engaged in an unauthorized disclosure of confidential
            information; or

            d. you, while employed by the Company, have performed services for
            another company or person which competes with the Company, without
            the prior written approval of the President of the Company; or

            e. you have materially breached your obligations hereunder or other
            agreement with the Company.

            "Disability" means that, at the time your employment is terminated,
            you have been unable to perform the duties of your position for a
            period of six consecutive months as a result of your incapability
            due to physical or mental illness.

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            "Good Reason" means:

            a. a reduction in salary or benefits (other than reductions
            applicable to employees generally);

            b. a material change in job responsibilities; or

            c. a request to relocate, except for office relocations that would
            not increase your one-way commute by more than 25 miles; or

            d. the failure of the Company to obtain the assumption of the
            Agreement as stipulated in Section 6.

6.    Company's Successors. The Company will require any successor (whether
      direct or indirect, by purchase, merger, consolidation or otherwise) to
      all or substantially all of the business and/or assets of the Company, to
      expressly assume and agree to perform the obligations under this Agreement
      in the same manner and to the same extent that the Company would be
      required to perform if no such succession had taken place. As used in this
      Section 6, "Company" includes any successor to its business or assets as
      aforesaid which executes and delivers this Agreement or which otherwise
      becomes bound by all the terms and provisions of this Agreement by
      operation of law.

7.    Termination of Agreement. This Agreement shall terminate upon your
      termination of employment with the Company, irrespective of reason, except
      for your right to receive any payment specified herein with respect to the
      year in which your termination occurs.

8.    General Provisions.

      a. Notice. Notices and all other communications provided for in this
      Agreement shall be in writing and shall be deemed to have been duly given
      when personally delivered or five (5) days after deposit with postal
      authorities transmitted by United States registered or certified mail,
      return receipt requested, postage prepaid, addressed to the respective
      addresses set forth on the first or last page of this Agreement, or to
      such other address as either party may have furnished to the other in
      writing in accordance herewith, except that notices of change address
      shall be effective only upon receipt.

      b. Amendment or Waiver. No provisions of this Agreement may be modified,
      waived or discharged unless such waiver, modification or discharge is
      agreed to in writing by you and the Company. No waiver of either party at
      any time of the breach of, or lack of compliance with, any conditions or
      provisions of this Agreement shall be deemed a waiver of the provisions or
      conditions hereof.

      c. Sole Agreement. This Agreement represents the entire agreement between
      you and the Company with respect to the matters set forth herein and
      supersedes and replaces any prior agreements in their entirety. No
      agreements or representations, oral or otherwise, express or implied, with
      respect to the subject matter of this Agreement will be made by either
      party which are not set forth expressly herein.

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      d. Funding. This Agreement shall be funded from the Company's general
      assets.

      e. Validity. The invalidity or unenforceability of any provision of this
      Agreement shall not affect the validity or enforceability of any other
      provisions of this Agreement, which shall remain in full force and effect.

      f. Applicable Law; Jurisdiction; Venue. This Agreement shall be
      interpreted and enforced in accordance with the internal laws of the State
      of Washington without reference to its conflicts of laws provisions. The
      parties agree that King County, Washington, shall be the exclusive proper
      place of venue for any action, dispute, or controversy arising from or in
      connection with this Agreement and submit to the jurisdiction of the state
      and federal courts located in King County, Washington. In the event either
      party institutes litigation hereunder, the prevailing party shall be
      entitled to reasonable attorneys' fees to be set by the trial court and,
      upon any appeal, the appellate court.

      g. Counterparts. This Agreement may be executed in counterparts, each of
      which shall be deemed an original, but all of which together will
      constitute one and the same instrument.

      h. Successors and Assigns. This Agreement shall be binding upon and inure
      to the benefit of the parties hereto and their respective successors and
      permitted assigns. The successors and permitted assigns hereunder shall
      include without limitation, any permitted assignee as well as the
      successors in interest to such permitted assignee (whether by merger,
      liquidation (including successive mergers or liquidations) or otherwise).

      i. No Third-Party Beneficiaries. Except as otherwise expressly
      contemplated by this Agreement, this Agreement is entered into solely for
      the benefit of the parties hereto and their respective successors and
      permitted assigns, and shall not confer any rights upon any person or
      entity not a party to this Agreement.

      If the foregoing conforms with your understanding, please indicate your
agreement to the terms hereof by signing where indicated below and returning one
copy of this Agreement to the undersigned.

                                           Very truly yours,

                                           CRAY INC.

                                           /s/ Peter J. Ungaro

                                           _____________________________________
                                           Peter J. Ungaro
                                           President and Chief Executive Officer
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ACCEPTED AND AGREED TO AS OF THE DATE FIRST SET FORTH ABOVE:

/s/ Brian C. Henry

______________________________________
Brian C. Henry