Form of Management Retention Agreement

1.

Term of Agreement . This Agreement shall commence on the date hereof and shall continue in effect until (a) your employment with the Company is terminated by you or the Company (i) other than in connection with a Potential Change of Control or a Change of Control pursuant to which you become entitled to receive the compensation and benefits described in Section 4(b), or (ii) pursuant to written agreement between the Company and you, or (b) the commencement of the twenty-fifth (25) month following the occurrence of a Change of Control.

2.

Definitions . As used in this Agreement:

(a)

" Beneficial Owner " has the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act").

(b)

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

(i)

you have willfully failed or refused in a material respect to follow reasonable policies or directives established by the Board of Directors or the Chief Executive Officer or willfully failed or refused to attend to material duties or obligations of your office (other than any such failure resulting from your incapacity due to physical or mental illness), which you have failed to correct within a reasonable period following written notice to you from the Chief Executive Officer or the Chairman of the Board that specifically identifies the manner in which you have not so performed your material duties and obligations, or

(ii)

there has been an act by you involving wrongful misconduct, including without limitation a conviction of or the entering into a plea of guilty or nolo contendere to a felony, which has a demonstrably adverse impact on or has caused material damage to the Company, or which constitutes a material misappropriation of the assets of the Company; or

(iii)

you have engaged in an unauthorized disclosure of confidential information which has a demonstrably adverse impact on or has caused material damage to the Company; or

(iv)

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

(v)

you have breached one or more of your material obligations hereunder.

(c)

" Change of Control " of the Company means and includes each and all of the following:

(i)

The consummation of a merger, consolidation, share exchange or other reorganization of the Company with any other entity, other than a merger, consolidation, share exchange or reorganization which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger, consolidation, share exchange or reorganization;

(ii)

The consummation of a sale, lease, exchange or other disposition (in one transaction or a series of related transactions) of all, or substantially all, of the Company’s assets;

(iii)

The shareholders of the Company approve a plan of liquidation of the Company;

(iv)

The acquisition by any means by any Person as Beneficial Owner, directly or indirectly, of securities of the Company representing 50% or more of the total voting power represented by the Company’s then outstanding voting securities except pursuant to a negotiated agreement with the Company pursuant to which such securities are purchased from the Company; or

(v)

At any time during any twenty-four (24) month period the individuals who at the beginning of such period constituted the Board ("Incumbent Directors") shall cease for any reason to constitute at least a majority thereof, provided, however, that the term "Incumbent Director" shall also include each new director elected during such twenty-four (24) month period whose nomination or election was approved by two-thirds of the Incumbent Directors then in office.

(d)

" COBRA " means 29 U.S. Code, Sections 1161 through 1168, as amended.

(e)

" Code " means the Internal Revenue Code of 1986, as amended from time to time.

(f)

" Company " means Cray Inc., a Washington corporation, and if the context reasonably requires, any subsidiary of the Company, and any successor as provided in Section 8.

(g)

" Compensation " means the sum of (i) one year of base salary, at the highest per pay period base salary rate that you were paid by the Company in the twelve (12)-month period prior to the date of the Notice of Termination plus (ii) your 100% target incentive award under the Company’s annual cash incentive plan and any other cash incentive or bonus awards approved by the Board for the calendar year in which your Date of Termination occurs (assuming for this purpose that all conditions to payment at 100% of target awards and of other awards and bonuses, if any, have been or will be satisfied), provided , that if the Board has not established the annual cash incentive plan for the calendar year in which your Date of Termination occurs by the date of the Notice of Termination, then this clause (ii) instead shall use 100% of the target award in effect for you under the cash incentive plan for the immediately preceding calendar year; provided that such incentive and bonus awards shall not include any retention awards or bonuses which by their terms are based substantially on continued employment for one or more specific time periods.

(h)

" Disability " has the meaning given such term in the Company’s disability plans as in effect immediately prior to the earlier of a Potential Change of Control, if any, or Change of Control.

(i)

" Good Reason " means a material negative change in the employment relationship between you and the Company, unless you otherwise agree, including without limitation:

(i)

a material reduction in your base salary in effect immediately prior to the earlier of a Potential Change of Control, if any, or Change of Control, which for purposes of this Agreement means a reduction by more than 5% (whether in one or a series of reductions) compared to your applicable base salary before the first such reduction;

(ii)

a material reduction in your annual target award opportunity under the Company’s annual cash incentive plan, which shall be deemed to include reductions that would reduce your total target compensation (including base salary but excluding the value of any equity component) by more than 5% compared to your total target compensation for the immediately preceding year (including base salary but excluding the value of any equity component);

(iii)

a material diminution of your status, title, position(s) or responsibilities from your status, title, position(s) and responsibilities (including reporting responsibilities) as in effect immediately prior to the earlier of the Potential Change of Control, if any, or Change of Control, or the assignment to you of any substantive duties or responsibilities which are inconsistent with such status, title, position(s) or responsibilities (in either case other than isolated, insubstantial or inadvertent actions which are remedied promptly after notice);

(iv)

a request by the Company for you to relocate (except for office relocations that would not increase your one-way commute by more than 25 miles), or a change of your customary office location which results in substantially increased air or other travel compared to such travel during the twelve (12) month period immediately prior to the earlier of a Potential Change of Control, if any, or Change of Control (an increase for a reasonably sustained period of 25% per week and/or 25% of the time shall be deemed to be substantially increased travel, excluding increased travel for temporary projects or arrangements, and it being understood that in general you can expect to travel at least 25% of the time); or

(v)

the discontinuance of, or a reduction in, benefit plans or other policies of the Company intended to benefit the Company’s employees in which you participated immediately prior to the earlier of a Potential Change of Control, if any, or Change of Control where the consequence to you is a material overall reduction in benefits, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan or plans) has been made with respect to such plans, or the failure by the Company to continue your participation therein (or in such substitute or alternative plans) on a basis not materially less favorable, both in terms of the amounts of benefits provided and the level of your participation relative to other participants, as existed immediately prior to the earlier of a Potential Change of Control, if any, or Change of Control; or

(vi)

the failure of the Company to obtain the assumption of the Agreement as required by Section 8.

(A)

it agrees with your Notice of Termination, in which event Good Reason shall be deemed to have occurred,

(B)

it intends to correct fully the circumstances giving rise to the claim of Good Reason and within thirty (30)-days of the receipt of the Notice of Termination, it corrects, rescinds or otherwise substantially reverses the circumstances supporting your claim for termination for Good Reason, in which event "Good Reason" shall be deemed not to have occurred, or

(C)

a dispute exists concerning whether Good Reason exists, and Sections 3(d) and 10(i) shall apply to such dispute.

(j)

" Person " has the meaning given such term in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act, but excluding the Company and any subsidiary and any employee benefit plan sponsored or maintained by the Company or any subsidiary (including any trustee of such plan acting as Trustee).

(k)

" Potential Change of Control " of the Company means the occurrence of any of the following:

(i)

the Company enters into an agreement, the consummation of which would result in the occurrence of a Change of Control of the Company;

(ii)

any Person or the Company publicly announces an intention to take or to consider taking actions which if consummated would constitute a Change of Control of the Company; or

(iii)

the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change of Control of the Company has occurred.

(l)

" Retirement " means your voluntary termination of employment on or after your 65th birthday, or at an earlier age pursuant to a written agreement between you and the Company with respect to retirement.

(m)

" Specified Employee " has the meaning given such term in Section 409A of the Code and the final regulations thereunder, as in effect from time to time ("Final 409A Regulations"), provided, however, that, as permitted in the Final 409A Regulations, the Company’s Specified Employees and the application of the six (6)-month delay rule of Section 409A(a)(2)(B)(i) of the Code shall be determined in accordance with rules adopted by the Board, which shall be applied consistently, with respect to all nonqualified deferred compensation arrangements of the Company, including this Agreement and similar agreements with other officers of the Company.

3.

Notice of Termination; Effective Date of Termination .

(a)

Any purported termination by the Company or by you shall be communicated by written Notice of Termination to the other party hereto.

(b)

For purposes of this Agreement, a " Notice of Termination " shall mean a notice in writing which indicates the specific termination provision(s) in this Agreement relied upon, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision(s) so indicated, and sets forth the applicable Date of Termination.

(c)

For purposes of this Agreement, the " Date of Termination " means, unless the Company and you agree to a different Date of Termination:

(i)

if your employment is terminated by reason of your death, the date of your death,

(ii)

if your employment is terminated by the Company for Cause, the date on which a Notice of Termination is given unless a subsequent Date of Termination is specified in such Notice,

(iii)

if your employment is terminated by the Company other than for Cause, or if your employment is terminated by you without a claim of Good Reason, the date specified in the Notice of Termination, or

(iv)

if you claim that you are terminating your employment for Good Reason, the date thirty (30) days after the date on which the Notice of Termination is given, unless:

(A)

an earlier Date of Termination has been specified or designated by the Company either in advance of, or after, receiving such Notice of Termination, pursuant to clauses (c)(ii) or (c)(iii) above, or

(B)

there is a dispute about whether Good Reason exists, in which case the Date of Termination shall be determined as set forth in Section 3(d) below.

(d)

Notwithstanding anything in the foregoing to the contrary, if the party receiving the Notice of Termination has not previously agreed to the termination, then within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination may notify the other party that a dispute exists concerning the termination, in which event the Date of Termination shall be extended to the date set either by mutual written agreement of the parties or through the proceedings described in Section 10(i). The Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. In case of such a dispute, the Company shall continue to pay to you your full compensation in effect on the date of the Notice of Termination giving rise to the dispute (including salary) or, if greater, your full compensation in effect immediately prior to the earlier of a Potential Change of Control, if any, or Change of Control, and continue you as a participant, on a basis at least as favorable to you as in effect on the date of the Notice of Termination giving rise to the dispute or, if greater, as in effect immediately prior to the Potential Change of Control, or Change of Control, in all compensation, insurance and benefit plans in which you were then participating until the dispute is finally resolved. During such period you shall continue to provide in good faith all of your customary services to the Company in your position, unless the Company elects to place you on paid leave. Amounts paid under this Section 3(d) are in addition to all other amounts due under this Agreement but without duplication under Section 4(a) or 4(b)(i) hereof, and shall not be offset against or reduce any other amounts due under this Agreement.

(e)

Notwithstanding anything to the contrary in this Agreement, (i) if at any time before the Date of Termination determined pursuant to this Agreement with respect to any purported termination by you of your employment with the Company, there exists a good faith basis for the Company to terminate your employment for Cause, then the Company may, regardless of whether or not you have given Notice of Termination for Good Reason and regardless of whether or not Good Reason exists, terminate your employment for Cause, in which event you shall not be entitled to the compensation and benefits provided in this Agreement, and (ii) if you die or your employment is terminated based on Disability after you have given Notice of Termination for Good Reason and before the Date of Termination specified in that Notice of Termination and if it is subsequently finally determined that Good Reason existed at the time your employment terminated, then termination of your employment shall be deemed to have occurred for Good Reason (and not due to your death or Disability), and you shall be entitled to the compensation and benefits provided in Section 4.

4.

Termination and Resulting Compensation and Benefits .

(a)

If, after the occurrence of a Potential Change of Control (and during the pendency of a Change of Control resulting from such Potential Change of Control), concurrent with a Change of Control, or within twenty-four (24) months after a Change of Control, your employment by the Company shall be terminated by the Company without Cause or due to Disability or death, or you terminate your employment for Good Reason, then you or your estate shall be entitled to receive the following:

(i)

Your full base salary through the Date of Termination to be paid pursuant to the Company’s standard payroll procedures, subject to Section 9, if applicable;

(ii)

Your accrued vacation pay, if any, which shall be paid in accordance with the Company’s practice for paying accrued vacation to terminating employees; and

(iii)

All amounts payable under the Company’s annual cash incentive plan for the calendar year immediately prior to the year in which the Date of Termination occurs which have not been paid to you on or before the Date of Termination, provided , if the Board has not yet approved the payment of any such amount for the prior calendar year by the date of your Notice of Termination, you will be paid your 100% target award under the Company’s annual cash incentive plan for that prior calendar year (in calculating such awards it shall be assumed for this purpose that all conditions to payment at 100% of target awards have been satisfied), with such amounts to be paid on the earlier of the date on which the non-terminated officers of the Company receive their payments under the cash incentive plan for such preceding calendar year or March 15 of the year in which the Date of Termination occurs; and

(iv)

All other compensation and benefits earned but not yet paid at the Date of Termination and all benefits as may be provided under the Company’s insurance and other benefit plans, programs and arrangements that provide you with the greatest of the benefits in effect immediately prior to the Potential Change of Control, if any, or the Change of Control or as in effect on the date of the Notice of Termination, such compensation and benefits to be paid or provided in the normal course pursuant to such plans, programs and arrangements.

(b)

If, after the occurrence of a Potential Change of Control (and during the pendency of a Change of Control resulting from such Potential Change of Control), concurrent with a Change of Control, or within twenty-four (24) months after a Change of Control, your employment by the Company shall be terminated by the Company without Cause, or you terminate your employment for Good Reason, then you, in addition to the payments specified in Section 4(a), shall be entitled to receive the following from the Company in lieu of any other severance compensation or benefits:

(i)

As severance pay and in lieu of any further salary for periods subsequent to the Date of Termination, an amount of cash in a single lump sum equal to two times your Compensation ("Termination Payment"), subject to the provisions of Section 9; and

(ii)

The following benefits:

(A)

For a period of up to eighteen (18) months from your Date of Termination, if you elect to continue coverage under COBRA for medical, dental, vision and orthodontia benefits that you and any dependents were receiving immediately prior to the Date of Termination, the Company will pay the entire cost of the COBRA coverage you had last elected for yourself, your spouse and your dependents under the Company’s medical, dental, vision and orthodontia plans prior to the date of the Notice of Termination or any lesser level of such benefits that you elect, and

(B)

The Company will reimburse you for the cost of an individual term life insurance policy on you for the period from the Date of Termination up to twenty-four (24) months with coverage up to the coverage amount provided by the Company to you immediately prior to the Notice of Termination of employment or, if greater, provided immediately prior to the Potential Change of Control, if any, or the Change of Control (currently a maximum of $500,000); if you cannot reasonably obtain such a life insurance policy for reasons of insurability, then, pursuant and subject to the limitations of the Company’s group insurance plan then in effect, which may include a lower level of insurance coverage and a shorter term, you may elect to convert your group coverage to individual coverage and the Company will pay the cost thereof, such conversion being effectuated no later than the time limits then applicable under the Company’s