<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)
[X]   Quarterly report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934 for the quarterly period ended December 28, 1997 or

[ ]   Transition report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934 for the transition period from ______ to _______

                         Commission file number:0-15086

                             SUN MICROSYSTEMS, INC.
             (Exact Name of registrant as specified in its charter)

                  DELAWARE                                  94-2805249
     (State or other jurisdiction of                     (I.R.S. Employer
     incorporation or organization)                     Identification No.)

                   901 SAN ANTONIO ROAD, PALO ALTO, CA 94303
             (Address of principal executive offices with zip code)

Registrant's telephone number, including area code:               (650) 960-1300

                                       N/A
              (Former name, former address and former fiscal year,
                         if changed since last report)

        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 12 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.

                           YES  [X]        NO  [ ]

                     APPLICABLE ONLY TO ISSUERS INVOLVED IN
                          BANKRUPTCY PROCEEDINGS DURING
                            THE PRECEDING FIVE YEARS:

        Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

                           YES  [ ]        NO  [ ]

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

        Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.

              CLASS                             OUTSTANDING AT DECEMBER 28, 1997
 Common stock - $0.00067 par value                        377,366,835



<PAGE>   2

                                      INDEX



<TABLE>
<CAPTION>
                                                                         PAGE
                                                                         ----
<S>                                                                      <C>
COVER PAGE                                                                1

INDEX                                                                     2

PART I - FINANCIAL INFORMATION

      Item 1 - Financial Statements
             Condensed Consolidated Balance Sheets                        3
             Condensed Consolidated Statements of Income                  4
             Condensed Consolidated Statements of Cash Flows              5
             Notes to Condensed Consolidated Financial Statements         7

      Item 2 - Management's Discussion and Analysis of
                Financial Condition and Results of Operations            10

PART II - OTHER INFORMATION

      Item 1 -  Legal Proceedings                                        16
      Item 4 -  Submission of Matters to a Vote of Security Holders      16
      Item 5 -  Other Information                                        17
      Item 6 -  Exhibits and Reports on Form 8-K                         18
      Item 7a - Quantitative and Qualitative Disclosures About 
                Market Risk                                              18

SIGNATURES                                                               19
</TABLE>





                                       2
<PAGE>   3

                         PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

                             SUN MICROSYSTEMS, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (in thousands)


<TABLE>
<CAPTION>
                                                 December 28,          June 30,
                                                     1997               1997
                                                 -----------         -----------
                                                 (unaudited)
<S>                                              <C>                 <C>        
ASSETS

Current assets:
      Cash and cash equivalents                  $   573,268         $   660,170
      Short-term investments                         329,476             452,590
      Accounts receivable, net                     1,652,871           1,666,523
      Inventories                                    459,579             437,978
      Deferred tax assets                            305,291             286,720
      Other current assets                           275,156             224,469
                                                 -----------         -----------
           Total current assets                    3,595,641           3,728,450
Property, plant and equipment, at cost             1,933,511           1,658,341
Accumulated depreciation and amortization           (862,278)           (858,448)
                                                 -----------         -----------
                                                   1,071,233             799,893
Other assets, net                                    269,730             168,931
                                                 -----------         -----------
                                                 $ 4,936,604         $ 4,697,274
                                                 ===========         ===========


LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
      Short-term borrowings                      $       482         $   100,930
      Accounts payable                               520,999             468,912
      Accrued liabilities                            938,846             963,012
      Other current liabilities                      311,287             316,184
                                                 -----------         -----------
           Total current liabilities               1,771,614           1,849,038
Long-term debt and other obligations                 137,782             106,299
Stockholders' equity                               3,027,208           2,741,937
                                                 -----------         -----------
                                                 $ 4,936,604         $ 4,697,274
                                                 ===========         ===========
</TABLE>



                             See accompanying notes.




                                       3
<PAGE>   4


                             SUN MICROSYSTEMS, INC.
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                   (unaudited)
                    (in thousands, except per share amounts)



<TABLE>
<CAPTION>
                                                   Three Months Ended               Six Months Ended
                                               --------------------------      --------------------------
                                               December 28,    December 29,    December 28,    December 29,
                                                   1997            1996            1997            1996
                                               ----------      ----------      ----------      ----------
<S>                                            <C>             <C>             <C>             <C>       
Net revenues                                   $2,450,243      $2,081,588      $4,548,847      $3,940,607
Cost and expenses:
      Cost of sales                             1,171,630       1,033,402       2,199,064       2,005,503
      Research and development                    259,228         201,010         481,846         387,278
      Selling, general and administrative         696,450         591,331       1,311,943       1,115,997
      Purchased in-process research and
             development                          110,100              --         162,284              --
                                               ----------      ----------      ----------      ----------
          Total costs and expenses              2,237,408       1,825,743       4,155,137       3,508,778
Operating income                                  212,835         255,845         393,710         431,829
Interest income, net                               10,197           6,421          20,768          11,893
                                               ----------      ----------      ----------      ----------
Income before income taxes                        223,032         262,266         414,478         443,722
Provision for income taxes                         73,600          83,925         156,613         141,991
                                               ----------      ----------      ----------      ----------
Net income                                     $  149,432      $  178,341      $  257,865      $  301,731
                                               ==========      ==========      ==========      ==========

Net income per common
      share - basic                            $     0.40      $     0.48      $     0.69      $     0.82
                                               ==========      ==========      ==========      ==========
Net income per common
      share - diluted                          $     0.38      $     0.46      $     0.65      $     0.77
                                               ==========      ==========      ==========      ==========

Shares used in the calculation of
      net income per share - basic                373,875         368,381         372,968         367,748
                                               ==========      ==========      ==========      ==========
Shares used in the calculation of
      net income per share - diluted              393,231         388,738         394,165         389,428
                                               ==========      ==========      ==========      ==========
</TABLE>



                             See accompanying notes.




                                       4
<PAGE>   5


                             SUN MICROSYSTEMS, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)
                                 (in thousands)


<TABLE>
<CAPTION>
                                                                    Six Months Ended
                                                            ----------------------------
                                                            December 28,    December 29,
                                                                1997            1996
                                                            ------------    ------------
<S>                                                          <C>             <C>      
Cash flow from operating activities:
      Net income                                             $ 257,865       $ 301,731
      Adjustments to reconcile net income
             to net cash provided from
             operating activities:
             Depreciation, amortization and
                    other non-cash items                       183,472         180,820
             Tax benefit of options exercised                   74,466          17,968
             Purchased in-process research
                    and development                            162,284              --
             Decrease (increase) in accounts receivable         16,004        (186,261)
             (Increase) decrease in inventories                (15,765)         65,995
             Increase in accounts payable                       14,414          58,914
             Net increase in other current
                    and non-current assets                     (97,594)        (37,045)
             Net increase in other current
                    and non-current liabilities                 19,301          12,517
                                                             ---------       ---------
Net cash provided from operating activities                    614,447         414,639
                                                             ---------       ---------
Cash flow from investing activities:
      Acquisition of property, plant and equipment            (410,453)       (301,582)
      Acquisition of other assets                              (49,080)        (22,241)
      Payment for acquisitions, net of cash acquired          (227,655)             --
      Acquisition of short-term investments                   (305,738)       (221,081)
      Maturities of short-term investments                     438,431         371,676
                                                             ---------       ---------
Net cash (used by) investing activities                       (554,495)       (173,228)
                                                             ---------       ---------
Cash flow from financing activities:
      Issuance of common stock                                  37,189          18,101
      Acquisition of treasury stock                           (140,537)       (329,531)
      Proceeds from employee stock purchase plans               50,649          37,303
      Reduction of short-term borrowings, net                 (100,448)        (22,260)
      Increase (reduction) of long-term borrowings               6,293         (35,795)
                                                             ---------       ---------
Net cash used by financing activities                         (146,854)       (332,182)
                                                             ---------       ---------
Net decrease in cash and cash equivalents                    $ (86,902)      $ (90,771)
                                                             =========       =========
</TABLE>





                                       5
<PAGE>   6


<TABLE>
<S>                                                             <C>             <C>      
Supplemental disclosures of cash flow information:
      Cash paid during the period for:
      Interest                                                  $     388       $   8,198
      Income taxes                                              $  55,503       $ 122,888
Supplemental schedule of non-cash investing and
     financing activities:
The Company purchased Diba, Inc., Integrity
      Arts, Inc. and certain assets of Chorus Systems,
      S.A. and Encore Computer Corporation. In conjunction
      with these acquisitions, liabilities were assumed as
      follows:
             Fair value of assets acquired                      $ 284,294
             Cash paid for assets                                (233,111)
                                                                ---------
             Liabilities assumed                                $  51,183
                                                                =========
</TABLE>



                             See accompanying notes.












                                       6
<PAGE>   7


                             SUN MICROSYSTEMS, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



BASIS OF PRESENTATION

        The consolidated financial statements include the accounts of Sun
        Microsystems, Inc. ("Sun" or "the Company") and its wholly-owned
        subsidiaries. Intercompany accounts and transactions have been
        eliminated. Certain amounts from prior years have been reclassified to
        conform to current year presentation.

        While the quarterly financial information is unaudited, the financial
        statements included in this report reflect all adjustments (consisting
        only of normal recurring accruals) that the Company considers necessary
        for a fair presentation of the results of operations for the interim
        periods covered and of the financial condition of the Company at the
        date of the interim balance sheet. The results for the interim periods
        are not necessarily indicative of the results for the entire year. The
        information included in this report should be read in conjunction with
        the 1997 Annual Report to Stockholders which is incorporated by
        reference in the Company's 1997 Form 10-K (as amended on Form 10-K/A).

INVENTORIES (IN THOUSANDS)

<TABLE>
<CAPTION>
                               December 28,        June 30,
                                  1997               1997
                               ------------        --------
        <S>                      <C>               <C>     
        Raw materials            $158,450          $236,900

        Work in process            74,977            50,577

        Finished goods            226,152           150,501
                                 --------          --------

                                 $459,579          $437,978
                                 ========          ========
</TABLE>


INCOME TAXES

The Company accounts for income taxes under the liability method of Statement of
Financial Accounting Standards No. 109. The provision for income taxes during
the interim periods considers anticipated annual income before taxes, earnings
of foreign subsidiaries permanently invested in foreign operations, and other
differences.

STOCK DIVIDEND

The Company declared a two-for-one stock split (effected in the form of a stock
dividend) to stockholders of record as of the close of business on November 18,
1996. Share and per share amounts presented have been adjusted to reflect the
stock dividend.




                                       7
<PAGE>   8


EARNINGS PER SHARE

The Company adopted Financial Accounting Standards No. 128 (FAS 128), "Earnings
Per Share" in the second quarter of fiscal 1998. Share and per share amounts for
all periods presented have been restated to comply with FAS 128.


<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED

                                          December 28, 1997                   December 29, 1996
                                  -------------------------------     ---------------------------------
                                  Net income    Shares      EPS       Net income    Shares       EPS
                                  ----------    -------    ------     ----------    -------    --------
        <S>                        <C>          <C>        <C>         <C>          <C>        <C>     
        Basic                      $149,432     373,875    $ 0.40      $178,341     368,381    $   0.48
        Effect of dilutive
           securities - options
           and warrants                          19,356                              20,357
                                                -------                             -------
       Diluted                     $149,432     393,231    $ 0.38      $178,341     388,738    $   0.46
                                                =======                             =======
</TABLE>


<TABLE>
<CAPTION>
                                                            SIX MONTHS ENDED

                                          December 28, 1997                   December 29, 1996
                                  -------------------------------     ---------------------------------
                                  Net income    Shares      EPS       Net income    Shares       EPS
                                  ----------    -------    ------     ----------    -------    --------
        <S>                        <C>          <C>        <C>         <C>          <C>        <C>     
        Basic                      $257,865     372,968    $ 0.69      $301,731     367,748    $   0.82
        Effect of dilutive
           securities - options
           and warrants                          21,197                              21,680
                                                -------                             -------
        Diluted                    $257,865     394,165    $ 0.65      $301,731     389,428    $   0.77
                                                =======                             =======
</TABLE>


ACQUISITIONS

On August 22, 1997, the Company acquired all of the outstanding stock of Diba,
Inc. for $25,000,000 in cash. The transaction was accounted for as a purchase
and, on this basis, the excess purchase price over the estimated fair value of
net tangible assets has been allocated, based upon an independent third-party
valuation, to various intangible assets, primarily consisting of purchased
in-process research and development and goodwill. In connection with this
acquisition, purchased in-process research and development of $22,300,000,
associated with products which had not achieved technological feasibility and
for which no alternative uses have been established by the Company, was written
off. Intangible assets, including goodwill, are being amortized over three
years. The results of operations of Diba, Inc. from the date of acquisition
through December 28, 1997 are included in the Company's consolidated statements
of income and are not material to the Company.

On September 22, 1997, the Company acquired all of the outstanding stock of
Integrity Arts, Inc. for $30,200,000 in cash. The transaction was accounted for
as a purchase and, on this basis, the excess purchase price over the estimated
fair value of net tangible assets has been allocated, based upon an independent
third-party valuation, to various intangible assets, primarily consisting of
purchased in-process research and development and goodwill. In connection with
this acquisition, purchased in-process research and development of approximately
$29,900,000, associated with products which had not achieved technological
feasibility and for which no alternative uses have been established by the
Company, was written off. Intangible assets, including goodwill, are being
amortized over three years. The results of operations of Integrity Arts, Inc.
from the date of acquisition through December 28, 1997 are included in the
Company's consolidated statements of income and are not material to the Company.

On October 21, 1997, the Company acquired substantially all of the assets and
certain liabilities of Chorus Systems, S.A. and its wholly-owned subsidiaries
for approximately $26,500,000 in cash. The transaction was accounted for as a
purchase and, on this basis, the excess purchase price over the estimated fair
value of net tangible assets has been allocated, based upon an independent
third-party valuation, to various intangible assets, primarily consisting of
purchased in-process research and development and goodwill. In connection with
this




                                       8
<PAGE>   9

acquisition, purchased in-process research and development of $13,100,000,
associated with products which had not achieved technological feasibility and
for which no alternative uses have been established by the Company, was written
off. Intangible assets, including goodwill, are being amortized over three
years. The results of operations of Chorus Systems, S.A. from the date of
acquisition through December 28, 1997 are included in the Company's consolidated
statements of income and are not material to the Company.

On November 24, 1997, the Company acquired substantially all of the assets and
certain liabilities of Encore Computer Corporation's storage products business
for approximately $186,000,000 in cash, $35,000,000 of which is due in July
1998. The transaction was accounted for as a purchase and, on this basis, the
excess purchase price over the estimated fair value of net tangible assets has
been allocated, based upon an independent third-party valuation, to various
intangible assets, primarily consisting of purchased in-process research and
development and goodwill. In connection with this acquisition, purchased
in-process research and development of $97,000,000, associated with products
which had not achieved technological feasibility and for which no alternative
uses have been established by the Company, was written off. Intangible assets,
including goodwill, are being amortized over three years. The results of
operations of the storage products business of Encore Computer Corporation from
the date of acquisition through December 28, 1997 are included in the Company's
consolidated statements of income and are not material to the Company.

REGISTRATION STATEMENT

On October 16, 1997, the Company filed a Registration Statement with the
Securities and Exchange Commission relating to the registration for public
offering of senior and subordinated debt securities and common stock with an
aggregate initial public offering price of up to $1,000,000,000. On October 24,
1997, the Registration Statement became effective, so that the Company may now
choose to offer, from time to time, the debt securities and common stock
pursuant to Rule 415 in one or more separate series, in amounts, at prices and
on terms to be set forth in the prospectus contained in the Registration
Statement and in one or more supplements to the prospectus.










                                       9
<PAGE>   10

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS

The following table sets forth items from the Condensed Consolidated Statements
of Income as a percentage of net revenues:

<TABLE>
<CAPTION>
                                              Three Months Ended           Six Months Ended
                                          --------------------------  --------------------------
                                          December 28,  December 29,  December 28,  December 29,
                                              1997          1996          1997          1996
                                          ------------  ------------  ------------  ------------
<S>                                          <C>           <C>           <C>           <C>   
Net revenues                                 100.0%        100.0%        100.0%        100.0%

Cost of sales                                 47.8          49.6          48.3          50.9
                                             -----         -----         -----         ----- 

        Gross margin                          52.2          50.4          51.7          49.1

Research and development                      10.6           9.7          10.6           9.8

Selling, general and administrative           28.4          28.4          28.8          28.3

Purchased in-process research
        and development                        4.5          --             3.6          --
                                             -----         -----         -----         ----- 

Operating income                               8.7          12.3           8.7          11.0

Interest income, net                           0.4           0.3           0.4           0.3
                                             -----         -----         -----         ----- 

Income before income taxes                     9.1          12.6           9.1          11.3

Provision for income taxes                     3.0           4.0           3.4           3.6
                                             -----         -----         -----         ----- 

        Net income                             6.1%          8.6%          5.7%          7.7%
                                             =====         =====         =====         ===== 
</TABLE>

The following sections contain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve risk and uncertainties such that actual results may vary
materially. Certain factors that may affect the Company's results and financial
condition over the next few quarters are discussed under the caption "Future
Operating Results" below. Other factors that may affect such results and
financial condition are set forth in the Company's 1997 Annual Report to
Stockholders which is incorporated by reference in the Company's Form 10-K (as
amended on Form 10-K/A), and the Company's Form 10-K, as amended.

RESULTS OF OPERATIONS

NET REVENUES

Net revenues were $2.450 billion for the second quarter and $4.549 billion for
the first six months of fiscal 1998, representing increases of 17.7% and 15.4%,
respectively, over the comparable periods of fiscal 1997. The growth in revenue
resulted primarily from strong demand for work group, enterprise and
departmental servers, and from high-end storage, memory and related products.
The remaining increase reflects growth in revenues from other Sun businesses,
primarily service.




                                       10
<PAGE>   11

Domestic net revenues increased by 19.4% and 18% while international net
revenues (including United States exports) grew 16.1% and 12.8% in the second
quarter and first six months of fiscal 1998, respectively, compared with the
corresponding periods of fiscal 1997. In US dollars, European net revenues
increased 22.3% and 14.8%, Japanese net revenues decreased 3.8% and increased
2.8%, and net revenues in Rest of World increased 23% and 19.2% in the second
quarter and first six months of fiscal 1998, respectively, when compared with
the same periods of fiscal 1997. These increases are due primarily to continued
strengthening of the markets in Europe and many of the markets in Asia, and are
partially offset by the strengthening of the U.S. dollar. Japan experienced a
modest increase in local currency revenue, but, when translated into US dollars,
showed a decline for the second quarter of fiscal 1998 as compared with the same
period of fiscal 1997.

The Company generally manages currency exposure through the use of simple,
short-term forward foreign exchange and currency option contracts, the objective
of which is to minimize the impact of currency fluctuations on the results of
operations. As the Company utilizes projected data to establish its forward
foreign exchange and currency option contracts, variances which result from
forecasting differences and the extent of currency movement during the quarter
could have a material adverse effect on the results of operations and cash
flows.

GROSS MARGIN

Gross margin was 52.2% for the second quarter and 51.7% for the first six months
of fiscal 1998, compared with 50.4% and 49.1%, respectively, for the
corresponding periods in fiscal 1997. The increase in the gross margin for the
periods compared primarily reflects the effects of increased revenues generated
from higher margin servers and storage products, as well as continued decreases
in costs of key components, including chips, memory and storage.

The factors described above resulted in a favorable impact on gross margin for
the second quarter and first six months of fiscal 1998. The Company continuously
evaluates the competitiveness of its product offerings. These evaluations could
result in repricing actions in the near term. Sun's future operating results
would be adversely affected if such repricing actions were to occur and the
Company were unable to mitigate the resulting margin pressure by maintaining a
favorable mix of systems, storage, software, service, and other products and by
achieving component cost reductions, operating efficiencies and by increasing
volumes.

RESEARCH AND DEVELOPMENT

Research and development (R&D) expenses were $259.2 million in the second
quarter and $481.8 million for the first six months of fiscal 1998, compared
with $201.0 and $387.3 million for the same periods of fiscal 1997. As a
percentage of net revenues, R&D expenses increased to 10.6% for both the second
quarter and the first six months of fiscal 1998 from 9.7% and 9.8%,
respectively, in the corresponding periods of fiscal 1997. These increases
reflect the increased expenditures focused on the development of hardware and
software products which utilize the Java architecture, as well as the continued
development of ULTRASparc systems, low-end desktop systems, storage products,
products acquired through acquisitions, and increased compensation due primarily
to an increase in personnel.




                                       11
<PAGE>   12

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative (SG&A) expenses were $696.5 million in the
second quarter and $1,311.9 million in the first six months of fiscal 1998,
compared with $591.3 and $1,116.0 million for the same periods of fiscal 1997.
As a percentage of net revenues, SG&A expenses were 28.4% and 28.8% in the
second quarter and first six months of fiscal 1998, respectively, and 28.4% and
28.3%, respectively in the corresponding periods of fiscal 1997. The dollar
increases are primarily attributable to increased compensation resulting from
higher levels of headcount (principally in the sales organization) in addition
to marketing costs related to demand creation programs. The increase is also due
to costs incurred in connection with the Company's ongoing efforts to improve
business processes and cycle times. The Company expects to continue to hire
personnel to further expand its demand creation programs and support
organizations.

PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT

Purchased in-process research and development represents the write-off of
purchased in-process research and development associated with the Company's
acquisitions of Diba, Inc., Integrity Arts, Inc., Chorus Systems, S.A. and the
storage products business of Encore Computer Corporation. Such write-offs were
$110.1 million and $162.3 million, respectively, for the second quarter and
first six months of fiscal 1998. There were no such charges in the corresponding
periods of fiscal 1997.

INTEREST INCOME, NET

Net interest income was $10.2 million for the second quarter and $20.8 million
for the first six months of fiscal 1998, compared with $6.4 million and $11.9
million, respectively, for the corresponding periods in fiscal 1997. The
increases are primarily the result of higher interest earnings due to a larger
average portfolio of cash and short-term investments.

INCOME TAXES

The Company's effective income tax rate was 33% for the second quarter and first
six months of fiscal 1998 before a $19.8 million tax charge resulting from a
non-recurring write-off of in-process research and development associated with
the acquisitions of Diba, Inc. and Integrity Arts, Inc. during the first quarter
of fiscal 1998. The effective income tax rate for the first six months of fiscal
1998 including such tax charge was 38%. The effective income tax rate for the
second quarter and first six months of fiscal 1997 was 32%. The increase in the
overall effective tax rate to 33% for fiscal 1998 is attributable to an increase
in anticipated worldwide earnings without offsetting tax credits or other tax
savings.

FUTURE OPERATING RESULTS

The market for Sun's products and services is intensely competitive and subject
to continuous, rapid technological change, short product life cycles and
frequent product performance improvements and price reductions. Due to the
breadth of the Company's product lines and the scalability of its products and
network computing model, Sun competes in many segments of the network computing
market across a broad spectrum of customers. The Company expects the markets for
its products and technologies, as well as its competitors within such markets,
will continue to change as the rightsizing trend shifts customer buying patterns
to network based systems which often employ solutions from multiple vendors.
Competition in these markets will also continue to intensify as Sun and its
competitors, principally Hewlett-Packard Corporation, International Business
Machines Corporation, Digital Equipment Corporation, and Silicon Graphics, Inc.,
aggressively position themselves to benefit from this shifting of customer
buying patterns and demand. The Company is also facing competition from these
competitors, as well as other systems manufacturers, such as Compaq Computer
Corporation and Dell Computer Corporation, with respect to products based on
microprocessors from Intel Corporation coupled with Windows NT operating system
software from Microsoft Corporation. These products demonstrate the viability of
certain networked personal computer solutions and have increased the competitive
pressure, particularly in the Company's workstation and lower-end server product
lines. Finally, the timing of introductions of new products and services by
Sun's competitors may negatively impact the future operating results of the
Company, particularly when such introductions occur in periods leading up to the
Company's introduction of its own new enhanced products. The Company expects
this pressure to continue and intensify throughout fiscal 1998 and beyond. While
many other technical, service and support capabilities affect a customer's
buying decision, the Company's future operating results will depend, in part, on
its ability to compete with these technologies.




                                       12
<PAGE>   13

The Company's future operating results will depend to a considerable extent on
its ability to rapidly and continuously develop, introduce, and deliver in
quantity new systems, storage, software, and service products, as well as new
microprocessor technologies, that offer its customers enhanced performance at
competitive prices. The development of new high-performance computer products,
such as the Company's development of the UltraSPARC microprocessor is a complex
and uncertain process requiring high levels of innovation from the Company's
designers and suppliers, as well as accurate anticipation of customer
requirements and technological trends. Once a hardware product is developed, the
Company must rapidly bring such products to volume manufacturing, a process that
requires accurate forecasting of volumes, mix of products and configurations,
among other things in order to achieve acceptable yields and costs. Future
operating results will depend to a considerable extent on the Company's ability
to closely manage product introductions in order to minimize unfavorable
patterns of customer orders, to reduce levels of older inventory and to ensure
that adequate supplies of new products can be delivered to meet customer demand.
The ability of the Company to match supply and demand is further complicated by
the Company's need to adjust prices to reflect changing competitive market
conditions as well as the variability and timing of customer orders with respect
to the Company's older products. As a result, the Company's operating results
could be adversely affected if the Company is not able to correctly anticipate
the level of demand for the mix of products. Because the Company is continuously
engaged in this product development, introduction, and transition process, its
operating results may be subject to considerable fluctuation, particularly when
measured on a quarterly basis.

The Company is increasingly dependent on the ability of its suppliers to design,
manufacture, and deliver advanced components required for the timely
introduction of new products. The failure of any of these suppliers to deliver
components on time or in sufficient quantities, or the failure of any of the
Company's own designers to develop advanced innovative products on a timely
basis, could result in a significant adverse impact on the Company's operating
results. The inability to secure enough components to build products, including
new products, in the quantities and configurations required, or to produce, test
and deliver sufficient products to meet demand in a timely manner, would
adversely affect the Company's net revenues and operating results. To secure
components for development, production, and introduction of new products, the
Company frequently makes advanced payments to certain suppliers and often enters
into noncancelable purchase commitments with vendors early in the design
process. Due to the variability of material requirement specifications during
the design process, the Company must closely manage material purchase
commitments and respective delivery schedules. In the event of a delay or flaw
in the design process, the Company's operating results could be adversely
affected due to the Company's obligations to fulfill such noncancelable purchase
commitments.

Generally, the computer systems sold by Sun, such as the UltraSPARC-based
products, are the result of hardware and software development, such that delays
in the software development can delay the ability of the Company to ship new
hardware products. In addition, adoption of a new release of an operating system
may require effort on the part of the customer and porting by software vendors
providing applications. As a result, the timing of conversion to a new release
is inherently unpredictable. Moreover, delays by customers in adopting a new
release of an operating system can limit the acceptability of hardware products
tied to that release. Such delays could adversely affect the future operating
results of the Company.

A significant portion of the Company's revenues is derived from international
sales and is therefore subject to inherent risks related thereto, including the
general economic and political conditions in each country, currency exchange
rate fluctuations, the effect of the tax structures of various jurisdictions,
changes to and compliance with a variety of foreign laws and regulations, trade
protection measures and import and export licensing requirements. There can be
no assurance that the economic crisis and currency issues currently being
experienced in Asia will not have an adverse effect on the Company's revenue or
revenue growth rates in the future. The impact of any of the foregoing factors
could have an adverse effect on the Company's financial condition and operating
results.




                                       13
<PAGE>   14

Seasonality also affects the Company's operating results, particularly in the
first quarter of each fiscal year. In addition, the Company's operating expenses
are increasing as the Company continues to expand its operations, and future
operating results will be adversely affected if revenues do not increase
accordingly. Additionally, the Company plans to continue to evaluate and, when
appropriate, make acquisitions of complementary technologies, products or
businesses. As part of this process, the Company will continue to evaluate the
changing value of its assets, and when necessary, make adjustments thereto.

In order to remain competitive in a rapidly changing industry, the Company is
continually improving and changing its business practices, processes, and
information systems. In this regard, the Company has begun to implement a number
of new business practices and a series of related information systems; such
activities are currently planned to be fully operational in the first half of
fiscal year 1999. Implementing a number of new business practices and
information systems is a complex process, affecting numerous operational and
financial systems and processes as well as requiring comprehensive employee
training. While the Company tests these new systems and processes in advance of
implementation, there are inherent limitations in the Company's ability to
simulate a full-scale operating environment in advance of the system cutover. To
the extent that the Company encounters problems after introduction of these new
systems and practices that prevent or limit their full utilization, there could
be a material, adverse impact on the Company's operating results.

Many installed computer systems and software products are coded to accept only
two digit entries in the date code field. As the year 2000 approaches, these
code fields will need to accept four digit entries to distinguish years
beginning with "19" from those beginning with "20" dates. As a result, in less
than two years, computer systems and/or software products used by many companies
may need to be upgraded to comply with such year 2000 requirements. The Company
is currently expending significant resources to review its products and
services, as well as its internal management information systems in order to
identify and modify those products, services and systems that are not year 2000
compliant. The Company expects such modifications will be made on a timely basis
and does not believe that the cost of such modifications will have a material
effect on the Company's operating results. There can be no assurance, however,
that the Company will be able to modify timely and successfully such products,
services and systems to comply with year 2000 requirements, which could have a
material adverse effect on the Company's operating results. Based on the
Company's assessment to date, most newly introduced products and services of the
Company are year 2000 compliant, however some of the Company's customers are
running product versions that are not year 2000 compliant. The Company has been
encouraging such customers to migrate to current product versions. In addition,
the Company faces risks to the extent that suppliers of products, services and
systems purchased by the Company and others with whom the Company transacts
business on a worldwide basis do not have business systems or products that
comply with the year 2000 requirements. In the event any such third parties
cannot timely provide the Company with products, services or systems that meet
the year 2000 requirements, the Company's operating results could be materially
adversely affected. Furthermore, there can be no assurance that these or other
factors relating to the year 2000 compliance issues, including litigation, will
not have a material adverse effect on the Company's business, operating results
or financial condition. 

While the Company can not predict what effect these various factors may have on
its financial results, the aggregate effect of these and other factors could
result in significant volatility in the Company's future performance and stock
price.









                                       14
<PAGE>   15

LIQUIDITY AND CAPITAL RESOURCES

Total assets at December 28, 1997 increased by approximately $239.3 million from
June 30, 1997, due principally to increases in inventory of $21.6 million,
property, plant and equipment-net of $271.3 million, other current assets and
deferred tax assets of $69.3 million and other assets of $100.8 million, offset
by decreases in cash, cash equivalents and short-term investments of $210
million and accounts receivable of $13.7 million. The decrease in accounts
receivable reflects slightly lower revenue in the second quarter of fiscal 1998
relative to the fourth quarter of fiscal 1997. The increase in inventory is the
result of inventory acquired through acquisitions and is also due to the
slightly lower revenue in the second quarter of fiscal 1998 as compared to the
fourth quarter of fiscal 1997. The increase in property, plant and equipment
reflects capital spending for real estate development of the Company's
facilities, assets acquired through acquisitions and capital additions to
support increased headcount, primarily in the Company's engineering, service and
marketing organizations. Other current assets increased due to the timing of
payments for insurance and other taxes and other assets increased due to the
recording of goodwill and other intangible assets related to the Company's
acquisitions.

Total current liabilities decreased $77.4 million from June 30, 1997, due
principally to decreases in short-term borrowings of $100.4 million, accrued
liabilities of $24.2 million and other current liabilities of $4.9 million,
offset by an increase in accounts payable of $52.1 million. The decrease in
short-term borrowings reflects payments related to debt of subsidiaries. The
decrease in accrued liabilities reflects the payment of performance-based
compensation and commissions, offset by increases in warranty and the employee
stock participation program liability. The decrease in other current liabilities
is the offset of a decrease in deferred revenue and an increase in income taxes
payable. The increase in accounts payable reflects increased inventory balances
and a payment due on one of the Company's acquisitions.

At December 28, 1997, the Company's primary sources of liquidity consisted of
cash, cash equivalents and short-term investments of $902.7 million and a
revolving credit facility with banks aggregating $500 million, which was
available subject to compliance with certain covenants. On October 16, 1997, the
Company filed a Registration Statement with the Securities and Exchange
Commission relating to the registration for public offering of senior and
subordinated debt securities and common stock with an aggregate initial public
offering price of up to $1,000,000,000. On October 24, 1997, the Registration
Statement became effective, so that the Company may now choose to offer, from
time to time, the debt securities and common stock pursuant to Rule 415 in one
or more separate series, in amounts, at prices and on terms to be set forth in
the prospectus contained in the Registration Statement and in one or more
supplements to the prospectus. The Company believes that the liquidity provided
by existing cash and short-term investment balances and the offering and
borrowing arrangements described above will be sufficient to meet the Company's
capital requirements through fiscal 1998. However, the Company believes the
level of financial resources is a significant competitive factor in its industry
and may choose at any time to raise additional capital through debt or equity
financing to strengthen its financial position, facilitate growth and provide
the Company with additional flexibility to take advantage of business
opportunities that may arise.








                                       15
<PAGE>   16

                           PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

On October 7, 1997, the Company filed suit against Microsoft Corporation in the
United States District Court for the Northern District of California alleging
breach of contract, trademark infringement, false advertising, unfair
competition, interference with prospective economic advantage and inducing
breach of contract. The Company filed an amended complaint on October 14, 1997.
Microsoft Corporation filed its answer, affirmative defenses and counterclaims
to the amended complaint. The counterclaims include breach of contract, breach
of the covenant of good faith and fair dealing, violation of the California
Business & Professions Code and declaratory judgment. The Company believes that
the counterclaims are without merit and/or that the Company has affirmative
defenses and intends vigorously to defend itself with respect thereto. The
Company believes that the outcome of this matter will not have a material
adverse impact on Sun's financial condition, results of operations or cash flows
in any given fiscal year.

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

On November 12, 1997, the Annual Meeting of Stockholders of the Company was held
in Menlo Park, California. The results of voting of the 308,000,440 shares of
common stock represented at the meeting are as described below.

An election of directors was held with the following individuals being elected
to the Board of Directors of the Company:

<TABLE>
<CAPTION>
                                 Shares Voted For      Votes Withheld
                                 ----------------      --------------
        <S>                        <C>                    <C>      
        Scott G. McNealy           306,596,583            1,403,857
        L. John Doerr              306,572,798            1,427,642
        Judith L. Estrin           306,568,115            1,432,325
        Robert J. Fisher           306,545,429            1,455,011
        Robert L. Long             306,581,242            1,419,198
        M. Kenneth Oshman          306,609,507            1,390,933
        A. Michael Spence          306,561,299            1,439,141
</TABLE>

The seven nominees who received the highest number of votes (all of the above
individuals) were elected to the Board of Directors.

The stockholders approved an amendment to the Company's 1990 Employee Stock
Purchase Plan in order to increase the number of shares of common stock reserved
for issuance thereunder by 10,000,000 shares of common stock to an aggregate of
55,800,000 shares. There were 250,085,154 votes cast for the amendment,
52,803,996 votes against the amendment, 1,437,287 abstentions and 3,674,003
broker non-votes.

The stockholders approved an amendment to the 1988 Directors' Stock Option Plan
(1988 DSOP) in order to (i) extend the duration of the 1988 DSOP by
approximately ten (10) additional years and (ii) increase the number of shares
of common stock reserved for issuance thereunder by 600,000 shares of common
stock to an aggregate of 2,200,000 shares. There were 214,860,004 votes cast for
the amendment, 91,365,940 votes cast against the amendment and 1,774,496
abstentions.

The stockholders approved the adoption of the 1997 French Stock Option Plan
(1997 FSOP) and the reservation for issuance thereunder of 3,000,000 shares of
common stock. There were 228,328,042 votes cast for the 1997 FSOP, 77,566,926
shares against the 1997 FSOP and 2,105,472 abstentions.





                                       16
<PAGE>   17

ITEM 5 - OTHER INFORMATION

 SCHEDULE OF SALES BY EXECUTIVE OFFICERS DURING THE QUARTER

The following is a summary of all sales of the Company's Common Stock by the
Company's executive officers and directors who are subject to Section 16 of the
Securities Exchange Act of 1934, as amended, during the fiscal quarter ended
December 28, 1997:

<TABLE>
<CAPTION>
     OFFICER/                                          NUMBER OF
     DIRECTOR              DATE              PRICE    SHARES SOLD
=================================================================
<S>                      <C>               <C>           <C>   
L. John Doerr            11/3/97           $35.75        10,000
                         11/3/97           $36.00         5,000
                         11/3/97           $36.25         5,000

Scott G. McNealy         11/13/97          $31.3958     150,000
                         11/18/97          $35.6310     150,000

John Shoemaker           10/24/97          $37.3675       1,000
                         10/24/97          $37.305        4,000

A. Michael Spence        11/18/97          $35.50         9,500

Edward J. Zander         10/29/97          $36.8958      15,000
</TABLE>








                                       17
<PAGE>   18


ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

     a) EXHIBITS

               10.64(1)   1988 Directors' Stock Option Plan, as amended on
                          August 13, 1997

               10.65(1)   1990 Employee Stock Purchase Plan, as amended on
                          August 13, 1997

               10.94(2)   1997 French Stock Option Plan

               27.0       Financial data for the period ended December 28, 1997


(1)     Incorporated by reference to Exhibits 4.2 and 4.1, respectively, filed
        as exhibits to the Registrant's Registration Statement on Form S-8, file
        no. 333-40677, filed with the Securities and Exchange Commission on
        November 20, 1997.

(2)     Incorporated by reference to Exhibit 4.1 filed as an exhibit to the
        Registrant's Registration Statement on Form S-8, file no. 333-40675,
        filed with the Securities and Exchange Commission on November 20, 1997.


b)     REPORTS ON FORM 8-K

       No reports on Form 8-K were filed during the quarter ended December 28,
       1997.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

       The Company's market risk disclosures set forth in the 1997 Annual
       Report to Stockholders have not changed significantly.







                                       18
<PAGE>   19


                                   SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                    SUN MICROSYSTEMS, INC.



                                    BY  


                                        /s/    Michael E. Lehman
                                       -----------------------------------------
                                        Michael E. Lehman
                                        Vice President, Corporate Resources and
                                        Chief Financial Officer



                                        /s/     George Reyes
                                       -----------------------------------------
                                        George Reyes
                                        Vice President and Corporate Controller,
                                        Chief Accounting Officer







Dated:   February 9, 1998





                                       19




<PAGE>   20



                                  EXHIBIT INDEX

                              SUN MICROSYSTEMS, INC.


EXHIBIT
NUMBER                            EXHIBIT TITLE


10.64(1)   1988 Directors' Stock Option Plan, as amended on August 13, 1997

10.65(1)   1990 Employee Stock Purchase Plan, as amended on August 13, 1997

10.94(2)   1997 French Stock Option Plan

27.0       Financial data for the period ended December 28, 1997



(1)     Incorporated by reference to Exhibits 4.2 and 4.1, respectively, filed
        as exhibits to the Registrant's Registration Statement on Form S-8, file
        no. 333-40677, filed with the Securities and Exchange Commission on
        November 20, 1997.

(2)     Incorporated by reference to Exhibit 4.1 filed as an exhibit to the
        Registrant's Registration Statement on Form S-8, file no. 333-40675,
        filed with the Securities and Exchange Commission on November 20, 1997.
        




                                       20