Cray, Inc. filed an 8-K report (from the Sarbanes-Oxley Act) on March 16, 2005 warning of material weaknesses in internal control over financial reporting.

Specifically, inadequate review of third-party contracts and lack of software application controls and documentation. Management's disclosure also addressed the possibility of failing SOX 404 compliance testing.

"We also expressed our auditors' serious reservations as to whether we will be able to complete our assessment and whether the auditors will be able to render an opinion on our assessment and/or our internal controls (03/16/05 8-K)". Cray's initial filing of its 10-K did not attest to operating effectiveness of internal controls as expected. Notes to the consolidated financial statements included a description of two types of material weaknesses discovered at the time of the report. The amended 10-K report, issued on May 3, 2005, described several material weaknesses in its control environment:

1. Control Environment. "Our control environment did not sufficiently promote effective internal control over financial reporting throughout our management structure, and this material weakness was a contributing factor in the development of other material weaknesses described below. Principal contributing factors included the lack of permanent employees in key financial reporting positions, resistance to change of long-held practices developed in an entrepreneurial and trust culture, the lack of a formal program for training members of our finance and accounting group and a lack of a full evaluation of our financial system applications due to incomplete documentation and testing of key controls. Our control environment also contributed to our inability to evaluate fully our general computer controls, financial system application controls and tax controls…"
2. Risk Assessment.
3. Segregation of Duties. (The following items relate to the financial system application control weaknesses stated above):
   1. Permitting changes to inventory quantity information within the financial application system without appropriate review;
   2. Providing users access within our financial application system to areas outside of their responsibilities; and
   3. Permitting the creation, modification and updating of customer or vendor data without a secondary level of review or approval.
4. Inadequate Staffing and Training in Finance and Accounting.
5. Inadequate Oversight of Accounting Transactions.
6. Inadequate Controls Over Journal Entry Approvals.
7. Complex Contract Accounting Procedures.
8. Tax Controls.

Cray prefaced its assessment by stating the fact that they were incomplete in their review, "Management performed an incomplete review of financial applications and general computer controls and tax controls and did not perform a formalized entity-level risk assessment."

Further contributing to Cray's problems was the loss of both the chief financial officer and financial reporting manager in the fourth quarter of 2004, and the head of information technology in the first quarter of 2005. In the first quarter of 2005 Cray hired a director of internal audit and Sarbanes-Oxley compliance to relieve pressure from the corporate controller. Cray's stock price dropped 56%, from $3.15 per share on March 15, 2005, to $1.38 on May 25, 2005.

On June 15, 2005, a class action suit was filed against Cray on behalf of shareholders who purchased securities between July 31 and May 12. The suit accuses that the company had misrepresented financial data.

In November 2005 Burton Smith, one of Tera's cofounders and Cray's chief scientist, resigned from the corporation to take up a position at Microsoft (Reuters).