949158--4/21/2006--CRAY

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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. 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. 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. Our reliance on third-party suppliers poses significant risks to our business and prospects. 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. 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. 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. 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. 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 effect on our stock price. 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. 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. 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. 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. 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. 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 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. Provisions of our Articles of Incorporation and Bylaws could make a proposed acquisition that is not approved by our Board of Directors more difficult.

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949158--4/21/2006--CRAY_INC