10-K

 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10-K

                           -------------------------

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
      ACT OF 1934

For the fiscal year ended: DECEMBER 31, 1994
Commission file number:  0-18072

 
                           CRAY COMPUTER CORPORATION
            (Exact name of Registrant as specified in its charter)

        Delaware                                       84-1120275
 (State of Incorporation)                (I.R.S. Employer Identification Number)

        1110 Bayfield Drive
     Colorado Springs, Colorado                            80906
(Address of principal executive offices)                (Zip Code)

Registrant's telephone number, including area code:  (719) 579-6464

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None

                           -------------------------

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                    Common Stock, $0.01 par value per share
                               (Title of class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.    [X] Yes     [ ] No

                           -------------------------

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [_]

                           -------------------------
                                        
The aggregate market value of the Registrant's voting shares held by non-
affiliates of the registrant was approximately $7,249,000 (based upon the
closing sale price of $.156 per share on the NASDAQ National Market System on
April 13, 1995).  As of April 13, 1995, 46,464,987 shares of the Registrant's
$0.01 par value Common Stock were outstanding.

 
                           -------------------------
                                        
                      Documents Incorporated by Reference

Portions of the Registrant's 1994 Annual Report to Stockholders for the year
ended December 31, 1994 are incorporated by reference into Part II.  Such Annual
Report, except for portions thereof which have been specifically incorporated by
reference, shall not be deemed filed as part of this Annual Report on Form 10-K.
 

 
                                     PART I
                                     ------

ITEM 1 - BUSINESS

OVERVIEW

On March 24, 1995 Cray Computer Corporation (the "Company") filed a voluntary
petition under Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the District of Colorado (the "Court") after the
Company determined it would be unable to complete a planned private placement
financing of up to $25 million of Common Stock with foreign and United States
institutional investors and the Company ceased to have sufficient liquid assets
which would allow it to continue in operation.  The Company's existing directors
and officers have remained in possession of the assets and business of the
Company, but are subject to the supervision and orders of the Court.  The
Company has terminated most of its employees and stopped work on its
supercomputer systems.

Under Chapter 11 the Company may attempt to reorganize, enabling it to resume
operations, or it may dispose of assets followed by distribution of the amount
realized to creditors and, if any excess remains, to shareholders of the
Company. If the assets of the Company are disposed of, that disposition may be
accomplished by the management of the Company as Debtor in Possession or by an
appointed trustee following conversion of the Chapter 11 proceeding to a
liquidation under Chapter 7 of the United States Bankruptcy Code.

Management of the Company has commenced discussions with potential strategic
partners which may result in the resumption of the Company's operation, either
by the Company or a different entity.  Management of the Company does not know
as of the date of this Report whether such discussions will result in a plan of
reorganization permitting the Company to resume its operations.  Management
intends to resolve no later than July 1, 1995, whether a plan of reorganization
is feasible.  If such a plan does prove feasible, it will be presented for
approval, as required, by interested parties including the Bankruptcy Court.

The Company, a development stage enterprise, had a net loss for the year ended
December 31, 1994 of $37,786,000.  The Company had accumulated losses of
approximately $363 million from its inception through December 31, 1994.
Approximately $123 million of this deficit was incurred while the Company was a
division or wholly owned subsidiary of Cray Research, Inc., (CRI).  Research and
development expenses were $35,742,000 in 1994, $45,034,000 in 1993, and
$49,258,000 in 1992.  Substantially all of the Company's funding since its
incorporation in 1989 has come from CRI ($98,640,000) between October 1989 and
October 1991, the sale of a CRAY-2 supercomputer ($12,760,000) in December 1990,
a public stock offering ($61,088,000) in July 1991, ongoing maintenance revenues
($1,593,000) on the CRAY-2 supercomputer, a sale of shares of Common Stock to
institutional and private investors ($27,805,000) in June 1993, loan proceeds
($12,719,000), contract revenue ($2,125,000) on a cost sharing development
contract with the National Security Agency (NSA) entered into in August 1994,
sales of shares of Common Stock to private and foreign institutional investors
(net proceeds of approximately $3,822,000) in 

                                       1

 
the fourth quarter of 1994, and sales of shares of Common Stock to Seymour R.
Cray, Chairman of the Board and Chief Executive Officer (1,165,501 shares) and
to foreign institutional investors (3,200,000 shares) in the first quarter of
1995 (aggregate net proceeds of approximately $3,909,000).

Until the date of its bankruptcy filing, the Company was engaged in the design,
development, manufacture and marketing of the CRAY-3/Super Scalable System (SSS)
and CRAY-4 high-performance computer systems and the marketing of the CRAY-3
supercomputer system.  The CRAY-3 and CRAY-4 are modular upgradeable general
purpose supercomputers designed to provide balanced, high-performance computing
for many types of scientific and engineering applications.  The Company was
addressing the high-performance, large-scale scientific computing segment of the
supercomputer market.  The number of potential customers in this market is and
always has been limited.  The market for supercomputers has been characterized
by continuing advancement of technology and the development of increasingly
sophisticated and powerful systems which render existing systems obsolete within
a few years.

The CRAY-3, CRAY-3/SSS, and CRAY-4 incorporate a modular or building-block
architecture designed to allow customers to add processing and memory
capability.  The CRAY-4 configuration can range from 4 to 64 processors with
base prices in the approximate range of $3.5 million to $40 million.  The CRAY-
3/SSS is designed to utilize a 2-processor CRAY-3 in conjunction with Processor-
in-Memory (PIM) chips developed and manufactured by a third party to provide
vector parallel processing, scalable parallel processing, and the combination of
both.  All of these systems are designed to incorporate advanced Gallium
Arsenide (GaAs) logic circuits, fast semiconductor Static Random Access Memory
(SRAM) circuits, advanced semiconductor packaging and interconnect technologies,
and advanced liquid cooling techniques.

The software environment for the CRAY-3 and CRAY-4 was based on the June 1989
version of the UNICOS operating system used by many supercomputers, including
the CRAY-2, which was developed and sold by CRI.  This compatibility permits
most software, including third party software applications, used in the CRAY-2
system to be used with the CRAY-3.  Throughout 1994 the Company exploited
compatibility with the CRAY-2 and enhanced the utility of the CRAY-3 by
embracing industry standards, including features from the UNIX System
Laboratories' (USL), (formerly AT&T Information Systems Inc.), UNIX System V
Release 4  (SVR4) operating system and other software, communication interfaces,
networking protocols, and peripheral equipment.  

The development of a new generation of scientific supercomputer is a lengthy and
technically challenging process.  The CRAY-3, CRAY-3/SSS, and CRAY-4 are
technically complex supercomputers that use advanced Gallium Arsenide (GaAs)
logic circuits, fast Static Random Access Memory (SRAM) circuits, advanced
printed circuit boards, miniaturized packaging and interconnect technologies,
and advanced cooling techniques.  All of these areas present significant
technical challenges.  The performance specifications of the CRAY-3, CRAY-3/SSS,
and CRAY-4 require a unique computer architecture and manufacturing and testing
process.  Because the Company has pioneered the technological development in all
of these areas, it has experienced various 

                                       2

 
developmental delays in each area and in combining all of the advanced
components into a complete supercomputer system. Some of these delays were
lengthy. In total, they resulted in an approximately two-year delay in market
introduction of the CRAY-3 from management's estimate at the time the Company
was spun off from CRI in 1989. The Company believes that this delay was the
principal cause of its inability to secure orders for the purchase of the CRAY-3
since it became available for sale in 1993. Because of this delay in market
introduction and associated sales, the Company has been repeatedly required to
raise additional capital to continue the funding of design, development, and
marketing activities for the CRAY-4, development of the CRAY-3/SSS, and the
manufacture and marketing of CRAY-3 systems. The Company was not successful in
its most recent attempt to raise sufficient capital for the completion and
market introduction of the CRAY-4.

The Company's independent auditors in their report for the year ended December
31, 1994, stated that because of the Company's recurring losses, the continued
utilization of cash flows by operating activities, the working capital deficit
at December 31, 1994, and the recent Chapter 11 bankruptcy filing, substantial
doubt is raised about the Company's ability to continue as a going concern. The
auditors reports for the years ended December 31, 1993 and 1992 also stated that
there was substantial doubt about the Company's ability to continue as a going
concern. The Company utilized $33,132,000 for operating activities in 1994 had a
deficit in working capital at December 31, 1994 of $6,702,000. The Company
needed substantial additional funds to continue operations past March 1995,
which it was unable to obtain. The Company has had no orders for or revenues
from the sale of its products, although through December 31, 1994, $2.1 million
of revenue had been generated from a development contract on the CRAY-3/SSS. The
Company's management believes losses would have continued at a rate of
approximately $3 million per month unless and until the Company achieved
substantial revenues from sales of the CRAY-4 and/or CRAY-3/SSS.

The Company's plant, equipment, and technology and intellectual property rights
are currently pledged as security for a financing obtained in June 1994.  The
Company has defaulted under the terms of the Company's secured debt financing,
which provides for certain events of default, including the filing of
bankruptcy.  The lender is subject under the "U.S. Bankruptcy Code" to an
automatic stay against any action against the Company or its assets to collect
its debt without prior approval of the Bankruptcy Court.  No additional debt
financing is currently available under the secured line of credit.

The secured lender, as a result of the bankruptcy filing, has notified the
Company of its right and intention to call on the standby letters of credit
(totally $6 million) issued in their favor by Mr. Cray.  Once the secured lender
receives payment from these standby letters of credit, this will reduce the
amount owed by the Company on its line of credit to the secured lender.  After
this happens, the Company will then have a liability to Mr. Cray for an
approximate amount of $6 million. Management of the Company believes such
liability will be unsecured.

The Company was incorporated under the laws of Delaware on July 27, 1989, as a
wholly owned subsidiary of Cray Research, Inc. (CRI).  On November 15, 1989, the
Company became publicly held by means of a distribution by CRI of the Company's
shares to CRI's shareholders.  To provide the Company with the technology
necessary for its independent operations, CRI and the Company entered into
cross-licensing and technology transfer agreements involving both hardware and
software.  Restrictions on the use and transfer of most of this technology
expired July 31, 1994.

                                       3

 
The Company's principal executive office is located at 1110 Bayfield Drive,
Colorado Springs, Colorado, 80906.  Its telephone number is (719) 579-6464.

The  Company's Common Stock is quoted on the NASDAQ National Market under the
symbol "CRAY."  Because of the Company's bankruptcy filing, the National
Association of Securities Dealers (NASD), in its discretion, may suspend or
terminate the listing of the Company's Common Stock on the NASDAQ Stock Market.

Effective April 11, 1995, the Company's NASDAQ symbol was changed to "CRAYQ."


INDUSTRY BACKGROUND

Supercomputers constitute the highest performance class of computers. In
contrast to other computers, such as mainframes, minicomputers, workstations,
and personal computers, supercomputers employ architectures optimized for
addressing computationally intensive tasks for specific applications.  A partial
list of applications for installed supercomputers include:

Market                             Application
- ------                             -----------

Nuclear energy ..................  Alternative energy research 
Meteorology......................  Weather forecasting
Climate .........................  Global warming, long term studies 
Geophysics.......................  Oil and gas exploration and production
                                   enhancement
Computational fluid dynamics.....  Aircraft design
Computational chemistry..........  Pharmaceutical drug design
Electronic design................  Simulation of new circuits
Structural analysis..............  Increasing strength and lowering
                                   cost of structures

Large-scale scientific supercomputers such as the CRAY-1, CRAY-2, CRAY-3, CRAY-
3/SSS, and CRAY-4 have all been designed to meet the needs of the scientific
supercomputer market.

To provide the capabilities needed for such tasks, supercomputers typically
provide performance characteristics that exceed those found in general mainframe
computers.  Supercomputers derive their high level of performance from several
characteristics, including:

     .  Vector processing which allows multiple executions of an operation on
        pairs of numbers in a set;
     .  Fast scalar processing which is the sequential performance of an 
        operation on one pair of numbers;
     .  Large internal memory capabilities;

                                       4

 
     .  Multiprocessing, which allows either the use of more than one processor
        for each job or the concurrent operation of several jobs using one
        processor for each job;
     .  High bandwidth connectivity, which is the ability to rapidly transfer
        large volumes of data in and out of the system; and
     .  The use of standard language (i.e., Fortran and C) compiler systems
        which automatically translate standard user programs into instructions
        which take advantage of vector and scalar processing, multiprocessing,
        and expanded memory architectures.

Supercomputers generally range in price from approximately $3 million to $30
million depending on the number of processors and amount of memory.
Improvements in technology and design have resulted in the availability of more
powerful supercomputers at a lower cost.  While prices of such computers
generally exceed those of most high-end general purpose mainframe computers, the
price-performance ratio of large-scale scientific supercomputers for certain
scientific and engineering applications can be substantially lower primarily due
to the supercomputers' greater processing speed. In addition, certain
computationally intensive applications demand processing power that can be
provided only by large-scale scientific computers.


ROLE OF SEYMOUR R. CRAY IN THE DEVELOPMENT OF THE SUPERCOMPUTER INDUSTRY

Seymour R. Cray, age 69, the Chairman of the Board and Chief Executive Officer
of the Company, is widely acknowledged to have played a leading role in the
development of the supercomputer industry.  Mr. Cray was a co-founder of Control
Data Corporation and Cray Research, Inc.  He designed the large-scale scientific
supercomputers that allowed Control Data to dominate the supercomputer industry
in the mid 1970's, and allowed CRI the same role since the introduction of the
CRAY-1 in the late 1970's.  Mr. Cray designed and developed the CRAY-3 and his
efforts were being directed to completing development of the next generation of
high speed supercomputers, the CRAY-4, and to a lesser extent, the CRAY-3/SSS.

COMPANY STRATEGY AND BUSINESS OPPORTUNITIES

The Company's strategy has been to develop high performance, large-scale
supercomputer systems for applications in the scientific and engineering user
markets.  The modular or building block architecture of the CRAY-3 and CRAY-4
would allow the Company to configure one, two, four, or eight processors for the
CRAY-3, and one, two, four, eight, 16, 32, or 64 processors for the CRAY-4.
Based upon its own research of its primary competitors, management believes that
no other manufacturer has designed a vector supercomputer system with comparable
flexibility, and that by offering a range of processor and memory configuration
options it would have achieved sales success within the large-scale scientific
and engineering market segment of the supercomputer marketplace.  The Company
was targeting scientific and engineering supercomputer users who are
instrumental in 

                                       5

 
setting computing standards, are capable of writing their own applications
software, and have sufficient financial resources.

The CRAY-3 and CRAY-4 are designed to offer an architecture familiar to the
users of the CRAY-1 and CRAY-2 supercomputers, with substantially faster
processor speeds and larger internal memories.  The Company intended to exploit
the compatibility of the CRAY-3 and CRAY-4 architecture with that of the CRAY-2.
The CRAY-3 and CRAY-4 processors use unpackaged gallium arsenide (GaAs) logic
circuits.  By comparison, the CRI C90 processor uses conventional packaged
silicon logic circuits.  GaAs offers higher electron mobility and higher
saturation velocity than silicon which allow electrons (electrical current) to
move at higher speeds.  A GaAs logic circuit is approximately four times faster
than a conventional silicon logic circuit.  The GaAs logic circuits in the CRAY-
3 and CRAY-4 operate at faster processing speeds with lower power consumption
compared to silicon logic circuits.  Management believes that the Company's
experience with GaAs technology in the CRAY-3 was facilitating the technological
migration path being used in the CRAY-4.  The Company has enhanced the utility
of the CRAY-3 and CRAY-4 by embracing industry standards, including features
from third party developed UNIX operating systems and other software,
communication interfaces, networking protocols, and peripheral equipment, as
such standards became available.  The Company's strategy was to take advantage
of commercially available technology including the High Performance Peripheral
Interface (HIPPI) high speed communication protocol, and Redundant Arrays of
Inexpensive Disks (RAID) data storage systems.  This strategy enabled the
Company to focus its efforts on building high performance, large-scale
scientific supercomputer systems.

Consistent with the  Company's strategy to develop high performance, large-scale
supercomputer systems for applications in the scientific and engineering user
markets, the Company was designing and developing a hybrid massively parallel
supercomputer, the CRAY-3/SSS.  The CRAY-3/SSS was designed to be a unique
system that combines proven traditional supercomputer vector/parallel
architecture with a radically new SIMD massively parallel technology.
Applications which were expected to derive significant and immediate benefit
from the CRAY-3/SSS technology include image processing, seismic-geology
processing, pattern recognition, signal processing and sophisticated graphics
applications.  In these application areas, the Company's management expected the
performance potential of the CRAY-3/SSS to be three to four times faster than
existing supercomputer systems.


COMPETITION

The marketing and sale of supercomputers is extremely competitive and the number
of potential customers for high-performance supercomputers is limited.  The
performance requirements of supercomputers require significant research,
development, and manufacturing resource investment.  These built-in costs have
historically required supercomputer prices to be primarily in the $10 to $30
million price range reflecting systems ranging from 4 to 16 processors.  Because
an 8-processor CRAY-4 system was intended to sell for less than $5 million,
broadening of the available market may have been achieved.

                                       6

 
The principal competitive factors for high performance supercomputers include
product performance, reliability, software capability, price, delivery lead
times, customer support, and the manufacturer's reputation and perceived ability
to continue to successfully develop successor products.  There can be no
assurance that the performance and other features of the CRAY-4, CRAY-3/SSS, or
any future systems, should the Company be able to again commence operations,
will be competitive with supercomputers offered by the Company's competitors or
accepted by the marketplace.  The Company believes that past delays have had a
material adverse effect on acceptance of the CRAY-3 in the marketplace.

The Company's primary competitors for traditional vector supercomputers were
CRI, International Business Machines Corporation ("IBM"), Fujitsu, Hitachi, and
Nippon Electric Corporation.  Additional competition was coming from alternative
supercomputer architectures such as massively parallel processors (MPP) and
workstation clusters.  These MPP competitors include CRI, IBM, Intel
Supercomputer, Convex and Silicon Graphics.  CRI has approximately 80 percent of
the traditional vector supercomputer market and has a substantial installed base
of X-MP, Y-MP, and C90 supercomputers.  On February 22, 1995, CRI announced the
introduction of its next generation traditional vector supercomputer, the T90,
with expected performance comparable to the CRAY-4.  The T90 was expected to be
priced higher than the Company expected to price the CRAY-4 and to have
substantially less memory than the CRAY-4.  CRI has announced booking eight
advance orders for the T90 with expected deliveries starting in the second
quarter of 1995.  These developments, combined with CRI's strong market position
make it a formidable competitor to the Company.  The Company was not aware of
any recent announcements by supercomputer manufacturers, other than CRI, that
would substantially impact the Company's competitive position in the market for
traditional vector/scalar scientific supercomputers.  All of the Company's
competitors have substantially greater resources than the Company.


TECHNOLOGY BACKGROUND

Supercomputers, including the CRAY-3, CRAY-4 and CRAY-3/SSS, are designed to
achieve maximum sustained performance for computationally intensive
applications.  Peak sustainable speed, an important performance measurement for
computer systems, is a function of several factors, most notably system
architecture, logic and memory component technology, packaging, system control
software, and application programming.

Typically, supercomputer architectures are designed to process data in an
assembly line fashion with specialized vector and parallel processing hardware
to yield high sustained performance.  Vector processing hardware is designed to
operate on long strings of numbers rather than the scalar processing of single
data elements typical of general purpose commercial computing.  A balanced
architectural approach enables the supercomputer to provide high computational
performance for a wide variety of applications.

Another key performance measurement of supercomputers is processor clock speed.
Clock speed, measured in billionths of a second (nanoseconds or ns), 

                                       7

 
represents the length of time for the simplest instruction to operate. To
minimize clock cycle time, high-end supercomputers are generally built with the
fastest available semiconductor technology. Additionally, most large-scale
supercomputers are built with Reduced Instruction Set Computing (RISC)
principles to maximize effective performance.

Supercomputers balance high computational performance with large internal memory
capability and high bandwidth input/output capability.  To address applications
using or generating large amounts of data, supercomputers employ a large central
memory with fast access times.  In addition to memory access speeds,
input/output bandwidth is a critical determinant of a processor's ability to
communicate with its support subsystems and peripherals, and thus the overall
processing speed.

Specialized packaging and cooling techniques are critical to take full advantage
of fast switching logic circuitry.  Despite electron movement which approaches
the speed of light, a system's peak performance is constrained by transmission
delays in moving electrical signals within a supercomputer system.  To minimize
delays, architectures must adapt innovative circuit design and packaging schemes
to minimize distances between Integrated Circuit (IC) gates, between circuits on
a printed circuit board (PCB), between circuit boards, and between memory and
logic circuits.  This process requires miniaturization and presents significant
challenges in the manufacturing process.  The miniaturization process results in
a high density of components and requires special cooling methods to prevent
heat induced failures.

Early supercomputers typically were installed with a proprietary or vendor-
specific operating system.  With the maturation of the supercomputer industry,
supercomputer vendors are increasingly expected to provide a full range of
system control software and program development utilities such as are embodied
in the de facto industry standard UNIX operating system.  UNIX has become an
increasingly popular operating system for a broad variety of computer platforms.

Various alternatives to traditional supercomputers are available to address the
computing needs of the scientific and technical user community.  Since the
emergence of high performance workstations based on commodity RISC
microprocessors, users may elect to employ multiple workstations each dedicated
to a single user.  In many cases, such an approach is complementary to the use
of supercomputers, with the supercomputer acting as a shared computer for
networks of workstations, and reserved for only the largest, most
computationally intensive tasks.  Several vendors of minicomputers and
mainframes offer vector processing options to augment their existing hardware
for higher system performance.  While these options offer relatively low cost
enhancements to general purpose computers, such enhanced systems typically
provide only a fraction of the performance of a traditional supercomputer.

Massively parallel processing (MPP) architectures are increasingly attracting
attention as an alternative approach to large-scale, computationally intensive
computing.  MPP designers typically seek to link hundreds or thousands of
relatively low cost microprocessors together to provide scalable systems.  The
two principal benefits of MPP relative to traditional supercomputers include
lower cost at a theoretical peak performance level and the ability to offer

                                       8

 
significantly higher theoretical peak performance levels on narrowly defined
problems.  Theoretical peaks of MPP's are now in excess of one gigaflop.  The
primary disadvantage of MPP architectures is the complexity of programming
required to coordinate the many component processors and the resulting poor
ratio of sustainable achieved-to-peak performance for most applications.  Large
arrays of microprocessors do not lend themselves to some types of computations.


PRODUCT INFORMATION

Critical Supercomputing Parameters

The critical supercomputing parameters by which supercomputers are traditionally
measured are performance, memory size, and memory bandwidth.  Performance is
measured in gigaflops (billion floating point operations per second) which is a
determining factor in both the resolution of problems that can be attempted in a
given period of time and the complexity of scientific problems that can be
solved.

In time critical applications, such as weather forecasting, a higher gigaflop
performance can allow for a number of improvements in prediction capability.
One such improvement is an increase in the resolution of the model (i.e., a
closer grid point spacing) resulting in the ability to resolve and forecast
smaller scale features.  A different improvement would be an expansion of the
geographic region being modeled, thereby allowing large-scale features to
influence the forecast.

Memory size is measured in gigabytes and impacts the potential complexity of a
given application and the system's ability to run multiple applications
concurrently to best utilize available performance.  A large common memory
enables multiple applications to run concurrently, ensuring that the processing
capacity of the system is always optimally utilized.  There tends to be a direct
relationship between the gigaflop potential of the system and the required size
of common memory.  As the gigaflop rate increases and the scientist desires to
run more complex models in a given period of time, the data associated with
these models grows.

Memory bandwidth (speed) is measured in gigabytes per second and impacts the
balance of the system (i.e., the ability of the memory to keep the processors
fully occupied).  The bandwidth of memory is critical because it defines what
"immediately accessible" means in terms of how long it takes data to get from
common memory to the processing part of the system and back.  For a high
performance system, it is important that the memory bandwidth complement
processing performance, otherwise processors will sit idle waiting for the data
needed to perform work.  A balanced supercomputer system addresses the issue of
matching processor performance with memory bandwidth and memory size.  The only
way to guarantee optimal performance for a given application is to have the data
immediately accessible in common memory.  Hence, as the model complexity grows,
so must the size and speed of the common memory required to support it.

                                       9


Architecture and Hardware
 
The essential design parameters of vector processing computer architecture
include fast processor speed combined with a large, high speed memory in a dense
packaging arrangement.  The architecture of the CRAY-3 has been designed to
enhance the familiar features and characteristics of the CRAY-1 and CRAY-2
product lines.  The CRAY-4 was being designed with similar features.

The following table presents the tested performance characteristics of the 
CRAY-3.
 
 
                                          NUMBER OF PROCESSORS
                                        1      2       4       8**
                                       ---    ---     ---     -----
                                                   
Gigaflops Per Second*                   1      2       4        8
Instructions Per Nanosecond             1/2    1       2        4
Clock Speed - Megahertz                500    500     500      500
Clock Speed - Nanoseconds               2      2       2        2
 
*Theoretical peak performance
**Projected performance based on 4-processor actual performance

The CRAY-3 featured a large main memory that was addressable by all the
processors in a system.  This memory may be as large as 1 gigaword in an 8-
processor system.  Each processor contains two memory ports for simultaneously
reading and writing memory.  The Company's present emphasis was on the
manufacture and sale of 4- and 8-processor CRAY-3 systems.  The Company will not
manufacture a 16-processor CRAY-3 unless it receives a customer order for such a
system.  Currently management does not expect to receive an order for a 16-
processor CRAY-3.

The CRAY-3 was designed as a modular supercomputer system composed of up to four
logic octants.  Each octant contains two central processors of four modules
each, two input/output modules and 64 banks of memory.  One of the input/output
modules may be the foreground processor which controls all traffic between the
central processors, memory, and input/output channels.  There must be one
foreground processor per CRAY-3 configuration.  Each octant contains 256
megawords of memory on 32 memory modules.


Peripheral Equipment and Networking

The Company has focused its efforts on providing industry standard channels for
external connections.  The CRAY-3 and CRAY-4 were designed to support up to 28
standard HIPPI channels, on a 8-processor CRAY-3.  These channels are used to
connect to high speed networks, other computers, and peripheral devices.  In
particular, the Company offers disk storage subsystems using RAID technology.
RAID technology packages multiple industry standard disk drives with proprietary
hardware and software interfaces to create storage subsystems that offer high
reliability and performance.  The Company developed software to take maximum
advantage of this technology.

                                       10

 
The CRAY-3 and the CRAY-4 are designed to support a number of peripherals
currently used with CRAY-2 systems.  This would have facilitated a customer's
migration from a CRAY-2 to a CRAY-3 or CRAY-4 system.  Initial network
connections use the existing CRAY-2 interfaces.

The CRAY-3

The essential design parameters of vector processing supercomputer architecture
include fast processor speed combined with a large, high speed memory in a dense
packaging arrangement.  The CRAY-3 features a large main memory and was designed
as a modular supercomputer system composed of up to four logic columns which the
Company refers to as octants.  Each octant contains two central processors
(CPU's) of four modules each, two input/output modules and 32 memory modules
comprising 64 banks and 256 million words (one word equals eight bytes) of
memory.  The CRAY-3, with four octants, runs up to eight gigaflops and performs 
up to four instructions per nanosecond depending on the number of processors
employed.  The CRAY-3 can be configured with one to eight processors.

The Company maintained a two-processor CRAY-3 dedicated to the CRAY-3/SSS
development contract, a two-processor CRAY-3 at the National Center for
Atmospheric Research (NCAR), located in Boulder, Colorado, in production use, a
four-processor CRAY-3 used for in-house module testing and final manufacturing
check-out and test, and a four-processor CRAY-3 used for benchmarks required by
the Government procurement process, for certain commercial opportunity
benchmarks, and for in-house software development and simulations.  The Company
does not plan to manufacture additional CRAY-3 systems.  As long as CRAY-3
systems were in operation, there was ongoing system maintenance, which included
replacing and repairing system modules.

The Company fell approximately two years behind the original development
schedule and market introduction of the CRAY-3 due to the difficult
technological challenges that were overcome in order to create the high
performance computing capabilities of the CRAY-3.  No orders have been received
for the CRAY-3.  Because of this situation, the Company was concentrating its
resources on its next generation product, the CRAY-4, which the Company's
Management believed would have leading technical performance at very attractive
prices.

The CRAY-4

The Company was focusing its resources on completing the development of the
CRAY-4, along with another advanced product, the CRAY-3/SSS.  The CRAY-4 was
designed to provide prospective customers with flexible CPU and memory
configurations.  The CRAY-4 design uses an extension of the technology developed
for the CRAY-3, including the use of similar architecture, hardware,
manufacturing techniques, peripheral equipment, and networking.

The CRAY-4 was expected to have excellent price/performance value.  The single
processor's gigaflop performance was twice as fast as its closest competitor
presently in commercial use, the CRI C90 and comparable to the announced CRI
T90.  The CRAY-4 was expected to have an approximate four times
price/performance advantage over the current CRI C90 product line.  

                                       11

 
This projected increase in price/performance was expected to expand the
traditional market for high-end scientific and engineering supercomputers.

The CRAY-4 was designed to run at two to 128 gigaflops and to perform one to 64
instructions per nanosecond depending on the number of processors employed.  The
Company was planning that initial CRAY-4 system configurations would be from
four to 16 processors.  CRAY-4 development work was continuing, up to the
bankruptcy filing, with the initial processors and memory modules beginning the
benchmark process.  This is an iterating hardware debugging process starting
with running small functional software codes on a single processor, expanding to
single processor software codes with input/output requirements, and ending with
industry standard benchmark codes requiring multiprocessor functionality.  The
Company was expecting to announce the results of the single processor benchmarks
in early 1995 with a four-processor 256 megaword prototype system expected to be
benchmarked and available for delivery by the second quarter of 1995.

CRAY-4 Node

The industry leading performance of the CRAY-4 was complemented by two other
significant attributes.  The CRAY-4 was the first high-end supercomputer to
support the IEEE Floating Point format.  This significantly enhances its ability
to interchange data with high-performance workstations in a heterogeneous
network environment.  Additionally, the CRAY-4 and its system software are
designed to support the concept of vector/parallel distributed computing.  This
allows multiple CRAY-4 systems (nodes) to be connected together to provide
superior levels of system performance, reliability, and throughput.


CRAY-3/Super Scalable System

Massively parallel supercomputer systems have shown great promise, but have
realized limited success in addressing real world scientific problems.  This can
be attributed, in part, to the complexity of their architecture and the
resultant difficulty in exploiting them efficiently without significant
modification of user codes.  The apparent benefits associated with the coupling
together of thousands of inexpensive processors are also seriously compromised
by their inability to communicate with each other or with external devices and
networks at the speeds required to support supercomputer class computation.
However, there are certain classes of problems that can successfully exploit
large numbers of relatively simple and cheap processors in parallel, if only the
issues of high speed bandwidth and usability can be successfully addressed.

The CRAY-3/SSS is a unique system that combines proven traditional
supercomputer vector/parallel architecture with a SIMD massively parallel
supercomputer architecture.  Unlike other MPP architectures, the CRAY-3/SSS is
intimately integrated into the high bandwidth heart of the traditional
supercomputer system.  It is an extension of the supercomputer system's high
speed common memory which incorporates thousands of simple yet powerful
processors that can be called upon to perform extremely complex functions at
extraordinary speeds.

                                       12

 
The CRAY-3/SSS uses a collection of special Processor in Memory (PIM) chips,
each of which provides 64 single bit processors and an associated 128K bits of
memory. The initial CRAY-3/SSS was intended to use a two processor CRAY-3 with
SIMD array, standard CRAY-3 memory interface and a maximum of one million SIMD
processors and 2.3 gigabytes of memory. Early generation SIMD machines have been
successfully used in both Government and commercial applications such as pattern
recognition, signal processing, image processing, seismic-geology, and weather
forecasting. The Company was completing the design and development of the
initial CRAY-3/SSS, and was targeting a deliverable prototype system by the
second quarter of 1995.

Software

The Company's software provides an effective and efficient program development
and execution environment on the CRAY-3 which both supports the migration of
codes from other platforms and the rapid exploitation of the CRAY-3 for new
problems.  This software environment was being extended to provide similar
levels of support for the CRAY-4 system.

The Company is licensed to use and distribute certain software developed by CRI.
This software consists of the June 1989 version of the UNICOS operating system
(a proprietary version of UNIX System V Release 2 developed by CRI) and
associated language compilers, libraries, and tools.  The Company has used its
CRAY-2 system, which CRI transferred to the Company as part of the spin off from
CRI, to enhance this software and has ported the UNICOS operating system,
compiler and other auxiliary software to the CRAY-3 system.

Management believes that customers and vendors will continue to place emphasis
on software environments that comply with emerging standards such as the IEEE
POSIX operating system standards.  It has been the Company's experience, that
the U.S. Government is now specifying compliance to such standards either
explicitly, or implicitly by specifying compatibility with certain products
which are designed to adhere to such standards, such as USL's SVR4 operating
system product.

The Company has included certain SVR4 like features in its UNICOS based, CSOS
operating system, and was continuing to evaluate the requirement for the
migration of additional features based on its perception of potential customer
needs.

The Company's software fully supports the industry standard windowing
environments X Windows and OSF/Motif.

Management believes that its strategy of initially exploiting a UNICOS operating
system compatible with the CRAY-2 and progressively migrating to industry-
standard software would have facilitated the use of the CRAY-3 and CRAY-4 by
current users of UNICOS based machines and, as standards are adopted, facilitate
the expansion of available applications software.  The Company was intending to
concentrate on Fortran and C application programming languages, and to enhance
its compilers and libraries for increased performance, its tools for ease of
use, and its diagnostics for rapid fault isolation and resilience.

                                       13

 
CRAY-3 specific features, such as HIPPI based RAID support, have been
implemented and tested.  All of the Company's CRAY-3 system software has been
exercised on the CRAY-3 systems in Colorado Springs and at NCAR.

To remain competitive the Company was devoting resources to developing and
enhancing its operating systems and language compiler software.

Other Developments During 1994

The Company focused its resources during 1994 on (i) testing and benchmarking
the CRAY-3; (ii) continuing the design and development of the CRAY-4; (iii)
completing the initial development work on the hybrid CRAY-3/SSS; (iv) upgrading
and verifying software products; and (v) significant marketing and sales
activities in the areas of submitting proposals on competitive Government
procurements, sole source procurements, and special developmental funding
sources.  The following covers these activities in more detail.

CRAY-3 Benchmarks

Throughout 1994, the Company continued to show that the CRAY-3 supercomputer
system was one of the most powerful systems commercially available by
demonstrating performance on industry standard benchmarks and key applications.
Several major applications from the National Center for Atmospheric Research
(NCAR), located in Boulder, Colorado, have been executing successfully on CRAY-3
systems for over a year.  NCAR's basic benchmark sets have demonstrated that the
CRAY-3 systems are among the most powerful available on a computations per
processor basis.

The Company also executed several national Government laboratory and commercial
prospect benchmarks during 1994.

CRAY-3 Demonstration Site

The first operational CRAY-3, (a four processor 128 megaword system), was
delivered to NCAR in May 1993 for evaluation and demonstration.  During this
evaluation period, both hardware and software problems were encountered and
addressed by the Company's engineers.  Significant technical progress has been
made to demonstrate the long-term reliability of the CRAY-3.  With the quadruple
memory upgrade of the CRAY-3 beginning in the Fall of 1993, the Company
concentrated most of its engineering resources on upgrading the memory in
subsequent CRAY-3 systems.  NCAR, along with other potential customers,
indicated a desire for this upgraded memory.

Subsequently, in the second quarter of 1994, the Company transferred NCAR users
to an upgraded four processor CRAY-3 with 512 megawords of memory, located at
the Company's main manufacturing facility.  Using a dedicated high-speed data
communication line, NCAR users accumulated almost 4,000 CPU hours on this system
between second quarter 1994 and October 1994.

In October 1994, the Company completed an upgrade of the CRAY-3 located at NCAR
to a two processor CRAY-3 with 256 megawords of memory.  From October 1994
through January 1995, NCAR users logged over 2,800 CPU hours on this system with
a mean time to interrupt of 150 hours.

                                       14

 
The Company used the upgraded CRAY-3 system in Colorado Springs for benchmarks
required by the Government procurement process, for certain commercial
opportunity benchmarks, and for in-house software development and simulations.

The CRAY-3 system currently at NCAR is provided under the terms of an equipment
loan agreement.  This agreement was amended December 6, 1993 extending the
period of the initial six-month term through February 28, 1994 and continuing,
thereafter, on a month-to-month basis until either party gives a 30-day
termination notice.  The Company has not and will not receive any revenue from
NCAR during this demonstration period.  Upon the Company's bankruptcy filing,
NCAR has shut down the CRAY-3.

CRAY-4

Significant technical progress was made during 1994 on the CRAY-4, which takes
advantage of technologies and manufacturing processes developed during the
design and manufacture of the CRAY-3.  The Company announced introduction of the
CRAY-4 to the market on November 10, 1994.  Several single processor CRAY-4
prototype systems, each with 64 megawords of memory, were undergoing diagnostic
testing prior to the Company filing for bankruptcy.  The Company began testing
individual CRAY-4 modules at the start of 1994 and planned to be able to deliver
a 4-processor CRAY-4 prototype system by approximately the end of the second
quarter of 1995.  Upon filing of bankruptcy, the Company stopped work on the
CRAY-4.


Impact of CRAY-4 Development on Sales of the CRAY-3

Because prospective customers have been aware of the Company's design and
development of the CRAY-4, which offered major advantages as compared to the 
CRAY-3, the Company's management believed that some prospective customers for
the CRAY-3 decided to wait for the availability of the CRAY-4. No new CRAY-3
systems were being manufactured.


CRAY-3/Super Scalable System

On August 17, 1994, the Company entered into a joint development contract with
the National security Agency (NSA) to produce a CRAY-3/SSS offering vector
parallel processing, scalable parallel processing, and the combination of both.
Under the NSA contract, the Company received revenues from NSA for a portion of
the Company's costs of developing the system.  The CRAY-3/SSS is designed to
utilize a CRAY-3 and a large number of Processor-In-Memory (PIM) chips developed
by the Supercomputing Research Center of the Institute for Defense Analyses and
manufactured by National Semiconductor Corporation.  The system was to consist
of a dual processor 256 million word CRAY-3, and a 512,000 processor, 128
million byte Single Instruction Multiple Data (SIMD) array.  The Company
successfully completed the first of a number of major tasks required under the
development contract which consisted of the successful test and demonstration of
an array of 256,000 single bit processors packaged using the Company's multi-
chip-module technology.  Upon filing of bankruptcy, the Company stopped work on
the CRAY-3/SSS.  The Company is 

                                       15

 
reviewing the terms and conditions of the development contract to assess the
ramifications of the bankruptcy filing.

Software

During the past year, the Company continued to upgrade and verify its system
software products.  NCAR users provided valuable feedback on the use of this
software in a production environment.  No major problems were identified in
migrating applications from other supercomputing environments.  The Company
successfully integrated several new industry standard features during this
period, including certain IEEE POSIX operating system features, a new ANSI
Standard C compiler based on the latest AT&T implementation, and extensions to
its Fortran compiler to support certain ANSI Fortran 90 standard constructs.
Additionally, the Company continued to optimize its software to provide
increased end-user performance and more efficient use of new I/O capabilities
such as the HIPPI connected RAID subsystem.

Equity Financings  in 1994 and Early 1995

In October 1994, the Company completed a private placement to foreign
institutional investors of 3,850,000 shares of unregistered Common Stock (net
proceeds of approximately $3,822,000).  The foreign institutional investors also
received warrants expiring in October 1997, to acquire up to 385,000 additional
shares of Common Stock at $1.50 per share.

In January 1995, the Company completed a sale of 1,100,000 shares of its
unregistered Common Stock to foreign institutional investors and 1,165,501
shares of its unregistered Common Stock to Seymour R. Cray, Chairman of the
Board and Chief Executive Officer (net proceeds of approximately $2,295,000).
The sales of shares to the foreign institutional investors were made pursuant to
Regulation S of the Securities Act (the "Securities Act") of 1933, as amended.
The sale of shares to Mr. Cray was made pursuant to Regulation D under the
Securities Act.

In February 1995, the Company sold 2,100,000 shares of its unregistered Common
Stock to a foreign institutional investor (net proceeds of approximately
$1,764,000).  This sale of shares was made pursuant to Regulation S under the
Securities Act.

Marketing Staff and Activities

In March 1994, the Company hired Charles Breckenridge as Executive Vice
President of Marketing.  Mr. Breckenridge has over 33 years of experience in the
supercomputer field.  His most recent position was Vice President and General
Manager, U.S. Western Region and Latin America, for Cray Research, Inc.  Also in
1994 the Company added a project director for the CRAY-3/SSS project, a senior
sales manager who was based in Washington, D.C., and a senior sales manager who
was based on the West Coast.  The Company has terminated the employment of all
of its sales and marketing staff because of the bankruptcy filing.

                                       16

 
Agreement with Seymour R. Cray

Seymour R. Cray, age 69, the Chairman of the Board and Chief Executive Officer
of the Company, is the designer of the CRAY-3 and CRAY-4 supercomputer systems.
Mr. Cray has devoted his full working time to the Company since its inception.
Prior to the date of the Company's bankruptcy filing, Mr. Cray devoted most of
his time to the design and development of the CRAY-4.  Currently he devotes his
time to his duties as Chief Executive Officer of the Company.  The Company's
future success, should the Company be able to resume operations, would be
materially and adversely affected if Mr. Cray's services become unavailable for
any reason.  The Company does not have key man insurance on the life of Mr.
Cray.

Mr. Cray  serves as an independent contractor to the Company under a Design and
Development Agreement which does not require any specific working time
commitment by Mr. Cray.  The Design and Development Agreement, which is similar
to his prior agreement with CRI from 1981 to 1989, and with the Company from
1989 to 1992, has a term expiring in June 1997.  This Agreement provides for
early termination in the event that the Company discontinues development funding
for the CRAY-4 or for future systems or limits or terminates agreed-upon
production for the CRAY-4 or for future systems.  In such event, Mr. Cray
retains the option to continue development and production of the project,
subject, however, to prior consent by the Company's asset-based lender for so
long as its loan agreement with the Company remains in effect.  No "agreed-upon
production" of the CRAY-4 had been established because the CRAY-4 was still in
the development stage.  The agreement also terminates in the event Mr. Cray
fails for any reason to continue a project, in which case the Company retains
the right to fund and participate in additional projects pursued by him.
Subject to prior consent by the Company's asset-based lender, Mr. Cray could
terminate his participation in the development of the CRAY-4 at any time and
would have the right to use independently the technology relating thereto and to
compete with the Company.

The Company is reviewing the terms and conditions of the agreement with Mr. Cray
to assess the ramifications of the bankruptcy filing.

Technology

The technology utilized in the CRAY-3 and CRAY-4 represents several advances in
the use of materials as well as innovative packaging and manufacturing
techniques.

Gallium Arsenide (GaAs)

GaAs was selected by the Company as the semiconductor substrate material of
choice due to its unique electronic properties that can provide the ultra high
speed IC performance required in the CRAY-3 and CRAY-4.  The Company intended to
continue to use GaAs IC's for its logic components due to its three to five
times speed advantage (at similar power consumption) over silicon IC's.  Over
the past several years, the Company has been intensively engaged in the
development and refinement of GaAs IC design, fabrication, and testing.  These
efforts have resulted in an advanced IC manufacturing technology which 

                                       17

 
routinely provided the CRAY-3 and CRAY-4 with logic circuits. GaAs has not yet
saturated its speed and density performance potential. While silicon IC's have a
more limited ability to increase their speed performance, GaAs IC's have the
potential to increase their speed by a factor of two or more. Early development
work at the Company has demonstrated GaAs IC's operating at speeds compatible
with the projected 1,000 megahertz (1 Gigahertz) operation of the CRAY-4.

Today management believes GaAs IC technology has taken its place alongside
silicon IC technology.  Other companies, including Convex Computer Corporation
and Fujitsu Limited, are now using GaAs IC's as logic circuits in their current
supercomputer product line offerings.

The Company operates its own GaAs IC manufacturing facility in Colorado Springs,
Colorado and has developed manufacturing techniques necessary for production of
GaAs circuits.  The Company has overcome many of the design and fabrication
problems which GaAs presented in the manufacture of the CRAY-3.  The
manufacturing yields now experienced by the Company on its GaAs circuits are
within parameters commonly encountered with the manufacture of silicon IC's.

The Company had increased the density of the GaAs circuits as part of the design
of the CRAY-4.

Printed Circuit Boards

The successful manufacture of high precision and high quality PCB's was
essential to the Company's ability to produce densely packed modules for the
CRAY-3 and CRAY-4 supercomputer systems.  While the Company's PCB's were
traditionally constructed of copper and epoxy layered boards, they were much
smaller than those generally used in the mainframe computer industry and require
precise drilling.  To satisfy its unique size and precision requirements, the
Company operated its own PCB manufacturing facility in Colorado Springs,
Colorado.

Component Packaging

Computer speed, an important measure of system performance, is a function of
circuit speed, the level of circuit integration and circuit packaging.  Since
the path length between circuits is normally a limiting factor on speed of
processing, minimizing the physical distance between circuits was a key design
goal.  The CRAY-3 has been designed to provide fast circuits in miniaturized
packages which operate at a clock speed of approximately two nanoseconds or 500
megahertz.  A CRAY-3 module includes approximately 125,000 equivalent logic
gates in a 4 inch X 4 inch X .3 inch physical package.  An 8-processor CRAY-3
configuration with 256 to 512 megawords of memory, plus associated interface
circuitry, and cooling and power systems, measures 44 inches wide and 50 inches
high.

Cooling

As packaging density increases so does the associated heat density, since more
heat must be removed from a smaller volume.  The dense packaging of high speed
circuits in the CRAY-3 and CRAY-4 presents a considerable cooling 

                                       18

 
challenge. To address this challenge, the Company developed an innovative
closed loop cooling technique based on the successful liquid immersion method
used to cool the CRAY-2 circuitry. This technique immerses the circuitry in an
electronically inert fluid and takes advantage of forced convection to provide
superior cooling within a stable environment.

Testing

The Company developed sophisticated test equipment capable of testing IC's
operating at up to 500 megahertz.  This proprietary test hardware and software
enabled the Company to test all circuits on a wafer for function and speed prior
to dicing the wafer.  As part of the Company's quality and reliability program,
should defects be detected, corrections could be made before or after the
assembly of PCB's into finished modules. The Company's testing equipment is
programmable and may be adapted to new circuit designs. The Company received a
patent relating to its circuit testing equipment.


Manufacturing

Limited Sources of Supply

The Company relied on outside vendors to manufacture certain raw materials,
components, subassemblies and production equipment.  Certain of these items
necessary for the development of the CRAY-3/SSS and CRAY-4, including without
limitation GaAs wafers, fast SRAM integrated circuits, and printed circuit board
manufacturing supplies, are obtainable from a sole supplier or a limited group
of suppliers.  Any prolonged delay in obtaining any of these key items would
adversely affect the Company.  To date, the Company has been able to obtain
adequate supplies of components from its sole and limited sources or, when
necessary, from alternative sources of supply.

To assure an adequate supply of its GaAs logic circuits and control over the
manufacturing process, in March 1990 the Company acquired a non-exclusive
license from GigaBit Logic, Inc., for certain process technology, equipment for
three wafer processing lines, and certain other assets.  The Company entered
into an Asset Purchase Agreement with GigaBit pursuant to which the Company
issued in a private placement 1,625,000 shares of Common Stock to GigaBit as
partial consideration for the purchase of certain foundry machinery, equipment
and other assets and a nonexclusive license to certain process technology.  The
Company has incorporated the technology and equipment into a Class One GaAs
foundry, which was producing GaAs IC's for the CRAY-3 and prototype IC's for the
CRAY-4 using four inch wafers and .9 micron geometry.  CRAY-3 GaAs wafer yields
were running at approximately 70 percent and management believed that the
Company would have been able to provide both CRAY-3 logic circuits and CRAY-4
prototype and production logic circuits.  However, fabrication of the Company's
GaAs IC's, which are extremely fragile and require special handling, is a highly
complex and precise process.  Minute impurities, difficulties in the fabrication
process, defects in the masks used to print circuits on a wafer, or other
factors may cause some wafers to be rejected or several die on each wafer to be
non-functional.

                                       19

 
The dense packaging of the CRAY-3, and even more dense packaging of the CRAY-4,
which is essential to delivering the speed of the GaAs circuits, required the
Company to design specialized robotic equipment to handle the miniaturized
components throughout the manufacturing process.  The Company was
successful in designing and acquiring testers to test its IC's, PCB's, and
modules.

The Company's PCB facility was manufacturing the CRAY-3 and prototype CRAY-4
PCB's.  Using a proprietary manufacturing process, CRAY-3 PCB manufacturing
yields were running between 60 percent and 70 percent.  Based upon such yields,
management believes that the Company would have been able to provide the CRAY-3
and CRAY-4 PCB requirements.

The Company purchased 4-megabit SRAM's from Toshiba Corporation as part of the
memory upgrade for the CRAY-3.  By incorporating a special 4-megabit SRAM,
management believes the CRAY-3 had the largest available SRAM memory of any
supercomputer in its price and performance class.

Although management did not expect technical problems or manufacturing delays in
such areas as GaAs IC production, PCB production, module assembly, and checkout
and test, delays in any of these areas would have been detrimental as the
Company entered the marketplace with the CRAY-4 and CRAY-3/SSS.  The Company
experienced extensive delays in the past with the CRAY-3 development process.

Some vendor delays were encountered in connection with meeting High Performance
Interface (HIPPI) and Redundant Array of Inexpensive Disks (RAID) industry
standards; however, these delays did not delay the introduction of the CRAY-3 to
the marketplace.  The Company installed a demonstration CRAY-3 system at NCAR,
which was utilizing both of these industry standards.

Environmental Regulations

Federal, state, and local laws and regulations impose various environmental
controls on the discharge of certain chemicals.  The Company's GaAs fabrication
foundry and printed circuit board production facility each utilize or generate
certain toxic substances which require special handling and disposal, as well as
compliance with various reporting and other environmental laws and regulations.
The Company believes that it is currently in compliance with such laws and
regulations.  However, any failure by the Company to control the use of, or to
restrict adequately the discharge of, hazardous substances could subject it to
material future liabilities.


Supercomputer Market

The current market for supercomputers is extremely dynamic, characterized by
continuing advancements in technology and the development of increasingly
sophisticated and powerful supercomputing systems which render existing
supercomputing systems obsolete within a few years.  The market for traditional
parallel vector supercomputers was estimated to be $850 

                                       20

 
million to $900 million in 1994. This market for traditional parallel vector
supercomputers is geographically divided into approximately 40 percent U.S. and
60 percent international.


Foreign and U.S. Government institutions account for approximately 70 percent of
supercomputer purchases and this was a key market segment for the Company.  The
U.S. Government has adopted policies designed to facilitate the development of,
and market for, new and enhanced supercomputers.  Governmental uses include
intelligence, defense, energy, aerospace, weather, environment, and university
research.  Commercial customers make up the remaining 30 percent of
supercomputer purchases with supercomputers being used in the areas of
petroleum, aerospace, automotive, chemical, pharmaceutical, and electronics.

The market for general purpose supercomputers, which is almost exclusively
engineering and scientific applications, exists because of the extensive base of
application software and their overall capabilities, resulting in lower overall
computing costs.  Supercomputer software applications are readily available and
include large libraries in most engineering and scientific disciplines.

The Company's next generation supercomputer, the CRAY-4, was expected to have
unsurpassed price/performance (cost per gigaflop).  The processor's gigaflop
performance was twice as fast as its closest competitor, the CRI C90.  The
Company's management expected the CRAY-4 would have an approximate four times
price/performance advantage over the current CRI C90 product line.  This
improvement in price/performance might have significantly expanded the
traditional market for high-end scientific and engineering supercomputers.


Industry Segment

The industry segment in which the Company participates is the high performance,
large-scale scientific supercomputer segment.  This is the only industry segment
in which the Company operates.


Sales and Marketing

Prior to the date of its bankruptcy filing, the Company was focusing its
marketing and sales efforts primarily upon the U.S. Government, including
intelligence agencies, research laboratories (civilian and military), nuclear
agencies, and weather and environmental agencies.  The Company was responding to
appropriate competitive procurements and was also seeking direct procurements
involving special projects covering technology research and development,
customizing the CRAY-3, or providing special funding for CRAY-4 development.

A second market addressed by the Company was the commercial supercomputer
market.  This market segment includes large multinational electronic,
automotive, aerospace, petroleum, and pharmaceutical companies.  The Company
expected that the commercial market for CRAY-3 and CRAY-4 

                                       21

 
systems would have developed only after these systems were installed and
operating at a few U.S. Government facilities.

Once an initial purchase was made, the modular or building block architecture of
the CRAY-3 and CRAY-4 would have allowed customers to increase the number of
processors from their initial purchase.  This was a key feature of the CRAY-3
and CRAY-4 supercomputer systems.

The CRAY-2 original installed customer base of approximately 28 systems, owned
by 22 government and commercial customers located in eight countries, represents
both a major market for the Company and a significant portion of the worldwide
installed base of supercomputers.  Approximately 16 CRAY-2 systems are still in
use today.  The remaining 12 CRAY-2 systems have been traded in on new CRI
systems or retired.  The CRAY-3 offers CRAY-2 customers a compatible
architecture and operating system with much higher performance.

Management believes that direct contact with customers is an essential element
of success in the supercomputer market.  Up to the date of the Company's
bankruptcy filing, marketing activities were being conducted by a staff of six
full-time employees.  To date the Company has had no sales or orders.

Once an initial purchase was made, the modular or building block architecture of
the CRAY-3 and CRAY-4 would have allowed customers to upgrade the number of
processors from their initial purchase.  This was a key feature of the CRAY-3
and CRAY-4 supercomputer system.

The U.S. Government restricts the exportation of  sophisticated technologies,
including those incorporated in the CRAY-3, CRAY-4, and CRAY-3/SSS.  These
restrictions may require export licenses prior to shipping supercomputers to
foreign customers.

Strategic Partner Discussions

Following expiration of certain restrictions in its license agreements from CRI
on July 31, 1994, the Company began to engage in discussions with potential
strategic partners.  Any such partnership could include joint manufacturing
and/or marketing activities, a commitment to provide funding to the Company in
exchange for an interest in the Company's technology (which may include the
licensing of hardware, software, know-how, patents, or marketing rights to
certain products or technology), an equity or debt investment, or any
combination of the above.  The Company is continuing its efforts to secure a
corporate strategic partnership. Any such relationship would require approval of
the Court. Although these discussions are continuing while in bankruptcy, no
agreements are currently pending. No partnership discussions have progressed
beyond the preliminary stage.


Agreements with Cray Research, Inc.

The Company was incorporated in July 1989 as a wholly owned subsidiary of CRI
for the purpose of enabling CRI to spin off to its stockholders the CRAY-3

                                       22

 
development project then being conducted by CRI.  In November 1989, CRI
distributed 14,733,347 shares of the Company's Common Stock to CRI stockholders
of record as of November 15, 1989, and retained 1,637,038 shares of the
Company's Common Stock (approximately 10 percent of the then outstanding
shares).  Prior to, and in contemplation of, the distribution, the Company and
CRI entered into a number of agreements, certain of which are summarized below.
Following the distribution, the Company and CRI have operated independently.  By
December 31, 1992, CRI had divested its ownership of the Company's Common Stock.

Cross-Licensing and Technology Transfers.  In 1989 the Company and CRI entered
into a cross-licensing and technology transfer agreement involving both hardware
and software pursuant to which CRI assigned to the Company its rights to certain
patents pertaining to the CRAY-3 system and granted the Company certain non-
exclusive, nontransferable, royalty-free rights to certain patents and
technology of CRI.  The Company has licensed the assigned patents back to CRI on
a similar basis.  CRI licensed the Company with respect to other technology used
in the CRAY-3 system, including underlying technology previously developed for
the CRAY-1 and CRAY-2 systems.  The CRI patents licensed to the Company include
patents relating to vector processing and related computer architectural
techniques, and immersion cooling.  Improvements made on the licensed patents by
either CRI or the Company through July 31, 1991 are also subject to cross-
license.  The Company also received operating system and compiler software from
the CRAY-2 systems for internal use by the Company.  Commencing July 31, 1994,
CRI and the Company may each sublicense patents licensed to them under the
license agreement, and the Company may sublicense the CRAY-3 technology.  With
limited exceptions, the restrictions on the Company's use of the software
terminated as of July 31, 1994.

Other Rights.  CRI granted the Company the right to use the name "CRAY" in its
or its subsidiaries' corporate names and to use the mark "CRAY" coupled with a
numerical suffix for its computer systems.  CRI continues to use the "CRAY" name
and trademark as well.

Indemnification.  The Company agreed to indemnify CRI against all claims and
liabilities for actions of the Company subsequent to its formation.  CRI has
agreed to indemnify the Company in connection with a lawsuit against the Company
and other parties brought by former employees of GigaBit Logic, Inc.  The
lawsuit related to alleged events occurring prior to the Company's formation.
CRI agreed to take over the defense of the Company and fully indemnify it for
all costs and liabilities by agreement dated March 14, 1990.


Patents and Licenses

Patents

The Company currently owns rights to 13 patents and has five patent applications
pending.  The Company's management believes that although these patents and
patent applications may have value, given the rapidly changing nature of the
supercomputer industry, should the Company be able to commence operations, its
future success will more likely depend on Seymour R. Cray and on the technical
competence and creativity of its new work force.

                                       23

 
Proprietary Rights

The Company relies on a combination of patent, copyright, and trade secret
protection, non-disclosure agreements and cross-licensing arrangements to
establish and protect its proprietary rights.  The Company's initial operating
system software, compilers, and tools were licensed from CRI in 1989, subject to
certain transfer and other restrictions which expired on July 31, 1994.  Despite
the Company's efforts to safeguard and maintain its proprietary rights, there
can be no assurance that the Company will be successful in doing so or that the
Company's competitors will not independently develop or patent technologies that
are substantially equivalent or superior to the Company's technologies.  The
Company has also entered into licensing or cross-licensing agreements with
several companies.  There can be no assurances that such agreements will not be
terminated or that the Company will be able to enter into similar arrangements
on favorable terms if required in the future.  Although the Company is not a
party to any present intellectual property litigation, it has from time to time
received, and may in the future receive, communications from third parties that
the Company's systems or components of such systems infringe patent rights,
maskwork right, or copyrights of such third parties.  Such claims of
infringement, if proved, could have a material adverse effect upon the Company
in the future.  In addition, although such claims may ultimately prove to be
without merit, the necessary management attention to and legal costs associated
with litigation or other resolution of such claims could have a significant
adverse effect on future operating results.  All of the Company's proprietary
rights and intellectual property have been pledged as security under the
Company's loan agreement.

Debt Financing

Events of Default

The terms of the Company's secured debt financing provided for certain events of
default, which include, among other things, (i) failure to perform or meet
certain covenants, such as maintaining a minimum working capital and net worth,
(ii) any change in the controlling ownership of the Company, (iii) the failure
of Seymour R. Cray to provide services to the Company substantially similar to
those he provided prior to the Company's bankruptcy filing, other than such
failure by reason of death, disability, sickness, or injury, (iv) any material
adverse change in the Company's business, assets, or prospects, and (v) the
filing of bankruptcy.  The Company has defaulted under the terms of the
Company's secured debt financing.  The lender is subject under the U.S.
Bankruptcy Code to an automatic stay against any action against the Company or
its assets to collect its debt without prior approval of the Bankruptcy Court.
No additional debt financing is currently available under the secured line of
credit.

The secured lender, as a result of the bankruptcy filing, has notified the
Company of its right and intention to call on the standby letters of credit
(totally $6 million) issued in their favor by Mr. Cray.  Once the secured lender
receives payment from these standby letters of credit, this will reduce the
amount owed by the Company on its line of credit to the secured lender.  After

                                       24

 
this happens, the Company will then have an unsecured liability to Mr. Cray for
an approximately amount of $6 million.  Management of the Company believes such 
liability will be unsecured.

Employees

At December 31, 1994, the Company employed 350 full and part-time employees, of
which 306 were directly involved in research, development, and manufacturing
activities  At April 13, 1995, the Company employed 20 employees.

Common Stock

Volatility of Stock Prices

The market price of the Company's Common Stock has experienced significant
volatility and has decreased substantially over the past three years.  The
recent bankruptcy filing resulted in a substantial drop in the market price of
the Company's Common Stock.

Stock Dividends

The Company has never declared or paid cash dividends on its Common Stock.

Increase in Authorized Common Stock

On February 27, 1995, the shareholders of the Company approved an amendment to
the Company's Restated Certificate of Incorporation increasing the number of
authorized shares of Common Stock, $0.01 par value, from 60,000,000 to
120,000,000 shares in order to have sufficient authorized unissued shares to
permit additional equity financing.

Possible Limitation of Net Operating Loss Carryforwards

The Company had a large net operating loss carryforward and a substantial
research and development credit carryforward for federal income tax purposes as
of December 31, 1994.  The use of these carryforwards would be severely limited
by the terms of Section 382 of the Internal Revenue Code if there is an
"ownership change" as defined in Section 382.  The future issuance of shares of
stock by the Company may trigger the application of Section 382 limitations,
which, in general, would create an annual limitation on net operating loss
carryover deductions equal to the product of (i) the fair market value of the
Company's stock, and (ii) a long-term tax exempt bond rate published by the
Internal Revenue Service.  The potential benefit to the Company from its net
operating loss and research and development credit carryforwards would be
greatly reduced if the limitations apply.  Depending upon the outcome of the 
Company's bankruptcy proceeding, its ability to utilize its carryforwards may be
further restricted or eliminated.

Anti-Takeover Provision

The Company's Restated Certificate of Incorporation and Bylaws contain certain
provisions which may have the effect of preventing, discouraging, or delaying
any change in the control of the Company, including changes in which the
Company's stockholders might otherwise receive a premium for their shares over
then-current market prices.  In addition, such provisions 

                                       25

 
may limit the stockholders' ability to approve transactions that they may deem
to be in their best interests. Such provisions include the classification of the
Company's Board of Directors, certain restrictions of corporate action by
stockholders and certain super-majority voting requirements. In addition, the
Company's ability to issue Preferred Stock could be used, under certain
circumstances, as a method of delaying or preventing a change in control of the
Company.

Securities and Exchange Commission Inquiry

The Securities and Exchange Commission (the "Commission") has issued a formal
order for a non-public investigation relating to trading in the Common Stock of
the Company during the period from September 1, 1990 through January 31, 1992,
which is the approximate period during which the Company was negotiating or had
in effect a purchase order for a 16-processor CRAY-3 supercomputer system from
the National Energy Research Supercomputer Center (NERSC) at Lawrence Livermore
National Laboratory.  The announced loss of this purchase order in December 1991
caused a major drop in the market price of the Company's Common Stock.  The
formal order states that the Commission staff has information tending to show
that during the period under investigation certain individuals and entities may
have traded stock of the Company while in possession of material non-public
information and that the Company and others may have made false and misleading
statements in filings with the Commission or in other public documents
concerning this purchase order or the progress of development of the CRAY-3,
which allegations, if true, would result in possible violation of Section 17(a)
of the Securities Act of 1933 and Sections 10(b) and 13(a) of the Securities
Exchange Act of 1934.  The staff of the Central Regional Office of the
Commission has notified the Company of its intention to recommend that the
Commission seek permanent injunctions and civil penalties against the Company,
Seymour R. Cray and a former officer of the  Company for alleged violations of
these Sections and to seek similar relief against Terry Willkom, the President
of the Company, under two of them.  The staff of the Central Regional Office has
informed the Company and the corporate officers that they may file a written
statement ("Wells Submission") to the Commission setting forth their positions
and arguments concerning the proposed recommendations, and such a statement was
filed with the Central Regional Office on February 15, 1995.  The staff has also
indicated its willingness to consider a proposed compromise resolution of the
issues.  Management of the Company is actively seeking to resolve these matters
and does not believe that the investigation has uncovered violations by the
Company or any of its officers and directors of any of the cited provisions of
law or that the investigation will result in a material adverse effect on the
business, operating results, or financial position of the Company.  However, the
Company cannot predict whether a prompt resolution will be reached or what the
ultimate outcome of the investigation will be.


Alleged Obligation to Issue Shares

The Company entered into two investment agreements with a foreign investor on
January 11, 1995, pursuant to which two blocks of 2,500,000 shares each would be
issued at a 25 percent discount from the average market price of the Common
Stock during two separate valuation periods.  A provisional closing on 

                                       26

 
the first of these transactions was scheduled to occur no later than January 13,
1995. The Company did not receive timely payment in compliance with the written
terms of the first agreement, even with an oral extension of the first closing
deadline. The Company immediately notified the investor of its breach of the
agreement and declared both of the agreements terminated. The investor has
asserted that it attempted to wire timely payment within the orally extended
deadline, but was prevented from completing the transfer through the fault of
the Company's bank. The management of the Company has consulted with its bank
and believes the payment terms were not met. Although the dispute remains
unresolved, the Company's management believes that no timely payment was made
within either the written or the orally extended deadline and that the
investment agreements are no longer in effect. However, if such shares were
issued, such issuance could result in possible dilution of the percentage
interest in the Company represented by outstanding shares of the Company's
Common Stock.

                                       27

 
ITEM 2 - PROPERTIES

The Company's principal properties are as follows:


                                                                       Ownership/
                                                                         Lease
                                                                      Approximate        Expiration
Location of Property                      Uses of Facility          Square Footage       Date
- --------------------                      ----------------          --------------       ----------
                                                                                 
Colorado Springs, CO                      Corporate offices,            170,000          Owned(1)
                                          research and development,
                                          production and marketing
                                  
Colorado Springs, CO                      Production                     34,000          1/31/00
 
(1)Pledged as security under financing agreement.


ITEM 3 - LEGAL PROCEEDINGS

To the Company's knowledge no legal actions are outstanding, except for the
bankruptcy filing.

On March 24, 1995 Cray Computer Corporation (the "Company") filed a voluntary
petition under Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the District of Colorado (the "Court") after the
Company determined it would be unable to complete a planned private placement
financing of up to $25 million of Common Stock with foreign and United States
institutional investors and the Company ceased to have sufficient liquid assets
which would allow it to continue in operation.  The Company's existing directors
and officers have remained in possession of the assets and business of the
Company, but are subject to the supervision and orders of the Court.  The
Company has terminated most of its employees and stopped work on its
supercomputer systems.

Under Chapter 11 the Company may attempt to reorganize, enabling it to resume
operations, or it may dispose of assets followed by distribution of the amount
realized to creditors and, if any excess remains, to shareholders of the
Company. If the assets of the Company are disposed of, that disposition may be
accomplished by the management of the Company as Debtor in Possession or by an
appointed trustee following conversion of the Chapter 11 proceeding to a
liquidation under Chapter 7 of the United States Bankruptcy Code.

Management of the Company has commenced discussions with potential strategic
partners which may result in the resumption of the Company's operation, either
by the Company or a different entity.  Management of the Company does not know
as of the date of this Report whether such discussions will result in a plan of
reorganization permitting the Company to resume its operations.  Management
intends to resolve no later than July 1, 1995, whether a plan of reorganization
is feasible.  If such a plan does prove feasible, it will be presented for
approval, as required, by interested parties including the Bankruptcy Court.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's stockholders during the
quarter ended December 31, 1994.

                                       28

 
                                    PART II
                                    -------

ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     "Investor Information," appearing on page 22 of the 1994 Annual Report to
Stockholders (the Annual Report), is incorporated herein by reference.


ITEM 6 - SELECTED FINANCIAL DATA

     "Historical Financial Summary," appearing on page 1 of the Annual Report,
is incorporated herein by reference.


ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     "Management's Discussion and Analysis of Financial Condition and Results of
Operations," appearing on pages 2 through 7 of the Annual Report, are
incorporated herein by reference.


ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements of the Company as of December 31, 1994 and 1993,
and for each of the years in the three-year period ended December 31, 1994, and
for the period from October 1983 (inception) through December 31, 1994, together
with the report thereon of KPMG Peat Marwick LLP dated January 24, 1995, except
as to Notes 1 and 12 for which the date is March 24, 1995, appearing on pages 8
through 21 of the Annual Report, are incorporated herein by reference.


ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

                                       29

                                   Part III 

ITEM 10 - Directors and Executive Officers of the Registrant

Identification of  Directors

   The business of the Company is managed under the direction of its Board of
Directors. The Company's Board of Directors meets on a regular basis to review
operations, strategic business plans, and acquisitions, dispositions and other
significant developments then affecting the Company, and to act on matters
requiring Board approval. The Board also holds special meetings when required.
Directors are elected for staggered terms of three years expiring as follows:
Seymour R. Cray in 1995, Jean-Louis Gassee in 1996, and Thomas A. Longo in 1997.

   Certain information regarding the individuals serving as directors is as
follows:

Seymour R. Cray

   Seymour R. Cray (age 69) has served as Chairman of the Board, Chief Executive
Officer, and as a director of the Company since July 1989. Mr. Cray co-founded
Cray Research, Inc. (CRI) in 1972 to design and manufacture the world's highest
performance supercomputers. From 1972 to 1977 he served as President and Chief
Executive Officer of CRI. In October 1977 he left the presidency but remained
Chief Executive Officer and became Chairman of the Board. In 1980 Mr. Cray
resigned as Chief Executive Officer and in 1981 stepped aside as Chairman of the
Board to devote full time to the CRAY-2 project as an independent contractor for
CRI. In 1988 Mr. Cray moved the CRAY-3 development project from Chippewa Falls,
Wisconsin to Colorado Springs, Colorado. Mr. Cray served on the board of CRI
from 1972 to November 15, 1989.

   Mr. Cray has spent his entire career designing large-scale computer
equipment. He was one of the founders of Control Data Corporation (CDC) in 1957
and was responsible for the design of the company's large-scale computers,
including the CDC 1604, 6600 and 7600 systems. He was Senior Vice President at
the time of his departure in 1972. From 1950 to 1957, Mr. Cray held several
positions with Engineering Research Associates (ERA), St. Paul, Minnesota. At
ERA, he worked on the development of the ERA 1101 Scientific Computer for the
U.S. Government. Later, he had the design responsibility for a major portion of
the ERA 1103, the first commercially successful scientific computer.

   Mr. Cray is the inventor of a number of technologies that have been patented
by CRI and by the Company. Among the more significant are the CRAY-1 vector
register technology, the cooling technologies for the CRAY-2 computer system and
the Gallium Arsenide logic design for the CRAY-3 and CRAY-4 systems.

Jean-Louis Gassee

   Mr. Gassee (age 51) has served as a director of the Company since November
1989. Mr. Gassee is Chairman and Chief Executive Officer of Be Inc., a personal
computer technology company. Prior to founding Be Inc. in 1990, Mr. Gassee was
President, Apple Products Division of Apple Computer, Inc., a manufacturer of
personal computers, from 1988 to 1990. Mr. Gassee was Senior Vice President of
Research and Development at Apple Computer, Inc. in 1987 and 1988, and was Vice
President, Product Development at Apple Computer, Inc. from 1985 to 1987, where
he was responsible for managing all of Apple Computer, Inc. products from
development to market introduction. He is also on the Board of Directors for
3Com, Electronics for Imaging, LaserMaster Technologies, Ray Dream and Xaos
Tools.

Thomas A. Longo

   Dr. Longo (age 68) has served as a director of the Company since November
1989. Dr. Longo has been President, Chairman and Chief Executive Officer of
Performance Semiconductor Corporation, a developer and manufacturer of
integrated circuits and formerly a major supplier of memory components for the
CRAY-3 system since 1984. Dr. Longo was a member of the Board of Directors of
Cray Research, Inc. from 1975 to May 1989.

Meetings And Committees Of The Board Of Directors

   The Board of Directors held four meetings and had eight actions by unanimous
consent during 1994. The Board has an audit committee and a compensation
committee, the membership of which in each case is presently the entire 

                                      30

 
Board of Directors. The Company does not have a nominating committee.

   Audit Committee. The audit committee reviews the accounting and auditing
principles and procedures of the Company with a view to providing for the
safeguard of the Company's assets and the reliability of its financial records;
recommends to the Board of Directors the engagement of the Company's independent
auditors; reviews with the independent auditors the plan and results of the
auditing engagement; and considers the independence of the Company's independent
auditors. The current members of this committee are Mr. Gassee (Chairman), Mr.
Cray and Dr. Longo. The audit committee, met two times during the last fiscal
year.

   Compensation Committee. The compensation committee establishes salaries,
incentives and other forms of compensation for directors, executive officers and
other employees of the Company. The committee also administers the various
incentive compensation and benefit plans of the Company and recommends policies
relating to such incentive compensation and benefit plans. The current members
of this committee are Dr. Longo (Chairman), Mr. Cray and Mr. Gassee. The
compensation committee, met three times during the last fiscal year.

   The Company's Board of Directors may also establish certain other committees
to facilitate its work.

   During 1994, with the exception of Jean-Louis Gassee each director of the
Company attended at least 75 percent of the aggregate number of meetings of the
Board of Directors and of the committees to which they were elected or
appointed.

                                      31

 
   Identification of Executive Officers

   Set forth below are the names, ages and titles of the persons who served
during 1994 as executive officers of the Company:


 
NAME                             AGE                              OFFICE(S)
- ----------------------------     ---     -----------------------------------------------------------
                                   
Seymour R. Cray.............      69     Chairman of the Board and Chief Executive Officer
Terry A. Willkom............      52     President and Chief Operating Officer
Charles W. Breckenridge.....      61     Executive Vice President, Marketing
William G. Skolout..........      44     Vice President, Finance; Chief Financial Officer, Secretary
                                           and Treasurer
Howard R. Watts.............      54     Vice President, Sales and Marketing


   Each of these executive officers will hold office until his respective
successor is elected, or until his earlier removal or resignation.

   The business experience during the past five years for Mr. Cray is set forth
above under "Identification of Directors."  Following are brief biographies of
Messrs. Willkom, Breckenridge, Skolout, and Watts.

Terry A. Willkom

   Mr. Willkom has served as President and Chief Operating Officer of the
Company since May 1992. He was the Company's Director of Production, responsible
for the production of the CRAY-3 from October 1990 until May 1992. From 1988 to
1990, Mr. Willkom served as President of Rex Systems, Inc., a manufacturer of
electronic systems and sub-systems for the defense industry. Previously, Mr.
Willkom was the Director of a long term care facility for the State of Wisconsin
from 1985 through 1988.

Charles W. Breckenridge

   Mr. Breckenridge joined the Company in March 1994 as Executive Vice
President, Marketing. Previously, Mr.Breckenridge was employed by Cray Research,
Inc. from May 1980 to March 1994. His positions there included Vice President
and General Manager for the Western Region and Latin America from November 1992
to March 1994; Vice President, Government Marketing from January 1990 to
November 1992; and General Manager for the Eastern Region from January 1988 to
January 1990. Mr. Breckenridge's employment with the company was terminated on
the date of the Company's bankruptcy filing.

William G. Skolout

   Mr. Skolout joined the Company in October 1992 and since that time has been
Vice President of Finance, Chief Financial Officer, Secretary and Treasurer.
From August 1988 to mid-1992 Mr. Skolout was Vice President of Finance and
Administration, Chief Financial Officer, Secretary and Treasurer of Simtek
Corporation. Simtek is a designer and manufacturer of semiconductor integrated
circuits. From 1986 to 1988 Mr. Skolout was Vice President of Finance, Chief
Financial Officer, Secretary and Treasurer of Ramtron International Corporation.

Howard R. Watts

   Mr. Watts has been Vice President, Sales and Marketing for the Company since
May 1992. Mr. Watts was the Sales Manager for the Company from February 1990 to
May 1992. Previously, Mr. Watts was employed by Cray Research, Inc., in various
sales and software management positions from January 1980 to February 1990. Mr.
Watts' employment with the Company was terminated on the date of the Company's
bankruptcy filing.

Section 16(a) Reporting Delinquency

   Executive officers and directors of the Company are required by Section 16(a)
of the Securities Exchange Act of 1934 to file reports on Forms 3, 4 and 5 with 
respect to their ownership of equity securities in the Company. To the Company's
knowledge, all reports required by Section 16(a) during 1994 were timely filed 
except that Charles W. Breckenridge made a late filing on Form 4 relating to a 
purchase of shares of the Company's common stock.

                                      32

 

Item 11 - Executive Compensation

   The following table sets forth the compensation paid by the Company to each
of the named executive officers of the Company for each of the years ended
December 31 , 1994, 1993 and 1992.

                                      33

 


 
                          SUMMARY COMPENSATION TABLE
 
                                                                 LONG-TERM COMPENSATION
                             ANNUAL COMPENSATION                                            Awards          Payouts
         Name                                                      Other            Restricted   Number of
         and                                                       Annual             Stock      Securities   LTIP      All Other
      Principal                        Salary (A)       Bonus    Compensation (B)     Award(s)   Underlying  Payouts   Compensation
      Position                Year       ($)             ($)         ($)                ($)      Options (C)   ($)         ($)
                                                                                                
S.R. Cray (E)                 1994      $273,200                                                   
Chief Executive               1993       293,100                                                   
  Officer                     1992       309,500                                                   
                                                                                                   
T.A. Willkom                  1994       217,300                                                    80,000  
President and Chief           1993       212,800                                               
  Operating Officer           1992       198,000                                               
                                                                                                   
C.W. Breckenridge (D)         1994       182,600        60,000                                     100,000        
Executive Vice                1993                                                                 
 President, Marketing         1992                                                             
                                                                                                   
W.G. Skolout (D)              1994       190,400                                                    80,000   
Chief Financial Officer,      1993       165,700                                               
  Secretary & Treasurer       1992        27,700                                               
                                                                                                   
H.R. Watts                    1994       122,300                                                    30,000  
Vice President, Sales         1993       150,700
   and Marketing              1992       116,000
- ---------------


(A)  Amounts shown include cash and non-cash compensation earned and received by
     the named executive officers, as well as amounts earned but deferred at the
     election of those officers under the Company's Deferred Profit-Sharing
     Plan, as described under "Compensation Committee Report on Executive
     Compensation." Pursuant to the 1989 Employee Stock Benefit Plan as
     described under "Compensation Committee Report on Executive Compensation,"
     Mr. Cray was issued 12,500 shares of the Company's Common Stock in each of
     1993 and 1992, with a fair market value on the dates of issue of
     approximately $37,000 and $54,000, respectively. Mr. Willkom was issued
     10,000 shares of the Company's Common Stock in each of 1994, 1993 and 1992,
     with a fair market value on the dates of issue of approximately $16,000,
     $30,000 and $44,000, respectively. Mr. Watts was issued 750 shares of the
     Company's Common Stock in 1994, with a fair market value on the date of
     issue of approximately $1,000, and 3,000 shares in each of 1993 and 1992,
     with a fair market value on the date of issue of approximately $9,000 and
     $14,000, respectively.

(B)  Other annual compensation, including non-cash personal benefits given to
     executive officers during the fiscal year ended December 31, 1994, did not
     exceed in the aggregate the lesser of 10 percent of the total salary and
     bonus reported or $50,000 for any such executive officer.

(C)  Includes stock options that were originally granted in 1992 and were
     repriced in 1993 and 1994. Also includes stock options that were originally
     granted in 1994 and also were repriced in 1994. There were no changes in
     exercise or expiration dates in connection with any of the repricings. See
     the tables "Option Grants in Last Fiscal Year" and "Compensation Committee
     Report on Executive Compensation - 10-Year Option Repricing."

(D)  Mr. Breckenridge joined the Company as Executive Vice President, Marketing
     in March 1994. Mr. Skolout joined the Company in October 1992 as Vice
     President, Finance; Chief Financial Officer, Secretary and Treasurer.

                                      34

 
(E)  Mr. Cray is an independent contractor to the Company. Amounts reported in
     this table for Mr. Cray include amounts paid pursuant to his design and
     development with the Company (see "Compensation Committee Report on
     Executive Compensation" and "Certain Relationships and Related Party
     Transactions") and amounts paid to him as a non-employee director.

The following table sets forth the options granted by the Company to each of the
named executive officers of the Company for the year ended December 31, 1994.

                       OPTION GRANTS IN LAST FISCAL YEAR


                                                                                                             POTENTIAL REALIZABLE
                                                                                                               Value at Assumed
                                                                                                               Annual Rates of
                                                                                                                  Stock Price
                                                                                                               Appreciation for
                                               Individual Grants                                               Option Term (E, F)
                                       Number of        % of Total
                                       Securities        Options
                                       Underlying       Granted to       Exercise or
                                     Options Granted   Employees in      Base Price      Expiration
   Name                                (#) (A,B,C)      Fiscal Year       ($/Share)(D)     Date            5% ($)         10%($) 
                                                                                                      
                                                                                                              
Terry A. Willkom
 - 1994 Grants repriced                    40,000         2.3%             1.19          03/09/01         18,000        41,000
 - 1992 Grants repriced                    40,000         2.3%             1.19          11/10/99         14,000        31,000
Charles W. Breckenridge                                                                          
 - 1994 Grants repriced                   100,000         5.8%             1.19          03/09/01         45,000       104,000
William G. Skoulout                                                                              
 - 1994 Grants repriced                    40,000         2.3%             1.19          03/09/01         18,000        41,000
 - 1992 Grants repriced                    40,000         2.3%             1.19          11/10/99         14,000        31,000
Howard R. Watts                                                                                  
 - 1992 Grants repriced                    30,000         1.7%             1.19          11/10/99         10,000        23,000

____________

(A)  These options are exercisable starting 12 months after their original grant
     dates, with 25 percent of the option shares granted becoming exercisable on
     each successive anniversary date, with full vesting occurring on the fourth
     anniversary date from the date of grant. Options become immediately
     exercisable upon the first purchase in a tender offer acquisition of 20
     percent or more of the Company's stock by a third party or approval of
     certain change of control transactions by the Board of Directors.
(B)  Under the terms of the Company's 1989 Employee Benefit Stock Plan, the
     Compensation Committee retains discretion, subject to plan limits, to
     modify the terms of outstanding options and to reprice the options.
(C)  The options were granted for a term of 7 years from the original grant
     dates of November 10, 1992 and March 9, 1994, subject to earlier
     termination in certain events related to termination of employment.
(D)  The exercise price and tax withholding obligations related to exercise may
     be paid by delivery of already owned shares or by offset of the underlying
     shares, subject to certain conditions.
(E)  The dollar amounts in these columns were calculated assuming 5% and 10%
     annual growth rates, as required by the rules of the Security and Exchange
     Commission. These rates are not intended to forecast future appreciation,
     if any, in the value of the Company's Common Stock. There can be no
     assurance that any appreciation in the Company's Common Stock will occur.

                                      35

 
(F)  The closing market price of the underlying shares on the dates of grant,
     November 10, 1992 and March 9, 1994 were $4.38 and $2.13, respectively. The
     stock option's exercise or base price was subsequently repriced at fair
     market value of the underlying shares on August 9, 1994 at $1.19. Potential
     realizable value was calculated based on the fair market value of the
     underlying shares at the date of repricing, $1.19.

   The following table sets forth the option exercises and year-end option
values for each of the Company's named executive officers for the year ended
December 31, 1994.


   AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES


 
                                                                Number Of
                                                                Securities                Value of Unexercised  
                                                                Underlying                    In-the-Money          
                                                                Unexercised                    Options at            
                                                                Options at                       FY-End                
                                                                FY-End (#)                        ($)                    
 
                                 Shares Acquired        Value
                                  on Exercise         Realized        Exercisable/             Exercisable/
      Name                            (#)               ($)           Unexercisable           Unexercisable
                                                                                  
Seymour R. Cray                         0                 0                      0/0                0/0
Terry A. Willkom                        0                 0            20,000/60,000                0/0
Charles W. Breckenridge                 0                 0                0/100,000                0/0
William G. Skolout                      0                 0            20,000/60,000                0/0
Howard R. Watts                         0                 0            15,000/15,000                0/0
 

Compensation Of Directors

   Directors are paid an annual retainer of $16,000 and are reimbursed for their
expenses. Directors are also eligible to receive stock options and/or grants
under the Company's 1989 Employee Benefit Stock Plan (the "Benefit Stock Plan").
Directors who are employees of the Company do not receive any fee for their
services as directors. There are currently no employees of the Company who are
directors. No director was awarded stock options and/or grants in 1994.

   The Benefit Stock Plan provides a means for the Company, by granting Company
stock or options to purchase stock to employees and directors of the Company and
its subsidiaries to attract and retain persons of ability and motivate them to
advance the interests of the Company and benefit its shareholders. Up to an
aggregate of 3,700,000 shares of Common Stock can be granted as stock options or
grants, of which up to 200,000 shares may be issued to directors, subject to
adjustments for future stock splits, stock dividends and similar events. Stock
options and grants are awarded by the Compensation Committee of the Board of
Directors.

   Mr. Cray serves as an independent contractor to the Company under a Design
and Development Agreement which does not require any specific working time
commitment by Mr. Cray. The Design and Development Agreement, which is similar
to his prior agreement with CRI from 1981 to 1989, and with the Company from
1989 to 1992, has a term expiring in June 1997. This agreement would terminate
early in the event that the Company discontinues development funding for the
CRAY-4 or for future systems or limits or terminates agreed-upon production for
the CRAY-4 or for future systems. In such event, Mr. Cray retains the option to
continue development and production of the project, subject, however, to prior
consent by the Company's asset-based lender for so long as its loan agreement
with the Company remains in effect. The agreement also terminates in the event
Mr. Cray fails for any reason to continue a project, in which case the Company
retains the right to fund and participate in additional projects pursued by him.
However, the failure of Mr. Cray to provide services to the Company
substantially similar to those he currently provides, other than such failure by
reason of death, disability, sickness or injury would be an event 

                                      36

 
of default under the Company's secured debt financing. Under the agreement,
until the date of the Company's bankruptcy filing, Mr. Cray received an annual
fee of $240,000, paid monthly, which is included in the Summary Compensation
Table.

   The Company is reviewing the terms and conditions of the agreement with Mr.
Cray to assess the ramifications of the bankruptcy filing.

Employment Contracts

   There was one employment contract between the Company and one executive
officer, Seymour R. Cray. Mr. Cray currently serves as an independent contractor
to the Company under a design and development agreement, as described in
"Compensation of Directors."

            COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

To: The Board of Directors

   As members of the Compensation Committee (the "Committee"), it is our
responsibility to review compensation levels of members of management, evaluate
the performance of management, consider management succession and other related
matters and administer the Company's various incentive plans, including the 1989
Employee Benefit Stock Plan (the "Benefit Stock Plan"), 1989 Qualified Stock
Purchase Plan and Deferred Profit Sharing Plan. The Committee determines what it
considers appropriate compensation based on the individual's performance and
contribution, the financial status of the Company, competitive national
compensation levels prevailing in the computer industry, competitive pressure
for key personnel and Company objectives. Compensation has been and is expected
to continue to be tax deductible.

Incentive Plans

   1989 Employee Benefit Stock Plan: The purpose of this plan is to provide a
means for the Company, by granting Company stock or options to purchase stock to
employees, executive officers, and directors of the Company and its
subsidiaries, to attract and retain such persons of ability and motivate them to
advance the interests of the Company and benefit its shareholders. Stock options
and grants are awarded by the Compensation Committee of the Board of Directors
subject to the terms of the plan. Up to an aggregate of 3,700,000 shares of
Common Stock may be granted as stock options or grants, of which up to 200,000
shares may be issued to directors, subject to adjustments for future stock
splits, stock dividends and similar events. The Compensation Committee considers
the employee's contribution made to the Company's business and the amount of
previous stock grants and/or stock option grants already awarded to an executive
officer when awarding new stock options and/or grants. The Compensation
Committee may amend outstanding stock option and grant agreements, subject to
plan limitations.

   The Compensation Committee has periodically awarded stock options to certain
eligible employees, including all executive officers except Seymour Cray,
beginning on November 10, 1992. The price of the Company's Common Stock has
dropped significantly since November 10, 1992. Because of this drop, the
Compensation Committee felt that the options no longer provided substantial
incentive to employees holding them and that it was in the best interest of the
Company, and consistent with the objectives and terms of the 1989 Employee
Benefit Stock Plan to reprice the stock options. The stock options of all
employees were repriced on August 10, 1993 and August 9, 1994. In addition, the
stock options held by T.A. Willkom and W.G. Skolout were repriced on March 9,
1994, and subsequently repriced on August 9, 1994. The original stock option
exercise prices and each of the repriced exercise prices were set at the closing
market price of the Company's Common Stock on the date of each transaction. The
following table summarizes all stock option repricing since the inception of the
1989 Employee Benefit Stock Plan.

                                      37

 


                                                                       10-YEAR OPTION REPRICINGS
                                                                                                                         Length of
                                                       Number of                                                          Original
                                                       Securities      Market Price       Exercise                      Option Term
                                                       Underlying      of Stock at        Price at                       Remaining
                                                        Options          Time of           Time of           New         at Date of
                                                      Repriced or      Repricing or     Repricing or      Exercise      Repricing or

Name                                    Date          Amended (#)      Amendment (      )$Amendment (     )$Price (     )$ Amendment

                                                                                                      
T.A. Willkom                              8/10/93          40,000              2.75              4.38          2.75        75 months

President and Chief                       3/09/94          40,000              2.13              2.75          2.13        68 months

 Operating Officer                        8/09/94          40,000              1.19              2.13          1.19        63 months

                                          8/09/94          40,000              1.19              2.13          1.19        79 months

 
C.W. Breckenridge                         8/09/94         100,000              1.19              2.13          1.19        79 months

Executive Vice President,
 Marketing
 
W.G. Skolout                              8/10/93          40,000              2.75              4.38          2.75        75 months

Chief Financial Officer,                  3/09/94          40,000              2.13              2.75          2.13        68 months

   Secretary and Treasurer                8/09/94          40,000              1.19              2.13          1.19        63 months

       8/09/94                                             40,000              1.19              2.13          1.19        79 months

 
H.R. Watts                                8/10/93          30,000              2.75              4.38          2.75        75 months

Vice President, Sales                     8/09/94          30,000              1.19              2.13          1.19        63 months

 and Marketing


1989 QUALIFIED STOCK PURCHASE INVESTMENT PLAN: The purpose of this plan is to
facilitate capital accumulation by eligible employees in the form of the
Company's Common Stock and thereby to provide employee identification with the
commitment to the goals of the Company. Directors are not eligible for benefits
under the Stock Purchase Plan. Executive officers and other eligible employees
may contribute between 2 and 15 percent of their annualized base pay as of the
first day of the current offering period.

DEFERRED PROFIT SHARING PLAN: All employees of the Company, including the named
executive officers, who have reached age 21 and who have at least six months of
service are eligible to participate in the program. Eligible employees may
contribute through payroll deductions up to 15 percent of their eligible
compensation. No matching contributions are made by the Company. All accounts
are fully vested at all times. The Deferred Profit Sharing Plan is intended to
meet the requirements of Section 401(k) of the Internal Revenue Code.

CEO Compensation


   Mr. Seymour R. Cray, Chairman of the Board and Chief Executive Officer,
serves as an independent contractor pursuant to a design and development
agreement (the "Agreement") with the Company. The Agreement, which is similar to
his agreement with the Company from 1989 to 1992, has a term expiring in June
1997 and may be extended as additional projects are undertaken by Mr. Cray. The
Company is reviewing the terms and conditions of the Agreement with Mr. Cray to
assess the ramifications of the bankruptcy filing. Under the Agreement Mr.
Cray's annual cash compensation was $240,000 per year from 1989 to 1994. In
addition, Mr. Cray is paid $16,000 annually as a non-employee director of the
Company and received beneficial payments of $17,200 in 1994 for letter of credit
fees. Mr. Cray was appointed Chief Executive Officer in 1992 and his cash
compensation was not adjusted for his additional Chief Executive duties.

   The basis for Mr. Cray's compensation is his experience in designing
supercomputers, his duties to the Company under the design and development
agreement and his duties and responsibilities as Chief Executive Officer. Mr.
Cray is widely acknowledged to have played a leading role in the development of
the supercomputer industry. Mr. Cray has devoted his full working time to the
Company since its inception. Prior to the date of the Company's bankruptcy
filing, Mr. Cray devoted most of his time to the design and development of the
CRAY-4, CRAY-3/SSS and the balance of his time to his duties as Chief Executive
Officer of the Company. He is a key contributor in the 

                                      38

 
areas of design architecture, circuit design, packaging techniques and cooling
technologies. The Company's future success would be materially and adversely
affected if Mr. Cray's services become unavailable for any reason. His
leadership and design expertise is critical to the Company.

Other Executive Compensation

   With respect to compensation for officers, other than Mr. Cray the Chief
Executive Officer, the Committee's policy is to review compensation proposals
from management, which are based upon a performance evaluation measuring past
performance as well as defined expected future contributions. At the present
time, the Company's officers receive compensation in the form of base salary and
long-term incentive compensation through stock options, pursuant to the Benefit
Stock Plan. In addition, the Company provides health, term life, and disability
$insurance as long as the officer is actively employed. The officers, as well as
substantially all full-time employees, are eligible to participate in the
Company's Deferred Profit Sharing Plan under Section 401(k) of the Internal
Revenue Code. The Company currently does not contribute to the Deferred Profit
Sharing Plan.

   No bonuses have been paid to the Company's officers, except a bonus of
$60,000 to Charles W. Breckenridge. The Compensation Committee does not expect
to award future bonuses until the Company is profitable. The Committee reviews
compensation annually, usually during the second quarter of the fiscal year. One
member of the Committee, Mr. Cray, is the current Chief Executive Officer of the
Company.

                                                    Compensation Committee

                                                    Thomas A. Longo
                                                    Seymour R. Cray
                                                    Jean-Louis Gassee

February 27, 1995
Colorado Springs, Colorado


          COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

   Mr. Seymour R. Cray, Chairman of the Board and Chief Executive Officer, is
also a member of the Compensation Committee. Mr. Cray currently serves as an
independent contractor to the Company under a design and development agreement
which does not require any specific working time commitment by Mr. Cray. Mr.
Cray did in fact work full time at the Company until the date of its bankruptcy
filing. The agreement is scheduled to remain effective until June, 1997 and may
be extended as additional projects are undertaken by Mr. Cray. Upon termination
of the agreement and subject to approval by the lender of the Company's secured
debt financing, Mr. Cray and the Company would have a royalty-free right to the
results of the development work performed under the agreement. Until the date of
the Company's bankruptcy filing, the Company provided all support personnel and
operating funds for systems development and production under Mr. Cray's
direction. Under the agreement, until the date of the Company's bankruptcy
filing, Mr. Cray received a monthly payment of $20,000. Payments to Mr. Cray
were approximately $240,000 in 1994. Mr. Cray also received a director fee of
$16,000 in 1994 and beneficial payment of letter of credit fees of $17,200.

   The Company is reviewing the terms and conditions of the agreement with Mr.
Cray to assess the ramifications of the bankruptcy filing.

                 COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
                  OF COMPANY, INDUSTRY INDEX AND BROAD MARKET


- ----------------------------- FISCAL YEAR ENDING ------------------------------
 
 
COMPANY                      1989    1990     1991     1992     1993     1994
                                                        
CRAY COMPUTER CP              100    119.35   200.00   100.00    64.52    26.61
INDUSTRY INDEX                100     98.72    96.20    75.49    84.85   110.23
BROAD MARKET                  100     81.12   104.14   105.16   126.14   132.44
 

                                      39

 
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                             Principal Shareholder

   The following person is the only person known to the Company who on February
28, 1995, beneficially owned more than 5% of the Company's Common Stock, its
only class of outstanding voting securities:

 
 
   Name And Address Of                Amount And Nature Of
     Beneficial Owner                Beneficial Ownership (1)   Percent of Class
                                                           
    Seymour R. Cray                       3,670,268                   8.3%
    1110 Bayfield Drive
    Colorado Springs, CO 80906
 
_______________ 

(1)  Beneficial ownership results from sole voting and investment power.


SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth information with respect to the shares of Common
Stock which were beneficially owned by each director and executive officer of
the Company and by all directors and executive officers as a group as of
February 28, 1995, according to data furnished by the persons named.

                        SECURITY OWNERSHIP OF MANAGEMENT


                                                                    Amount And Nature Of
                                                                     Beneficial Common
 Beneficial Owner                                                    Stock Ownership (1)     Percent of Class
                                                                                          
Seymour R. Cray.................................................              3,670,268              8.3%
Jean-Louis Gassee...............................................                260,000                *
Thomas A. Longo.................................................                 12,035                *
Terry A. Willkom................................................                123,441                *
Charles W. Breckenridge.........................................                120,336                *
William G. Skolout..............................................                 80,000                *
Howard R. Watts.................................................                 42,000                *
All directors and executive officers as a group                               4,308,080              9.8%     
 
_______________ 
*    Represents beneficial ownership of less than 1 percent of the outstanding
     Common Stock.

(1)  Mr. Willkom's shares include 100 shares which are owned indirectly by him.
     Mr. Breckenridge's shares are owned jointly with his wife. Each of the
     named persons has sole voting and investment power for the other shares
     shown.


ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain Relationships And Related Party Transactions

   The Company is a party to a design and development agreement with Seymour R.
Cray, Chairman of the Company's Board of Directors. Under the agreement Mr. Cray
acts as an independent contractor for the Company to 

                                      40

 
furnish development work. The agreement is scheduled to remain in effect until
June 30, 1997 and may be extended upon mutual agreement as additional projects
are undertaken by Mr. Cray. Subject to approval of the lender of the Company's
secured debt financing, upon termination of the agreement, Mr. Cray and the
Company would have a royalty-free right to the results of the development work
performed under the agreement. The Company provides all support personnel and
operating funds for systems development and production under Mr. Cray's
direction. Under the agreement, until the date of the Company's bankruptcy
filing, Mr. Cray currently received an annual fee of $240,000, paid monthly. Mr.
Cray also received a director's fee of $16,000 in 1994.

Total related party expenses included in research and development expenses for
the year ended December 31, 1994 are approximately $318,516. In the opinion of
management, all related party purchases were at terms no less favorable than
those obtainable in transactions with unaffiliated third parties.

                                      41

 
                                    PART IV
                                    -------

ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

Financial Statements
The following financial statements are incorporated by reference into Part II,
Item 8 of this Report:


                                                                           Pages in
                                                                          1994 Annual
                                                                           Report to
                                                                          Stockholders
                                                                          ------------
                                                                         
 
Independent Auditors' Report                                                      8
 
Statements of Operations cumulative from October 1983 (inception)
through December 31, 1994 and years ended December 31,
1994, 1993, and 1992.                                                             9
 
Balance Sheets, December 31, 1994 and 1993.                                      10
 
Statements of Cash Flows cumulative from October 1983 (inception)
through December 31, 1994 and years ended December 31,
1994, 1993, and 1992.                                                            11
 
Statement of Stockholders' Equity years ended
December 31, 1994, 1993, 1992, and 1991.                                         12
 
Notes to Financial Statements                                              13 to 21


Financial Statement Schedules

All schedules are omitted because they are not applicable or not required, or
because the required information is included in the financial statements or
notes thereto.

                                       42

 
Exhibits                         Description
                                 -----------
     3.1*  The Company's Restated Certificate of Incorporation as filed 
           with the Delaware Secretary of State on February 27, 1995.

     3.2   The Company's Bylaws, as amended through August 10, 1993
           (incorporated by reference to Exhibit 3.2 of Amendment No. 
           1 to the Company's Form S-3 Registration Statement 
           No. 33-67906, filed with the Commission on September 29, 1993).

     4.1   The Company's Restated Certificate of Incorporation as filed 
           with the Delaware Secretary of State on October 26, 1989 
           (incorporated by reference to Exhibit 3.1 of this Form 10-K.

     4.2   The Company's Bylaws, as amended through August 10, 1993 
           (incorporated by reference to Exhibit 3.2 of Amendment No. 1 
           to the Company's Form S-3 Registration Statement No. 33-67906, 
           filed with the Commission on September 29, 1993).

     4.3** The Cray Computer Corporation 1989 Employee Benefit Stock 
           Plan (incorporated by reference to Exhibit 4 of the Company's 
           Registration Statement No. 33-33277 on Form S-8, filed with 
           the Commission on January 30, 1990).

     4.4** Amendment No. 1 to the Cray Computer Corporation 1989 Employee 
           Benefit Stock Plan effective November 10, 1992 (incorporated 
           by reference to Exhibit 4.4 of the Company's Registration 
           Statement No. 33-33277 on Form S-8, filed with the
           Commission on December 8, 1993).

     4.5** Amendment No. 2 to the Cray Computer Corporation 1989 Employee 
           Benefit Stock Plan effective November 10, 1992 (incorporated 
           by reference to Exhibit 4.5 of the Company's Registration 
           Statement No. 33-33277 on Form S-8, filed with the
           Commission on December 8, 1993).

                                       43

 
    4.6**  Form of Incentive Stock Option Agreement utilized under the 1989
           Employee Benefit Stock Plan (incorporated by reference to Exhibit 4.6
           of the Company's Registration Statement No. 33-33277 on Form S-8,
           filed with the Commission on December 8, 1993).
          
    4.7**  Form of Nonstatutory Stock Option Agreement utilized under the 1989
           Employee Benefit Stock Plan (incorporated by reference to Exhibit 4.7
           of the Company's Registration Statement No. 33-33277 on Form S-8,
           filed with the Commission on December 8, 1993).
          
    4.8**  Form of Employee Stock Grant Agreement utilized under the 1989
           Employee Benefit Stock Plan (incorporated by reference to Exhibit 4.8
           of the Company's Registration Statement No. 33-33277 on Form S-8,
           filed with the Commission on December 8, 1993).
          
    4.9**  Form of Director Stock Grant Agreement utilized under the 1989
           Employee Benefit Stock (incorporated by reference to Exhibit 4.9 of
           the Company's Registration Statement No. 33-33277 on Form S-8, filed
           with the Commission on December 8, 1993).
          
    4.10** Form of 1989 Employee Benefit Stock Plan Repricing Agreement
           (incorporated by reference to Exhibit 4.10 of the Company's
           Registration Statement No. 33-33277 on Form S-8, filed with the
           Commission on December 8, 1993).
          
   4.11*** 1989 Qualified Stock Purchase Investment Plan (1995 Restatement).
          
    10.1** The Cray Computer Corporation 1989 Employee Benefit Stock Plan
           (incorporated by reference to Exhibit 4 of the Company's Registration
           Statement No. 33-33277 on Form S-8, filed with the Commission on
           January 30, 1990).
          
 10.1(a)** Amendment No. 1 to the Cray Computer Corporation 1989 Employee
           Benefit Stock Plan effective November 10, 1992 (incorporated by
           reference to Exhibit 4.4 of the Company's Registration Statement No.
           33-33277 on Form S-8, filed with the Commission on December 8, 1993).
          
 10.1(b)** Amendment No. 2 to the Cray Computer Corporation 1989 Employee
           Benefit Stock Plan effective November 10, 1992 (incorporated by
           reference to Exhibit 4.5 of the Company's Registration Statement No.
           33-33277 on Form S-8, filed with the Commission on December 8, 1993).
          
    10.2** 1989 Qualified Stock Purchase Investment Plan (incorporated by
           reference to Exhibit 4.11 of this Form 10-K.
          
                                       44

 
     10.3  Distribution Agreement dated as of July 31, 1989, between Cray
           Research, Inc., and the Company (incorporated by reference to Exhibit
           10.1 of Item 15(b) to the Company's Form 10, filed with the
           Commission on October 31, 1989, File No. 0-18072).

     10.4  License Agreement dated July 31, 1989, between Cray Research, Inc.,
           and the Company (patents, technology, software) (incorporated by
           reference to Exhibit 10.3(a) of Item 15(b) to the Company's Form 10,
           filed with the Commission on October 31, 1989, File No. 0-18072).

     10.5  Amendment to License Agreement dated October 24, 1989, between Cray
           Research, Inc., and the Company (incorporated by reference to Exhibit
           10.3(b) of Item 15(b) to the Company's Form 10, filed with the
           Commission on October 31, 1989, File No. 0-18072).

     10.6  License Agreement dated July 31, 1989, between Cray Research, Inc.,
           and the Company (software) (incorporated by reference to Exhibit 10.4
           of Item 15(b) to the Company's Form 10, filed with the Commission on
           October 31, 1989, File No. 0-18072).

     10.7  Remarketing Agreement dated July 31, 1989, between Cray Research,
           Inc., and the Company (incorporated by reference to Exhibit 10.5 of
           Item 15(b) to the Company's Form 10, filed with the Commission on
           October 31, 1989, File No. 0-18072).

   10.8**  Cray Computer Corporation Deferred Profit Sharing Plan (incorporated
           by reference to Exhibit 10.12 of Item 15(b) to the Company's Form 10,
           filed with the Commission on October 31, 1989, File No. 0-18072).

     10.9  Assignment, Assumption Agreement and Consent dated September 21,
           1989, among Cray Research, Inc., the Company and GigaBit Logic, Inc.
           (incorporated by reference to Exhibit 10.15(b) of Item 15(b) to the
           Company's Form 10, filed with the Commission on October 31, 1989,
           File No. 0-18072).

     10.10 Research and Development Agreement and Consent dated as of November
           20, 1985, between Performance Semiconductor Corporation and Cray
           Research, Inc. (incorporated by reference to Exhibit 10.16(a) of Item
           15(b) to the Company's Form 10, filed with the Commission on October
           31, 1989, File No. 0-18072).

     10.11 Assignment, Assumption Agreement and Consent dated September 21,
           1989, among Cray Research, Inc., the Company and Performance
           Semiconductor Corporation (incorporated by reference to Exhibit
           10.16(b) of Item 15(b) to the Company's Form 10, filed with the
           Commission on October 31, 1989, File No. 0-18072).

                                       45

 
     10.12 Research and Development Agreement and Consent dated as of March 4,
           1987, between Performance Semiconductor Corporation and Cray
           Research, Inc. (incorporated by reference to Exhibit 10.17(a) of Item
           15(b) to the Company's Form 10, filed with the Commission on October
           31, 1989, File No. 0-18072).

     10.13 Asset Purchase Agreement dated as of March 1, 1990 between the
           Company and GigaBit Logic, Inc. (incorporated by reference to Exhibit
           2.1 of Item 7(c) to the Company's Current Report on Form 8-K dated
           March 1, 1990, filed with the Commission on March 16, 1990).

     10.14 Assignment and License Agreement between Cray Research, Inc., the
           Company, and Raychem Corporation dated effective November 2, 1989
           (incorporated by reference to Exhibit 10.1 to the Company's
           Registration Statement on Form S-1, Post Effective Amendment No. 3,
           filed with the Commission on May 14, 1991, Registration No. 33-
           34053).

     10.15 Cross License Agreement between Cray Research, Inc., the Company, and
           Raychem Corporation dated effective November 2, 1989 (incorporated by
           reference to Exhibit 10.2 to the Company's Registration Statement on
           Form S-1, Post Effective Amendment No. 3, filed with the Commission
           on May 14, 1991, Registration No. 33-34053).

     10.16 AT&T Information Systems Inc., Software Agreement dated as of
           September 15, 1989 between the Company and AT&T Information Systems
           Inc. (incorporated by reference to Exhibit 10.1 to the Company's
           Registration Statement on Form S-1, Amendment No. 3, filed with the
           Commission on July 25, 1990, Registration No. 33-34053).

     10.17 License Agreement effective as of September 20, 1989, among the
           Company, Pacific-Sierra Research Corporation, and Typalogics
           (incorporated by reference to Exhibit 10.2 to the Company's
           Registration Statement on Form S-1, Amendment No. 3, filed with the
           Commission on July 25, 1990, Registration No. 33-34053).

                                       46

 
     10.18 Purchase Order B116827 between the Regents of the University of
           California and the Company dated as of December 8, 1990 (incorporated
           by reference to Exhibit 10.29 to the Company's Registration Statement
           on Form S-1 filed with the Commission on June 25, 1991, Registration
           No. 33-41249).

     10.19 Technology License Agreement between GigaBit Logic, Inc., and the
           Company dated March 1, 1990 (incorporated by reference to Exhibit
           10.30 to the Company's Registration Statement on Form S-1 filed with
           the Commission on June 25, 1991, Registration No. 33-41249).

     10.20 Business Lease Agreement between R.V. Centennial Partnership and the
           Company dated as of September 22, 1989 (incorporated by reference to
           Exhibit 10.30 to the Company's Registration Statement on Form S-1
           filed with the Commission on June 25, 1991, Registration No. 33-
           41249).

     10.21 Letter from NERSC requesting the Company to provide an alternate
           system and to assign all rights, obligations, and responsibility for
           the delivery and installation of an alternate system to Cray
           Research, Inc., (incorporated by reference to Exhibit 28.1 to the
           Company's Current Report on Form 8-K dated December 23, 1991, as
           filed with the Commission on December 23, 1991).

     10.22 Assignment of rights and obligations under Purchase Order B116827
           between the Regents of the University of California and the Company
           dated as of December 8, 1990, as they apply to the delivery of Item 2
           (Alternate) per Part III-C, to Cray Research, Inc., (incorporated by
           reference to Exhibit 10.33 to the Company's Annual Report on Form 10-
           K dated December 31, 1991, as filed with the Commission on March 26,
           1992).

     10.23 Assignment Agreement between the Company, and Raychem Corporation
           dated effective October 17, 1991 (incorporated by reference to
           Exhibit 10.34 to the Company's Annual Report on Form 10-K dated
           December 31, 1991, as filed with the Commission on March 26, 1992).

                                       47

 
  10.24**  Design and Development Agreement between the Company and Seymour R.
           Cray dated effective December 1, 1992. This agreement will remain in
           effect until December 31, 1995 (incorporated by reference to Exhibit
           10.36 to the Company's Annual Report on Form 10-K dated December 31,
           1992, as filed with the Commission on March 30, 1993).

     10.25 Equipment Loan Agreement between the Company and the University
           Corporation for Atmospheric Research dated effective February 18,
           1993 (incorporated by reference to Exhibit 10.37 to the Company's
           Annual Report on Form 10-K dated December 31, 1992, as filed with the
           Commission on March 30, 1993).

 10.26(a)  Amendment to Equipment Loan Agreement between the Company and the
           University Corporation for Atmospheric Research dated effective
           December 6, 1993 (incorporated by reference to the Company's Annual
           Report on Form 10-K, dated December 31, 1993, as filed with the
           Commission on March 30, 1994).

     10.27 Form of Stock Purchase Agreement (incorporated by reference to
           Exhibit 10.38 of the Company's Registration Statement No. 33-33277 on
           Form S-8, filed with the Commission on December 8, 1993).

  10.28**  Stock Purchase Agreement between the Company and Seymour R. Cray
           dated effective June 11, 1993 (incorporated by reference to Exhibit
           10.29 to the Company's Annual Report on Form 10-K dated December 31,
           1993, as filed with the Commission on March 30, 1994).

     10.29 Amendment No. 1 to the Design and Development Agreement (dated
           effective December 1, 1992) between the Company and Seymour R. Cray
           dated effective June 6, 1994 (incorporated by reference to Exhibit
           10.33 to the Company's Form 10-Q dated June 30, 1994, as filed with
           the Commission on August 12, 1994).

     10.30 Technology Rights Subordination Agreement between the Company and
           Seymour R. Cray for the benefit of Congress Financial Corporation
           dated effective June 10, 1994 (incorporated by reference to Exhibit
           10.34 to the Company's Form 10-Q dated June 30, 1994, as filed with
           the Commission on August 12, 1994).

     10.31 Loan and Security Agreement between the Company and Congress
           Financial Corporation dated effective June 10, 1994 (incorporated by
           reference to Exhibit 10.30 to the Company's Current Report on Form 8-
           K dated June 15, 1994, as filed with the Commission on June 15,
           1994).

     10.32 Term Note by the Company in favor of Congress Financial Corporation
           dated effective June 10, 1994 (incorporated by reference to Exhibit
           10.31 to the Company's Current Report on Form 8-K dated June 15,
           1994, as filed with the Commission on June 15, 1994).

     10.33 Letter of Credit issued by The Chase Manhattan Bank, N.A. for the
           benefit of Congress Financial Corporation dated effective June 10,
           1994 (incorporated by reference to Exhibit 10.32 to the Company's
           Current Report on Form 8-K dated June 15, 1994, as filed with the
           Commission on June 15, 1994).

     13.1* 1994 Annual Report to Stockholders

     23.1* Consent of KPMG Peat Marwick LLP.

     24.1* Power of Attorney (See Signature Page of this Annual Report on 
           Form 10-K).

      27*  1994 Financial Data Schedule.

- --------------
*Filed herewith
**Management contract or compensatory plan or arrangement

Reports on Form 8-K

Reports on Form 8-K filed during the quarter ended December 31, 1994.

(1) A report on Form 8-K dated October 14, 1994 was filed by the Company which
reported that on October 11, 1994, Cray Computer Corporation announced the
completion of a $3,850,000 private placement of unregistered shares of its
Common Stock to foreign institutional and private investors.

(2) A report on Form 8-K dated November 11, 1994 was filed by the Company which
reported that on November 10, 1994, Cray Computer Corporation announced the
introduction of the CRAY-4 supercomputer system.

                                       48

 
                                  SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on April 17, 1995.


                                                  CRAY COMPUTER CORPORATION



                                                  By: /s/ William G. Skolout
                                                     -----------------------
                                                     William G. Skolout
                                                     Chief Financial Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the date indicated.

    Name                       Title                      Signature
    ----                       -----                      ---------
 
Seymour R. Cray          Chairman of the Board,        /s/ Seymour R. Cray
                         Director, and Chief           -------------------
                         Executive Officer (Principal  Seymour R. Cray      
                         Executive Officer)            Chairman of the Board,
                                                       Director, and Chief  
                                                       Executive Officer    
                                                       (Principal Executive)
 
                                                       
William G. Skolout       Vice President, Finance;      /s/ William G. Skolout
                         Chief Financial Officer,      ----------------------
                         Treasurer and Corporate       William G. Skolout
                         Secretary (Principal          Chief Financial Officer,
                         Financial Officer and         for himself and as
                         Principal Accounting Officer) Attorney-in-Fact for the
                                                       named Directors, who
                                                       constitute more than a
                                                       majority of the Directors
                                                       of the Company


Jean-Louis Gassee        Director

Thomas A. Longo          Director


Dated April 17, 1995

                                       49

 
EXHIBIT INDEX

Exhibits filed as part of Annual Report to Form 10-K for fiscal year ended
December 31, 1994.

Exhibits              Description                                          Page
- --------              -----------                                          ----
     3.1*  The Company's Restated Certificate of Incorporation as filed 
           with the Delaware Secretary of State on February 27, 1995.

     3.2   The Company's Bylaws, as amended through August 10, 1993
           (incorporated by reference to Exhibit 3.2 of Amendment No. 
           1 to the Company's Form S-3 Registration Statement 
           No. 33-67906, filed with the Commission on September 29, 1993).

     4.1   The Company's Restated Certificate of Incorporation as filed 
           with the Delaware Secretary of State on October 26, 1989 
           (incorporated by reference to Exhibit 3.1 of this Form 10-K.

     4.2   The Company's Bylaws, as amended through August 10, 1993 
           (incorporated by reference to Exhibit 3.2 of Amendment No. 1 
           to the Company's Form S-3 Registration Statement No. 33-67906, 
           filed with the Commission on September 29, 1993).

     4.3** The Cray Computer Corporation 1989 Employee Benefit Stock 
           Plan (incorporated by reference to Exhibit 4 of the Company's 
           Registration Statement No. 33-33277 on Form S-8, filed with 
           the Commission on January 30, 1990).

     4.4** Amendment No. 1 to the Cray Computer Corporation 1989 Employee 
           Benefit Stock Plan effective November 10, 1992 (incorporated 
           by reference to Exhibit 4.4 of the Company's Registration 
           Statement No. 33-33277 on Form S-8, filed with the
           Commission on December 8, 1993).

     4.5** Amendment No. 2 to the Cray Computer Corporation 1989 Employee 
           Benefit Stock Plan effective November 10, 1992 (incorporated 
           by reference to Exhibit 4.5 of the Company's Registration 
           Statement No. 33-33277 on Form S-8, filed with the
           Commission on December 8, 1993).

                                       50

 
    4.6**  Form of Incentive Stock Option Agreement utilized under the 1989
           Employee Benefit Stock Plan (incorporated by reference to Exhibit 4.6
           of the Company's Registration Statement No. 33-33277 on Form S-8,
           filed with the Commission on December 8, 1993).

    4.7**  Form of Nonstatutory Stock Option Agreement utilized under the 1989
           Employee Benefit Stock Plan (incorporated by reference to Exhibit 4.7
           of the Company's Registration Statement No. 33-33277 on Form S-8,
           filed with the Commission on December 8, 1993).

    4.8**  Form of Employee Stock Grant Agreement utilized under the 1989
           Employee Benefit Stock Plan (incorporated by reference to Exhibit 4.8
           of the Company's Registration Statement No. 33-33277 on Form S-8,
           filed with the Commission on December 8, 1993).

    4.9**  Form of Director Stock Grant Agreement utilized under the 1989
           Employee Benefit Stock (incorporated by reference to Exhibit 4.9 of
           the Company's Registration Statement No. 33-33277 on Form S-8, filed
           with the Commission on December 8, 1993).

    4.10** Form of 1989 Employee Benefit Stock Plan Repricing Agreement
           (incorporated by reference to Exhibit 4.10 of the Company's
           Registration Statement No. 33-33277 on Form S-8, filed with the
           Commission on December 8, 1993).

   4.11*** 1989 Qualified Stock Purchase Investment Plan (1995 Restatement).

    10.1** The Cray Computer Corporation 1989 Employee Benefit Stock Plan
           (incorporated by reference to Exhibit 4 of the Company's Registration
           Statement No. 33-33277 on Form S-8, filed with the Commission on
           January 30, 1990).

 10.1(a)** Amendment No. 1 to the Cray Computer Corporation 1989 Employee
           Benefit Stock Plan effective November 10, 1992 (incorporated by
           reference to Exhibit 4.4 of the Company's Registration Statement No.
           33-33277 on Form S-8, filed with the Commission on December 8, 1993).

 10.1(b)** Amendment No. 2 to the Cray Computer Corporation 1989 Employee
           Benefit Stock Plan effective November 10, 1992 (incorporated by
           reference to Exhibit 4.5 of the Company's Registration Statement No.
           33-33277 on Form S-8, filed with the Commission on December 8, 1993).

    10.2** 1989 Qualified Stock Purchase Investment Plan (incorporated by
           reference to Exhibit 4.11 of this Form 10-K.

                                       51

 
     10.3  Distribution Agreement dated as of July 31, 1989, between Cray
           Research, Inc., and the Company (incorporated by reference to Exhibit
           10.1 of Item 15(b) to the Company's Form 10, filed with the
           Commission on October 31, 1989, File No. 0-18072).

     10.4  License Agreement dated July 31, 1989, between Cray Research, Inc.,
           and the Company (patents, technology, software) (incorporated by
           reference to Exhibit 10.3(a) of Item 15(b) to the Company's Form 10,
           filed with the Commission on October 31, 1989, File No. 0-18072).

     10.5  Amendment to License Agreement dated October 24, 1989, between Cray
           Research, Inc., and the Company (incorporated by reference to Exhibit
           10.3(b) of Item 15(b) to the Company's Form 10, filed with the
           Commission on October 31, 1989, File No. 0-18072).

     10.6  License Agreement dated July 31, 1989, between Cray Research, Inc.,
           and the Company (software) (incorporated by reference to Exhibit 10.4
           of Item 15(b) to the Company's Form 10, filed with the Commission on
           October 31, 1989, File No. 0-18072).

     10.7  Remarketing Agreement dated July 31, 1989, between Cray Research,
           Inc., and the Company (incorporated by reference to Exhibit 10.5 of
           Item 15(b) to the Company's Form 10, filed with the Commission on
           October 31, 1989, File No. 0-18072).

   10.8**  Cray Computer Corporation Deferred Profit Sharing Plan (incorporated
           by reference to Exhibit 10.12 of Item 15(b) to the Company's Form 10,
           filed with the Commission on October 31, 1989, File No. 0-18072).

     10.9  Assignment, Assumption Agreement and Consent dated September 21,
           1989, among Cray Research, Inc., the Company and GigaBit Logic, Inc.
           (incorporated by reference to Exhibit 10.15(b) of Item 15(b) to the
           Company's Form 10, filed with the Commission on October 31, 1989,
           File No. 0-18072).

     10.10 Research and Development Agreement and Consent dated as of November
           20, 1985, between Performance Semiconductor Corporation and Cray
           Research, Inc. (incorporated by reference to Exhibit 10.16(a) of Item
           15(b) to the Company's Form 10, filed with the Commission on October
           31, 1989, File No. 0-18072).

     10.11 Assignment, Assumption Agreement and Consent dated September 21,
           1989, among Cray Research, Inc., the Company and Performance
           Semiconductor Corporation (incorporated by reference to Exhibit
           10.16(b) of Item 15(b) to the Company's Form 10, filed with the
           Commission on October 31, 1989, File No. 0-18072).


                                       52

 
     10.12 Research and Development Agreement and Consent dated as of March 4,
           1987, between Performance Semiconductor Corporation and Cray
           Research, Inc. (incorporated by reference to Exhibit 10.17(a) of Item
           15(b) to the Company's Form 10, filed with the Commission on October
           31, 1989, File No. 0-18072).

     10.13 Asset Purchase Agreement dated as of March 1, 1990 between the
           Company and GigaBit Logic, Inc. (incorporated by reference to Exhibit
           2.1 of Item 7(c) to the Company's Current Report on Form 8-K dated
           March 1, 1990, filed with the Commission on March 16, 1990).

     10.14 Assignment and License Agreement between Cray Research, Inc., the
           Company, and Raychem Corporation dated effective November 2, 1989
           (incorporated by reference to Exhibit 10.1 to the Company's
           Registration Statement on Form S-1, Post Effective Amendment No. 3,
           filed with the Commission on May 14, 1991, Registration No. 33-
           34053).

     10.15 Cross License Agreement between Cray Research, Inc., the Company, and
           Raychem Corporation dated effective November 2, 1989 (incorporated by
           reference to Exhibit 10.2 to the Company's Registration Statement on
           Form S-1, Post Effective Amendment No. 3, filed with the Commission
           on May 14, 1991, Registration No. 33-34053).

     10.16 AT&T Information Systems Inc., Software Agreement dated as of
           September 15, 1989 between the Company and AT&T Information Systems
           Inc. (incorporated by reference to Exhibit 10.1 to the Company's
           Registration Statement on Form S-1, Amendment No. 3, filed with the
           Commission on July 25, 1990, Registration No. 33-34053).

     10.17 License Agreement effective as of September 20, 1989, among the
           Company, Pacific-Sierra Research Corporation, and Typalogics
           (incorporated by reference to Exhibit 10.2 to the Company's
           Registration Statement on Form S-1, Amendment No. 3, filed with the
           Commission on July 25, 1990, Registration No. 33-34053).

                                       53

 
     10.18 Purchase Order B116827 between the Regents of the University of
           California and the Company dated as of December 8, 1990 (incorporated
           by reference to Exhibit 10.29 to the Company's Registration Statement
           on Form S-1 filed with the Commission on June 25, 1991, Registration
           No. 33-41249).

     10.19 Technology License Agreement between GigaBit Logic, Inc., and the
           Company dated March 1, 1990 (incorporated by reference to Exhibit
           10.30 to the Company's Registration Statement on Form S-1 filed with
           the Commission on June 25, 1991, Registration No. 33-41249).

     10.20 Business Lease Agreement between R.V. Centennial Partnership and the
           Company dated as of September 22, 1989 (incorporated by reference to
           Exhibit 10.30 to the Company's Registration Statement on Form S-1
           filed with the Commission on June 25, 1991, Registration No. 33-
           41249).

     10.21 Letter from NERSC requesting the Company to provide an alternate
           system and to assign all rights, obligations, and responsibility for
           the delivery and installation of an alternate system to Cray
           Research, Inc., (incorporated by reference to Exhibit 28.1 to the
           Company's Current Report on Form 8-K dated December 23, 1991, as
           filed with the Commission on December 23, 1991).

     10.22 Assignment of rights and obligations under Purchase Order B116827
           between the Regents of the University of California and the Company
           dated as of December 8, 1990, as they apply to the delivery of Item 2
           (Alternate) per Part III-C, to Cray Research, Inc., (incorporated by
           reference to Exhibit 10.33 to the Company's Annual Report on Form 10-
           K dated December 31, 1991, as filed with the Commission on March 26,
           1992).

     10.23 Assignment Agreement between the Company, and Raychem Corporation
           dated effective October 17, 1991 (incorporated by reference to
           Exhibit 10.34 to the Company's Annual Report on Form 10-K dated
           December 31, 1991, as filed with the Commission on March 26, 1992).

                                       54

 
  10.24**  Design and Development Agreement between the Company and Seymour R.
           Cray dated effective December 1, 1992. This agreement will remain in
           effect until December 31, 1995 (incorporated by reference to Exhibit
           10.36 to the Company's Annual Report on Form 10-K dated December 31,
           1992, as filed with the Commission on March 30, 1993).

     10.25 Equipment Loan Agreement between the Company and the University
           Corporation for Atmospheric Research dated effective February 18,
           1993 (incorporated by reference to Exhibit 10.37 to the Company's
           Annual Report on Form 10-K dated December 31, 1992, as filed with the
           Commission on March 30, 1993).

 10.26(a)  Amendment to Equipment Loan Agreement between the Company and the
           University Corporation for Atmospheric Research dated effective
           December 6, 1993 (incorporated by reference to the Company's Annual
           Report on Form 10-K, dated December 31, 1993, as filed with the
           Commission on March 30, 1994).

     10.27 Form of Stock Purchase Agreement (incorporated by reference to
           Exhibit 10.38 of the Company's Registration Statement No. 33-33277 on
           Form S-8, filed with the Commission on December 8, 1993).

  10.28**  Stock Purchase Agreement between the Company and Seymour R. Cray
           dated effective June 11, 1993 (incorporated by reference to Exhibit
           10.29 to the Company's Annual Report on Form 10-K dated December 31,
           1993, as filed with the Commission on March 30, 1994).

     10.29 Amendment No. 1 to the Design and Development Agreement (dated
           effective December 1, 1992) between the Company and Seymour R. Cray
           dated effective June 6, 1994 (incorporated by reference to Exhibit
           10.33 to the Company's Form 10-Q dated June 30, 1994, as filed with
           the Commission on August 12, 1994).

     10.30 Technology Rights Subordination Agreement between the Company and
           Seymour R. Cray for the benefit of Congress Financial Corporation
           dated effective June 10, 1994 (incorporated by reference to Exhibit
           10.34 to the Company's Form 10-Q dated June 30, 1994, as filed with
           the Commission on August 12, 1994).

     10.31 Loan and Security Agreement between the Company and Congress
           Financial Corporation dated effective June 10, 1994 (incorporated by
           reference to Exhibit 10.30 to the Company's Current Report on Form 8-
           K dated June 15, 1994, as filed with the Commission on June 15,
           1994).

     10.32 Term Note by the Company in favor of Congress Financial Corporation
           dated effective June 10, 1994 (incorporated by reference to Exhibit
           10.31 to the Company's Current Report on Form 8-K dated June 15,
           1994, as filed with the Commission on June 15, 1994).

                                       55

 
     10.33 Letter of Credit issued by The Chase Manhattan Bank, N.A. for the
           benefit of Congress Financial Corporation dated effective June 10,
           1994 (incorporated by reference to Exhibit 10.32 to the Company's
           Current Report on Form 8-K dated June 15, 1994, as filed with the
           Commission on June 15, 1994).

     13.1* 1994 Annual Report to Stockholders

     23.1* Consent of KPMG Peat Marwick LLP.

     24.1* Power of Attorney (See Signature Page of this Annual Report on 
           Form 10-K).

      27*  1994 Financial Data Schedule.

- --------------------
*Filed herewith
**Management contract or compensatory plan or arrangement


                                       56

EX-3.1

                                                                     EXHIBIT 3.1
 
                                    RESTATED
                          CERTIFICATE OF INCORPORATION
                                       OF
                           CRAY COMPUTER CORPORATION
                            (A DELAWARE CORPORATION)


     Cray Computer Corporation (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify:

     FIRST:  That Cray Computer Corporation was originally incorporated under
the same name and the Corporation's original Certificate of Incorporation was
filed with the Secretary of State of Delaware on July 27, 1989.

     SECOND:  That the Board of Directors of the Corporation at a meeting duly
held adopted a resolution proposing and declaring it advisable that the Restated
Certificate of Incorporation of the Corporation be restated to read in its
entirety as set forth below.

     THIRD:  That this Restated Certificate of Incorporation was adopted by the
Board of Directors without a vote of the stockholders and only restates and
integrates and does not further amend the provisions of the Corporation's
Restated Certificate of Incorporation as theretofore amended or supplemented and
there is no discrepancy between those provisions and the provisions of this
Restated Certificate of Incorporation.

     FOURTH:  That this Restated Certificate of Incorporation was duly adopted
in accordance with Section 245 of the General Corporation Law of the State of
Delaware.

                                   ARTICLE I

                                      NAME
                                      ----

          The name of this Corporation is Cray Computer Corporation.

                                   ARTICLE II

                               REGISTERED OFFICE
                               -----------------

     The address of the registered office of the Corporation in the State of
Delaware is 1209 Orange Street, City of Wilmington, County of New Castle, and
the name of the registered agent of the Corporation in the State of Delaware at
such address is The Corporation Trust Company.

 
                                  ARTICLE III

                                BUSINESS PURPOSE
                                ----------------

     The purpose for which the Corporation is formed is to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law of Delaware.  The Corporation will have perpetual existence.

                                  ARTICLE IV

                                 CAPITAL STOCK
                                 -------------

     The total number of shares of stock which the Corporation shall have
authority to issue is one hundred twenty million (120,000,000) shares of Common
Stock, having a par value of One Cent ($0.01) per share, and twenty million
(20,000,000) shares of Preferred Stock having a par value of One Cent ($0.01)
per share.

     The Preferred Stock shall be issued from time to time in one or more series
and shall have such voting powers, full or limited, or no voting powers, and
such designations, preferences, and relative, participating, optional, or other
special rights, and qualifications, limitations, or restrictions thereof, as
shall hereafter be stated and expressed in the resolution or resolutions
providing for the issue of such series of Preferred Stock from time to time
adopted by the Board of Directors pursuant to authority so to do, which
authority is hereby expressly granted to and vested in the Board of Directors.

     Each outstanding share of Common Stock of the Corporation shall have one
vote on all matters submitted to a vote of stockholders.  No outstanding share
of any series of Preferred Stock which is denied voting power (under the
provisions of the resolution or resolutions providing for the issue of such
series of Preferred Stock from time to time adopted by the Board of Directors
pursuant to the authority granted to and vested in the Board of Directors by
this Certificate of Incorporation) shall entitle the holder thereof to the right
to vote at any meeting of stockholders on any matter subject to a vote of
stockholders  except as the provisions of Section 242(b)(2) of the General
Corporation Law of the State of Delaware shall otherwise require; provided that
no share of any series of Preferred Stock which is otherwise denied voting power
shall entitle the holder thereof to vote upon the increase or decrease in the
number of authorized shares of Preferred Stock.

     There shall be no cumulative voting of the shares of the Corporation, and
the holders of shares of any class of the Corporation shall not have preemptive
rights to subscribe for any shares or securities convertible into shares of the
Corporation.

                                      -2-

 
                                   ARTICLE V

                              BOARD OF DIRECTORS
                              ------------------

     Section 1.  Number.  The business and affairs of the Corporation shall be
     ------------------                                                       
managed under the direction of a Board of Directors, which, subject to any right
of the holders of any series of Preferred Stock then outstanding to elect
additional directors under specified circumstances, shall be fixed in the manner
provided in the Bylaws.  The directors shall be divided into three classes, as
nearly equal in number as possible, with the term of office of Class A to expire
at the 1990 Annual Meeting of Stockholders, the term of office of Class B to
expire at the 1991 Annual Meeting of Stockholders and the term of office of
Class C to expire at the 1992 Annual Meeting of Stockholders.  At each Annual
Meeting of Stockholders following such initial classification and election,
directors elected to succeed those directors whose terms expire shall be elected
for a term of office to expire at the third succeeding Annual Meeting of
Stockholders after their election.

     Section 2.  Newly Created Directorships and Vacancies.  Subject to the
     -----------------------------------------------------                 
rights of the holders of any series of Preferred Stock then outstanding and
except as otherwise provided by law, newly created directorships resulting from
any increase in the authorized number of directors or any vacancies in the Board
of Directors resulting from death, resignation, retirement, disqualification,
removal from office or other cause shall be filled only by a majority vote of
the directors then in office, and directors so chosen shall hold office for a
term expiring at the Annual Meeting of Stockholders at which the term of the
class to which they have been elected expires.  No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.

     Section 3.  Removal.  Subject to the right of the holders of any series of
     -------------------                                                       
Preferred Stock then outstanding, any director, or the entire Board, may be
removed from office at any time, but only for cause and only by the affirmative
vote of the holders of a majority of the voting power of the then outstanding
shares of voting stock.

     Section 4.  Ballot.  Directors of the Corporation need not be elected by
     ------------------                                                      
written ballot unless the Bylaws of the Corporation otherwise provide.

     Section 5.  Amendment, Repeal, Etc.  Notwithstanding anything contained in
     ----------------------------------                                        
this Certificate of Incorporation to the contrary, the affirmative vote of the
holders of at least 80% of the voting power of the then outstanding shares of
voting stock, voting together as a single class, shall be required to alter,
amend or repeal this Article V.

                                      -3-

 
                                  ARTICLE VI

                        EXCLUSION OF DIRECTOR LIABILITY
                        -------------------------------

      A director of the Corporation shall not be personally liable to the
Corporation or to its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involved intentional misconduct or knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which a director derived an improper
personal benefit.

                                  ARTICLE VII

                                    BYLAWS
                                    ------

     In furtherance and not in limitation of the powers conferred by law, the
directors of the Corporation shall have the power to adopt, amend, and repeal
the Bylaws of this Corporation in any manner not inconsistent with the laws of
the State of Delaware.

                                 ARTICLE VIII

                             CERTAIN TRANSACTIONS
                             --------------------

     No contract or transaction between the Corporation and one or more of its
directors, officers, or stockholders or between the Corporation and any person
(as used herein "person" means other corporation, partnership, association,
firm, trust, joint venture, political subdivision or instrumentality) or other
organization in which one or more of its directors, officers, or stockholders
are directors, officers, or stockholders, or have a financial interest, shall be
void or voidable solely for this reason, or solely because the director or
officer is present at or participates in the meeting of the board or committee
which authorizes the contract or transaction, or solely because his or her or
their votes are counted for such purpose, if:  (1) the material facts as to his
or her relationship or interest and as to the contract or transaction are
disclosed or are known to the Board of Directors or the committee, and the Board
of Directors or committee in good faith authorizes the contract or transaction
by affirmative votes of a majority of the disinterested directors, even though
the disinterested directors be less than a quorum; or (2) the material facts as
to his or her relationship or interest and as to the contract or transaction are
disclosed or are known to the stockholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
stockholders; or (3) the contract or transaction is fair as to the Corporation
as of the time it is authorized, approved, or ratified, by the Board of
Directors, a 

                                      -4-

 
committee thereof, or the stockholders. Common or interested directors may be
counted in determining the presence of a quorum at a meeting of the Board of
Directors or of a committee which authorizes the contract or transaction.

                                  ARTICLE IX

                         INDEMNIFICATION AND INSURANCE
                         -----------------------------

     Section 1.  Right to Indemnification.  Each person who was or is made a
     ------------------------------------                                   
party or is threatened to be made a party to or is involved in any action, suit
or proceeding, whether civil, criminal, administrative, or investigative
(hereinafter "proceeding"), by reason of the fact that he or she, or a person of
whom he or she is the legal representative, is or was a director or officer, of
the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged action
in an official capacity as a director, officer, employee or other agent or in
any other capacity while serving as a director, officer, employee or agent,
shall be indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than said law permitted the Corporation to provide prior to such
amendment), against all expense, liability and loss (including attorneys' fees,
judgments, fines, ERISA excise taxes or penalties, and amounts paid or to be
paid in settlement) reasonably incurred or suffered by such person in connection
therewith and such indemnification shall continue as to a person who has ceased
to be a director, officer, employee or agent and shall inure to the benefit of
his or her heirs, executors and administrators; provided, however, that the
Corporation shall indemnify any such person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person only if
such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.  The right to indemnification conferred in this Article shall
be a contract right, which may, by action of the Board of Directors of the
Corporation and at its option, be expressed in a separate written instrument,
and shall include the right to be paid by the Corporation the expenses incurred
in defending any such proceeding in advance of its final disposition; provided,
however, that if the Delaware General Corporation Law requires, the payment of
such expenses incurred by a director or officer in his or her capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by such person while a director or officer, including 

                                      -5-

 
without limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding, shall be made only upon delivery to the Corporation
of an undertaking, by or on behalf of such director of officer, to repay all
amounts so advanced if it shall ultimately be determined that such director or
officer is not entitled to be indemnified under this Article or otherwise. The
Corporation may, by action of its Board of Directors, provide indemnification to
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.

     Section 2.  Nonexclusivity of Rights.  The right to indemnification and the
     ------------------------------------                                       
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Article shall not be exclusive of any other right
which any persons may have or hereafter acquire under any statute, provision of
the Certificate of Incorporation, bylaw, agreement, vote of stockholders or
disinterested directors or otherwise.

     Section 3.  Insurance.  The Corporation may maintain insurance, at its
     ---------------------                                                 
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust, or other
enterprise against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.

                                   ARTICLE X

                            ACTIONS BY STOCKHOLDERS
                            -----------------------

     Any action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of
stockholders of the Corporation and may not be effected by any consent in
writing by such stockholders.  Special meetings of stockholders of the
Corporation may be called only by the Board pursuant to a resolution approved by
a majority of the entire Board.  Notwithstanding anything contained in this
Certificate of Incorporation to the contrary, the affirmative vote of the
holders of at least 80% of the voting power of the then outstanding shares of
voting stock, voting together as a single class, shall be required to alter,
amend, or repeal this Article X.

                                  ARTICLE XI

                   AMENDMENT OF CERTIFICATE OF INCORPORATION
                   -----------------------------------------

     The Corporation reserves the right to amend, alter, change, or repeal any
provision contained in this Certificate of 

                                      -6-

 
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred on stockholders herein are granted subject to this reservation.

     IN WITNESS WHEREOF, CRAY COMPUTER CORPORATION has caused this Restated
Certificate of Incorporation to be signed by Terry A. Willkom, its President,
and attested to by William G. Skolout, its Secretary, this 27th day of February,
1995.



                                       CRAY COMPUTER CORPORATION



                                       By: /s/ Terry A. Willkom
                                          -----------------------------------
                                          Terry A. Willkom
                                          President


ATTEST:

/s/ William G. Skolout
- ----------------------------------
William G. Skolout
Secretary

                                      -7-

EX-4.11

                                                                    Exhibit 4.11

                         THE CRAY COMPUTER CORPORATION
                 1989 QUALIFIED STOCK PURCHASE INVESTMENT PLAN
                               (1995 RESTATEMENT)


1.  Purpose.  The purpose of The Cray Computer Corporation 1989 Qualified Stock
    -------                                                                    
Purchase Investment Plan (1995 Restatement) (the "Plan") is to facilitate
capital accumulation by Eligible Employees in the form of Common Stock of the
Company and thereby to provide employee identification with and commitment to
the goals of the Company.  This Plan amends and restates the original Plan
adopted in 1989.

2.  Definitions.  Whenever used in this Plan:
    -----------                              

     A.  "Beneficiary" means the person designated by the Eligible Employee in
     the form and manner prescribed by the Committee.  If the Eligible Employee
     has no beneficiary designation on file, the Beneficiary shall be the legal
     representative of the Eligible Employee.  The Beneficiary designation may
     be changed at any time by the Eligible Employee by filing a new completed
     form with the Committee.

     B.  "Board of Directors" means the Board of Directors of Cray Computer
     Corporation.

     C.  "Code" means the Internal Revenue Code of 1986, as amended.

     D.  "Committee" means the Compensation Committee of the Board of Directors
     of Cray Computer Corporation.

     E.  "Common Stock" means the Common Stock, par value $.01 per share, of
     Cray Computer Corporation.

     F.  "Company" means Cray Computer Corporation and such of its subsidiaries
     now existing as of the effective date of the adoption of this Plan or
     thereafter formed or acquired (corporations in respect of which Cray
     Computer Corporation owns, directly or indirectly, at least fifty-one
     percent (51%) of the total issued and outstanding voting capital stock) as
     may be designated from time to time by its Board of Directors.

     G.  "Compensation" means for purposes of Paragraph 5.A: in the case of a
     salaried employee, the aggregate of the rate of salary in effect for the
     employee on the respective Date of Offering annualized; in the case of an
     employee paid on an hourly basis, the aggregate of the rate of pay in
     effect for the employee on the respective Date of Offering for the number
     of regular hours to be worked for the ensuing year; and, in the case of an
     employee paid wholly or partly on a commission or other similar basis, in
     addition the aggregate of the commission or other similar payments 

                                                                               1

 
     to the employee paid on a three year rolling average starting with the
     calendar year immediately prior to the respective Date of Offering. Such
     determination shall be exclusive of all overtime earnings, shift
     differential, bonus payments and all other forms of remuneration not
     required by the Eligible Employee's employment relationship. For all other
     purposes, "Compensation" means compensation paid to an Eligible Employee
     during a Purchase Period.

     H.  "Date of Offering" means March 1, 1990, and thereafter each March 1.

     I.  "Eligible Employee" means any person who is a regular employee
     scheduled to work at least twenty (20) hours per week and who is in the
     service of the Corporation on a Date of Offering during the term of this
     Plan.  Provided, however, that "Eligible Employee" shall not include any
     person who immediately prior to the offering on a Date of Offering: is a
     director of the Company or would be deemed for purposes of Code (S)
     423(b)(3) to own stock possessing five percent (5%) or more of the total
     combined voting power or value of all classes of stock of the Company.

     J.  "Interest" means the rate of interest negotiated prior to the Date of
     Offering between the Committee and the bank acting as custodian for funds
     received under the Plan, which shall be guaranteed for the remainder of the
     Purchase Period.  Such rate of interest may be a floating or a variable
     rate, such as the money market certificate rate from time to time
     established by the bank during the Purchase Period.

     K.  "Market Price" means the closing sale price for Common Stock (as
     reported in the record of Composite Transactions for the Nasdaq National
     Market listed securities and published in the Wall Street Journal) on a
     given day or, if no sales of Common Stock were made on that day, on the
     next preceding day on which sales were made and prices reported.

     L.  "Offering Price" means eighty-five percent (85%) of the Market Price of
     Common Stock on a Date of Offering.

     M.  "Plan" means the Cray Computer Corporation 1989 Qualified Stock
     Purchase Investment Plan.

     N.  "Purchase Period" means the period of March 1, 1990 to February 28,
     1991, and thereafter the annual period commencing on March 1 and ending on
     the last day of February of each year, during and with respect to which
     periods payroll deductions shall be made from the Compensation of Eligible
     Employees accepting an option under an offering hereunder for the period
     then ending.

3.  Scope of the Plan.  Options to purchase shares of Common Stock may be
    -----------------                                                    
granted by the Company to Eligible Employees during the ten (10) year period
commencing March 1, 1990, as hereinafter provided, but not more than 1,500,000
shares of Common Stock (subject 

                                                                               2

 
to adjustment as provided in Paragraph 16) shall be purchased pursuant to such
options. All options granted pursuant to this Plan shall be subject to the same
terms, conditions, rights and privileges. The shares of Common Stock delivered
by the Company pursuant to this Plan may be treasury shares, newly issued
shares, or both.

4.  Offerings.  Subject to the terms and conditions of this Plan, the Board of
    ---------                                                                 
Directors through the Committee shall make an offering on each Date of Offering
to Eligible Employees to purchase Common Stock under this Plan on each
subsequent last day of February.  The terms and conditions for each such
offering shall specify such information as the Committee may deem appropriate,
including (i) the aggregate number of shares of Common Stock available for
purchase under the Plan, and (ii) the aggregate purchase price of those shares.

5.  Amount of Common Stock Each Eligible Employee May Purchase.
    ---------------------------------------------------------- 

     A.  Subject to the provisions of this Plan, and as to any offering made
     hereunder, each Eligible Employee shall be offered an option to purchase
     the number of whole shares of Common Stock which has on the Date of
     Offering an aggregate purchase price (determined on the basis of the
     Offering Price) equal to the amount designated by the Eligible Employee of
     from two percent (2%) to fifteen percent (15%) of his or her Compensation
     as of the Date of Offering.  In the event the sum of the amounts designated
     above would involve the purchase of a fractional share, the number of
     shares which may be purchased shall be increased to the next whole number.

     B.  Anything herein to the contrary notwithstanding, if any Eligible
     Employee offered an option to purchase shares of Common Stock hereunder
     would be deemed for the purposes of Code (S)(S) 423(b)(3) and 424(d) to own
     stock (including the maximum number of shares of Common Stock covered by
     the option determined pursuant to the foregoing formula) possessing five
     percent (5%) or more of the total combined voting power or value of all
     classes of stock of the Company, the maximum number of shares of Common
     Stock covered by the option shall be reduced to that number of whole shares
     which, when added to the stock which such person is so deemed to own
     (excluding the maximum number of shares of Common Stock covered by the
     option determined pursuant to the foregoing formula), is less than such
     five percent (5%).

     C.  Anything herein to the contrary notwithstanding, no Eligible Employee
     may be granted an option under this Plan which (within the meaning of the
     limitation provided by Code (S) 423(b)(8)) would permit his or her rights
     to purchase stock under all qualified employee stock purchase plans of the
     Company to accrue at a rate in excess of $25,000 of fair market value of
     the Common Stock (determined as of the time of grant) for each calendar
     year for which such option is outstanding at any time.  If such be the case
     with respect to an option under this Plan determined 

                                                                               3

 
     pursuant to the foregoing formula, such option shall be reduced to cover
     only the greatest number of whole shares an option for which may be granted
     within the limitation provided by Code (S) 423(b)(8).

     D.  If Eligible Employees elect, in any one offering, to accept options to
     an extent which would result (if options were granted on that basis) in the
     granting of options for that offering to purchase more than the aggregate
     number of shares of Common Stock specified by the Board of Directors for
     that offering, the Committee shall adjust such options on a pro rata basis,
     in accordance with the number of shares of Common Stock actually subscribed
     for by each such Eligible Employee, so that the aggregate number of shares
     subject to purchase under that offering does not exceed such specified
     number of shares.

6.  Method of Participation.
    ----------------------- 

     A.  The Committee shall give notice to Eligible Employees of each offering
     of options to purchase shares of Common Stock pursuant to Paragraph 4 of
     this Plan and the terms and conditions for each offering, including the
     aggregate purchase price of the option to be offered to each Eligible
     Employee and such other information as the Committee may determine.  Such
     notice is subject to revision by the Company at any time prior to the Date
     of Offering, which is the date of grant of the option.

     B.  Each Eligible Employee who, in accordance with Paragraph 5.A above,
     desires to accept all or any part of the option to purchase shares of
     Common Stock under an offering shall signify his or her election to do so
     prior to a date set therefor by the Committee, which date shall be prior to
     five (5) business days following the Date of Offering; provided, however,
     that if the Committee does not set such a date, such election shall be made
     prior to five (5) business days following  the Date of Offering.  The
     notice of election, or a cancellation or any revision of such notice of
     election, shall be in the form and manner prescribed by the Committee.
     Each such Eligible Employee also shall authorize the Company, in the form
     and manner prescribed by the Committee, to make payroll deductions to cover
     the aggregate purchase price of those shares of Common Stock in respect of
     which he or she has elected to accept an option.  Such election and
     authorization may be accompanied by a one time cash payment by the Eligible
     Employee to be applied toward the purchase price for those shares of Common
     Stock as to which each Eligible Employee has elected to accept the option
     offered to him or her in amount up to but not to exceed fifty percent (50%)
     of the aggregate purchase price.  Such election and authorization shall
     continue in effect, unless and until such Eligible Employee withdraws from
     this Plan, modifies his or her authorization and designation, or terminates
     his or her employment with the Company, as hereinafter provided.

                                                                               4

 
     C.  Following each Date of Offering, the Company shall, as soon as
     practicable, provide each Eligible Employee accepting an option under the
     offering a notice confirming the number of shares covered by such option,
     the per share and aggregate Offering Price, any reduction in accordance
     with Paragraph 5 above, and the resulting amount of periodic payroll
     deductions.

     D.  Any Eligible Employee who shall not make a timely election as provided
     in Paragraph 6.B above, shall be deemed to have elected not to accept any
     part of such option.  Such election shall be irrevocable for such offering.

7.  Payroll Deductions.
    ------------------ 

     A.  The balance of the aggregate purchase price for those shares of Common
     Stock as to which each Eligible Employee has elected to accept the option
     offered to him or her shall, during the Purchase Period, be deducted from
     the Eligible Employee's Compensation through payroll deductions, in
     substantially equal installments.  Such payroll deduction periods shall
     commence with the first applicable payroll period beginning in March and
     shall continue until the last payroll period of the Purchase Period.

     B.  All amounts so paid or deducted during the Purchase Period as provided
     under Paragraphs 6.B, 7.A and 7.C shall be deposited by the Company as soon
     as practicable with a custodian bank for the benefit of Eligible Employees
     who have elected to accept an option.  Funds on deposit shall be held in an
     account identified to each Eligible Employee and shall be credited with
     Interest.

     C.  In the event the amount of payroll deductions, together with Interest
     paid, during a Purchase Period credited to the account of an Eligible
     Employee participating in this Plan is, because of leave of absence,
     temporary lay-off, temporary disability or any other reason (other than
     reduction as provided in Paragraph 8, withdrawal as provided in Paragraph 9
     or termination of employment as provided in Paragraph 10) not sufficient to
     permit the purchase of the total number of shares of Common Stock for which
     he or she has accepted an option, the Eligible Employee may at any time
     prior to conclusion of the Purchase Period make a payment to the Company in
     one lump sum of all or any portion of the shortfall amount.  To the extent
     of any remaining shortfall, the number of shares of Common Stock subject to
     purchase under the Eligible Employee's option shall be reduced
     automatically to that number of whole shares which his or her account, at
     the conclusion of the Purchase Period, is sufficient to purchase.  The cash
     balance, if any, shall be refunded to the Eligible Employee with Interest.

8.  Right to Reduce or Stop Deductions.  An Eligible Employee who has accepted
    ----------------------------------                                        
an option to purchase shares of Common Stock may, at any time prior to his or
her last regular payroll deduction thereunder, direct the Company to (i) reduce
his or her payroll deduction 

                                                                               5

 
(provided that such reduction may not reduce the percentage of Compensation
subject to payroll deduction below 2%), or (ii) make no further deductions. Upon
either of such actions, payroll deductions with respect to such option shall be
reduced or discontinued. If the employee has directed that payroll deductions be
reduced or discontinued, any sum previously deducted in respect of the offering
shall be retained by the Company until the end of the Purchase Period, and shall
be applied, along with any additional deductions at the reduced rate, to the
exercise of the employee's option as provided in Paragraph 10.

Any Eligible Employee who stops payroll deductions may not thereafter resume
payroll deductions for the Purchase Period, and any Eligible Employee who
decreases payroll deductions may not thereafter further decrease or increase
such contributions, except that he or she may stop such contributions during the
Purchase Period.  Notification of an Eligible Employee's election to reduce or
terminate deductions, to cancel an option or to otherwise withdraw funds shall
be made by the filing of an appropriate notice to such effect with the
Committee.

9.  Right to Withdraw.  In addition to the reduction or cessation of
    -----------------                                               
contributions in Paragraph 8, any Eligible Employee may direct the Company to
cancel the entire option or request return of any portion of his or her account
at any time on or before the date set therefor by the Committee, which date
shall not be prior to the month end preceding the last day of the Purchase
Period; provided, however, that if the Committee does not set such a date, such
direction may be made at any time before the last day of the Purchase Period.
If the Eligible Employee has so directed, the Company shall stop automatically
any payroll deduction for the Eligible Employee and shall, as soon as
practicable, refund all requested amounts, with Interest, credited to the
account of such Employee with respect to the applicable offering.  Notification
of an Eligible Employee's election to cancel an option or otherwise withdraw
funds shall be made by the filing of an appropriate notice to such effect with
the Committee.

10.  Termination of Employment.
     ------------------------- 

     A.  In the event the employment of an Eligible Employee who has accepted an
     option to purchase shares of Common Stock is terminated prior to conclusion
     of the Purchase Period, because of death, permanent disability, or
     retirement at or after age 65 (or earlier with the Company's consent), the
     Eligible Employee or (in the case of the Eligible Employee's death) his or
     her Beneficiary may either:

          (1) cancel the option, in which event the Company shall, as soon as
          practicable, refund all amounts credited to his or her account, with
          Interest, under any offering in which he or she is participating under
          this Plan; or

          (2) elect to receive at the conclusion of the Purchase Period that
          number of whole shares of Common Stock (not to exceed the shares
          subject to the option, as the same may be adjusted hereunder) which
          those payroll 

                                                                               6

 
          deductions actually made are sufficient to purchase,
          plus the cash balance and Interest credited to his or her account, if
          any.

     For purposes of this paragraph, "permanent disability" shall mean the
     inability of an individual to engage in any substantial gainful activity by
     reason of any medically determinable physical or mental impairment which
     can be expected to result in death or which has lasted or can be expected
     to last for a continuous period of not less than twelve (12) months.  The
     Committee may request reasonable proof of disability.

     B.  The election of an Eligible Employee or his or her Beneficiary pursuant
     to Paragraph 10.A above, shall be made within three (3) months of the event
     causing the termination of employment, but not later than the conclusion of
     the Purchase Period.  Notification of the election shall be filed with the
     Committee and, in the event no notification has been filed within the
     prescribed period, the Company shall act in accordance with provision (1)
     of Paragraph 10.A.

     C.  In the event the employment of an Eligible Employee who has accepted an
     option to purchase shares of Common Stock is terminated for any reason
     other than those specified in Paragraph 10.A, the Company shall, as soon as
     practicable, refund in cash, with Interest, all amounts credited to his or
     her account under any offering in which he or she is participating under
     this Plan.  Any Eligible Employee who is on a leave of absence for longer
     than ninety (90) days and whose reemployment is not guaranteed either by
     statute or by contract shall be deemed to have terminated employment for
     purposes of this Plan on the ninety-first (91) day of such absence.

11.  Exercise of Option and Purchase of Shares.  As of the last day of the
     -----------------------------------------                            
Purchase Period, the Committee shall determine an Alternative Offering Price,
which shall be eighty-five percent (85%) of the Market Price of the Common Stock
on such last day of the Purchase Period.  Unless an Eligible Employee who has
accepted an option under the offering has subsequently withdrawn from the
offering pursuant to Paragraph 9 or 10.A(1) hereof, his or her option shall be
deemed to have been exercised as of the last day of the applicable Purchase
Period and become on such date an irrevocable obligation to purchase Common
Stock in accordance with the provisions of this Plan.  The number of shares of
Common Stock so purchased by each Eligible Employee shall be determined by
dividing the amount accumulated in his or her account, with Interest during the
Purchase Period, in accordance with Paragraphs 6.B and 7 hereof, by the lower of
either the Offering Price or the Alternative Offering Price, rounded up to the
nearest number of whole shares.  Provided, however, in no event shall the number
of shares so determined and purchased by an Eligible Employee exceed the total
number of shares originally covered by his or her option in accordance with
Paragraph 6.  As soon as practicable thereafter, certificates for the number of
whole shares of Common Stock, determined as aforesaid, purchased by each
Eligible Employee shall be issued and delivered to him or her.  Any cash balance
remaining in the account of an Eligible Employee shall be refunded, without
further Interest.

                                                                               7

 
12.  Rights as a Stockholder.  An Eligible Employee who has accepted an option
     -----------------------                                                  
to purchase shares of Common Stock under this Plan shall not be entitled to any
of the rights or privileges of a stockholder of the Company with respect to such
shares, including the right to receive any dividends which may be declared by
the Company, until such time as he or she actually has paid the purchase price
for such shares and certificates have been issued to him or her in accordance
with Paragraph 11 hereof.

13.  Rights Not Transferable.  An Eligible Employee's rights under this Plan and
     -----------------------                                                    
options accepted by him or her hereunder are exercisable only by the Eligible
Employee during his or her lifetime, and may not be sold, pledged, assigned or
transferred in any manner other than by will or the laws of descent and
distribution.  Any attempt to sell, pledge, assign or transfer the same shall be
void, and automatically shall cause the option held by the Eligible Employee to
be terminated.  In such event, the Company shall refund all remaining amounts
credited to the account of such Eligible Employee under this Plan without
payment of interest.

14.  Administration of the Plan.
     -------------------------- 

     A.  This Plan shall be administered by the Committee, which is authorized
     to make such uniform rules as may be necessary to carry out its provisions.
     The Committee shall determine any questions arising in the administration,
     interpretation and application of this Plan, and all such determination
     shall be conclusive and binding on all parties.  Any decision or
     determination reduced to writing and signed by a majority of the Committee
     shall be effective as if made by majority vote at a meeting duly called and
     held.  The Committee may meet by telephone.

     B.  If any option under this Plan shall be cancelled, lapse or terminate
     unexercised, the number of shares of Common Stock covered thereby shall
     again become available for sale under this Plan.

15.  Adjustment Upon Changes in Capitalization.  In the event of any change in
     -----------------------------------------                                
the Common Stock of the Company by reason of stock dividends, split-ups,
corporate separations, recapitalizations, mergers, consolidations, combinations,
exchanges of shares and the like, the aggregate number and class of shares
available under this Plan and the number, class and Offering Price of shares
under option but not yet purchased under this Plan, shall be adjusted
appropriately by the Committee.

16 .  Registration of Certificates.  Stock certificates may be registered in the
      ----------------------------                                              
name of the Eligible Employee, or, if he or she so designates, in the Eligible
Employee's name jointly with his or her spouse, with right of survivorship.

17.  Amendment of Plan.  The Board of Directors may at any time amend this Plan
     -----------------                                                         
in any respect which shall not adversely affect the rights of Eligible Employees
pursuant to options accepted under the Plan, except that, without stockholder
approval on the same basis as required by Paragraph 21.A, no amendment shall be
made (i) increasing the 

                                                                               8

 
number of shares to be reserved under this Plan, (ii) decreasing the Offering
Price, (iii) withdrawing the administration of this Plan from the Committee, or
(iv) changing the definition of subsidiaries eligible to participate in the
Plan.

18.  Termination of the Plan.  This Plan shall consist of an offering commencing
     -----------------------                                                    
March 1, 1990, and ending the last day of February, 1991, and thereafter nine
(9) consecutive annual offerings beginning on March 1 of each year and ending on
the last day of February of the subsequent year, the conclusion of the
respective Purchase Period therefor.  All rights of Eligible Employees in any
offering hereunder shall terminate at the earlier of the conclusion of the last
Purchase Period authorized herein on February 28, 2000, or:

     A.  On the day that Eligible Employees participating in offerings made
     under this Plan become entitled to purchase a number of shares of Common
     Stock equal to or greater than the total number of shares remaining
     available for purchase;

     B.  Upon the dissolution or liquidation of the Company, or upon a sale of
     substantially all of the property or stock of the Company to another
     entity; or

     C.  At any time, at the discretion of the Board of Directors after thirty
     (30) days' notice has been given to the employees.

Upon termination of this Plan, shares of Common Stock shall be issued to
Eligible Employees in accordance with Paragraph 10, and cash, if any, remaining
in the accounts of the Eligible Employees shall be refunded to them, with
Interest, as if the Plan were terminated at the end of a Purchase Period;
provided that, upon an event described in Paragraph 19.B, no Common Stock shall
be issued and all cash shall be refunded.

19.  Governmental Regulations and Listing.  All rights granted or to be granted
     ------------------------------------                                      
to Eligible Employees under this Plan are expressly subject to all applicable
laws and regulations and to the approval of all governmental authorities
required in connection with the authorization, issuance, sale or transfer of the
shares of Common Stock reserved for this Plan, including, without limitation,
there being a current registration statement of the Company under the Securities
Act of 1933, as amended, covering the shares of Common Stock purchasable under
options on the last day of the Purchase Period applicable to such options, and
if such a registration statement shall not then be effective, the term of such
options and the Purchase Period shall be extended until the first business day
after the effective date of such a registration statement, or post-effective
amendment thereto.  If applicable, all such rights hereunder are also similarly
subject to effectiveness of an appropriate listing application to the National
Association of Securities Dealers, Inc., covering the shares of Common Stock
under the Plan upon official notice of issuance.

                                                                               9

 
20.  Miscellaneous.
     ------------- 

     A.  This Plan shall be submitted for approval by the stockholders of Cray
     Computer Corporation prior to February 28, 1995, in accordance with
     standard corporate procedures. Exercise of options accepted prior thereto
     shall be subject to the condition that prior to such date this Plan shall
     be approved by such stockholders in the manner contemplated by Code (S)
     423(b)(2).  If not so approved prior to such date, this Plan shall
     terminate, all options hereunder shall be cancelled and be of no further
     force or effect, and the Company shall, as soon as practicable, refund in
     cash, with Interest, to all Eligible Employees, all sums credited to their
     respective accounts in accordance with Paragraph 7 hereof.

     B.  This Plan shall not be deemed to constitute a contract of employment
     between the Company and any Eligible Employee, nor shall it interfere with
     the right of the Company to terminate any Eligible Employee and treat him
     or her without regard to the effect which such treatment might have upon
     him or her under this Plan.

     C.  This Plan shall be construed and its provisions enforced and
     administered in accordance with the laws of the State of Colorado, and in
     accordance with the applicable provisions of Code (S)(S) 421 and 423 and
     all related Code sections applicable to a qualified "employee stock
     purchase plan."

     D.  Wherever appropriate as used herein, the masculine gender may be read
     as the feminine gender, the feminine gender may be read as the masculine
     gender, the singular may be read as the plural and the plural may be read
     as the singular.

     E.  If any one or more of the terms, conditions or provisions or any part
     hereof contained in this Plan shall for any reason or to any extent be held
     invalid, illegal or unenforceable by any court or governmental agency of
     competent jurisdiction, such invalidity, illegality or unenforceability
     shall not affect the remainder of such terms, conditions or provisions, or
     any other provision of this Plan, and this Plan shall be construed as if
     the invalid, illegal or unenforceable term, condition or provision had
     never been contained herein, and each term, condition or provision shall be
     valid and enforced to the fullest extent permitted by law.



     IN WITNESS WHEREOF, the duly authorized representatives of the Company have
executed this amended and restated Plan, effective as of January 31, 1995.


                                                       CRAY COMPUTER CORPORATION


                                                                              10

 


                                                  By: /s/ William G. Skolout
                                                      --------------------------


                                                  Title: Chief Financial Officer
                                                         -----------------------

                                                                              11

EX-13.1

 
                              1994 Annual Report

                           -------------------------

                           Cray Computer Corporation



Historical Financial Summary................................................   1

Management's Discussion and Analysis of Financial Condition and         
   Results of Operations....................................................   2

Independent Auditors' Report................................................   8

Statements of Operations....................................................   9

Balance Sheets..............................................................  10

Statements of Cash Flows....................................................  11

Statements of Stockholders' Equity..........................................  12

Notes to Financial Statements...............................................  13

Investor Information........................................................  21

Corporate Information.......................................................  22

 
CRAY COMPUTER CORPORATION
(A Development Stage Enterprise)
- --------------------------------------------------------------------------------

Historical Financial Summary

Selected Financial Data: The following table presents information regarding the
financial condition and results of operations of Cray Computer Corporation (the
Company) for the past five years as a separate company and while a division of
Cray Research, Inc., (CRI). The table does not reflect any adjustments related
to the Bankruptcy Filing on March 24, 1995. The data as of December 31, 1994 and
1993, for the three-year period ended December 31, 1994, and cumulative from
October 1983 (inception) through December 31, 1994, should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources," and the financial
statements and notes included elsewhere in this Annual Report. The Company has
never declared or paid cash dividends on its Common Stock.

 
 
                                                                                 Years ended December 31,   
                                          Cumulative from  -----------------------------------------------------------------
                                             October 1983
                                      (inception) through
                                        December 31, 1994         1994          1993         1992         1991         1990
- ----------------------------------------------------------  -----------  ------------  -----------  -----------  -----------
                                                                                                
Summary of Operations 
(In thousands, except per share data)
Revenue                                         $  16,534        2,512           352          334          333       13,003
Operating costs and expenses:                                                                     
   Cost of sales and services                       8,327           40           160          161          160        7,806
   Research and development                       350,090       35,742        45,034       49,258       52,777       47,542
   Marketing                                        3,497        1,212           707          668          475          435
   General and administrative                      17,814        2,409         3,208        2,474        2,411        2,951 
Other income (deductions), net                        908         (895)          826        2,733        3,276         (718) 
Litigation settlement expense                       1,000            -             -        1,000            -            -
                                              ------------  -----------  ------------  -----------  -----------  -----------
Net loss                                        $(363,286)     (37,786)      (47,931)     (50,494)     (52,214)     (46,449)
                                              ============  ===========  ============  ===========  ===========  ===========
Loss per share                                                 $ (0.97)        (1.50)       (2.08)       (2.50)       (2.61)
                                                            -----------  ------------  -----------  -----------  -----------
 
 
                                                                                           December 31,
- -----------------------------------------------------------------------------------------------------------------------------
Financial Position (In thousands)                                  1994          1993         1992         1991         1990
                                                             -----------  ------------  -----------  -----------  -----------
                                                                                                    
Current assets                                                 $  4,953        23,415       32,693       56,838       16,710
Current liabilities                                              11,655         5,697        4,437        5,174        3,817
Working capital (deficit)                                        (6,702)       17,718       28,256       51,664       12,893
Spares, net                                                           -            40          200          361          521
Property, plant and equipment, net                               21,213        25,132       33,256       44,637       54,989
Long-term marketable securities and other assets                      -            12          564       15,038        1,396
        Total                                                    14,511        42,902       62,276      111,700       69,799
Less long-term liability                                          5,416(1)        250            -            -            -
Less capital lease obligations, noncurrent                            -             -            -           58          138
        Total stockholders' equity                             $  9,095        42,652       62,276      111,642       69,661
        (1) In default on March 24, 1995. 
 
                                                                                           December 31,
- -----------------------------------------------------------------------------------------------------------------------------
General Data and Ratios (at year end)                              1994          1993         1992         1991         1990
                                                             -----------  ------------  -----------  -----------  -----------
                                                                                                    
Current ratio                                                     0.4:1         4.1:1        7.4:1       11.0:1        4.4:1
Common shares outstanding (in thousands)                         41,906        37,792       24,522       24,100       18,354
Book value per share                                           $   0.22          1.13         2.54         4.63         3.80
Stockholders of record                                            7,020         7,207        7,378        6,734        6,942 
Number of employees                                                 350           383          372          384          266 
 
 
                                                                               1
 

 
Management's Discussion and Analysis of Financial Condition
and Results of Operations
 
  
The following is a discussion of the historical results of operations and
financial condition of Cray Computer Corporation. This discussion should be read
in conjunction with the financial statements and notes included elsewhere in
this Annual Report.

Overview

On March 24, 1995 Cray Computer Corporation (the "Company") filed a voluntary
petition under Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the District of Colorado (the "Court") after the
Company determined it would be unable to complete a planned private placement
financing of up to $25 million of Common Stock with foreign and United States
institutional investors and the Company ceased to have sufficient liquid assets
which would allow it to continue in operation.  The Company's existing directors
and officers have remained in possession of the assets and business of the
Company, but are subject to the supervision and orders of the Court.  The
Company has terminated most of its employees and stopped work on its
supercomputer systems.

Under Chapter 11 the Company may attempt to reorganize, enabling it to resume
operations, or it may dispose of assets followed by distribution of the amount
realized to creditors and, if any excess remains, to shareholders of the
Company. If the assets of the Company are disposed of, that disposition may be
accomplished by the management of the Company as Debtor in Possession or by an
appointed trustee following conversion of the Chapter 11 proceeding to a
liquidation under Chapter 7 of the United States Bankruptcy Code.

Management of the Company has commenced discussions with potential strategic
partners which may result in the resumption of the Company's operation, either
by the Company or a different entity.  Management of the Company does not know
as of the date of this Report whether such discussions will result in a plan of
reorganization permitting the Company to resume its operations.  Management
intends to resolve no later than July 1, 1995, whether a plan of reorganization
is feasible.  If such a plan does prove feasible, it will be presented for
approval, as required, by interested parties including the Bankruptcy Court.

The Company, a development stage enterprise, had a net loss for the year ended
December 31, 1994 of $37,786,000. The Company had accumulated losses of
approximately $363 million from its inception through December 31, 1994.
Approximately $123 million of its cumulative deficit was incurred while the
Company was a division or wholly owned subsidiary of Cray Research, Inc. (CRI).
Research and development expenses were $35,742,000 in 1994, $45,034,000 in 1993,
and $49,258,000 in 1992. Substantially all of the Company's funding since its
incorporation in 1989 has come from CRI ($98,640,000) between October 1989 and
October 1991, the sale of a CRAY-2 supercomputer ($12,760,000) in December 1990,
a public stock offering (net proceeds of approximately $61,088,000) in July
1991, ongoing maintenance revenues ($1,593,000) on the CRAY-2 supercomputer, a
sale of shares of Common Stock to institutional and private investors (net
proceeds of approximately $27,805,000) in June 1993, loan proceeds
($12,719,000), contract revenue ($2,125,000) on the cost sharing development
contract with the National Security Agency (NSA) entered into in August 1994,
sales of shares of Common Stock to private and foreign institutional investors
(net proceeds of approximately $3,822,000) in the fourth quarter of 1994, and
sales of shares of Common Stock to Seymour R. Cray, Chairman of the Board and
Chief Executive Officer (1,165,501 shares) and to foreign institutional
investors (3,200,000 shares) in the first quarter of 1995 (aggregate net
proceeds of approximately $3,909,000).

Until the date of its bankruptcy filing, the Company was engaged in the design,
development, manufacture and marketing of the CRAY-3/Super Scalable System (SSS)
and CRAY-4 high-performance computer system and the marketing of the CRAY-3
supercomputer system. The CRAY-3 and CRAY-4 are modular upgradeable general
purpose supercomputers designed to provide balanced, high-performance computing
for many types of scientific and engineering applications. The Company was
addressing the high-performance, large-scale scientific computing segment of the
supercomputer market. The number of potential customers in this market is and
always has been limited. The market for supercomputers has been characterized by
continuing advancement of

2

 
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
 
 
technology and the development of increasingly sophisticated and powerful
systems which render existing systems obsolete within a few years.

The CRAY-3, CRAY-3/SSS, and CRAY-4 incorporate a modular or building-block
architecture designed to allow customers to add processing and memory
capability. The CRAY-4 configuration can range from 4 to 64 processors with base
prices in the approximate range of $3.5 million to $40 million. The CRAY-3/SSS
is designed to utilize a 2-processor CRAY-3 in conjunction with Processor-in-
Memory (PIM) chips developed and manufactured by a third party to provide vector
parallel processing, scalable parallel processing, and the combination of both.
All of these systems are designed to incorporate advanced Gallium Arsenide
(GaAs) logic circuits, fast semiconductor Static Random Access Memory (SRAM)
circuits, advanced semiconductor packaging and interconnect technologies, and
advanced liquid cooling techniques.

On August 17, 1994, the Company entered into a joint development contract with
the National Security Agency (NSA), to produce a CRAY-3/SSS offering vector
parallel processing, scalable parallel processing, and the combination of both.
Under the NSA contract, the Company received revenues from NSA for a portion of
the Company's costs of developing the system. The CRAY-3/SSS is designed to
utilize a CRAY-3 and a large number of Processor-In-Memory (PIM) chips developed
by the Supercomputing Research Center of the Institute for Defense Analyses and
manufactured by National Semiconductor Corporation. The system was to consist of
a dual processor 256 million word CRAY-3, and a 512,000 processor, 128 million
byte Single Instruction Multiple Data (SIMD) array. The Company successfully
completed the first of a number of major tasks required under the development
contract which consisted of the successful test and demonstration of an array of
256,000 single bit processors packaged using the Company's multi-chip-module
technology. Upon filing of bankruptcy, the Company stopped work on the CRAY-3/
SSS. The Company is reviewing the terms and conditions of the development
contract to assess the ramifications of the bankruptcy filing.

Significant technical progress was made during 1994 on the CRAY-4, which takes
advantage of technologies and manufacturing processes developed during the
design and manufacture of the CRAY-3. The Company announced introduction of the
CRAY-4 to the market on November 10, 1994. Several single processor CRAY-4
prototype systems, each with 64 megawords of memory, were undergoing diagnostic
testing prior to the Company filing for bankruptcy. The Company began testing
individual CRAY-4 modules at the start of 1994 and planned to be able to deliver
a 4-processor CRAY-4 prototype system by approximately the end of the second
quarter of 1995. Upon filing of bankruptcy, the Company stopped work on the 
CRAY-4.

Following expiration of certain restrictions in its license agreements from CRI
on July 31, 1994, the Company began to engage in discussions with potential
strategic partners. Any such partnership could include joint manufacturing
and/or marketing activities, a commitment to provide funding to the Company in
exchange for an interest in the Company's technology (which may include the
licensing of hardware, software, know-how, patents, or marketing rights to
certain products or technology), an equity or debt investment, or any
combination of the above. The Company is continuing its efforts to secure a
corporate strategic partnership. Any such relationship would require approval of
the Court and possibly the Company's lender under its secured debt financing
agreement. Although these discussions are continuing while in bankruptcy, no
agreements are currently pending. No partnership discussions have progressed
beyond the preliminary stage.

On February 27, 1995, the stockholders of the Company approved an amendment to
the Company's Restated Certificate of Incorporation increasing the number of
authorized shares of Common Stock, $0.01 par value, from 60,000,000 to
120,000,000 shares in order to have sufficient authorized unissued shares to
permit additional equity financing.

As of the date of this report, the Company's Common Stock is listed and trading
on the NASDAQ Stock Market--National Market. NASDAQ By-Laws state that "should
an issuer file under any of the sections of the Bankruptcy Act or announce that
liquidation has been authorized by

                                                                               3

 
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
 
 
its Board of Directors and that it is committed to proceed, the Association may
suspend or terminate the issuers securities unless it is determined that the
public interest and the protection of investors would be served by continued
designation." Again, the Company has filed a voluntary petition under Chapter 11
of the United States Bankruptcy Code. No liquidation has been authorized by the
Company's Board of Directors, as of the date of this report, and Management has
submitted information to the NASDAQ Stock Market supporting its position that
the Company's Common Stock should continue to be listed. There can be no
assurance that the Company's Common Stock will continue to be listed on the
NASDAQ National Market or the NASDAQ SmallCap Market.

Results of Operations

Revenue and cost of revenue: Service fees revenue and cost of services relate to
the maintenance of the CRAY-2 supercomputer installed at the National Energy
Research Supercomputer Center (NERSC) in April 1990. Service fees revenue for
1994 totaled $351,000 compared with $332,000 for 1993. The $19,000 increase in
service fees revenue results from the terms of a new NERSC maintenance agreement
which was signed in March 1994 and renewed through March 31, 1995. The
maintenance agreement was extended through April 30, 1995 and is currently being
negotiated to be effective through March 31, 1996. Services under the 
maintenance agreement are performed by CRI as a subcontractor and have not been 
interrupted by the bankruptcy filing. The service fee revenues described herein 
are net of payments to the subcontractor.

Service fees revenue for 1993 totaled $332,000 compared with $334,000 for 1992.
The $2,000 decrease results from the terms of a NERSC maintenance agreement
which was signed in March 1993 and renewed through February 28, 1994.

Development contract revenue related to the joint development contract entered
into between the Company and the NSA in August 1994. The contract provided that
the Company would be paid up to $4,200,000 for development costs, and the
Government would provide approximately $400,000 in software consulting services.
As of December 31, 1994, the Company had cumulatively invoiced the NSA
approximately $2,125,000 pursuant to the terms of the joint development contract
and had related outstanding accounts receivable of approximately $562,000, which
amount was collected subsequent to December 31, 1994.

Other revenue of $36,000 for 1994 relates to GaAs wafer qualification work
performed for a third party.

Cost of services for 1994 totaled $40,000 compared with $160,000 for 1993. The
$120,000 decrease in cost of services results from maintenance spare parts that
became fully depreciated in 1994.

Research and development expenses: Research and development expenses in 1994
relate primarily to the design and development of the CRAY-3/SSS and CRAY-4 
high-performance computer systems, including costs associated with the
manufacture of prototype systems, and depreciation expenses on facilities and
equipment used in research and development activities.

Research and development expenses for 1994 totaled $35,742,000 compared with
$45,034,000 for 1993. The $9,292,000 decrease in research and development
expenses is primarily due to decreases in depreciation of approximately
$3,893,000 as a result of assets becoming fully depreciated in 1994, material
charges of approximately $2,236,000 due to decreased material usage as a result
of decreased CRAY-3 manufacturing, the write-off of $834,000 of obsolete prepaid
CRAY-3 material in 1993, charges for equipment of approximately $622,000, mask
fabrication and PCB drill bits of approximately $255,000, employee relocation of
approximately $153,000, equipment and building repair and maintenance of
approximately $264,000, and equipment leases that matured in 1993 of
approximately $837,000. The equipment previously leased was purchased by the
Company in 1993 and 1994.

Research and development expenses include certain related party transactions.
Related party expenses for 1994 totaled $319,000 compared with $3,499,000 for
1993. The $3,180,000 decrease in related party expenses is due to the fact that
the Company was purchasing SRAM circuits from a related party in 1993, and in
1994 purchased them from Toshiba Corporation, a non-related party.

4

 
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
 
 
Research and development expenses for 1993 totaled $45,034,000 compared with
$49,258,000 for 1992. The $4,224,000 decrease in research and development
expenses for 1993 is due to decreases in depreciation as a result of assets
becoming fully depreciated, reduced compensation charges associated with the
declining amortization of stock grant expense over the life of the 1989 Employee
Benefit Stock Plan and allocation of some general and administrative expenses
that were previously allocated to research and development expenses.

Marketing: Marketing expenses for 1994 totaled $1,212,000 compared with $707,000
for 1993. The $505,000 increase in marketing expenses was the result in part of
increased labor and benefit expenses of approximately $475,000 and increased
fixed charges for leased office space of approximately $31,000 associated with
the addition of employees to the marketing staff. Additional increases were
associated with increased marketing activities, such as travel expenses which
increased approximately $38,000 and trade show expenses which increased
approximately $26,000. These increases were partially offset by a decrease of
approximately $36,000 in charges for consulting services and a decrease of
approximately $26,000 in employee relocation costs.

Marketing expenses for 1993 totaled $707,000 compared with $668,000 for 1992.
The $39,000 increase in marketing expenses for 1993 was a result of increased
marketing promotional expenses and employee relocation expenses associated with
relocating the Pleasanton, California office to Colorado Springs, Colorado in
February 1993. Increased relocation and marketing promotional expenses were
partially offset by reduced facilities expenses and allocation of some general
and administrative expenses that were previously allocated to marketing
expenses.

General and administrative expenses: General and administrative expenses for
1994 totaled $2,409,000 compared with $3,208,000 for 1993. The $799,000 decrease
in general and administrative expenses was due primarily to decreased
depreciation expenses of approximately $177,000 as a result of assets becoming
fully depreciated, decreased fixed expenses of approximately $282,000 for
directors' and officers' insurance coverage that was not renewed by the Company
in July 1993, and decreased legal expenses associated with the June 1993
litigation settlement. These decreases were partially offset by expenses
associated with the Company's acquisition of debt and equity financing, such as
employee travel expense which increased approximately $20,000 and other business
expenses which increased approximately $42,000.

General and administrative expenses for 1993 totaled $3,208,000 compared with
$2,474,000 for 1992. The $734,000 increase in general and administrative
expenses for 1993 reflects changes in the allocation of certain costs that were
previously allocated to research and development and marketing expenses. This
increase was partially offset by decreased fixed charges for directors' and
officers' insurance coverage that was not renewed by the Company in 1993 and
reduced personal property taxes as a result of depreciating assets.

Other income (deductions), net: Other income (deductions), net for 1994 totaled
($895,000) compared with $826,000 for 1993. The $1,721,000 decrease in other
income, net is a result in part of reduced interest income of approximately
$565,000 resulting from decreased cash and short-term investments. Interest
expense increased approximately $532,000 as a result of acquiring the secured
line of credit financing. (See "NOTES TO FINANCIAL STATEMENTS - (9) Bank
Borrowings"). Other expenses increased approximately $925,000 primarily for
costs relating to the debt financing (i.e., broker fees, legal fees, travel,
title insurance and loan fees.) The increase was partially offset by other
income which increased approximately $170,000 due to miscellaneous tax refunds
received. The loss on sale of fixed assets also decreased approximately $131,000
because of obsolete and idle equipment that was written off in 1993.

Other income (deductions), net for 1993 totaled $826,000 compared with
$2,733,000 for 1992. The $1,907,000 decrease for 1993 is primarily due to
reduced interest income resulting from decreased cash and short-term
investments, and lower interest rates. The Company 

                                                                               5

 
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
 
 
wrote off $227,000 of obsolete and idle equipment in 1993.

Litigation settlement: On June 17, 1993, the Company reached a final settlement
with the consolidated plaintiffs in a lawsuit against the Company. The Company
paid $1,000,000 in April 1993 towards the settlement and the Company's
directors' and officers' liability insurer paid an additional $4,000,000. The
Company accrued its share of the tentative settlement, $1,000,000, in its
financial statements as of and for the year ended December 31, 1992.

Liquidity and Capital Resources

The Company's Independent Auditors in their report for the year ended December 
31, 1994, stated that because of the Company's recurring losses, continued 
utilization of cash flows, working capital deficit at December 31, 1994, and the
bankruptcy filing on March 24, 1995 by the Company, substantial doubt is raised
about the Company's ability to continue as a going concern and that the
Company's historical Financial Statements do not include any adjustments that
might result from the outcome of this uncertainty. The Auditors' Report for the
year ended December 31, 1993, and 1992 also stated there was substantial doubt
about the Company's ability to continue as a going concern.

The Company utilized $33,132,000 for operating activities in 1994 and had a
deficit in working capital at December 31, 1994 of $6,702,000. The Company
needed substantial additional funds to continue operations past March 1995,
which it was unable to obtain.

After the Company determined it would be unable to complete a planned private
placement financing of up to $25 million of Common Stock with foreign and United
States institutional investors, and the Company ceased to have sufficient liquid
assets which would allow it to continue in operation on March 24, 1995 it filed
a voluntary petition under Chapter 11 of the United States Bankruptcy Code in
the United States Bankruptcy Court for the District of Colorado (the "Court").
The Company's existing directors and officers have remained in possession of the
assets and business of the Company but are subject to the supervision and orders
of the Court.

The Company has terminated most of its employees and stopped work on its
supercomputer systems. The Company's cash resources are very limited and it will
incur continuing administrative expenses. The Company is operating within the 
requirements of the U.S. Bankruptcy Code and the Rules thereunder.

In June 1994, the Company obtained a $17.5 million secured line of credit
commitment from an asset-based lender, comprised of a $6.5 million term loan and
a revolving line of credit of up to $11.0 million. The amount advanced is
secured by a senior security interest in all the assets of the Company,
including the Company's plant, equipment, technology, and intellectual property
rights. Additional collateral was provided by Seymour R. Cray, Chairman of the
Board and Chief Executive Officer, in the form of a $5.0 million standby letter
of credit in June 1994 and a $1.0 million standby letter of credit in December
1994. The Company received the funds from the $6.5 million term loan upon
closing of the transaction in June 1994. As of December 31, 1994, the Company
had borrowed $6.2 million of the revolving line of credit, for a total of $12.7
million borrowed against the available line of credit of $17.5 million. As of
March 24, 1994, approximately $12.4 million was outstanding under the line of
credit. The terms of the Company's secured debt financing provided for certain
events of default. The Filing of Bankruptcy is stated to be an event of default.
The lender is subject under the U.S. Bankruptcy Code to an automatic stay
against any action against the Company or its assets to collect its debt without
prior approval of the Bankruptcy Court. No additional debt financing is
currently available under the secured line of credit.

The secured lender, as a result of the bankruptcy filing, has notified the
Company of its right and intention to call on the standby letters of credit
(totalling $6 million) issued in their favor by Mr. Cray. Once the secured
lender receives payment from these standby letters of credit this will reduce
the amount owed by the Company on its line of credit to the secured lender.
After this happens, the Company will then have an unsecured liability to Mr.
Cray for an approximate amount of $6 million.

In October 1994, the Company completed a private placement to foreign
institutional investors of 3,850,000 shares of unregistered Common Stock (net
proceeds of approximately $3,822,000). The foreign institutional investors also
received warrants expiring in October 1997, to acquire up to 385,000 additional
shares of Common Stock at $1.50 per share. On January 25, 1995, the
 
6
 

 
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
 
 
Company completed a sale of 1,100,000 shares of its unregistered Common Stock to
foreign institutional investors and 1,165,501 shares of its unregistered Common
Stock to Seymour R. Cray, Chairman of the Board and Chief Executive Officer (net
proceeds of approximately $2,295,000). The sales of shares to the foreign
institutional investors were made pursuant to Regulation S of the Securities Act
(the "Securities Act") of 1933, as amended. The sale of shares to Mr. Cray was
made pursuant to Regulation D under the Securities Act.

On February 27, 1995, the Company sold 2,100,000 shares of its unregistered  
Common Stock to a foreign institutional investor (net proceeds of approximately
$1,764,000). This sale of shares was made pursuant to Regulation S under the 
Securities Act.                                                               

On February 27, 1995, the stockholders of the Company approved an amendment to
the Company's Restated Certificate of Incorporation increasing the number of
authorized shares of Common Stock, $0.01 par value, from 60,000,000 to
120,000,000 shares in order to have sufficient authorized unissued shares to
have permitted additional equity financing. The Company had approximately 72
million authorized shares of Common Stock remaining available for future
issuance at February 28, 1995.

Capital equipment expenditures for 1994 totaled $1,605,000 compared with
$1,723,000 for 1993. The 1994 expenditures relate primarily to the purchase of
test equipment, GaAs fabrication equipment and computer equipment. The
difference of $361,000 between capital expenditures and additions is a result of
the reclassification of a peripheral device (RAID disk) that was previously
recorded as prepaid production supplies to property, plant and equipment. Cash
expenditures for production supplies and peripheral equipment were approximately
$6,946,000 for 1994. These expenditures were primarily for 4-megabit memory
circuits ($3,893,000) supplied by Toshiba Corporation. If the Company had
continued operations, it expected such capital and other expenditures to
continue and expected continued losses at a rate of approximately $3 million per
month unless the Company began to receive substantial revenue from the sale of
supercomputers. As discussed above, the Company terminated most of its employees
concurrent with the Filing on March 24, 1995. In the event the Company were to
resume operations, the extent of operations and related costs have not been
determined. There can be no assurance that the Company will resume operations,
even on a limited basis, and that it will not be required to liquidate its
assets to satisfy its liabilities.  In the event of liquidation, management has 
not determined if sufficient amounts will be realized to satisfy the Company's 
liabilities. Furthermore, it is not possible for management to determine whether
there will be any distributions to shareholders of any residual values available
in the event of liquidation.

The Company has had no orders for or revenues from the sale of its products,
although through December 31, 1994, $2.1 million of revenues had been generated
from a development contract on the CRAY-3/SSS.
 
                                                                               7

 
Independent Auditors' Report

To Board of Directors Cray Computer Corporation

We have audited the accompanying balance sheets of Cray Computer Corporation (a
development stage enterprise) as of December 31, 1994 and 1993, and the related
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1994 and for the period from
October 1983 (inception) through December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cray Computer Corporation (a
development stage enterprise) as of December 31, 1994 and 1993, and the results
of its operations and its cash flows for each of the years in the three-year
period ended December 31, 1994 and for the period from October 1983 (inception)
through December 31, 1994, in conformity with generally accepted accounting
principles.

The accompanying financial statements have been prepared assuming that Cray
Computer Corporation will continue as a going concern. As discussed in Note 1 to
the financial statements, the Company has suffered recurring losses and
continued utilization of cash flows from operating activities and has a working
capital deficit at December 31, 1994. On March 24, 1995, the Company filed a
voluntary petition under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for District of Colorado. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
 
                                                         KPMG Peat Marwick LLP
 
Denver, Colorado
January 20, 1995, except for Notes 1 and 12, for which the date 
is March 24, 1995. 
 
8
 

 
CRAY COMPUTER CORPORATION
(A Development Stage Enterprise)
- --------------------------------------------------------------------------------
 
Statements of Operations
(In thousands, except per share data)



                                                      Cumulative from
                                                         October 1983
                                                  (inception) through
                                                    December 31, 1994                   Years ended December 31,
                                                 --------------------        --------------------------------------------
                                                                                  1994             1993             1992
                                                                             ----------      -----------       ----------
                                                                                                   
Revenue
   Sales                                                   $   12,760                -                -                -
   Service fees                                                 1,593              351              332              334
   Development contract revenue                                 2,125            2,125                -                -
   Other revenue                                                   56               36               20                -
                                                        -------------        ----------      -----------       ----------
Total revenue                                                  16,534            2,512              352              334
                                                        -------------        ----------      -----------       ----------
Operating costs and expenses
   Cost of sales                                                7,686                -                -                -
   Cost of services                                               641               40              160              161
   Research and development
      Related parties                                          41,109              319            3,499            4,139
      Other                                                   308,981           35,423           41,535           45,119
                                                        -------------        ----------      -----------       ----------
   Total research and development                             350,090           35,742           45,034           49,258
   Marketing                                                    3,497            1,212              707              668
   General and administrative                                  17,814            2,409            3,208            2,474
                                                        -------------        ----------      -----------       ----------
                                                              379,728           39,403           49,109           52,561
                                                        -------------        ----------      -----------       ----------
Operating loss                                               (363,194)         (36,891)         (48,757)         (52,227)
      Other income (deductions), net                              908             (895)             826            2,733
      Litigation settlement expense                             1,000                -                -            1,000
                                                        -------------        ----------      -----------       ----------
Net loss                                                   $ (363,286)         (37,786)         (47,931)         (50,494)
                                                        -------------        ----------      -----------       ----------
Loss per share                                                               $   (0.97)           (1.50)           (2.08)
                                                                             ----------      -----------       ----------
Weighted average number of shares outstanding                                   38,962           31,937           24,333
                                                                             ----------      -----------       ----------


See accompanying notes to financial statements.

                                                                               9

 
CRAY COMPUTER CORPORATION
(A Development Stage Enterprise)
- --------------------------------------------------------------------------------
 
Balance Sheets
(In thousands, except share data)

 
 
                                                                        December 31,
                                                                 ------------------------
                                                                    1994             1993
                                                                 ---------      ---------
                                                                           
Assets                                                                          
Current assets:                                                                 
   Cash and cash equivalents                                     $   2,372          4,691
   Short-term investments                                                -         15,435
   Accounts receivable                                                 711            363
   Prepaid expenses                                                  1,855          2,845 
   Other current assets                                                 15             81
                                                                 ---------      ---------
      Total current assets                                           4,953         23,415
                                                                 ---------      ---------
Property, plant and equipment                                       78,392         76,877
Less accumulated depreciation and amortization                      57,179         51,745
                                                                 ---------      ---------
   Net property, plant and equipment                                21,213         25,132
                                                                 ---------      ---------
Maintenance spare parts                                                641            641
Less accumulated depreciation and amortization                         641            601
                                                                 ---------      ---------
   Net spare parts                                                       -             40
                                                                 ---------      ---------
Other assets                                                             -             12
                                                                 ---------      ---------
Total assets                                                     $  26,166         48,599
                                                                 ---------      ---------
Liabilities and stockholders' equity                      
Current liabilities:                                      
   Accounts payable                                              $   2,392          3,889
   Accrued expenses                                                  1,600          1,799
   Capital lease obligations                                             -              9
   Bank borrowings, including current portion                                            
    of note payable to bank                                          7,663              - 
                                                                 ---------      ---------
      Total current liabilities                                     11,655          5,697
                                                                 ---------      ---------
Long-term liability                                                    360            250
Note payable to bank, long-term                                      5,056              -
                                                                 ---------      ---------
      Total liabilities                                             17,071          5,947
                                                                 ---------      ---------
Stockholders' equity:
   Preferred stock of $.01 par value
      Authorized 20,000,000 shares, none outstanding                     -              -
   Common stock of $.01 par value
      Authorized 120,000,000 shares, issued and
        outstanding 41,905,800 and 37,792,105 shares                   419            378
   Additional paid-in capital                                      249,187        244,999 
                                                                 ---------      ---------
                                                                   249,606        245,377
                                                                 ---------      ---------
   Deficit accumulated during the development stage               (363,286)      (325,500)
   Less accumulated deficit transferred to additional 
    paid-in capital                                                122,775        122,775
                                                                 ---------      ---------
   Accumulated deficit since November 15, 1989                    (240,511)      (202,725)
                                                                 ---------      ---------
      Total stockholders' equity                                     9,095         42,652
                                                                 ---------      ---------
Commitments and contingencies
                                                                 ---------      ---------
Total liabilities and stockholders' equity                       $  26,166         48,599
                                                                 ---------      ---------
 

See accompanying notes to financial statements.
  
10

 
CRAY COMPUTER CORPORATION
(A Development Stage Enterprise)
- --------------------------------------------------------------------------------
 


Statements of Cash Flows                                               Cumulative from
(In thousands)                                                            October 1983
                                                                   (inception) through
                                                                     December 31, 1994                Years ended December 31,
                                                                   -------------------     -----------------------------------------

                                                                                                 1994           1993           1992
                                                                                           -----------    -----------    -----------

                                                                                                              
Cash flows from operating activities:
   Net loss                                                                  $(363,286)       (37,786)       (47,931)       (50,494)
   Adjustments to reconcile net loss to net cash flows used by
     operating activities:
        Depreciation and amortization                                           80,291          5,537          9,885         13,433
        Loss on sale or retirement of property, plant and
          equipment                                                              5,572             61            391            554
        Change in operating assets and liabilities:
          Accounts receivable                                                     (711)          (348)           255          1,021
          Inventories                                                            1,574              -              -              -
          Spares, net                                                             (641)             -              -              -
          Prepaid expenses                                                        (516)           990          1,166         (1,288)
          Accounts payable                                                       2,172         (1,497)         2,373         (2,014)
          Accrued expenses                                                       1,600           (199)        (1,064)         1,299
          Long-term liability                                                      360            110            250              -
                                                                            ----------     -----------    -----------    -----------
Cash flows used by operating activities                                       (273,585)       (33,132)       (34,675)       (37,489)
                                                                            ----------     -----------    -----------    -----------

Cash flows from investing activities:
   Sale of short-term investments                                                    -         15,435          3,606         30,977
   Sale of long-term marketable securities                                           -              -              -         13,819
   Purchase of property, plant and equipment                                   (90,246)        (1,605)        (1,723)        (1,536)
   Proceeds from sale of property, plant and equipment                           1,653              -            105             21
   Proceeds from matured lease deposits                                            987             81            906              -
   Increase in other assets                                                     (2,105)             -              -              -
                                                                            ----------     -----------    -----------    -----------
Cash flows provided by (used by) investing activities                          (89,711)        13,911          2,894         43,281
                                                                            ----------     -----------    -----------    -----------
Cash flows from financing activities:
   Advances from Cray Research, Inc., net                                      160,336              -              -              -
   Proceeds from issuance of common stock                                       94,300          4,192         27,999            373
   Proceeds from note receivable from Cray Research, Inc.                       98,640              -              -              -
   Proceeds from sale and leaseback transactions                                 3,874              -              -              -
   Proceeds from bank borrowings                                                 6,219          6,219              -              -
   Proceeds from issuance of note payable to bank                                6,500          6,500              -              -
   Principal payments on capital leases                                         (4,201)            (9)           (70)           (80)
                                                                            ----------     -----------    -----------    -----------
Cash flows provided by financing activities                                    365,668         16,902         27,929            293
                                                                            ----------     -----------    -----------    -----------
Increase (decrease) in cash and cash equivalents                                 2,372         (2,319)        (3,852)         6,085
Cash and cash equivalents at beginning of period                                     -          4,691          8,543          2,458
                                                                            ----------     -----------    -----------    -----------
Cash and cash equivalents at end of period                                   $   2,372          2,372          4,691          8,543
                                                                            ----------     -----------    -----------    -----------
Noncash investing and financing activities:
   Net transfers of property, plant and equipment from Cray
     Research, Inc. at net book value                                        $   3,723              -              -              -
   Acquisition of equipment and process technology from GigaBit
     Logic, Inc., fair market value                                          $  10,854              -              -              -
        Consideration                                                          (10,328)             -              -              -
                                                                            ----------     -----------    -----------    -----------
        Liabilities assumed                                                  $     526              -              -              -
                                                                            ----------     -----------    -----------    -----------


See accompanying notes to financial statements.

                                                                              11

 
CRAY COMPUTER CORPORATION
(A Development Stage Enterprise)
- --------------------------------------------------------------------------------

Statements of Stockholders' Equity
(In thousands, except per share data)



                                                                                                           Note
                                                                                                        Receivable
                                                                                          Additional    from Cray
                                                         Common Stock                      Paid-in       Research,     Accumulated
                                                            Shares         Amount          Capital          Inc.         Deficit
                                                         ------------     --------       -----------    -----------    -----------
                                                                                                        
Balance at January 1, 1990                                  16,370        $   164          140,442        (79,360)        (5,637)
  Issuance of common stock @ $5.12 (avg), net                1,625             16            8,312              -              -
  Stock grant shares issued @ $3.58 (avg)                      359              4               (4)             -              -
  Amortization of deferred
     compensation expense                                        -              -            3,577              -              -
  Payment of promissory note                                     -              -                -         48,902              -
  Advances from Cray Research, Inc.                              -              -             (306)             -              -
  Issuance of common stock @ $11.80 (avg), net               5,175             52           61,036              -              -
  Stock grant shares issued @ $12.30 (avg)                     462              4               (4)             -              -
  Amortization of deferred
    compensation expense                                         -              -            2,165              -              -
  Payment of promissory note                                     -              -                -         30,458              -
  Employee Stock Purchase Plan
    shares issued @ $4.46                                      109              1              483              -              -
  Net loss, two years                                            -              -                -              -        (98,663)
                                                         ------------     --------       -----------    -----------    -----------
Balance at December 31, 1991                                24,100            241          215,701              -       (104,300)
  Stock grant shares issued @ $4.37 (avg)                      356              3               (3)             -              -
  Amortization of deferred
    compensation expense                                         -              -              755              -              -
  Employee Stock Purchase Plan
    shares issued @ $5.63                                       66              1              372              -              -
  Net loss                                                       -              -                -              -        (50,494)
                                                         ------------     --------       -----------    -----------    -----------
Balance at December 31, 1992                                24,522            245          216,825              -       (154,794)
  Issuance of common stock @ $2.16 (avg), net               12,896            128           27,677              -              -
  Stock grant shares issued @ $3.01 (avg)                      303              4               (4)             -              -
  Amortization of deferred
    compensation expense                                         -              -              308              -              -
  Employee Stock Purchase Plan
    shares issued @ $2.76                                       71              1              193              -              -
  Net loss                                                       -              -                -              -        (47,931)
                                                         ------------     --------       -----------    -----------    -----------
Balance at December 31, 1993                                37,792            378          244,999              -       (202,725)
  Issuance of common stock @ $0.99 (avg), net                3,850             39            3,783              -              -
  Stock grant shares issued @ $1.80 (avg)                       43              1               (1)             -              -
  Stock option shares issued @ $1.19                            10              -               12              -              -
  Amortization of deferred
    compensation expense                                         -              -               37              -              -
  Employee Stock Purchase Plan
    shares issued @ $1.70                                      211              1              357              -              -
  Net loss                                                       -              -                -              -        (37,786)
                                                         ------------     --------       -----------    -----------    -----------
Balance at December 31, 1994                                41,906      $     419          249,187              -       (240,511)
                                                         ------------     --------       -----------    -----------    -----------


See accompanying notes to financial statements.

12

 
Notes to Financial Statements
 
 
(1) Bankruptcy Filing and Basis of Financial Statement Presentation
 
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company's recurring losses,
continued utilization of cash flows by operating activities, working capital 
deficit at December 31, 1994, and the Bankruptcy filing on March 24, 1995 raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

On March 24, 1995 Cray Computer Corporation (the "Company") filed a voluntary
petition under Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the District of Colorado (the "Court") after the
Company determined it would be unable to complete a planned private placement of
up to $25 million of Common Stock with foreign and United States institutional
investors, and the Company ceased to have liquid assets which would allow it to
continue in operations. The Company's existing directors and officers have
remained in possession of the assets and business of the Company but are subject
to the supervision and orders of the Court. The Company has terminated most of
its employees and stopped work on its supercomputer systems.

The terms of the Company's secured debt financing provided for certain events of
default. The filing of Bankruptcy is stated to be an event of default. No
additional debt financing is currently available under the secured line of
credit and under the terms of the debt agreement repayment of such debt is
required. The lender is subject under the U.S. Bankruptcy Code to an automatic
stay against any action against the Company or its assets to collect its debt
without prior approval of the Bankruptcy Court.

In accordance with the Bankruptcy Code, the Company can seek court approval for
the rejection of executory contracts, including real property leases, its Design
and Development Agreement with Seymour R. Cray, and the development contract
with the National Security Agency. Any such rejection may give rise to a
prepetition unsecured claim for breach of contract.

As of the petition date, payment of liabilities to unsecured creditors,
including trade unsecured creditors and secured noteholders, are stayed while
the Company is a Debtor in Possession.

Depending on the ultimate outcome of the Company's bankruptcy proceeding, the
Company's ability to utilize its Federal income tax net operating loss and
research and development credit carryforwards may be further restricted or
eliminated.

As a result of the bankruptcy proceedings, the Company may sell or otherwise
realize assets and liquidate or settle liabilities for amounts other than those
reflected in the accompanying financial statements, including the amounts
recorded for prepaid expenses and net property, plant, and equipment. Further, a
plan of reorganization could materially change the amounts currently recorded in
the accompanying financial statements. The accompanying financial statements do
not give effect to any adjustments to the carrying value of assets, or amounts
and classification of liabilities that might be necessary as a consequence of
these matters. In particular, a portion of bank debt is classified as long term 
at December 31, 1994 in the accompanying financial statements pursuant to the 
original payment terms. As a result of the bankruptcy filing the timing of 
repayment is uncertain.

See Notes 2, 4, 5, 6, 7, 8 and 9 for matters that are or may be significantly
impacted by the bankruptcy filing.

Cray Research, Inc., (CRI) distributed 90 percent of the then outstanding shares
of Cray Computer Corporation (the "Company") to its shareholders on November 19,
1989. By December 31, 1992, CRI had sold the remaining common shares of the
Company which it had owned. The accompanying financial statements include the
historical basis accounts of the Company while operating as a division of CRI
and as a separate company. These accounts do not include general unallocated
corporate expenses of CRI while the Company operated as a division of CRI.
Advances made by CRI to the Company through November 15, 1989 were transferred
to additional paid-in capital and the Company's accumulated deficit from October
1983 (inception) through November 15, 1989 was offset against additional paid-in
capital.

The Company is a development stage enterprise, having devoted substantially all
of its efforts from inception through December 31, 1994 to activities related to
the design and development of the CRAY-3, CRAY-3/Super Scalable System (SSS),
and CRAY-4 supercomputer systems. Such activities have included research and
development; raising capital; acquiring and constructing


                                                                              13

 
Notes to Financial Statements (continued)
 
 
property, plant and equipment; recruiting and training personnel; establishing
sources of supply; and developing potential markets. The Company has had no
orders for or revenues from the sale of its products. The Company will remain a
development stage enterprise until significant revenues are derived from the
sale of its supercomputer systems.

(2) Summary of Significant Accounting Policies

Revenue recognition: Revenue from supercomputer system sales is recognized at
the time the system is accepted by the customer. Service fees are recorded
monthly as earned.

Development contract revenue relates to the joint development contract between
the Company and the National Security Agency (NSA). Under the terms of the
contract, the Company recognizes revenue when allowable costs, which are
attributable to the performance of the contract, are incurred and approved for
payment by the contracting officer.

Research and development: The Company is a development stage enterprise.
Research and development costs include hardware and software development
expenses, and costs incurred to enhance and maintain existing software features.
Research and development costs are expensed. The Company does capitalize
materials and equipment which have alternative future use other than research
and development. Capitalized materials amounted to approximately $1,800,000 and
$2,811,000 as of December 31, 1994 and 1993, respectively, and are reported as
prepaid expenses. Capitalized materials are expensed when used.

Income taxes: The Financial Accounting Standards Board has issued the Statement
of Financial Accounting Standard (SFAS) No. 109, Accounting for Income Taxes.
Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to the
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date.

Effective January 1, 1993, the Company adopted SFAS 109. There was no effect on
the financial statements as a result of this change in accounting for income
taxes.

Loss per common share: Loss per common share has been computed based upon the
weighted average number of common shares outstanding. Common stock equivalents
are not included in the computation because their effect would be anti-dilutive.

Cash and cash equivalents and short-term investments: For purposes of the
statements of cash flows, the Company considers all highly liquid investment
instruments with original maturities of three months or less to be cash
equivalents. These consist mainly of short-term money market funds, U.S.
Government securities, and commercial paper. Short-term investments consist of
investments with original maturities of more than three months and less than one
year, such as corporate bonds, certificates of deposit, and U.S. Government
securities. Short-term investments are stated at cost, which approximates fair
value. The fair values are determined based on quoted market prices.

In May 1993, the Financial Accounting Standards Board issued SFAS 115,
Accounting for Certain Investments in Debt and Equity Securities. This
statement was adopted by the Company January 1, 1994, the effect of which was
not material to the Company's financial statements.

Property, plant and equipment: Property, plant and equipment are carried at cost
less accumulated depreciation and amortization. Plant and equipment are
depreciated on a straight-line method over their estimated useful lives which
range from 3 to 8 years.

14

 
Notes to Financial Statements (continued)
 
Accounts receivable 
- --------------------------------------------------------------------------------
(in thousands)

 
                                                               December 31,
                                                        -----------------------
                                                         1994             1993
                                                        ------           ------
                                                                     
Development contract 
receivable                                              $  562              -
Accounts receivable                                         87             19 
Service fees                                                62             54 
Investment interest receivable                               -            288
Other                                                        -              2 
                                                        ------           ----
        Total accounts receivable                       $  711            363
                                                        ------           ----
 

In August 1994, the Company and the National Security Agency (NSA) entered into
a cost sharing development contract for the Company to produce a CRAY-3/SSS.
Under the terms of the contract, the Company may be paid up to $4,200,000 for
development costs, and the Government will provide approximately $400,000 in
software consulting services. As of December 31, 1994, the Company had
cumulatively invoiced NSA approximately $2,125,000 pursuant to the terms of the
joint development contract and had related outstanding accounts receivable of
approximately $562,000. Development costs incurred by the Company are charged to
research and development expense.

Prepaid expenses 
- --------------------------------------------------------------------------------
(in thousands)

 
 
                                                                December 31,
                                                          ----------------------
                                                            1994           1993
                                                          -------         ------
                                                                     
Prepaid supplies                                          $ 1,800         2,811
Property insurance                                             22             -
Other                                                          33            34
                                                          -------         ------
   Total prepaid expenses                                 $ 1,855         2,845
                                                          -------         ------
 


Property, plant and equipment 
- --------------------------------------------------------------------------------
(in thousands)



                                                               December 31,
                                                        -----------------------
                                                          1994           1993
                                                        ---------       -------
                                                                   
Land and improvements                                   $  4,910          4,910
Buildings                                                 15,211         15,211
Machinery and equipment                                   39,161         38,040
Data processing equipment                                 14,362         13,946
Office furniture                                           1,813          1,835
Leasehold improvements                                     2,935          2,935
                                                        ---------       -------
   Total property, plant and
     equipment                                          $ 78,392         76,877
                                                        ---------       -------


Accrued expenses 
- --------------------------------------------------------------------------------
(in thousands)

 
 
                                                             December 31,  
                                                        ---------------------
                                                         1994           1993 
                                                        ------         ------
                                                                   
Employee compensation                                   $   786           820 
Taxes (non-income)                                          502           649
Other                                                       312           330
                                                        -------         -----
   Total accrued expenses                               $ 1,600         1,799
                                                        -------         -----
 
 
(3) Common Stock and Warrants

At December 31, 1994, 2,576,061 shares of Cray Computer Corporation Common Stock
were reserved for issuance pursuant to stock plans.

In October 1994, the Company completed a private placement to foreign
institutional investors of 3,850,000 shares of unregistered Common Stock (net
proceeds of approximately $3,822,000). The foreign investors also received
warrants expiring in October 1997, to acquire up to 385,000 additional shares of
Common Stock at $1.50 per share. The sales of shares to the foreign
institutional investors were made pursuant to Regulation S of the Securities Act
(the "Securities Act") of 1933, as amended.

In June 1993, the Company sold 11,078,161 unregistered shares of its Common
Stock to institutional investors at $2.25 per share, and 1,818,182 unregistered
shares of its Common Stock to Seymour R. Cray, Chairman of the Board and Chief
Executive Officer, at $2.75 per share pursuant to exclusions or exemptions from
securities registration requirements. The registration for resale of the shares
sold in this offering was declared effective by the Securities and Exchange
Commission on October 27, 1993. The gross proceeds were approximately
$29,926,000, less issuance expenses of approximately $2,121,000.

                                                                              15

 
Notes to Financial Statements (continued)

On July 23, 1991, the Company sold 5,175,000 shares of the Company's Common
Stock at $12.50 per share in a registered public offering. The gross proceeds
were approximately $64,688,000, less issuance expenses of approximately
$3,600,000.

On March 1, 1990, the Company issued 1,625,000 shares of the Company's Common
Stock to Gigabit Logic, Inc. in a private placement as partial consideration for
the purchase of certain machinery, equipment and other assets, and a
nonexclusive license to purchase process technology.

(4) Stock Plans

1989 Employee Benefit Stock Plan: The purpose of this plan is to provide a means
for the Company, by granting Company stock or options to purchase stock to
eligible employees and directors of the Company and its subsidiaries, to attract
and retain persons of ability and motivate them to advance the interests of the
Company and benefit its stockholders. Stock options and grants are awarded by
the Compensation Committee of the Board of Directors. Under the plan, 3,700,000
shares of the Company's Common Stock may be issued, of which 200,000 shares may
be issued to the Company's directors. Under the terms of the plan, the option
price (in the case of stock options) is equal to the fair market value on the
date of grant or, if repriced, on the date of option repricing. Options may be
exercised at a rate of 25 percent annually, beginning one year from the date of
grant, and terminate seven years from the date of grant.

In the case of stock grants, the vesting terms vary. However, in most cases the
employee or director becomes vested 25 percent one year after the date of grant
and then 6.25 percent every three months thereafter. The value of grants on the
date awarded, net of the value related to grants subsequently cancelled, is
amortized on a progressive method to the statement of operations over the four
years during which the grants become vested. Such amortization resulted in
charges of approximately $37,000 in 1994, $308,000 in 1993 and $755,000 in 1992.
There was no unamortized deferred compensation expense related to stock grants
or outstanding stock grants at December 31, 1994. Stock options awarded in 1994
were 340,000 shares.

1989 Qualified Stock Purchase Investment Plan: The purpose of this plan is to
facilitate capital accumulation by eligible employees in the form of the
Company's Common Stock and thereby to provide employee identification with the
commitment to the goals of the Company. Under the original plan, up to 500,000
shares of Common Stock could be issued. At the Annual Meeting of Shareholders
held on May 10, 1994, shareholders approved an amendment to the original plan
adding 1,000,000 shares for issuance under the plan bringing the total to
1,500,000 shares. The Company has registered the 1,500,000 shares with the
Securities and Exchange Commission. Eligible employees may designate from 2 to
15 percent of their earnings to be withheld through payroll deductions for the
purchase of Common Stock at 85 percent of the lower of the market price on the
first or the last day of the offering period. Directors are not eligible to
participate. Participant elections resulted in the issuance of 193,686 shares at
a per share price of $0.93 for the offering period ended February 28, 1995,
208,748 shares at a per share price of $1.70 for the offering period ended
February 28, 1994, and 70,570 shares at a per share price of $2.76 for the
offering period ended February 26, 1993.

Following is a summary of stock options and stock grants pursuant to the 1989
Employee Benefit Stock Plan for the past three years: Shares under options

 
 
                                                                      Shares   
                                         Price                     under stock 
                                        per share       Number        grants   
                                      --------------  ----------   ------------ 
                                                           
Outstanding at  
   December 31, 1991                    $   3.75 (a)     40,250       840,453

        Granted                             2.75 (a)  1,120,000             -
        Issued                                 -              -      (355,572)
        Cancelled                              -              -      (111,582)
                                      --------------  ----------   ------------ 
Outstanding at 
   December 31, 1992                   2.75-3.75      1,160,250       373,299

        Granted                             3.00 (a)     75,000             -
        Issued                                 -              -      (303,611)
        Cancelled                              -        (71,250)      (26,629)
                                      --------------  ----------   ------------ 
Outstanding at 
   December 31, 1993                   2.75-3.75      1,164,000        43,059
                                      --------------  ----------   ------------ 
        Granted                        1.19-1.56 (a)    340,000             -
        Issued                                 -        (10,000)      (42,522)
        Cancelled                              -        (79,925)         (537)
                                      --------------  ----------   ------------ 
 

16

 
Notes to Financial Statements (continued)
 
 
 
 
                                                                     Shares
                                       Price                       Under stock
                                      per share       Number         grants
                                      ---------       ------       -----------
                                                           
Outstanding at 
   December 31, 1994                  $1.19-3.75      1,414,075           -
Exercisable at
   December 31, 1994                  $     1.19      526,437
 

At December 31, 1994 there were 753,333 unissued shares available for options
and grants.

(a)  On August 9, 1994, all options previously issued were repriced at $1.19.  
     Subsequent option awards range in price from $1.25 to $1.56.

(5) Income Taxes

As discussed in the Summary of Significant Accounting Policies, the Company
adopted Statement of Financial Accounting Standard (SFAS) No. 109, Accounting
for Income Taxes as of January 1, 1993. There was no effect on the financial
statements as a result of this change in accounting for income taxes.

The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, 1994 and 1993 are
presented below:

(in thousands)



                                                               December 31,
                                                      --------------------------
                                                         1994            1993
                                                      ----------       ---------
                                                                  
Deferred tax assets:
   Plant and equipment, principally
     due to differences in basis and
     depreciation                                     $   1,033           1,293
   Net operating loss carryforwards                      86,254          73,182
   Research and development tax
     credit carryforwards                                13,773          11,317
   Compensated absences,
     principally due to accrual for
     financial reporting purposes                            57              49
   Deferred compensation
     arrangements                                             -              15
                                                      ----------       ---------
        Total gross deferred tax
          assets                                        101,117          85,856
        Less valuation allowance                         98,739          82,775
                                                      ----------       ---------
          Net deferred tax assets                         2,378           3,081
                                                      ----------       ---------
Deferred tax liabilities:
   Plant and equipment, principally
     due to differences in basis and
     depreciation                                         1,694           1,947
   Prepaid production supplies,
     principally due to
     capitalization for financial
     reporting purposes                                     684           1,068

   Deferred compensation
     arrangements                                             -              66
                                                      ----------       ---------
        Total gross deferred tax
          liabilities                                     2,378           3,081
                                                      ----------       ---------
        Net deferred tax account                      $       -               -
                                                      ----------       ---------


At December 31, 1994, the Company had a net operating loss carryforward for
Federal income tax purposes of approximately $226,985,000 which it believes may
be available to offset future taxable income, if any, through 2009. The Company
also has a research and development tax credit carryforward for Federal income
tax purposes of approximately $13,773,000 which it believes will be available to
offset future Federal income taxes, if any, through 2009. The use of these
carryforwards would be severely limited by the terms of Section 382 of the
Internal Revenue Code if there is an "ownership change" as defined by Section
382.

Depending on the ultimate outcome of the Company's bankruptcy proceeding, the
Company's ability to utilize its Federal income tax net operating loss and
research and development credit carryforwards may be further restricted or
eliminated.

(6) Related Party Transactions

Below is a table which sets forth the related party transactions included in
research and development expenses for the periods indicated.

Related party transactions included in R&D expenses 
- --------------------------------------------------------------------------------

                                                                              17

 
Notes to Financial Statements (continued)


(in thousands)

 
 
                                                  Years ended December 31,
                                           ----------------------------------
                                              1994         1993         1992
                                           --------     --------      -------
                                                               
Performance                                                       
  Semiconductor Corp.                      $    46      $ 3,227        3,845
Seymour R. Cray                                273          272          294
                                           --------     --------      -------
    Total related party                                           
      transactions included                                       
      in R&D expenses                      $   319        3,499        4,139
                                           --------     --------      -------
 

Performance Semiconductor Corporation (PSC) supplied the Company with 4 Kilobit
and 256 Kilobit Static Random Access Memory (SRAM) circuits until August 1993.
The $46,000 reported above represents the cost of SRAM circuits that were used
in the research and development process and expensed in 1994. The circuits were
previously classified as prepaid expenses.

In November 1991, the Company entered into an agreement with PSC to design and
develop a specialized one-megabit memory circuit. Under the terms of the
agreement, the Company would pay development fees of approximately $1,025,000 to
PSC beginning in November 1991. The Company paid $925,000 to PSC under this
agreement during 1992. No payments were made under the agreement in 1994, 1993
and 1991. The Company had the right, in its sole discretion, to cancel the
remaining payment(s) under the agreement if it was determined that adequate
progress was not or could not be made. The Company notified PSC that the
agreement was cancelled because adequate progress was not made on the part of
PSC, and no additional payments will be made.

PSC declared Chapter 11 Bankruptcy in January 1994. The Company received Chapter
11 Notice of Final Hearing on Debtor's Motion for Approval of Stipulation for
Use of Cash Collateral dated January 5, 1994 from the United States Bankruptcy
Court, Northern District of California. All outstanding purchase orders between
the Company and PSC had been fulfilled or cancelled prior to January 1994.

Seymour R. Cray, Chairman of the Board and Chief Executive Officer, serves as an
independent contractor to the Company under a Design and Development Agreement
(the "Agreement") which does not require any specific working time commitment by
Mr. Cray. The Design and Development Agreement, which is similar to his prior
agreement with CRI from 1981 to 1989, and with the Company from 1989 to 1992,
has a term expiring in June 1997. This Agreement would terminate early in the
event that the Company discontinues development funding for the CRAY-4 or for
future systems or limits or terminates agreed-upon production for the CRAY-4 or
for future systems. In such event, Mr. Cray retains the option to continue
development and production of the project, subject, however, to prior consent by
the Company's asset-based lender for as long as its loan agreement with the
Company remains in effect. No "agreed-upon production" of the CRAY-4 has been
established because the CRAY-4 is still in the development stage. The Agreement
also terminates in the event Mr. Cray fails for any reason to continue a
project, in which case the Company retains the right to fund and participate in
additional projects pursued by him. Subject to prior consent by the Company's
asset-based lender, Mr. Cray could terminate his participation in the
development of the CRAY-4 at any time and would have the right to use
independently the technology relating thereto and to compete with the Company.

The Company is reviewing the terms and conditions of the Agreement with Mr. Cray
to assess the ramifications of the bankruptcy filing.

(7) Leasing Arrangements as Lessee

At December 31, 1994, there were no assets under capital leases. The Company
leases office equipment and facilities under operating leases. The rental
payments under these leases are charged to expense as incurred.

Future minimum lease payments under operating leases with noncancelable terms of
more than one year are as follows:

(in thousands)

 
 
                                                                Operating
                                                                 leases
                                                                ---------
                                                              
Years ending December 31:
1995                                                            $     256 
 

18

 
Notes to Financial Statements (continued)

                                                              
1996                                                                  261 
1997                                                                  266 
1998                                                                  271
- --------------------------------------------------------------  ---------
   Total minimum lease payments                                 $   1,054
                                                                ---------
 
 

Total rent expense for all operating leases, including rents under lease
arrangements with terms of one year or less, aggregated $257,000 in 1994,
$959,000 in 1993, and $1,206,000 in 1992.

The majority of the operating leases provide that the Company pay taxes,
maintenance, insurance, and certain other operating expenses applicable to the
leased premises and property.

(8) Licensing Agreement

In June 1993, the Company entered into a systems distributorship and license
agreement with Advanced Visual Systems, Inc. (AVS). The agreement grants the
Company a license to use AVS software and AVS documentation internally to make
distributor versions of AVS software. The agreement also grants the Company a
license to sublicense distributor versions of AVS software. The agreement
expires after three years and can be automatically renewed on a year-to-year
basis. The Company has the right to cancel the agreement upon 90 days written
notice to AVS. Under the terms of the license agreement a one-time, non-
refundable licensing fee of $300,000 was incurred by the Company. The Company
paid $50,000 of this fee upon the execution of the agreement with the remaining
amount of $250,000 due in 1996. The total license fee of $300,000 was charged to
research and development expense in 1993.

(9) Bank Borrowings

In June 1994, the Company obtained a $17.5 million secured line of credit
commitment from a lender. The commitment is comprised of a $6.5 million term
loan and an $11.0 million revolving line of credit. The commitment is secured by
a senior security interest in all the assets of the Company. Additional
collateral was provided by Seymour R. Cray, Chairman of the Board and Chief
Executive Officer, in the form of a $5.0 million standby letter of credit in
June 1994 and a $1.0 million standby letter of credit in December 1994. The
Company received the funds from the $6.5 million term loan upon closing of the
transaction in June 1994. As of December 31, 1994, the Company had borrowed
$6.2 million of the revolving line of credit, for a total amount of $12.7
million borrowed against the available line of credit of $17.5 million. The
Company could have borrowed the remaining amount of the available revolving line
of credit ($4.8 million) only by providing additional collateral in the form of
standby letter(s) of credit (up to $4.0 million) and/or 70 percent of eligible
accounts receivable (up to $.8 million). The revolving line of credit is for a
term of three years from June 10, 1994 and from year to year thereafter,
unless sooner terminated pursuant to the terms of the Loan and Security
Agreement.

All loans under the revolving line of credit are subject to the lender's
continuing right to establish lending reserves. These reserves, if imposed,
could have reduced the amount of revolving line of credit loans which otherwise
would have been available to the Company under the lending formulas.

The $6.5 million term loan has a five-year term under which the Company made
interest only payments from June 1994 through December 1994. Principal plus
interest payments commence in January 1995. Annual maturities on the term loan
are as follows: 1995 through 1998 - $1,444,440, 1999 - $722,240.

The terms of the Company's secured debt financing provide for certain events of
default, which include, among other things, (i) failure to perform or meet
certain covenants, such as maintaining a minimum working capital and net worth,
as defined by the agreement, (ii) any change in the controlling ownership of the
Company, (iii) the failure of Seymour R. Cray to provide services to the Company
substantially similar to those he currently provides, other than such failure by
reason of death, disability, sickness, or injury, (iv) any material adverse
change in the Company's business, assets, or prospects and (v) the filing of
bankruptcy. If the Company were to default under the financing, the lender may
take

                                                                              19

 
Notes to Financial Statements (continued)
 
 
possession of the Company's assets, charge higher interest rates on the
outstanding debt, demand immediate repayment of all obligations and/or take
other actions as specified in the loan agreement.

The secured lender, as a result of the bankruptcy filing, has notified the
Company of its right and intention to call on the standby letters of credit
(totalling $6 million) issued in their favor by Mr. Cray. Once the secured
lender receives payment from these standby letters of credit this will reduce
the amount owed by the Company on its line of credit to the secured lender.
After this happens, the Company will then have an unsecured liability to Mr.
Cray for an approximate amount of $6 million.

See Note 1 - Bankruptcy Filing and Basis of Financial Statement Presentation.

The filing of bankruptcy is an event of default.

The term loan and the revolving line of credit bear interest at prime 1994 FORM
10-K #2 word (as publicly announced by Philadelphia National Bank from time to
time) plus 2 1/2 percent and prime plus 1 1/2 percent, respectively. The Company
must also pay a service fee of $50,000 for each year the loan agreement is
effective and certain other fees.

Per the terms of the Loan and Security Agreement between the Company and
Congress Financial Corporation, the Company must pay a success fee of $175,000
on June 10, 1997 or, if sooner, upon termination of the loan. The success fee
owed is recorded as a long-term liability at December 31, 1994.

(10) Other Income (Deductions), Net

Other income (deductions), net consists of the following:

(in thousands)



                                                      December 31,
                                           ---------------------------------
                                             1994         1993         1992
                                           -------       ------      -------
                                                             
Interest income                            $  274          839        2,722
Interest expense                             (535)          (3)         (10)
Other, net                                   (634)         (10)          21
                                           -------       ------      -------
                                           $ (895)         826        2,733
                                           -------       ------      -------


(11) Commitments and Contingencies

The Securities and Exchange Commission (the "Commission") has issued a formal
order for a non-public investigation relating to trading in the Common Stock of
the Company during the period from September 1, 1990 through January 31, 1992,
which is the approximate period during which the Company was negotiating or had
in effect a purchase order for a 16-processor CRAY-3 supercomputer system from
the National Energy Research Supercomputer Center (NERSC) at Lawrence Livermore
National Laboratory. The announced loss of this purchase order in December 1991
caused a major drop in the market price of the Company's Common Stock. The
formal order states that the Commission staff has information tending to show
that during the period under investigation certain individuals and entities may
have traded stock of the Company while in possession of material non-public
information and that the Company and others may have made false and misleading
statements in filings with the Commission or in other public documents
concerning this purchase order or the progress of development of the CRAY-3,
which allegations, if true, would result in possible violation of Section 17 (a)
of the Securities Act of 1933 and Sections 10 (b) and 13 (a) of the Securities
Exchange Act of 1934. The staff of the Central Regional Office of the Commission
has notified the Company of its intention to recommend that the Commission seek
permanent injunctions and civil penalties against the Company, Seymour R. Cray
and a former officer of the Company for alleged violations of these Sections and
to seek similar relief against Terry Willkom, the President of the Company,
under two of them. The staff of the Central Regional Office has informed the
Company and the corporate officers that they may file a written statement
("Wells Submission") to the Commission setting forth their positions and
arguments concerning the proposed recommendation, and such a statement was filed
with the Central Regional Office on February 15, 1995. The staff has also
indicated its willingness to consider a proposed compromise resolution of the
issues. Management of the

20

 
Notes to Financial Statements (continued)


Company is actively seeking to resolve these matters and does not believe that
the investigation has uncovered violations by the Company or any of its officers
and directors of any of the cited provisions of law or that the investigation
will result in a material adverse effect on the business, operating results, or
financial position of the Company. However, the Company cannot predict whether a
prompt resolution will be reached or what the ultimate outcome of the
investigation will be.

The Company entered into two investment agreements with a foreign investor on
January 11, 1995, pursuant to which two blocks of 2,500,000 shares each would be
issued at a 25 percent discount from the average market price of the Common
Stock during two separate valuation periods. A provisional closing on the first
of these transactions involving 2,500,000 shares was scheduled to occur no later
than January 13, 1995. The Company did not receive timely payment in compliance
with the written terms of the first agreement, even with an oral extension of
the first closing deadline. The Company immediately notified the investor of its
breach of the agreement and declared both of the investment agreements
terminated. The investor has asserted that it attempted to wire timely payment
within the orally extended deadline, but was prevented from completing the
transfer through the fault of the Company's bank. The management of the Company
has consulted with its bank and believes the payment terms were not met.
Although the dispute remains unresolved, the Company's management believes that
no timely payment was made within either the written or the orally extended
deadline and that the investment agreements are no longer in effect. However, if
such shares were issued, such issuance could result in possible dilution of the
percentage interest in the Company represented by outstanding shares of the
Company's Common Stock.

(12) Other Subsequent Events

On January 25, 1995, the Company completed a sale of 1,100,000 shares of its
unregistered Common Stock to foreign institutional investors and 1,165,501
shares of its unregistered Common Stock to Seymour R. Cray, Chairman of the
Board and Chief Executive Officer (net proceeds of approximately $2,295,000).
The sale of shares to the foreign institutional investors was exempt from the
registration requirements of the Securities Act (the "Securities Act") of 1933,
as amended pursuant to Regulation S. The sale of shares to Mr. Cray was exempt
from registration requirements of the Securities Act pursuant to Regulation D.

On February 27, 1995, the stockholders of the Company approved an amendment to
the Company's Restated Certificate of Incorporation increasing the number of
authorized shares of Common Stock, $0.01 par value, from 60,000,000 to
120,000,000 shares in order to have sufficient authorized unissued shares to
permit substantial additional equity financing. The Company had approximately 72
million authorized shares of Common Stock remaining available for future
issuance at February 28, 1995.

On February 27, 1995, the Company completed a sale of 2,100,000 shares of its
unregistered Common Stock to a foreign institutional investor (net proceeds of
approximately $1,764,000). This sale of shares was exempt from the registration
requirements of the Securities Act pursuant to Regulation S.

                                                                              21

 
Notes to Financial Statements (continued)


(13) Quarterly Financial Data 
(Unaudited)
(in thousands, except per share data)

 
 
                       First       Second        Third      Fourth       Annual 
                      quarter      quarter      quarter     quarter      total  
                     ---------     --------    ---------   ---------   ---------
                                                          
1994                                                                  
Revenue              $     80           91       1,551         790        2,512
Operating costs                                                       
  and expenses         11,842       10,473       8,652       8,436       39,403
Net Loss              (11,448)     (11,188)     (7,242)     (7,908)     (37,786)
Loss per share          (0.30)       (0.29)      (0.19)      (0.19)       (0.97)

1993
Revenue              $     83           76          97          96          352
Operating costs          
  and expenses         11,930       12,116      12,154      12,909       49,109
Net Loss              (11,513)     (11,864)    (11,665)    (12,889)     (47,931)
Loss per share          (0.47)       (0.43)      (0.31)      (0.34)       (1.50)
 


22

 
Investor Information


Annual Meeting

A date for the 1995 Annual Meeting of Stockholders of Cray Computer Corporation
has not been set as of the date of this Annual Report.

Stockholder Inquiries

Communications concerning transfer requirements, change of address, and lost
certificates should be directed to the Transfer Agent.

To meet the general information needs of stockholders and investors, Cray
Computer Corporation staffs an investor relations department at its Corporate
Headquarters. Inquiries are welcomed by letter or telephone to: Investor
Relations Department, Cray Computer Corporation, Post Office Box 17500, Colorado
Springs, Colorado 80935; telephone (719) 579-6464.

Securities Listing

The Company's Common Stock is listed and traded on the NASDAQ National Market
under the symbol "CRAY."

Because of the Company's bankruptcy filing, the National Association of
Securities Dealers (NASD), in its discretion, may suspend or terminate the
listing of the Company's Common Stock on the Nasdaq Stock Market.

Effective April 11, 1995, the Company's NASDAQ symbol was changed to "CRAYQ."

Form 10-K

The Company will provide a copy of its most recent Form 10-K Annual Report to
any stockholder requesting a copy. Inquiries should be directed to the Investor
Relations Department at the address above.

Transfer Agents and Registrars

Chemical Mellon Shareholder Services
300 South Grand Avenue
Los Angeles, California 90071

Common Stock Prices

The following table sets forth, for the period indicated, the high and low
closing sales prices per share for the Company's Common Stock as reported by the
NASDAQ National Market.

 
 
                                               1994                   1993
                                        ----------------      ------------------
                                         High       Low         High        Low
                                                                
First quarter                           $ 3.00      1.88      $ 5.13        2.25
Second quarter                            2.38       .94        4.00        2.50
Third quarter                             2.06       .81        4.50        2.50
Fourth quarter                            1.56      1.00        4.25        1.88
 

As of April 13, 1995, the closing sales price for the Company's Common Stock as
reported by the NASDAQ National Market was $.15.

As of January 31, 1995, there were approximately 7,000 stockholders of record of
the Company's Common Stock.

Dividends

The Company has not declared or paid any cash dividends with respect to its
Common Stock.

                                                                              23

 
Corporate Information

Directors

Seymour R. Cray
  Chairman and Chief Executive Officer
  Cray Computer Corporation

Jean-Louis Gassee
  Chairman and Chief Executive Officer
  Be, Inc. (Computers)
  San Jose, California

Dr. Thomas A. Longo
  President and Chief Executive Officer
  Performance Semiconductor Corporation (Electronics)
  Sunnyvale, California


Committees

Audit Committee
  Jean-Louis Gassee, Chairman
  Seymour R. Cray
  Thomas A. Longo

Compensation Committee
  Thomas A. Longo, Chairman
  Seymour R. Cray
  Jean-Louis Gassee

Counsel
  Holland & Hart
  Denver, Colorado

Independent Auditors
  KPMG Peat Marwick LLP
  Denver, Colorado


Officers

Seymour R. Cray
  Chairman of the Board and Chief Executive Officer

Terry A. Willkom
  President and Chief Operating Officer

William G. Skolout
  Vice President, Finance; Chief Financial Officer,
  Treasure and Corporate Secretary

Charles W. Breckenridge
  Executive Vice President, Marketing

Howard R. Watts
  Vice President, Printed Circuit Operations

Malcolm A. Hammerton
  Vice President, Software

Bryant M. Welch
  Vice President, Circuit Production


Corporate Facilities

Corporate Headquarters
Colorado Springs, Colorado

Manufacturing and Development
Colorado Springs, Colorado


              [LOGO OF APPEARS HERE]   Cray Computer Corporation

EX-23.1

 
                        Consent of Independent Auditors
                        -------------------------------




The Board of Directors
Cray Computer Corporation:


We consent to incorporation by reference in the Registration Statement (No. 
33-67906) on Form S-3 of Cray Computer Corporation of our report dated January 
20, 1995, except for Notes 1 and 12, for which the date is March 24, 1995, 
relating to the balance sheets of Cray Computer Corporation as of December 31, 
1994 and 1993 and the related statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended December 31, 
1994 and for the period from October 1983 (inception) through December 31, 1994.

Our report dated January 20, 1995, except for Notes 1 and 12, for which the date
is March 24, 1995, contains an explanatory paragraph that states the Company's 
recurring losses, continued utilization of cash flows by operating activities, 
working capital deficit at December 31, 1994, and bankruptcy filing on March 24,
1995, raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might 
result from the outcome of that uncertainty.


                                            /s/ KPMG Peat Marwick LLP

                                            KPMG Peat Marwick LLP

Denver, Colorado
March 24, 1995

EX-24.1

 
                                 EXHIBIT 24.1

                               POWER OF ATTORNEY
                               -----------------


     Each of the undersigned directors and/or officers of Cray Computer
Corporation (the "Company") hereby authorizes William G. Skolout, the Chief
Financial Officer of the Company, as his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution: (1) to sign in the
name of each such person in any and all capacities and file with the Securities
and Exchange Commission the Company's annual report on Form 10-K for the fiscal
year ended December 31, 1994, and any and all amendments to such annual report;
and (2) to take any and all actions necessary or required in connection with
such annual report and amendments to comply with the Securities Exchange Act of
1934, as amended, and the rules and regulations of the Securities and Exchange
Commission promulgated thereunder.

     IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the 17th day of April, 1995.



                              /s/ SEYMOUR R. CRAY
                              ----------------------------
                              Seymour R. Cray, Director
 
 
                              /s/ JEAN-LOUIS GASSEE
                              ----------------------------
                              Jean-Louis Gassee, Director


                              /s/ THOMAS A. LONGO
                              ----------------------------
                              Thomas A. Longo, Director

EX-27

 


 
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