<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 March 29, 1998 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 Identification No.)
incorporation or organization)


               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.

<TABLE>
<CAPTION>
              CLASS                            OUTSTANDING AT MARCH 29, 1998
              -----                            -----------------------------
<S>                                                     <C>        
Common stock - $0.00067 par value                       378,811,393
</TABLE>


                                       1

<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
             Results of Operations and Financial Condition             10

PART II - OTHER INFORMATION

    Item 1 - Legal Proceedings                                         16
    Item 5 - Other Information                                         16
    Item 6 - Exhibits and Reports on Form 8 - K                        17
    Item 7A - Quantitative and Qualitative Disclosures
              About Market Risk                                        17

SIGNATURES                                                             18
</TABLE>


                                       2
<PAGE>   3
                         PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

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


<TABLE>
<CAPTION>
                                                March 29,          June 30,
                                                   1998              1997
                                               -----------       -----------
                                               (unaudited)
<S>                                            <C>               <C>        
ASSETS
Current assets:
      Cash and cash equivalents                $   656,765       $   660,170
      Short-term investments                       357,098           452,590
      Accounts receivable, net                   1,675,899         1,666,523
      Inventories                                  476,471           437,978
      Deferred tax assets                          315,766           286,720
      Other current assets                         272,566           224,469
                                               -----------       -----------
           Total current assets                  3,754,565         3,728,450
Property, plant and equipment, at cost           2,040,090         1,658,341
Accumulated depreciation and amortization         (901,382)         (858,448)
                                               -----------       -----------
                                                 1,138,708           799,893
Other assets, net                                  277,972           168,931
                                               -----------       -----------
                                               $ 5,171,245       $ 4,697,274
                                               ===========       ===========



LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
      Short-term borrowings                    $        --       $   100,930
      Accounts payable                             521,938           468,912
      Accrued liabilities                          993,927           963,012
      Other current liabilities                    293,981           316,184
                                               -----------       -----------
           Total current liabilities             1,809,846         1,849,038
Long-term debt and other obligations               137,637           106,299
Stockholders' equity                             3,223,762         2,741,937
                                               -----------       -----------
                                               $ 5,171,245       $ 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              Nine Months Ended
                                               --------------------------      --------------------------
                                                March 29,       March 30,       March 29,       March 30,
                                                  1998            1997            1998            1997
                                               ----------      ----------      ----------      ----------
<S>                                            <C>             <C>             <C>             <C>       
Net revenues                                   $2,360,928      $2,114,618      $6,909,775      $6,055,225
Cost and expenses:
      Cost of sales                             1,101,636       1,053,194       3,300,700       3,058,697
      Research and development                    252,770         196,151         734,616         583,429
      Selling, general and administrative         672,606         585,305       1,984,549       1,701,302
      Purchased in-process research and
          development                                  --          22,958         162,284          22,958
                                               ----------      ----------      ----------      ----------
          Total costs and expenses              2,027,012       1,857,608       6,182,149       5,366,386
Operating income                                  333,916         257,010         727,626         688,839
Gain on sale of equity investment                      --          62,245              --          62,245
Interest income, net                               12,366           9,438          33,134          21,331
                                               ----------      ----------      ----------      ----------
Income before income taxes                        346,282         328,693         760,760         772,415
Provision for income taxes                        114,273         105,182         270,886         247,173
                                               ----------      ----------      ----------      ----------
Net income                                     $  232,009      $  223,511      $  489,874      $  525,242
                                               ==========      ==========      ==========      ==========
Net income per common
      share - basic                            $     0.62      $     0.61      $     1.31      $     1.43
                                               ==========      ==========      ==========      ==========
Net income per common
      share - diluted                          $     0.59      $     0.58      $     1.24      $     1.35
                                               ==========      ==========      ==========      ==========
Shares used in the calculation
      of net income per share - basic             374,524         368,247         373,487         367,915
                                               ==========      ==========      ==========      ==========
Shares used in the calculation
      of net income per share - diluted           394,637         388,364         394,322         389,073
                                               ==========      ==========      ==========      ==========
</TABLE>



                             See accompanying notes.


                                       4
<PAGE>   5
                             SUN MICROSYSTEMS, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                   Nine Months Ended
                                                                               -------------------------
                                                                               March 29,       March 30,
                                                                                 1998             1997
                                                                               ---------       ---------
<S>                                                                            <C>             <C>      
Cash flow from operating activities:
      Net income                                                               $ 489,874       $ 525,242
      Adjustments to reconcile net income
             to net cash provided from
             operating activities:
             Depreciation, amortization and
                    other non-cash items                                         292,446         266,069
             Tax benefit of options exercised                                    106,399          39,815
             Gain on sale of equity investment                                        --         (62,245)
             Purchased in-process research
                    and development                                              162,284          22,958
             Increase in accounts receivable                                      (7,025)       (214,877)
             Increase in inventories                                             (32,657)        (30,556)
             Increase in accounts payable                                         15,353         196,647
             Net increase in other current
                    and non-current assets                                      (114,747)        (91,890)
             Net increase in other current
                    and non-current liabilities                                   54,002         116,271
                                                                               ---------       ---------
Net cash provided from operating activities                                      965,929         767,434
                                                                               ---------       ---------
Cash flow from investing activities:
      Acquisition of property, plant and equipment                              (571,379)       (403,589)
      Acquisition of other assets                                                (84,918)        (27,270)
      Payment for acquisitions, net of cash acquired                            (227,655)        (22,958)
      Acquisition of short-term investments                                     (460,278)       (473,939)
      Maturities of short-term investments                                       571,032         447,574
                                                                               ---------       ---------
Net cash used by investing activities                                           (773,198)       (480,182)
                                                                               ---------       ---------
Cash flow from financing activities:
      Issuance of common stock                                                    58,872          32,482
      Acquisition of treasury stock                                             (224,002)       (398,267)
      Proceeds from employee stock purchase plans                                 61,905          51,287
      Proceeds from sale of equity investment                                         --          62,245
      Reduction of short - term borrowings, net                                 (100,930)        (44,605)
      Increase in (reduction of) long-term borrowings                              8,019         (34,769)
                                                                               ---------       ---------
Net cash used by financing activities                                           (196,136)       (331,627)
                                                                               ---------       ---------
Net decrease in cash and cash equivalents                                      $  (3,405)      $ (44,375)
                                                                               =========       =========
</TABLE>


                                       5

<PAGE>   6

<TABLE>
<S>                                                                            <C>             <C>      
Supplemental disclosures of cash flow information:
   Cash paid during the period for:
             Interest                                                          $     606       $  10,616
             Income taxes                                                      $ 210,632       $ 248,172
Supplemental schedule of non-cash investing and financing activities:
 In conjunction with the Company's 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>
                                   March 29, 1998       June 30, 1997
                                   --------------       -------------
<S>                                  <C>                   <C>     
        Raw materials                $200,258              $236,900

        Work in process                66,813                50,577

        Finished goods                209,400               150,501
                                     --------              --------

                                     $476,471              $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.


                                       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.


                               THREE MONTHS ENDED

<TABLE>
<CAPTION>
                                      March 29, 1998                        March 30, 1997
                            ---------------------------------      --------------------------------
                            Net income      Shares        EPS      Net income      Shares       EPS
                            ----------      ------        ---      ----------      ------       ---
<S>                          <C>            <C>          <C>        <C>            <C>          <C>  
Basic                        $232,009       374,524      $0.62      $223,511       368,247      $0.61
Effect of dilutive
   securities - options
   and warrants                              20,113                                 20,117
                                            -------                                -------
Diluted                      $232,009       394,637      $0.59      $223,511       388,364      $0.58
                                            =======                                =======            
</TABLE>


                                NINE MONTHS ENDED

<TABLE>
<CAPTION>
                                      March 29, 1998                        March 30, 1997
                            ---------------------------------      --------------------------------
                            Net income      Shares        EPS      Net income      Shares       EPS
                            ----------      ------        ---      ----------      ------       ---
<S>                          <C>            <C>          <C>        <C>            <C>          <C>  
Basic                        $489,874       373,487      $1.31      $525,242       367,915      $1.43
Effect of dilutive
   securities - options
   and warrants                              20,835                                 21,158
                                            -------                                -------
Diluted                      $489,874       394,322      $1.24      $525,242       389,073      $1.35
                                            =======                                =======            
</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.
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 their estimated useful lives of
three years. The results of operations of Diba, Inc. from the date of
acquisition through March 29, 1998 are included in the Company's consolidated
statement 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. 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 their estimated useful lives of three years. The results of
operations of Integrity Arts, Inc. from the date of acquisition through March
29, 1998 are included in the Company's consolidated statement 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 



                                       8
<PAGE>   9
accounted for as a purchase. 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 $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 their
estimated useful lives of three years. The results of operations of Chorus
Systems, S.A. from the date of acquisition through March 29, 1998 are included
in the Company's consolidated statement of income and are not material to the
Company.

On November 24, 1997, the Company acquired substantially all of the assets of
Encore Computer Corporation's storage products business for approximately
$186,000,000 in cash. The transaction was accounted for as a purchase. 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 their estimated useful lives of
three years. The results of operations of the storage products business of
Encore Computer Corporation from the date of acquisition through March 29, 1998
are included in the Company's consolidated statement 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 RESULTS OF
         OPERATIONS AND FINANCIAL CONDITION

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

<TABLE>
<CAPTION>
                                          Three Months Ended        Nine Months Ended
                                        ----------------------    ----------------------
                                        March 29,   March  30,    March 29,    March 30,
                                          1998         1997         1998         1997
                                         ------       ------       ------       ------
<S>                                     <C>         <C>           <C>          <C>   
Net revenues                              100.0%       100.0%       100.0%       100.0%

Cost of sales                              46.7         49.8         47.8         50.5
                                         ------       ------       ------       ------

        Gross margin                       53.3         50.2         52.2         49.5

Research and development                   10.7          9.3         10.6          9.6

Selling, general and administrative        28.5         27.6         28.7         28.1

Purchased in-process research and
        development                          --          1.1          2.4           .4
                                         ------       ------       ------       ------

Operating income                           14.1         12.2         10.5         11.4

Gain on sale of equity investment            --          2.9           --          1.0

Interest income, net                        0.6          0.4          0.5          0.4
                                         ------       ------       ------       ------

Income before income taxes                 14.7         15.5         11.0         12.8

Provision for income taxes                  4.9          4.9          3.9          4.1
                                         ------       ------       ------       ------

        Net income                          9.8%        10.6%         7.1%         8.7%
                                         ======       ======       ======       ======
</TABLE>


The following sections contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve risks 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 $2.361 billion for the third quarter and $6.910 billion for
the first nine months of fiscal 1998, representing increases of 11.6% and 14.1%,
respectively, over the corresponding periods of fiscal 1997. 



                                       10
<PAGE>   11
The growth in revenues resulted primarily from increased demand for workgroup
and enterprise servers, and from high-end storage, memory and related products.
The remaining increase reflects growth in revenues from other Sun businesses,
primarily customer services.

Domestic net revenues increased by 17.8% and 17.9% while international net
revenues (including United States exports) grew 6.0% and 10.4% in the third
quarter and first nine months of fiscal 1998, respectively, compared with the
corresponding periods of fiscal 1997. In US dollars, European net revenues
increased 19.9% and 16.6%, Japanese net revenues decreased 12.2% and 2.6% and
net revenues in Rest of World decreased 3.8% and increased 10.6% in the third
quarter and first nine months of fiscal 1998, respectively, when compared with
the same periods of fiscal 1997. The increase in European revenues was
principally due to the continued strengthening of the markets and producer
acceptance. The decrease in Japanese net revenues primarily reflects the
macroeconomic issues in that country. The decrease was also reflected in local
currency. The decrease in Rest of World net revenues was primarily the result
of decreases in Korea and other South East Asian country net revenues, offset
partially by increases in net revenues generated from markets in China,
Australia and Latin America.

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 as a basis for 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 53.3% for the third quarter and 52.2% for the first nine months
of fiscal 1998, compared with 50.2% and 49.5%, respectively, for the
corresponding periods in fiscal 1997. The increase in gross margin for the
periods compared reflects principally the effects of increased revenue generated
from sales of higher margin servers and storage products, as well as decreases
in the cost of key components, including chips, memory and storage.

The factors described above resulted in a favorable impact on gross margin for
the third quarter and first nine 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, software, service, and other products and by achieving
component cost reductions, operating efficiencies and increasing volumes.

RESEARCH AND DEVELOPMENT

Research and development (R&D) expenses were $252.8 million in the third quarter
and $734.6 million for the first nine months of fiscal 1998, compared with
$196.2 million and $583.4 million, respectively, for the same periods of fiscal
1997. As a percentage of net revenues, R&D expenses increased to 10.7% for the
third quarter and 10.6% for the first nine months of fiscal 1998, from 9.3% and
9.6% ,respectively, for 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, storage products and further
development of 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 $672.6 million in the
third quarter and $1,984.5 million in the first nine months of fiscal 1998,
compared with $585.3 and $1,701.3 million, respectively, for the same periods of
fiscal 1997. As a percentage of net revenues, SG&A expenses were 28.5% and 28.7%
in the third quarter and first nine months of fiscal 1998, respectively, and
27.6% and 28.1%, 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 associated with the Company's ongoing efforts to improve
business processes and cycle times. The Company expects to continue to focus on
expansion of 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 in fiscal 1998 and
Longview Technologies, LLC in the third quarter of fiscal 1997.

GAIN ON SALE OF EQUITY INVESTMENT

The gain on sale of equity investment represents the net proceeds from the sale
of the Company's equity investment in Iona Technologies, plc. during the third
quarter of fiscal 1997.

INTEREST INCOME, NET

Net interest income was $12.4 million for the third quarter and $33.1 million
for the first nine months of fiscal 1998, compared with $9.4 million and $21.3
million, respectively, for the corresponding periods in fiscal 1997. The
increase for the third quarter of fiscal 1998 is 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 for the third quarter and first nine
months of fiscal 1998 was 33% 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 including such tax charge was 36%.
The effective income tax rate for the third quarter and first nine 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 trend in enterprise computing 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 Co., International
Business Machines Corporation, Digital Equipment Corporation, and Silicon
Graphics, Inc., aggressively position 



                                       12
<PAGE>   13
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 the 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.
Additionally, 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 the remainder of fiscal 1998
and into fiscal 1999. 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.

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 Company's 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, 



                                       13
<PAGE>   14

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 certain parts of 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 future
financial condition and operating results.

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 



                                       14
<PAGE>   15
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 cannot 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.


LIQUIDITY AND CAPITAL RESOURCES

Total assets at March 29, 1998 increased by approximately $474 million from June
30, 1997, due principally to increases in accounts receivable of $9.4 million,
inventory of $38.5 million, other current assets of $77.2 million, property,
plant and equipment-net of $338.8 million, and other assets of $109 million
offset by a decrease in cash, cash equivalents and short term investments of
$98.9 million. The increase in accounts receivable primarily reflects the timing
of cash receipts as compared to the fourth quarter of fiscal 1997. The increase
in inventory is due to the seasonally lower sales level in the third fiscal
quarter relative to the fourth quarter. 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. Other assets increased due to the
recording of goodwill and other intangible assets related to the Company's
acquisitions.

Total current liabilities decreased $39.2 million from June 30, 1997, due
principally to increases in accounts payable of $53 million and accrued
liabilities of $30.9 million, offset by decreases in short-term borrowings of
$100.9 million and other current liabilities of $22.2 million. The increase in
accounts payable reflects increased inventory levels and a payment due on one of
the Company's acquisitions. The increase in accrued liabilities is due to
increases in warranty and the employee stock participation program. The decrease
in short-term borrowings reflects payments related to the debt of subsidiaries
and the decrease in other current liabilities primarily reflects the decrease in
income taxes payable.

At March 29, 1998, the Company's primary sources of liquidity consisted of cash,
cash equivalents and short-term investments of $1,013.9 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 1999. 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. On March
24, 1998 the United States District Court judge granted a preliminary injunction
that prevents Microsoft Corporation from using the Company's Java Compatible
(TM) logo. 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 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 March 29, 1998:

<TABLE>
<CAPTION>
     OFFICER/          DATE          PRICE                NUMBER OF
     DIRECTOR                                             SHARES SOLD
=====================================================================
<S>                   <C>           <C>                    <C>  
  Alan E. Baratz      2/27/98       $47.625                 8,000
                      2/27/98       $47.5625                8,000
                      2/27/98       $47.6875                8,000

  Lawrence W.         2/27/98       $47.4375               10,000
        Hambly        2/27/98       $47.8125                5,000
                      2/27/98       $48.0625                5,000

  Michael E. Lehman   2/25/98       $46.00                 20,000
                      2/26/98       $46.5625                3,420

  Michael  H. Morris  2/19/98       $46.3125                3,020

  Alton D. Page       2/25/98       $46.50                  5,000
                      2/27/98       $47.6875                5,000

  Frank Pinto         2/27/98       $48.00                 47,000

  George Reyes        2/26/98       $46.5625               10,000

  Edward Saliba       2/19/98       $46.8750                8,000
</TABLE>


                                       16
<PAGE>   17

<TABLE>
<S>                   <C>           <C>                    <C>  
  Janpieter T.        2/13/98       $44.4895               8,000
        Scheerder     2/13/98       $44.4895              40,000

  John Shoemaker      2/19/98       $46.3375               3,620

  A. Michael Spence   2/20/98       $45.8125               7,500
                      2/25/98       $45.5625               4,500
                      2/25/98       $45.6250               3,000

  William Sutherland  2/24/98       $45.1875               2,400

  Kevin Walsh         2/25/98       $46.50                 7,000
                      2/25/98       $46.4375               2,300
                      2/25/98       $46.3125               5,700
                      2/26/98       $46.8125              15,000
                      2/26/98       $47.00                11,600

  Edward J. Zander    2/23/98       $46.3125               5,000
                      2/24/98       $45.00                 5,000
                      2/25/98       $45.25                 5,000
                      2/25/98       $46.00                 5,000
                      2/26/98       $47.00                 2,500
                      2/27/98       $47.875                2,500
</TABLE>


ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

        a) EXHIBITS

                3.1     Registrant's Restated Certificate of Incorporation, as
                        amended February 11, 1998

                3.2     Registrant's Bylaws, as amended February 11, 1998

                4.3(1)  Second Amended and Restated Shares Rights Agreement
                        dated as of February 11, 1998

                27.0    Financial data schedule for the period ended 
                        March 29, 1998


(1)     Incorporated herein by reference to the Registrant's Registration
        Statement on Form 8-A/A Amendment No. 6 filed on February 13, 1998.


        b) REPORTS ON FORM 8-K

                No reports on form 8-K were filed during the quarter ended March
                29, 1998.


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 through the third quarter
ended March 29, 1998.






                                       17
<PAGE>   18
                                   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: May 6, 1998


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