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UNITED STATES
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 September 30, 2001                                       
|       |                                                                                         
|       | 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



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

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

901 San Antonio Road, Palo Alto, CA 94303
(Address of principal executive offices with zip code)

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

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



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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 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
Common Stock  $0.00067 par value |  | Outstanding at October 25, 2001
3,241,598,047





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TABLE OF CONTENTS



|                               |                                                                                               |                                                      |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                               |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                               |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                               |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                               |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                               | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                               | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II  OTHER INFORMATION   
|                               | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                               | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                    
|EXHIBIT INDEX                 
|Exhibit 10.82A                
|Exhibit 10.85                 



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INDEX

|                                                                                              |                                                      |  |    |   | 
|--------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  | -- | - | 
|PART I  FINANCIAL INFORMATION                                                                |                                                      |  |    |  
|Item 1. Financial Statements:                                                                 |                                                      |  |    |  
|                                                                                              | Condensed Consolidated Statements of Operations      |  |    | 3 | 
|                                                                                              | Condensed Consolidated Balance Sheets                |  |    | 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 |                                                      |  | 13 |  
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                      |  | 28 |  
|PART II  OTHER INFORMATION                                                                   |                                                      |  |    |  
|Item 1. Legal Proceedings                                                                     |                                                      |  | 29 |  
|Item 6. Exhibits and Reports on Form 8-K                                                      |                                                      |  | 29 |  
|SIGNATURES                                                                                    |                                                      |  | 30 |  

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PART I  FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




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

|                                                                             |                                                                                           |                          |                         |       |                    |       |                 |       |       |       | 
|---------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------ | ----------------------- | ----- | ------------------ | ----- | --------------- | ----- | ----- | ----- | 
|                                                                             |                                                                                           |                          |                         |       | Three Months Ended
|                                                                             |                                                                                           |                          |                         |       |                   
|                                                                             |                                                                                           |                          |                         |       | September 30, 2001 |       | October 1, 2000
|                                                                             |                                                                                           |                          |                         |       |                    |       |                
|Net revenues:                                                                |                                                                                           |                          |                         |       |                    |       |                 |      
|                                                                             | Products                                                                                  |                          | $                       | 2,057 |                    |       | $               | 4,343 |      
|                                                                             | Services                                                                                  |                          |                         | 804   |                    |       |                 | 702   |      
|                                                                             |                                                                                           |                          |                         |       |                    |       |                 |      
|                                                                             |                                                                                           | Total net revenues       |                         |       | 2,861              |       |                 |       | 5,045 |      
|Cost of sales:                                                               |                                                                                           |                          |                         |       |                    |       |                 |      
|                                                                             | Cost of sales-products                                                                    |                          |                         | 1,287 |                    |       |                 | 2,153 |      
|                                                                             | Cost of sales-services                                                                    |                          |                         | 518   |                    |       |                 | 462   |      
|                                                                             |                                                                                           |                          |                         |       |                    |       |                 |      
|                                                                             |                                                                                           | Total cost of sales      |                         |       | 1,805              |       |                 |       | 2,615 |      
|                                                                             |                                                                                           |                          |                         |       |                    |       |                 |      
|                                                                             |                                                                                           |                          | Gross margin            |       |                    | 1,056 |                 |       |       | 2,430 | 
|Operating expenses:                                                          |                                                                                           |                          |                         |       |                    |       |                 |      
|                                                                             | Research and development                                                                  |                          |                         | 473   |                    |       |                 | 490   |      
|                                                                             | Selling, general and administrative                                                       |                          |                         | 975   |                    |       |                 | 1,229 |      
|                                                                             | Goodwill amortization                                                                     |                          |                         |      |                    |       |                 | 13    |      
|                                                                             | Purchased in-process research and development                                             |                          |                         | 3     |                    |       |                 |      |      
|                                                                             |                                                                                           |                          |                         |       |                    |       |                 |      
|                                                                             |                                                                                           | Total operating expenses |                         |       | 1,451              |       |                 |       | 1,732 |      
|                                                                             |                                                                                           |                          |                         |       |                    |       |                 |      
|                                                                             |                                                                                           |                          | Operating income (loss) |       |                    | (395  | )               |       |       | 698   | 
|Loss on strategic investments, net                                           |                                                                                           |                          | (19                     | )     |                    |       |                |      
|Interest income, net                                                         |                                                                                           |                          | 107                     |       |                    |       | 75              |      
|                                                                             |                                                                                           |                          |                         |       |                    |       |                 |      
|                                                                             | Income (loss) before income taxes and cumulative
effect of change in accounting principle |                          |                         | (307  | )                  |       |                 | 773   |      
|Provision (benefit) for income taxes                                         |                                                                                           |                          | (127                    | )     |                    |       | 263             |      
|                                                                             |                                                                                           |                          |                         |       |                    |       |                 |      
|                                                                             | Income (loss) before cumulative effect of change
in accounting principle                  |                          |                         | (180  | )                  |       |                 | 510   |      
|Cumulative effect of change in accounting principle, net                     |                                                                                           |                          |                        |       |                    |       | (54             | )    
|                                                                             |                                                                                           |                          |                         |       |                    |       |                 |      
|Net income (loss)                                                            |                                                                                           | $                        | (180                    | )     |                    | $     | 456             |      
|                                                                             |                                                                                           |                          |                         |       |                    |       |                 |      
|Net income (loss) per common share-basic:                                    |                                                                                           |                          |                         |       |                    |       |                 |      
|                                                                             | Income (loss) before cumulative effect of change
in accounting principle                  |                          | $                       | (0.06 | )                  |       | $               | 0.16  |      
|                                                                             | Cumulative effect of change in accounting principle                                       |                          |                         |      |                    |       |                 | (0.02 | )    
|                                                                             |                                                                                           |                          |                         |       |                    |       |                 |      
|Net income (loss) per common share-basic                                     |                                                                                           | $                        | (0.06                   | )     |                    | $     | 0.14            |      
|                                                                             |                                                                                           |                          |                         |       |                    |       |                 |      
|Net income (loss) per common share-diluted:                                  |                                                                                           |                          |                         |       |                    |       |                 |      
|                                                                             | Income (loss) before cumulative effect of change
in accounting principle                  |                          | $                       | (0.06 | )                  |       | $               | 0.15  |      
|                                                                             | Cumulative effect of change in accounting principle                                       |                          |                         |      |                    |       |                 | (0.02 | )    
|                                                                             |                                                                                           |                          |                         |       |                    |       |                 |      
|Net income (loss) per common share-diluted                                   |                                                                                           | $                        | (0.06                   | )     |                    | $     | 0.13            |      
|                                                                             |                                                                                           |                          |                         |       |                    |       |                 |      
|Shares used in the calculation of net income (loss) per
common share-basic   |                                                                                           |                          | 3,240                   |       |                    |       | 3,204           |      
|                                                                             |                                                                                           |                          |                         |       |                    |       |                 |      
|Shares used in the calculation of net income (loss) per
common share-diluted |                                                                                           |                          | 3,240                   |       |                    |       | 3,436           |      
|                                                                             |                                                                                           |                          |                         |       |                    |       |                 |      

See accompanying notes.

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

|                                            |  |                                           |                           |   |                    |       |               |   |       |       | 
|------------------------------------------- |  | ----------------------------------------- | ------------------------- | - | ------------------ | ----- | ------------- | - | ----- | ----- | 
|                                            |  |                                           |                           |   | September 30, 2001 |       | June 30, 2001
|                                            |  |                                           |                           |   |                    |       |              
|                                            |  |                                           |                           |   | (unaudited)        |       |               |   |      
|ASSETS                                      |  |                                           |                           |   |                    |       |               |  
|Current assets:                             |  |                                           |                           |   |                    |       |               |  
|                                            |  | Cash and cash equivalents                 |                           | $ | 1,021              |       |               | $ | 1,472 |      
|                                            |  | Short-term investments                    |                           |   | 917                |       |               |   | 387   |      
|                                            |  | Accounts receivable, net                  |                           |   | 2,183              |       |               |   | 2,955 |      
|                                            |  | Inventories                               |                           |   | 845                |       |               |   | 1,049 |      
|                                            |  | Deferred tax assets                       |                           |   | 1,278              |       |               |   | 1,102 |      
|                                            |  | Prepaid expenses and other current assets |                           |   | 1,013              |       |               |   | 969   |      
|                                            |  |                                           |                           |   |                    |       |               |  
|                                            |  |                                           | Total current assets      |   |                    | 7,257 |               |   |       | 7,934 | 
|Property, plant and equipment, net          |  |                                           | 2,744                     |   |                    |       | 2,697         |  
|Long-term investments                       |  |                                           | 4,404                     |   |                    |       | 4,677         |  
|Goodwill                                    |  |                                           | 2,181                     |   |                    |       | 2,126         |  
|Other acquisition-related intangible assets |  |                                           | 152                       |   |                    |       | 185           |  
|Other assets, net                           |  |                                           | 624                       |   |                    |       | 562           |  
|                                            |  |                                           |                           |   |                    |       |               |  
|                                            |  | $                                         | 17,362                    |   |                    | $     | 18,181        |  
|                                            |  |                                           |                           |   |                    |       |               |  
|LIABILITIES AND STOCKHOLDERS EQUITY        |  |                                           |                           |   |                    |       |               |  
|Current liabilities:                        |  |                                           |                           |   |                    |       |               |  
|                                            |  | Short-term borrowings                     |                           | $ | 9                  |       |               | $ | 3     |      
|                                            |  | Accounts payable                          |                           |   | 813                |       |               |   | 1,050 |      
|                                            |  | Accrued payroll-related liabilities       |                           |   | 450                |       |               |   | 488   |      
|                                            |  | Accrued liabilities and other             |                           |   | 1,599              |       |               |   | 1,688 |      
|                                            |  | Deferred revenues and customer deposits   |                           |   | 1,701              |       |               |   | 1,827 |      
|                                            |  | Income taxes payable                      |                           |   | 29                 |       |               |   | 90    |      
|                                            |  |                                           |                           |   |                    |       |               |  
|                                            |  |                                           | Total current liabilities |   |                    | 4,601 |               |   |       | 5,146 | 
|Long-term debt and other obligations        |  |                                           | 2,509                     |   |                    |       | 2,449         |  
|Total stockholders equity                  |  |                                           | 10,252                    |   |                    |       | 10,586        |  
|                                            |  |                                           |                           |   |                    |       |               |  
|                                            |  | $                                         | 17,362                    |   |                    | $     | 18,181        |  
|                                            |  |                                           |                           |   |                    |       |               |  

See accompanying notes.

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

|                                                   |                   |   |                                                                                          |                                                                |   |                    |        |                 |  |   |        |  
|-------------------------------------------------- | ----------------- | - | ---------------------------------------------------------------------------------------- | -------------------------------------------------------------- | - | ------------------ | ------ | --------------- |  | - | ------ | -
|                                                   |                   |   |                                                                                          |                                                                |   | Three Months Ended
|                                                   |                   |   |                                                                                          |                                                                |   |                   
|                                                   |                   |   |                                                                                          |                                                                |   | September 30, 2001 |        | October 1, 2000
|                                                   |                   |   |                                                                                          |                                                                |   |                    |        |                
|Cash flows from operating activities:              |                   |   |                                                                                          |                                                                |   |                    |        |                
|                                                   | Net income (loss) |   | $                                                                                        | (180                                                           | ) |                    | $      | 456             | 
|                                                   |                   |   | Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |                                                                |   |                    |        |                 |  |   |       
|                                                   |                   |   |                                                                                          | Depreciation and amortization                                  |   |                    | 245    |                 |  |   | 185    |  
|                                                   |                   |   |                                                                                          | Amortization of goodwill and other acquisition-related charges |   |                    | 28     |                 |  |   | 25     |  
|                                                   |                   |   |                                                                                          | Tax benefits from employee stock plans                         |   |                    | 25     |                 |  |   | 472    |  
|                                                   |                   |   |                                                                                          | Loss on strategic investments, net                             |   |                    | 19     |                 |  |   |       |  
|                                                   |                   |   |                                                                                          | Other                                                          |   |                    | 3      |                 |  |   | 54     |  
|                                                   |                   |   |                                                                                          | Changes in operating assets and liabilities:                   |   |                    |        |                 |  |   |        |  
|                                                   |                   |   |                                                                                          | Accounts receivable, net                                       |   |                    | 772    |                 |  |   | (266   | )
|                                                   |                   |   |                                                                                          | Inventories                                                    |   |                    | 204    |                 |  |   | (118   | )
|                                                   |                   |   |                                                                                          | Prepaids and other assets                                      |   |                    | (22    | )               |  |   | (156   | )
|                                                   |                   |   |                                                                                          | Accounts payable                                               |   |                    | (238   | )               |  |   | 219    |  
|                                                   |                   |   |                                                                                          | Other liabilities                                              |   |                    | (523   | )               |  |   | (170   | )
|                                                   |                   |   |                                                                                          |                                                                |   |                    |        |                
|Net cash provided by operating activities          |                   |   | 333                                                                                      |                                                                |   |                    | 701    |                
|                                                   |                   |   |                                                                                          |                                                                |   |                    |        |                
|Cash flows from investing activities:              |                   |   |                                                                                          |                                                                |   |                    |        |                
|                                                   |                   |   |                                                                                          | Purchases of investments                                       |   |                    | (4,281 | )               |  |   | (2,469 | )
|                                                   |                   |   |                                                                                          | Proceeds from sales and maturities of investments              |   |                    | 4,027  |                 |  |   | 2,076  |  
|                                                   |                   |   |                                                                                          | Acquisitions of property, plant and equipment                  |   |                    | (213   | )               |  |   | (244   | )
|                                                   |                   |   |                                                                                          | Acquisitions of spare parts and other assets                   |   |                    | (27    | )               |  |   | (9     | )
|                                                   |                   |   |                                                                                          | Payments for acquisitions, net of cash acquired                |   |                    | (40    | )               |  |   | (19    | )
|                                                   |                   |   |                                                                                          |                                                                |   |                    |        |                
|Net cash used in investing activities              |                   |   | (534                                                                                     | )                                                              |   |                    | (665   | )              
|                                                   |                   |   |                                                                                          |                                                                |   |                    |        |                
|Cash flows from financing activities:              |                   |   |                                                                                          |                                                                |   |                    |        |                
|                                                   |                   |   |                                                                                          | Principal payments on borrowings and other obligations         |   |                    | (3     | )               |  |   | (15    | )
|                                                   |                   |   |                                                                                          | Proceeds from issuance of common stock, net                    |   |                    | 19     |                 |  |   | 90     |  
|                                                   |                   |   |                                                                                          | Acquisition of treasury stock                                  |   |                    | (266   | )               |  |   | (156   | )
|                                                   |                   |   |                                                                                          |                                                                |   |                    |        |                
|Net cash used in financing activities              |                   |   | (250                                                                                     | )                                                              |   |                    | (81    | )              
|                                                   |                   |   |                                                                                          |                                                                |   |                    |        |                
|Net decrease in cash and cash equivalents          |                   |   | (451                                                                                     | )                                                              |   |                    | (45    | )              
|Cash and cash equivalents, beginning of period     |                   |   | 1,472                                                                                    |                                                                |   |                    | 1,849  |                
|                                                   |                   |   |                                                                                          |                                                                |   |                    |        |                
|Cash and cash equivalents, end of period           |                   | $ | 1,021                                                                                    |                                                                |   | $                  | 1,804  |                
|                                                   |                   |   |                                                                                          |                                                                |   |                    |        |                
|Supplemental disclosures of cash flow information: |                   |   |                                                                                          |                                                                |   |                    |        |                
|                                                   |                   |   |                                                                                          | Cash paid during the period for:                               |   |                    |        |                 |  |   |        |  
|                                                   |                   |   |                                                                                          | Interest                                                       |   | $                  | 56     |                 |  | $ | 56     |  
|                                                   |                   |   |                                                                                          |                                                                |   |                    |        |                
|                                                   |                   |   |                                                                                          | Income taxes                                                   |   | $                  | 50     |                 |  | $ | 205    |  
|                                                   |                   |   |                                                                                          |                                                                |   |                    |        |                

See accompanying notes.

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

| |  |                                                        |  |                                                          |  |                    |    |                 |  |   |    | 
| |  | ------------------------------------------------------ |  | -------------------------------------------------------- |  | ------------------ | -- | --------------- |  | - | -- | 
| |  |                                                        |  |                                                          |  | Three Months Ended
| |  |                                                        |  |                                                          |  |                   
| |  |                                                        |  |                                                          |  | September 30, 2001 |    | October 1, 2000
| |  |                                                        |  |                                                          |  |                    |    |                
| |  | Supplemental schedule of noncash investing activities: |  |                                                          |  |                    |    |                 |  |  
| |  |                                                        |  | Stock and options issued in connection with acquisitions |  | $                  | 29 |                 |  | $ | 19 | 
| |  |                                                        |  |                                                          |  |                    |    |                

See accompanying notes.

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

1. DESCRIPTION OF BUSINESS

Sun Microsystems, Inc. (Sun or the Company) is a leading worldwide provider
of products, services and support solutions for building and maintaining
network computing environments. Sun sells scalable computer and storage
systems, high-speed microprocessors, and a complete line of high-performance
software for operating networks, computing equipment and storage products. Sun
also provides a full range of services including support, professional services
and education. The Company markets its products primarily to business,
governmental and educational customers and operates in various product
categories across geographically diverse markets.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fiscal year

Suns first three quarters in fiscal 2002 end on September 30, December 30 and
March 31 (in fiscal 2001 the quarters ended on October 1, December 31 and April
1). The fourth quarter in all fiscal years ends on June 30.

Basis of presentation

The consolidated financial statements include the accounts of Sun and its
wholly owned subsidiaries. Intercompany accounts and transactions have been
eliminated. Certain amounts from prior years have been reclassified to conform
to the current year presentation.

While the quarterly financial information is unaudited, the financial
statements included in this report reflect all adjustments (consisting of
normal recurring adjustments) 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 condensed consolidated balance sheet as of
June 30, 2001 has been derived from the audited consolidated balance sheet as
of that date. The information included in this report should be read in
conjunction with the Companys Annual Report on Form 10-K for fiscal 2001,
filed with the Securities and Exchange Commissions on September 20, 2001.

Computation of net income (loss) per common share

Basic net income (loss) per common share is computed using the weighted average
number of common shares outstanding (adjusted for treasury stock and common
stock subject to repurchase activity) during the period. Diluted net income
(loss) per common share is computed using the weighted average number of common
and dilutive common equivalent shares (none and 232 million at September 30,
2001 and October 1, 2000, respectively) outstanding during the period. Dilutive
common equivalent shares consist primarily of stock options. At September 30,
2001, 110 million common equivalent shares were excluded from the computation
of diluted net income (loss) per common share because they were anti-dilutive.

Change in accounting

The Company changed its revenue recognition policy effective July 1, 2000,
based on guidance provided in Securities and Exchange Commission (SEC) Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial

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Statements, as
amended (SAB 101). The Companys adoption of SAB 101 resulted in a change in
accounting for certain product shipments where installation services were other
than perfunctory. The cumulative effect of the change on prior years retained
earnings resulted in a charge of $54 million (net of income taxes of $33
million) to fiscal 2001 income.

Recent pronouncements

On June 29, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141 (SFAS 141), Business
Combinations, which eliminates the pooling of interests method of accounting
for all business combinations initiated after June 30, 2001 and addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination. As of July 1, 2001, the Company adopted
this accounting standard.

In addition, as of July 1, 2001, the Company early-adopted SFAS 142, Goodwill
and Other Intangible Assets, which addresses the financial accounting and
reporting standards for goodwill and other intangible assets subsequent to
their acquisition. This accounting standard requires that goodwill no longer be
amortized, and instead, be tested for impairment on a periodic basis. In
addition, within six months of adopting the accounting standard, a transitional
impairment test must be completed, and any impairments identified must be
treated as a cumulative effect of a change in accounting principle. The Company
will complete its transitional impairment test during the quarter ending
December 30, 2001.

In accordance with SFAS 142, the Company discontinued the amortization of
goodwill effective July 1, 2001. In addition, the Company recharacterized
acquired workforce, which is no longer defined as an acquired intangible asset
under SFAS 141, and its related deferred tax liabilities as goodwill.
Accordingly, no acquired workforce amortization was recognized during the three
months ended September 30, 2001. For further discussion, see Note 5, Goodwill
and Other Acquisition-Related Intangible Assets.

A reconciliation of previously reported net income and earnings per share to
the amounts adjusted for the exclusion of goodwill amortization, net of the
related income tax effect, follows (in millions, except per share amounts):

|                            |                                        |                                    |      |                    |   |                 |     |      |   | 
|--------------------------- | -------------------------------------- | ---------------------------------- | ---- | ------------------ | - | --------------- | --- | ---- | - | 
|                            |                                        |                                    |      | Three Months Ended
|                            |                                        |                                    |      |                   
|                            |                                        |                                    |      | September 30, 2001 |   | October 1, 2000
|                            |                                        |                                    |      |                    |   |                
|Reported net income (loss)  |                                        | $                                  | (180 | )                  |   | $               | 456 |     
|                            | Add: Goodwill amortization, net of tax |                                    |      |                   |   |                 |     | 12   |  
|                            |                                        | Workforce amortization, net of tax |      |                    |  |                 |     |      | 1 | 
|                            |                                        |                                    |      |                    |   |                 |     |     
|Adjusted net income (loss)  |                                        | $                                  | (180 | )                  |   | $               | 469 |     
|                            |                                        |                                    |      |                    |   |                 |     |     
|Basic earnings per share:   |                                        |                                    |      |                    |   |                 |     |     
|                            | Reported earnings per share  basic    |                                    | $    | (0.06              | ) |                 | $   | 0.14 |  
|                            | Add: Goodwill amortization, net of tax |                                    |      |                   |   |                 |     | 0.01 |  
|                            |                                        | Workforce amortization, net of tax |      |                    |  |                 |     |      |  | 
|                            |                                        |                                    |      |                    |   |                 |     |     
|                            | Adjusted earnings per share  basic    |                                    | $    | (0.06              | ) |                 | $   | 0.15 |  
|                            |                                        |                                    |      |                    |   |                 |     |     
|Diluted earnings per share: |                                        |                                    |      |                    |   |                 |     |     
|                            | Reported earnings per share  diluted  |                                    | $    | (0.06              | ) |                 | $   | 0.13 |  
|                            | Add: Goodwill amortization, net of tax |                                    |      |                   |   |                 |     | 0.01 |  
|                            |                                        | Workforce amortization, net of tax |      |                    |  |                 |     |      |  | 
|                            |                                        |                                    |      |                    |   |                 |     |     
|                            | Adjusted earnings per share  diluted  |                                    | $    | (0.06              | ) |                 | $   | 0.14 |  
|                            |                                        |                                    |      |                    |   |                 |     |     

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On October 3, 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 supersedes SFAS 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed
of. The primary objectives of SFAS 144 are to develop one accounting model
based on the framework established in SFAS 121 for long-lived assets to be
disposed of by sale, and to address significant implementation issues. At this
time, Sun is evaluating the impact of SFAS 144 on its financial position and
results of operations. The Company will adopt SFAS 144 for its fiscal year
beginning July 1, 2002.

3. BUSINESS COMBINATIONS

The Company completed two acquisitions in the first quarter of fiscal 2002.
Suns acquisition of ISOPIA, Inc. (Isopia) on July 26, 2001 is described below.
The consolidated financial statements include the operating results of each
business from the date of acquisition. Pro forma results of operations have not
been presented because the effects of these acquisitions were not material on
either an individual or an aggregate basis.

The Company calculates amounts allocated to in-process research and development
(IPRD) using established valuation techniques in the high-technology industry
and expenses such amounts in the quarter that the related acquisition was
consummated if technological feasibility of the in-process technology has not
been achieved and no alternate future uses have been established. Research and
development costs to bring the products from the acquired companies to
technological feasibility are not expected to have a material impact on the
Companys future results of operations or cash flows. Intangible assets subject
to amortization are being amortized on a straight line basis over periods not
exceeding five years.

On July 26, 2001, Sun acquired Isopia, a corporation located in Toronto,
Canada, by means of a plan of arrangement. Isopia develops on-line software
that enables the delivery of on-line training and end-to-end management of
training products via the Internet. Sun acquired Isopia to enhance its position
in the corporate education market. Sun issued approximately 1.84 million
exchangeable shares at a fair value of $15.235 per share, or $28.0 million in
the aggregate, and paid $36.2 million in cash, in exchange for all of Isopias
outstanding stock. Sun also assumed all of Isopias 1.4 million outstanding
options at an estimated fair value of $1.3 million, and incurred $1.3 million
in acquisition costs, resulting in an aggregate purchase price of approximately
$66.8 million. This transaction was accounted for as a purchase, with the
excess of the purchase price over the estimated fair value of the net tangible
assets ($0.6 million) being allocated to developed technology ($3.7 million),
IPRD ($3.2 million), goodwill ($39.0 million), and related deferred tax
liabilities ($4.8 million). In addition, $25.1 million of the purchase price
was allocated to deferred compensation, which primarily represents the pro-rata
portion of the intrinsic value of unvested exchangeable shares held by certain
key Isopia shareholders at the date of the acquisition.

4. BALANCE SHEET DETAILS

Inventories are comprised of the following (in millions):

|                |  |                    |     |               |  |   |       | 
|--------------- |  | ------------------ | --- | ------------- |  | - | ----- | 
|                |  | September 30, 2001 |     | June 30, 2001
|                |  |                    |     |              
|Raw materials   |  | $                  | 449 |               |  | $ | 600   | 
|Work in process |  |                    | 129 |               |  |   | 137   | 
|Finished goods  |  |                    | 267 |               |  |   | 312   | 
|                |  |                    |     |               |  |   |       | 
|                |  | $                  | 845 |               |  | $ | 1,049 | 
|                |  |                    |     |               |  |   |       | 

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Long-term investments are comprised of the following (in millions):

|                      |  |                    |       |               |  |   |       | 
|--------------------- |  | ------------------ | ----- | ------------- |  | - | ----- | 
|                      |  | September 30, 2001 |       | June 30, 2001
|                      |  |                    |       |              
|Marketable securities |  | $                  | 4,068 |               |  | $ | 4,312 | 
|Strategic investments |  |                    | 336   |               |  |   | 365   | 
|                      |  |                    |       |               |  |   |       | 
|                      |  | $                  | 4,404 |               |  | $ | 4,677 | 
|                      |  |                    |       |               |  |   |       | 

5. GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS

Changes in the carrying amount of goodwill for the quarter ended September 30,
2001, are as follows (in millions):

|                                    |  |   |       | 
|----------------------------------- |  | - | ----- | 
|Balance as of July 1, 2001          |  | $ | 2,126 | 
|Workforce reclassified as goodwill  |  |   | 13    | 
|Goodwill acquired during the period |  |   | 42    | 
|                                    |  |   |       | 
|Balance as of September 30, 2001    |  | $ | 2,181 | 
|                                    |  |   |       | 

The Company will complete its transitional impairment test during the quarter
ending December 30, 2001.

Information regarding the Companys other acquisition-related intangible assets
is as follows (in millions):

|                     |  |                          |     |                     |  |     |      |        |  |                |     |             |  |   |     |  |  |   |      |   |  |   |     | 
|-------------------- |  | ------------------------ | --- | ------------------- |  | --- | ---- | ------ |  | -------------- | --- | ----------- |  | - | --- |  |  | - | ---- | - |  | - | --- | 
|                     |  | As of September 30, 2001 |     | As of June 30, 2001
|                     |  |                          |     |                    
|                     |  | Gross Carrying           |     | Accumulated         |  |     |      |        |  | Gross Carrying |     | Accumulated |  |   |     | 
|                     |  | Amount                   |     | Amortization        |  | Net |      | Amount |  | Amortization   |     | Net        
|                     |  |                          |     |                     |  |     |      |        |  |                |     |            
|Developed technology |  | $                        | 296 |                     |  | $   | (183 | )      |  | $              | 113 |             |  | $ | 290 |  |  | $ | (169 | ) |  | $ | 121 | 
|Customer base        |  |                          | 57  |                     |  |     | (23  | )      |  |                | 34  |             |  |   | 57  |  |  |   | (19  | ) |  |   | 38  | 
|Other                |  |                          | 7   |                     |  |     | (2   | )      |  |                | 5   |             |  |   | 53  |  |  |   | (27  | ) |  |   | 26  | 
|                     |  |                          |     |                     |  |     |      |        |  |                |     |             |  |   |     |  |  |   |      |   |  |   |     | 
|                     |  | $                        | 360 |                     |  | $   | (208 | )      |  | $              | 152 |             |  | $ | 400 |  |  | $ | (215 | ) |  | $ | 185 | 
|                     |  |                          |     |                     |  |     |      |        |  |                |     |             |  |   |     |  |  |   |      |   |  |   |     | 

Amortization expense of other acquisition-related intangible assets was $18
million for the three months ended September 30, 2001, and $3 million for the
three months ended October 1, 2000.

Estimated amortization expense for the fiscal years ending June 30, are as
follows (in millions):

|     |  |   |     | 
|---- |  | - | --- | 
|2002 |  | $ | 72  | 
|2003 |  |   | 68  | 
|2004 |  |   | 30  | 
|     |  |   |     | 
|     |  | $ | 170 | 
|     |  |   |     | 

6. AMENDMENT TO STRATEGIC DEVELOPMENT AND MARKETING AGREEMENT WITH AMERICA ONLINE, INC.

Sun and AOL-Time Warner (AOL) have a Strategic Alliance consisting of several
agreements between the parties, including a Strategic Development and Marketing
Agreement (SDMA). The SDMA has a term of three years ending March 2002.

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On September 25, 2001, Sun and AOL modified certain terms of the agreements to
give Sun operational control of the Strategic Alliance during the remaining
term of the SDMA. The amendment also fixed and accelerated the payment
obligations that were otherwise due by the parties through March 2002 under the
various agreements. As a result of these payments, which were made prior to
September 30, 2001, Sun recognized a prepaid asset of approximately $75 million
which will be amortized over the remaining term of the SDMA.

7. WORKFORCE REDUCTION AND FACILITY EXIT COSTS

Facility exit costs

In the fourth quarter of fiscal 2001, Sun elected to exit certain building
leases and building projects. The Company accrued approximately $75 million for
facility exit costs associated with this decision. The following activity
impacted the accrual during the first quarter of fiscal 2002: (1) $18 million
was charged against the accrual and (2) an additional $14 million was accrued
to reflect a change in our facility exit cost estimates. It is anticipated that
the facility exit activities will be completed by the end of fiscal 2002. These
charges are classified as selling, general and administrative expense.

Workforce reduction and facility exit costs subsequent to September 30, 2001

On October 5, 2001, the Company announced a program to reduce its worldwide
workforce by approximately 9% as well as consolidate excess facilities. As a
result of this program, the Company expects to record a charge of approximately
$500 million in the second quarter of fiscal 2002.

8. COMPREHENSIVE INCOME (LOSS)

The components of comprehensive income (loss), net of related taxes, are as
follows (in millions):

|                                                          |  |                    |      |                 |  |   |     |  
|--------------------------------------------------------- |  | ------------------ | ---- | --------------- |  | - | --- | -
|                                                          |  | Three Months Ended
|                                                          |  |                   
|                                                          |  | September 30, 2001 |      | October 1, 2000
|                                                          |  |                    |      |                
|Net income (loss)                                         |  | $                  | (180 | )               |  | $ | 456 |  
|Change in unrealized value on investments, net            |  |                    | 23   |                 |  |   | 50  |  
|Change in unrealized fair value of derivative instruments |  |                    | (28  | )               |  |   | 17  |  
|Translation adjustments, net                              |  |                    | 53   |                 |  |   | (6  | )
|                                                          |  |                    |      |                 |  |   |     |  
|                                                          |  | $                  | (132 | )               |  | $ | 517 |  
|                                                          |  |                    |      |                 |  |   |     |  

The components of accumulated other comprehensive income (loss), net of related
taxes, are as follows (in millions):

|                                                    |  |                    |     |               |  |   |     |  
|--------------------------------------------------- |  | ------------------ | --- | ------------- |  | - | --- | -
|                                                    |  |                   
|                                                    |  | September 30, 2001 |     | June
30, 2001
|                                                    |  |                    |     |              
|Unrealized gains on investments, net                |  | $                  | 76  |               |  | $ | 53  |  
|Unrealized gains (losses) on derivative instruments |  |                    | (13 | )             |  |   | 15  |  
|Cumulative translation adjustments                  |  |                    | (44 | )             |  |   | (97 | )
|                                                    |  |                    |     |               |  |   |     |  
|                                                    |  | $                  | 19  |               |  | $ | (29 | )
|                                                    |  |                    |     |               |  |   |     |  

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9. OPERATING SEGMENTS

The following table presents revenues, interdivision revenues and operating
income (loss) for the Companys segments for the three months ended September
30, 2001 and October 1, 2000. The Other segment consists of certain operating
product groups that did not meet the requirements for a reportable segment,
such as Suns Software Systems Group and iPlanet, and other miscellaneous
functions, such as Corporate and Global Sales Operations (in millions):

|                        |  |                     |       |            |  |       |     |       |  |   |      |   |  |   |       |  
|----------------------- |  | ------------------- | ----- | ---------- |  | ----- | --- | ----- |  | - | ---- | - |  | - | ----- | -
|                        |  | Computer Systems    |       | Enterprise |  |       |     |       |  |   |      |  
|                        |  | and Network Storage |       | Services   |  | Other |     | Total
|                        |  |                     |       |            |  |       |     |      
|September 30, 2001      |  |                     |       |            |  |       |     |       |  |   |      |   |  |   |       |  
|Revenues                |  | $                   | 1,910 |            |  | $     | 804 |       |  | $ | 147  |   |  | $ | 2,861 |  
|Interdivision revenues  |  |                     |      |            |  |       | 130 |       |  |   | (130 | ) |  |   |      |  
|Operating income (loss) |  |                     | 178   |            |  |       | 192 |       |  |   | (765 | ) |  |   | (395  | )
|October 1, 2000         |  |                     |       |            |  |       |     |       |  |   |      |   |  |   |       |  
|Revenues                |  |                     | 4,192 |            |  |       | 702 |       |  |   | 151  |   |  |   | 5,045 |  
|Interdivision revenues  |  |                     |      |            |  |       | 108 |       |  |   | (108 | ) |  |   |      |  
|Operating income (loss) |  | $                   | 1,528 |            |  | $     | 126 |       |  | $ | (956 | ) |  | $ | 698   |  

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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This quarterly report, including the following sections, contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, particularly statements relating to our
expectations as to product demand and products net revenue, our expectations
regarding product mix trends, our expectations regarding services net revenue,
revenues, results of operations, cash flows, products gross margin, our
expectations regarding our services employee head count, our expectations to
invest in our services business, our expectations regarding an approximate
charge of $500 million relating to reductions in workforce and facilities, our
expectations to continue developing systems and software products, our belief
that to maintain our competitive position, we must continue to invest in new
systems, software and microprocessor development as well as enhancing existing
products, our expectations regarding the dollar amount of R&D expenses and
managements objectives to invest 10-11% of its net revenues in R&D, our
expectations relating to selling, general and administrative expenses, our
continual focus on efforts to achieve additional operating efficiencies and to
review and improve our business processes, our continual focus on our cost
structure, our expectations to continue investing in technology, resources and
infrastructure to provide customers with an integrated portfolio of services,
our expectations regarding the volatility of our marketable securities
portfolio and interest income, our expected effective income tax benefit rate,
our intentions as to stock repurchase activity, our belief that we have
sufficient capital to meet our requirements for at least the next twelve
months, our expectations regarding the timing of payments to be made related to
workforce and facility reductions, our intent to focus on inventory management,
and as set forth in the section entitled Purchased in-process research and
development expenses: statements regarding our belief of the realization of
expected economic return from acquired in-processed technology and resulting or
related products, our ability to continue making substantial progress in the
development and commercialization of acquired technologies and the significant
assumptions underlying the valuation related to the IPRD.

These forward-looking statements involve risks and uncertainties, and the
cautionary statements set forth below and those contained in RISK FACTORS,
identify important factors that could cause actual results to differ materially
from those predicted in any such forward-looking statements. Such factors
include, but are not limited to, increased competition, continued adverse
changes in general economic conditions in the U.S. and internationally,
including adverse changes in the specific markets for our products, adverse
business conditions, adverse changes in customer order patterns, inability to
successfully manage inventory levels, lack of acceptance of new products,
pricing pressures, lack of success in technological advancements, risks
associated with foreign operations, failure to reduce costs or improve
operating efficiencies, and our ability to attract, hire and retain key and
qualified employees.

With respect to risks related to purchased in-process research and development,
there can be no assurance that any new technologies will be developed into
products, that such products will achieve either technological or commercial
success, or that we will receive any economic benefit from such products as a
result of delays in the development of the technology or release of such
products into the market, the complexity of the technology, our ability to
successfully manage product introductions, lack of customer acceptance,
competition and changes in technological trends, and fluctuations in market or
general economic conditions.

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RESULTS OF OPERATIONS

Net revenues
(dollars in millions)

|                     |                                  |   |                    |      |                 |   |        |      |   |  |       |    | 
|-------------------- | -------------------------------- | - | ------------------ | ---- | --------------- | - | ------ | ---- | - |  | ----- | -- | 
|                     |                                  |   | Three Months Ended |      |                 |   |       
|                     |                                  |   |                    |      |                 |   |       
|                     |                                  |   | September 30, 2001 |      | October 1, 2000 |   | Change
|                     |                                  |   |                    |      |                 |   |       
|Products net revenue |                                  | $ | 2,057              |      |                 | $ | 4,343  |      |   |  | (52.6 | )%
|                     | Percentage of total net revenues |   |                    | 71.9 | %               |   |        | 86.1 | % |  |       |    | 
|Services net revenue |                                  | $ | 804                |      |                 | $ | 702    |      |   |  | 14.5  | % 
|                     | Percentage of total net revenues |   |                    | 28.1 | %               |   |        | 13.9 | % |  |       |    | 
|Total net revenues   |                                  | $ | 2,861              |      |                 | $ | 5,045  |      |   |  | (43.3 | )%

Products net revenue

Products net revenue consists of revenue generated from the sale of our
scalable computer systems and storage products, high-speed microprocessors, and
our high-performance software for operating network computing equipment.
Products net revenue in the first quarter of fiscal 2002 as compared with the
corresponding period of fiscal 2001, was negatively impacted by weak global
macroeconomic conditions and the resulting reduction in information technology
(IT) spending. In the U.S., the September 11, 2001 terrorist attacks
exacerbated the negative effects the weak economy had on our products net
revenue.

Over 90% of our products net revenue in the first quarter of both fiscal 2002
and 2001 was generated by Computer Systems and Network Storage. Computer
Systems and Network Storage consists primarily of servers, storage and desktop
computers. Over 75% of the total decrease in products net revenue during the
first quarter of fiscal 2002 was attributable to a decrease in our server and
storage products revenue; this decline was primarily a result of the weaker
global macroeconomic conditions. Revenues from the sale of desktop systems
represented approximately 9% and 10% of products net revenue in the first
quarter of fiscal 2002 and 2001, respectively. We expect the current product
mix trend of the increasing percentage of products net revenue from server and
storage products and decreasing percentage of products net revenue from desktop
systems to continue in fiscal 2002.

If the current adverse macroeconomic conditions persist, we expect demand, and
therefore, products net revenue in the second quarter of fiscal 2002 will be
less than products net revenue in the comparable period in fiscal 2001. See
Net revenues by geographic area for further discussion and analysis regarding
specific regions.

Services net revenue

Services net revenue consists of Support Services, Professional Services and
Educational Services. The 14.5% growth in services net revenue in the first
quarter of fiscal 2002 compared with the first quarter of fiscal 2001 was
primarily due to an increase in revenue from Support Services, and to a lesser
degree an increase in revenue from Professional Services. Support Services
revenue growth was a result of: (1) a larger installed base of hardware product
units; and (2) a shift towards premium service and support
contracts. Professional Services revenue growth was a result of our
increased efforts to provide IT services to our new and existing
customers.

Because a significant portion of our services revenue is generated by contracts
related to product sales, our services net revenue could be negatively impacted
by the adverse macroeconomic conditions which are currently impacting our
products net revenue.

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Net revenues by geographic area
(dollars in millions)

|                                          |                            |   |                    |      |                 |   |        |      |   |  |       |    | 
|----------------------------------------- | -------------------------- | - | ------------------ | ---- | --------------- | - | ------ | ---- | - |  | ----- | -- | 
|                                          |                            |   | Three Months Ended |      |                 |   |       
|                                          |                            |   |                    |      |                 |   |       
|                                          |                            |   | September 30, 2001 |      | October 1, 2000 |   | Change
|                                          |                            |   |                    |      |                 |   |       
|U.S                                       |                            | $ | 1,321              |      |                 | $ | 2,699  |      |   |  | (51.1 | )%
|Americas-Other (Canada and Latin America) |                            |   | 128                |      |                 |   | 192    |      |   |  | (33.3 | )%
|                                          |                            |   |                    |      |                 |   |        |      |   |  |       |   
|Americas-Total                            |                            |   | 1,449              |      |                 |   | 2,891  |      |   |  | (49.9 | )%
|                                          | Percentage of net revenues |   |                    | 50.7 | %               |   |        | 57.3 | % |  |       |    | 
|EMEA (Europe, Middle East and Africa)     |                            |   | 862                |      |                 |   | 1,370  |      |   |  | (37.1 | )%
|                                          | Percentage of net revenues |   |                    | 30.1 | %               |   |        | 27.2 | % |  |       |    | 
|APAC (Asia, Australia and New Zealand)    |                            |   | 550                |      |                 |   | 784    |      |   |  | (29.8 | )%
|                                          | Percentage of net revenues |   |                    | 19.2 | %               |   |        | 15.5 | % |  |       |    | 
|Total net revenues                        |                            | $ | 2,861              |      |                 | $ | 5,045  |      |   |  | (43.3 | )%

|                   |                            |   |                    |      |                 |   |        |      |   |  |       |    | 
|------------------ | -------------------------- | - | ------------------ | ---- | --------------- | - | ------ | ---- | - |  | ----- | -- | 
|                   |                            |   | Three Months Ended |      |                 |   |       
|                   |                            |   |                    |      |                 |   |       
|                   |                            |   | September 30, 2001 |      | October 1, 2000 |   | Change
|                   |                            |   |                    |      |                 |   |       
|U.S                |                            | $ | 1,321              |      |                 | $ | 2,699  |      |   |  | (51.1 | )%
|                   | Percentage of net revenues |   |                    | 46.2 | %               |   |        | 53.5 | % |  |       |    | 
|International      |                            | $ | 1,540              |      |                 | $ | 2,346  |      |   |  | (34.4 | )%
|                   | Percentage of net revenues |   |                    | 53.8 | %               |   |        | 46.5 | % |  |       |    | 
|Total net revenues |                            | $ | 2,861              |      |                 | $ | 5,045  |      |   |  | (43.3 | )%

Starting late in the second quarter of fiscal 2001, there was an unexpected and
significant reduction in capital spending in many industries, which negatively
impacted U.S. demand for our products and resulted in a decline in our products
net revenue. This declining revenue trend has continued through the first
quarter of fiscal 2002, resulting in a 51.1% decrease in our U.S. net revenues
as compared with the corresponding period of fiscal 2001. The weak U.S.
economic situation evolved into a worldwide adverse macroeconomic condition,
which negatively impacted our non-U.S. revenues beginning in the fourth quarter
of fiscal 2001. In the first quarter of fiscal 2002, capital spending continued
to decline in many countries within the international regions in which we do
significant business. As a result, our first quarter of fiscal 2002 revenues
were lower in the majority of the countries within these international regions
as compared with the corresponding period of fiscal 2001.

Within the EMEA region, net revenues decreased by 37.1% (primarily contributed
by the United Kingdom, Northern Europe and Germany) during the first quarter of
fiscal 2002, as compared with the corresponding period of fiscal 2001. Northern
Europe is comprised primarily of the Scandinavian countries, the Netherlands,
Belgium/Luxembourg, Eastern European countries and Russia. Within the APAC
region, net revenues decreased by 29.8% (primarily contributed by Japan and
Korea) during the first quarter of fiscal 2002 as compared with the
corresponding period of fiscal 2001. Net revenues in the United Kingdom,
Northern Europe, Germany, Japan and Korea collectively accounted for more than
65% of the total decrease in international net revenues for the first quarter
of fiscal 2002 as compared with the corresponding period of fiscal 2001.

If the worldwide adverse macroeconomic conditions persist, our revenues, and
potentially our results of operations and cash flows, will continue to be
adversely affected.

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Gross margin
(dollars in millions)

|                      |                                    |   |                    |      |                 |   |        |      |   |  |       |    | 
|--------------------- | ---------------------------------- | - | ------------------ | ---- | --------------- | - | ------ | ---- | - |  | ----- | -- | 
|                      |                                    |   | Three Months Ended |      |                 |   |       
|                      |                                    |   |                    |      |                 |   |       
|                      |                                    |   | September 30, 2001 |      | October 1, 2000 |   | Change
|                      |                                    |   |                    |      |                 |   |       
|Products gross margin |                                    | $ | 770                |      |                 | $ | 2,190  |      |   |  | (64.8 | )%
|                      | Percentage of products net revenue |   |                    | 37.4 | %               |   |        | 50.4 | % |  |       |    | 
|Services gross margin |                                    | $ | 286                |      |                 | $ | 240    |      |   |  | 19.2  | % 
|                      | Percentage of services net revenue |   |                    | 35.6 | %               |   |        | 34.2 | % |  |       |    | 
|Total gross margin    |                                    | $ | 1,056              |      |                 | $ | 2,430  |      |   |  | (56.5 | )%
|                      | Percentage of net revenues         |   |                    | 36.9 | %               |   |        | 48.2 | % |  |       |    | 

Products gross margin

In the first quarter of fiscal 2002, products gross margin decreased by 13.0
percentage points as compared with the corresponding period of fiscal 2001. The
vast majority of the gross margin percentage decline in the first quarter of
fiscal 2002 was due to price reductions in our products sold and lower volumes
of products manufactured, which is a result of the weak global macroeconomic
conditions. In response to the decline in demand for our products since the
second half of fiscal 2001, we reduced the volume of products manufactured. This reduction in volume adversely impacts
our gross margin because certain of our manufacturing costs are fixed and have
been set for higher capacities. In addition, certain vendor component cost
improvements partially offset the impact of the pricing actions and reduced
product volumes in the first quarter of fiscal 2002 as compared with the
comparable period in fiscal 2001.

Should the global macroeconomic conditions continue to deteriorate further,
products gross margin could continue to be adversely impacted.

Services gross margin

The 1.4 percentage point increase in services gross margin in the first quarter
of fiscal 2002 as compared with the corresponding period of fiscal 2001
reflects the impact of: (1) decreased variable costs as a result of
discretionary spending controls instituted; and (2) decreased capital and
operating expenditures related to the deployment of service delivery
technologies and processes. These cost reductions in the first quarter of
fiscal 2002 as compared with the corresponding period of fiscal 2001 were
partially offset by: (1) expanded field service delivery headcount to support
increased customer service expectations and expected future growth in the
service business; (2) increased fixed infrastructure costs; and (3) increased
pricing pressure. While we anticipate our services employee headcount will
decline in the second quarter of fiscal 2002, although at a slower rate than
the planned approximately 9% Sun-wide headcount decrease, we will continue to
invest in technology, resources and infrastructure to provide our customers
with an integrated portfolio of proactive mission-critical services.

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Operating expenses
(dollars in millions)

|                                              |                            |   |                    |      |                 |   |        |      |   |  |       |    | 
|--------------------------------------------- | -------------------------- | - | ------------------ | ---- | --------------- | - | ------ | ---- | - |  | ----- | -- | 
|                                              |                            |   | Three Months Ended |      |                 |   |       
|                                              |                            |   |                    |      |                 |   |       
|                                              |                            |   | September 30, 2001 |      | October 1, 2000 |   | Change
|                                              |                            |   |                    |      |                 |   |       
|Research and development                      |                            | $ | 473                |      |                 | $ | 490    |      |   |  | (3.5  | )%
|                                              | Percentage of net revenues |   |                    | 16.5 | %               |   |        | 9.7  | % |  |       |    | 
|Selling, general and administrative           |                            | $ | 975                |      |                 | $ | 1,229  |      |   |  | (20.7 | )%
|                                              | Percentage of net revenues |   |                    | 34.1 | %               |   |        | 24.4 | % |  |       |    | 
|Goodwill amortization                         |                            | $ |                   |      |                 | $ | 13     |      |   |  | (100  | )%
|                                              | Percentage of net revenues |   |                    |     | %               |   |        | 0.3  | % |  |       |    | 
|Purchased in-process research and development |                            | $ | 3                  |      |                 | $ |       |      |   |  | 100   | % 
|                                              | Percentage of net revenues |   |                    | 0.1  | %               |   |        |     | % |  |       |    | 

On October 5, 2001, we announced a program to reduce our workforce by
approximately 9% and consolidate excess facilities. As a result of this
program, we expect to record a charge of approximately $500 million in the
second quarter of fiscal 2002, which will be reflected as a separate line item
in our Statements of Operations.

Research and development expenses

R&D expenses, as a percentage of total net revenues, increased to 16.5% for the
first quarter of fiscal 2002 from 9.7% for the corresponding period of fiscal
2001. The increase in the percentage of R&D expenses to total net revenues is
the result of a decrease in revenues in the first quarter of fiscal 2002 as
compared with the first quarter of fiscal 2001 (see Net revenues for further
discussion). In dollars, R&D expenses decreased by 3.5% to $473 million in the
first quarter of fiscal 2002, as compared with $490 million for the
corresponding period of fiscal 2001, while R&D headcount increased by 12.3% on
a year-over-year basis. The reduction in R&D expense is primarily due to a
reduction in incentive compensation costs. Our R&D spending reflects our
continued development of a broad line of scalable and reliable systems,
including servers, desktop systems, storage technologies and SPARC
microprocessors, as well as software products that utilize the Java platform,
Solaris Operating Environment software and Jini network technology. We
believe that to maintain our competitive position in a market characterized by
rapid rates of technological advancement, we must continue to invest
significant resources in new systems, software, and microprocessor development,
as well as continue to enhance existing products. We anticipate the dollar
amount of R&D expenses for the second quarter of fiscal 2002 will approximate
the amount incurred during the first quarter of fiscal 2002. It is managements
long-term objective to invest 10-11% of its net revenues in R&D.

Selling, general and administrative expenses

SG&A expenses, as a percentage of total net revenues, increased by 9.7
percentage points in the first quarter of fiscal 2002 as compared with the
first quarter of fiscal 2001. This increase is a result of the decline in
revenue in the current period. In dollars, SG&A expenses decreased $254 million
to $975 million in the first quarter of fiscal 2002 from $1,229 million in the
first quarter of fiscal 2001. As previously stated, late in the second quarter
of fiscal 2001 we experienced a sharp decline in product demand, and we
responded by reducing variable SG&A costs. During the first quarter of fiscal
2002, our SG&A expenses were lower than the corresponding period of fiscal
2001, which was primarily the result of: (1) lower variable compensation such
as commissions and bonuses, net of increased incremental headcount costs for
the same period; (2) significant cost cutting measures in the areas of travel,
advertising, marketing, facilities and other types of discretionary spending,
and (3) a decrease in the vacation accrual generated by our shutdown in July
2001.

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We are continuing to focus our efforts on achieving additional future operating
efficiencies by reviewing and improving upon existing business processes and
evaluating our cost structure. We anticipate the dollar amount of SG&A expenses
for fiscal 2002 will approximate the amount incurred during fiscal 2001.

Goodwill amortization

On July 1, 2001, we early-adopted SFAS 142. In accordance with SFAS 142,
goodwill is no longer amortized. See Note 2, Summary of Significant Accounting
Policies in the Notes to Condensed Consolidated Financial Statements
(Unaudited) for further discussion. In the first quarter of fiscal 2001, the
$13 million goodwill amortization is primarily attributable to the acquisitions
of MAXSTRAT, Star Division Corporation and Innosoft International, Inc.

Purchased in-process research and development expenses

Overview

In the first quarter of fiscal 2002, we acquired Isopia, Inc. (Isopia).
Purchased in-process research and development expenses (IPRD) of $3.2 million
in the first quarter of fiscal 2002 represented the write-off of in-process
technologies associated with Isopia. There was no purchased IPRD in the first
quarter of fiscal 2001. At the date of the Isopia acquisition, the projects
associated with the IPRD efforts had not yet reached technological feasibility
and the IPRD had no alternative future uses. Accordingly, the amount was
expensed on the acquisition date. See Note 3, Business Combinations in the
Notes to Condensed Consolidated Financial Statements (Unaudited) for further
discussion.

Valuation of IPRD

We used independent third-party sources to calculate the amounts allocated to
IPRD. In calculating IPRD, the independent third party used established
valuation techniques accepted in the high-technology industry. These
calculations gave consideration to relevant market sizes and growth factors,
expected industry trends, the anticipated nature and timing of new product
introductions by us and our competitors, individual product sales cycles, and
the estimated lives of each of the products underlying technology. The value
of the IPRD reflects the relative value and contribution of the acquired
research and development. We gave consideration to the R&Ds stage of
completion, the complexity of the work completed to date, the difficulty of
completing the remaining development, costs already incurred, and the projected
cost to complete the project in determining the value assigned to IPRD.

The values assigned to developed technologies related to each acquisition were
based upon discounted cash flows related to the existing products projected
income stream. Elements of the projected income stream included revenues, cost
of sales (COS), SG&A expenses, and R&D expenses. The discount rates used in the
present value calculations were generally derived from a weighted average cost
of capital, adjusted upward to reflect the additional risks inherent in the
development life cycle, including the useful life of the technology,
profitability levels of the technology, and the uncertainty of technology
advances that are known at the date of each acquisition. Because each acquired
entitys IPRD is unique, the discount rate, revenue, COS, R&D and SG&A
assumptions used varied on a case-by-case basis. We did not expect to achieve a
material amount of expense reductions or synergies, therefore the valuation
assumptions did not include significant anticipated cost savings.

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Valuation assumptions

The following table summarizes the significant assumptions underlying the
valuation related to the IPRD for the quarter ended September 30, 2001 (dollars
in millions):

|                 |  |      |     |                     |  |                |     |             |  |         |    |            |  |          |    |         |  |            |    |   |  |  |    |   |  |  |   |   |  |  |    |  
|---------------- |  | ---- | --- | ------------------- |  | -------------- | --- | ----------- |  | ------- | -- | ---------- |  | -------- | -- | ------- |  | ---------- | -- | - |  |  | -- | - |  |  | - | - |  |  | -- | -
|                 |  |      |     |                     |  |                |     |             |  |         |    |            |  |          |    |         |  | Percentage |    |   |  | 
|                 |  |      |     |                     |  | Estimated Cost |     | Percentage  |  | Average |    | of Revenue |  |          |    |        
|                 |  |      |     |                     |  | to Complete    |     | Complete at |  | Revenue |    |            |  | Discount
|                 |  |      |     |                     |  | Technology at  |     | Time of     |  | Growth  |    | Average    |  | Average  |    | Average |  | Rate      
|Acquired Company |  | IPRD |     | Time of Acquisition |  | Acquisition    |     | Rate        |  | COS     |    | SG&A       |  | R&D      |    | Used   
|                 |  |      |     |                     |  |                |     |             |  |         |    |            |  |          |    |        
|Isopia, Inc.     |  | $    | 3.2 |                     |  | $              | 0.6 |             |  |         | 45 | %          |  |          | 58 | %       |  |            | 13 | % |  |  | 35 | % |  |  | 2 | % |  |  | 26 | %

Overview of significant purchased IPRD in the quarter ended September 30, 2001

Included below are further details regarding the nature of the purchased
technology acquired during the quarter ended September 30, 2001.

Given the uncertainties of the commercialization process, we cannot assure you
that deviations from our estimates will not occur. We believe there is a
reasonable chance of realizing the economic return expected from the acquired
in-process technology. However, there is risk associated with the realization
of benefits related to commercialization of an in-process project due to
rapidly changing customer needs, complexity of technology and growing
competitive pressures. Therefore, we cannot assure you that any project will
meet with commercial success. Failure to successfully commercialize an
in-process project would result in the loss of the expected economic return
inherent in the fair value allocation. Additionally, the value of our
intangible assets acquired may become impaired.

At the acquisition date, Isopia was engaged in development activity associated
with LearnTone, a web-based training content delivery technology. As of the
acquisition date, this technology was still under development and substantial
efforts needed to be completed prior to the release of a commercially viable
product.

Overall status of business combinations prior to the quarter ended September
30, 2001

With respect to acquisitions completed prior to the quarter ended September 30,
2001, we believe that the projections we used in performing our valuations for
each acquisition are still valid in all material respects; however, we cannot
assure you that the projected results will be achieved. We continue to make
substantial progress related to the development and commercialization of
acquired technologies. Although we have experienced delays in the completion of
certain of our development efforts and their related commercialization, the
expected total costs to complete such technologies have not materially
increased, individually or in the aggregate. We periodically evaluate our
product development timeline and modify our overall business plan in response
to various factors. Modifications to our business plan include the reallocation
of resources among various alternative development projects. The impact of
delays in the realization of economic benefits related to acquired
technologies, individually or in the aggregate, has not been material to our
overall consolidated financial position or results of operations as of and for
the quarter ended September 30, 2001.

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Loss on strategic investments
(dollars in millions)

|                                   |                            |   |                    |     |                 |   |        |   |   |  |     |   | 
|---------------------------------- | -------------------------- | - | ------------------ | --- | --------------- | - | ------ | - | - |  | --- | - | 
|                                   |                            |   | Three Months Ended |     |                 |   |       
|                                   |                            |   |                    |     |                 |   |       
|                                   |                            |   | September 30, 2001 |     | October 1, 2000 |   | Change
|                                   |                            |   |                    |     |                 |   |       
|Loss on strategic investments, net |                            | $ | (19                | )   |                 | $ |       |   |   |  | 100 | %
|                                   | Percentage of net revenues |   |                    | 0.7 | %               |   |        |  | % |  |     |   | 

Our strategic investments portfolio, which is primarily comprised of public and
private technology companies, was negatively impacted by the decline in The
Nasdaq National Market and the adverse macroeconomic conditions of the
technology sector during the first quarter of fiscal 2002. The loss on
strategic investments in the first quarter of fiscal 2002 includes $21 million
related to a decline in market value that was considered other-than-temporary.
This loss was offset by realized gains of $2 million on sales of certain
marketable strategic equity securities.

Our decision to sell marketable strategic equity securities in the future will
depend upon numerous factors, including the condition of the stock market and
the status of the economy, many of which are not predictable nor within the
control of Sun.

Interest income, net
(dollars in millions)

|                     |                            |   |                    |     |                 |   |        |     |   |  |      |   | 
|-------------------- | -------------------------- | - | ------------------ | --- | --------------- | - | ------ | --- | - |  | ---- | - | 
|                     |                            |   | Three Months Ended |     |                 |   |       
|                     |                            |   |                    |     |                 |   |       
|                     |                            |   | September 30, 2001 |     | October 1, 2000 |   | Change
|                     |                            |   |                    |     |                 |   |       
|Interest income, net |                            | $ | 107                |     |                 | $ | 75     |     |   |  | 42.7 | %
|                     | Percentage
of net
revenues |   |                    | 3.7 | %               |   |        | 1.5 | % |  |      |   | 

The growth of interest income (net of interest expense) in the first quarter of
fiscal 2002 is primarily the result of a $48 million gain realized on the sale
of certain of our fixed income marketable securities.

The average duration of our portfolio of marketable securities increased from
1.12 years as of October 1, 2000 to 1.36 years as of September 30, 2001. In
general, we would expect that the volatility of this portfolio would increase
as its duration increases. Our interest income and expenses are sensitive
primarily to changes in the general level of U.S. interest rates. In this
regard, changes in U.S. interest rates affect the interest earned on our cash
equivalents and marketable securities. To mitigate the impact of fluctuations
in U.S. interest rates on our issued fixed-rate unsecured senior debt
securities, we have entered into interest rate swap transactions so that the
interest associated with these debt securities effectively becomes variable.

We expect our interest income in the second quarter of fiscal 2002 will
approximate our interest income earned (excluding realized gains) in the first
quarter of fiscal 2002.

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Income taxes
(dollars in millions)

|                                     |                                                                                           |   |                    |      |                 |   |        |      |   |  |      |    | 
|------------------------------------ | ----------------------------------------------------------------------------------------- | - | ------------------ | ---- | --------------- | - | ------ | ---- | - |  | ---- | -- | 
|                                     |                                                                                           |   | Three Months Ended |      |                 |   |       
|                                     |                                                                                           |   |                    |      |                 |   |       
|                                     |                                                                                           |   | September 30, 2001 |      | October 1, 2000 |   | Change
|                                     |                                                                                           |   |                    |      |                 |   |       
|Provision (benefit) for income taxes |                                                                                           | $ | (127               | )    |                 | $ | 263    |      |   |  | (148 | )%
|                                     | Percentage of income before taxes
and cumulative effect of change
in accounting principle |   |                    | 41.5 | %               |   |        | 34.0 | % |  |      |    | 

Our effective income tax benefit rate was 41.5% for the first quarter of fiscal
2002 as compared to an effective income tax provision rate of 34% for the first
quarter of fiscal 2001. The change in our effective income tax rate is due to a
change in our profitability.

We currently expect the fiscal 2002 effective income tax benefit rate to remain
at 41.5%. However, our previously discussed workforce reduction and facility
exit cost charges are expected to reduce our effective income tax benefit rate
by approximately 1.3% to 40.2% in the second quarter of fiscal 2002. Our
expected effective income tax rate is based on current tax law and current
estimates of earnings, and is subject to change.

LIQUIDITY AND CAPITAL RESOURCES
(dollars in millions)

|                                                      |                            |   |                    |      |               |   |        |      |   |   |      |     |  
|----------------------------------------------------- | -------------------------- | - | ------------------ | ---- | ------------- | - | ------ | ---- | - | - | ---- | --- | -
|                                                      |                            |   | September 30, 2001 |      | June 30, 2001 |   | Change
|                                                      |                            |   |                    |      |               |   |       
|Cash, cash equivalents, and non-strategic investments |                            | $ | 6,006              |      |               | $ | 6,171  |      |   | $ | (165 | )  
|                                                      | Percentage of total assets |   |                    | 34.6 | %             |   |        | 33.9 | % |   |      | 2.1 | %
|Days sales outstanding (DSO)                          |                            |   | 69                 |      |               |   | 67     |      |   |   | (3.0 | )% 
|Inventory turns                                       |                            |   | 11.8               |      |               |   | 12.5   |      |   |   | (5.6 | )% 

|                                          |  |   |                    |   |                 |   |        |   |  |   |      |   | 
|----------------------------------------- |  | - | ------------------ | - | --------------- | - | ------ | - |  | - | ---- | - | 
|                                          |  |   | Three Months Ended |   |                 |   |       
|                                          |  |   |                    |   |                 |   |       
|                                          |  |   | September 30, 2001 |   | October 1, 2000 |   | Change
|                                          |  |   |                    |   |                 |   |       
|Cash provided by operating activities     |  | $ | 333                |   |                 | $ | 701    |   |  | $ | (368 | )
|Cash used in investing activities         |  | $ | (534               | ) |                 | $ | (665   | ) |  | $ | 131  |  
|Cash used in financing activities         |  | $ | (250               | ) |                 | $ | (81    | ) |  | $ | (169 | )
|Net decrease in cash and cash equivalents |  | $ | (451               | ) |                 | $ | (45    | ) |  | $ | (406 | )

In the first quarter of fiscal 2002, cash, cash equivalents and non-strategic
investments decreased by $165 million from the fourth quarter of fiscal 2001.
The decrease in cash and cash equivalents (excluding non-strategic investments)
of $451 million primarily consists of the cash provided by operating activities
of $333 million, less the following investing and financing uses: (1) capital
spending of $213 million for real estate development and equipment additions to
support product development and infrastructure initiatives; (2) net purchases
of investments for $254 million; and (3) acquisition of treasury stock for $266
million.

Cash flows provided by operating activities were generated primarily from net
income (as adjusted for depreciation and amortization, and tax benefits from
employee stock plans) and decreases in accounts receivable (net) and inventory;
these cash influxes were partially offset by decreases in accounts payable and
other liabilities. Accounts receivable (net) decreased to $2,183 million at
September 30, 2001 from $2,955 million at June 30, 2001. The decrease in
accounts receivable (net) and increase in DSO were primarily due to the lower
volume of sales and timing of payments by customers. Inventory decreased to
$845 million at September 30, 2001 from $1,049 million at June 30, 2001. While
we were successful in decreasing inventory during the quarter, inventory turns
have slightly declined. The decrease in inventory turns is a reflection of
increased inventory for new product releases

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and lower shipment volumes
impacted by the continued decrease in demand for our products due to certain
unfavorable economic conditions. Inventory management will continue to be an
area of focus as we balance the need to maintain strategic inventory levels to
ensure competitive lead times with the risk of inventory obsolescence because
of rapidly changing technology and customer requirements. The accounts payable
and other liabilities decrease of $761 million in the first quarter of fiscal
2002 is primarily due to the reduction in operating expenses and the timing of
payments to vendors.

Decisions related to how much cash is used for investing and financing purposes
are influenced by the expected amount of cash to be provided by operations. In
addition, Sun continually evaluates whether we will acquire our outstanding
common stock under our various stock repurchase programs by considering various
factors such as our projected cash flow requirements and Suns stock price on
the open market.

We have a $500 million revolving credit facility (Facility) with a syndicate
of commercial banks. The Facility is available subject to compliance with
certain covenants. Sun was in compliance with the covenants as of September 30,
2001. No amounts were outstanding under the Facility at September 30, 2001.

In August 1999, we issued $1.5 billion in unsecured debt securities in four
tranches (the Senior Notes). The Senior Notes are due at various times
between August 2002 and August 2009 ($200 million due on August 15, 2002 and
bearing interest at 7%). In addition, we currently have effective shelf
registration statements on file with the Securities and Exchange Commission
that permit us to offer an additional $2.5 billion of debt securities and
common and preferred stock in one or more separate series, in amounts, at
prices, and on terms to be set forth in the prospectus contained in these
registration statements and in one or more supplements to the prospectus.

We believe that the liquidity provided by existing cash, cash equivalents, and
non-strategic investments, along with our borrowing arrangements described
above and cash generated from operations, will provide sufficient capital to
meet our requirements for at least the next 12 months. The cash expenditures
relating to workforce reductions and termination of facility agreements will be
substantially paid during the second and third quarters of fiscal 2002; any
facility agreements which we are unable to terminate but have exited will be
paid over their respective lease terms. We believe our level of financial
resources is a significant competitive factor in our industry and we may choose
at any time to raise additional capital through debt or equity financing to
strengthen our financial position, facilitate growth, and provide us with
additional flexibility to take advantage of business opportunities that may
arise.

RISK FACTORS

If we are unable to compete effectively with existing or new competitors, our
resulting loss of competitive position could result in price reductions, fewer
customer orders, reduced revenues, reduced margins, reduced levels of
profitability, and loss of market share.

We compete in the hardware and software products and services markets. These
markets are intensely competitive. If we fail to compete successfully in these
markets, the demand for our products and services would decrease. Any reduction
in demand could lead to a decrease in the prices of our products and services,
fewer customer orders, reduced revenues, reduced margins, reduced levels of
profitability, or loss of market share. These competitive pressures could
adversely affect our business and operating results.

Our competitors are some of the largest, most successful companies in the
world. They include International Business Machines Corporation (IBM),
Hewlett-Packard Company (HP), Compaq Computer Corporation (Compaq), and EMC
Corporation (EMC). Our future competitive performance depends on a number of
factors, including our ability to: continually develop and introduce new
products and services with better prices and performance than those offered by
our competitors; offer a wide range of products and solutions from small single

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processor systems to large complex enterprise level systems; offer solutions to
customers that operate effectively within a computing environment that includes
hardware and software from multiple vendors; offer products that are reliable
and that ensure the security of data and information; create products for which
third party software vendors will develop a wide range of applications; and
offer high quality products and services.

We also compete with systems manufacturers and resellers of systems based on
microprocessors from Intel Corporation (Intel) and the Windows family of
operating systems software from Microsoft Corporation (Microsoft). These
competitors include Dell Computer Corporation (Dell), HP, and Compaq, in
addition to Intel and Microsoft. This competition creates increased pressure,
including pricing pressure, on our workstation and lower-end server product
lines. We expect this competitive pressure to continue during fiscal year 2002,
with the anticipated releases of new software products from Microsoft and new
microprocessors from Intel.

The computer systems that we sell are made up of many products and components,
including workstations, servers, storage products, microprocessors, the Solaris
Operating Environment and other software products. In addition, we sell some of
these components separately and as add-ons to installed systems. If we are
unable to offer products and services that compete successfully with the
products and services offered by our competitors or that meet the complex needs
of our customers, our business and operating results could be adversely
affected. In addition, if in responding to competitive pressures, we are forced
to lower the prices of our products or services and we are unable to reduce our
component costs or improve operating efficiencies, our business and operating
results would be adversely affected.

Over the last several years, we have invested significantly in our storage
products business with a view to increasing the sales of these products both on
a standalone basis to customers using the systems of our competitors, and as
part of the systems that we sell. The intelligent storage products business is
intensely competitive. EMC is currently the leader in this market. We recently
entered into an agreement with Hitachi, LTD. and Hitachi Data Systems
Corporation (collectively Hitachi) under which we and Hitachi will
collaborate to provide hardware, software and support solutions. To the extent
we are unable to penetrate this market and compete effectively, our business
and operating results could be adversely affected.

The products we make are very complex. If we are unable to rapidly and
successfully develop and introduce new products and manage our inventory, we
will not be able to satisfy customer demand.

We operate in a highly competitive, quickly changing environment, and our
future success depends on our ability to develop and introduce new products
that our customers choose to buy. If we are unable to develop new products, our
business and operating results could be adversely affected. We must quickly
develop, introduce, and deliver in quantity new, complex systems, software, and
hardware products and components. These include products which incorporate our
new UltraSPARC III architecture and the Solaris Operating Environment which we
plan to continue to deploy during fiscal 2002, and other products. The
development process for these complicated products is very uncertain. It
requires high levels of innovation from both our product designers and the
suppliers of the components used in our products. The development process is
also lengthy and costly. If we fail to accurately anticipate our customers
needs and technological trends, or are otherwise unable to complete the
development of a product on a timely basis, we will be unable to introduce new
products into the market on a timely basis, if at all, and our business and
operating results would be adversely affected.

Software and hardware products such as ours may contain known as well as
undetected errors, and these defects may be found following introduction and
shipment of new products or enhancements to existing products. Although we
attempt to fix errors that we believe would be considered critical by our
customers prior to shipment, we may not be able to detect or fix all such
errors, and this could result in lost revenues and delays in customer
acceptance, and could be detrimental to our business and reputation.

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The manufacture and introduction of our new hardware and software products is
also a complicated process. Once we have developed a new product we face
several challenges in the manufacturing process. We must be able to manufacture
new products in high enough volumes so that we can have an adequate supply of
new products to meet customer demand. We must be able to manufacture the new
products at acceptable costs. This requires us to be able to accurately
forecast customer demand so that we can procure the appropriate components at
optimal costs. Forecasting demand requires us to predict order volumes, the
correct mixes of our software and hardware products, and the correct
configurations of these products. We must manage new product introductions,
like the continued deployments of systems which incorporate our new UltraSPARC
III architecture during fiscal 2002, to minimize the impact of customer-delayed
purchases of existing products in anticipation of new product releases. We must
also try to reduce the levels of older product and component inventories to
minimize inventory write-offs. If we have excess inventory, it may be necessary
to reduce our prices and write down inventory, which could result in lower
gross margins. Additionally, we may decide to adjust prices of our existing
products during this process to try to increase customer demand for these
products. If we are introducing new products at the same time or shortly after
the price adjustment, this will complicate our ability to anticipate customer
demand for our new products. We continuously evaluate the competitiveness of
our product and service offerings. These evaluations could also result in
repricing actions in the near term. Our future operating results would be
adversely affected if such repricing actions were to occur and we were unable
to mitigate the resulting margin pressure by maintaining a favorable mix of
systems, software, service and other products, or if we were unsuccessful in
achieving component cost reductions, operating efficiencies and increasing
volumes.

If we are unable to timely develop, manufacture, and introduce new products in
sufficient quantity to meet customer demand at acceptable costs, or if we are
unable to correctly anticipate customer demand for our new and existing
products, our business and operating results could be materially adversely
affected.

Our reliance on single source suppliers could delay product shipments and
increase our costs.

We depend on many suppliers for the necessary parts and components to
manufacture our products. There are a number of vendors producing the parts and
components that we need. However, there are some components that can only be
purchased from a single vendor due to price, quality, or technology reasons.
For example, we depend on Texas Instruments for our SPARC microprocessors and
on Sony for various monitors. If we were unable to purchase the necessary parts
and components from a particular vendor and we had to find a new supplier for
such parts and components, our new and existing product shipments could be
delayed, adversely affecting our business and operating results.

Our future operating results depend on our ability to purchase a sufficient
amount of components to meet the demands of our customers.

We depend heavily on our suppliers to timely design, manufacture, and deliver
the necessary components for our products. While many of the components we
purchase are standard, we do purchase some components, specifically color
monitors and custom memory integrated circuits such as static random access
memories (SRAMS) and video random access memories (VRAMS), that require long
lead times to manufacture and deliver. Long lead times make it difficult for us
to plan component inventory levels in order to meet the customer demand for our
products. In addition, in the past, we have experienced shortages in certain of
our components (specifically, dynamic random access memories (DRAMS) and
SRAMS). If a component delivery from a supplier is delayed, if we experience a
shortage in one or more components, or if we are unable to provide for adequate
levels of component inventory, our new and existing product shipments could be
delayed and our business and operating results could be adversely affected.

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Since we order our components (and in some cases commit to purchase) from
suppliers in advance of receipt of customer orders for our products which
include these components, we face a substantial inventory risk.

As part of our component inventory planning, we frequently pay certain
suppliers well in advance of receipt of customer orders. For example, we often
enter into noncancelable purchase commitments with vendors early in the
manufacturing process of our microprocessors to make sure we have enough of
these components for our new products to meet customer demand. Because the
design and manufacturing process for these components is very complicated it is
possible that we could experience a design or manufacturing flaw that could
delay or even prevent the production of the components for which we have
previously committed to pay. We also face the risk of ordering too many
components, or conversely, not enough components, since the orders are based on
the forecasts of customer orders rather than actual orders. If we cannot change
or be released from the noncancelable purchase commitments, we could incur
significant costs from the purchase of unusable components, due to a delay in
the production of the components or as a result of inaccurately predicting
component orders in advance of customer orders. Our business and operating
results could be adversely affected as a result of these increased costs.

Delays in product development or customer acceptance and implementation of new
products and technologies could seriously harm our business.

Generally, the computer systems we sell to customers incorporate hardware and
software products that we sell, such as UltraSPARC microprocessors, the Solaris
Operating Environment and Sun StorEdge storage products. Any delay in the
development of the software and hardware included in our systems could delay
our shipment of these systems. Delays in the development and introduction of
our products may occur for various reasons. For example, delays in software
development could delay shipments of related new hardware products.

In addition, if customers decided to delay the adoption and implementation of
new releases of our Solaris Operating Environment this could also delay
customer acceptance of new hardware products tied to that release. Adopting a
new release of an operating environment requires a great deal of time and money
for a customer to convert its systems to the new release. The customer must
also work with software vendors who port their software applications to the new
operating system and make sure these applications will run on the new operating
system. As a result, customers may decide to delay their adoption of a new
release of an operating system because of the cost of a new system and the
effort involved to implement it. Such delays in product development and
customer acceptance and implementation of new products could adversely affect
our business.

If we are unable to continue generating substantial revenues from international
sales our business could be adversely affected.

Currently, more than half of our revenues come from international sales. Our
ability to sell our products internationally is subject to a number of risks.
General economic and political conditions in each country could adversely
affect demand for our products and services in these markets. Currency exchange
rate fluctuations could result in lower demand for our products, as well as
currency translation losses. Changes to and compliance with a variety of
foreign laws and regulations may increase our cost of doing business in these
jurisdictions. Trade protection measures and import and export licensing
requirements subject us to additional regulation and may prevent us from
shipping products to a particular market, and increase our operating costs.

We expect our quarterly revenues and operating results to fluctuate for a
number of reasons.

Future operating results will continue to be subject to quarterly fluctuations
based on a wide variety of factors, including:

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Seasonality.Our sequential quarterly operating results usually fluctuate
downward in the first quarter of each fiscal year when compared with the
immediately preceding fourth quarter.

Acquisitions/Alliances.If, in the future, we acquire technologies, products,
or businesses, or we form alliances with companies requiring technology
investments or revenue commitments we will face a number of risks to our
business. The risks we may encounter include those associated with integrating
or co-managing operations, personnel, and technologies acquired or licensed,
and the potential for unknown liabilities of the acquired or combined business.
Also, we early-adopted the new Statement of Financial Accounting Standards No.
142 (SFAS 142) Goodwill and Other Intangible Assets, as of July 1, 2001.
Accordingly, our goodwill and other intangible assets that have an indefinite
useful life are no longer amortized but instead reviewed at least annually for
impairment. If general macroeconomic conditions continue to deteriorate,
affecting our business and operating results over the long-term, we could be
required to record impairment charges related to goodwill and other intangible
assets, which could adversely affect our financial results. In addition, our
business and operating results could be adversely affected if our acquisition
or alliance activities are not successful.

Significant Customers and Industries.Sales to a single customer (General
Electric Company (GE)) accounted for approximately 13%, 19% and 15% of our
fiscal 2001, 2000 and 1999 net revenues, respectively. The major customer
revenues in fiscal 2001, 2000 and 1999 were primarily generated by two GE
subsidiaries: (1) MRA Systems, Inc., a reseller (10%, 16% and 14% of net
revenues in 2001, 2000 and 1999, respectively), acquired by GE in fiscal 1999;
and (2) GE Capital, a finance/leasing company (2%, 3% and 1% of net revenues in
fiscal 2001, 2000 and 1999, respectively). Revenue is generated with the
finance/leasing company whenever our customer elects to lease equipment; in
such cases, we sell the equipment to the leasing company. Our business could be
adversely affected if GE or any other significant customer terminated its
business relationship with us or significantly reduced the amount of business
it did with us.

We depend on the telecommunications, financial services and manufacturing
industries for a significant portion of our revenues. Significant reduction in
technology capital spending in these industries caused by worsening economic
conditions, such as we experienced over the last two quarters of fiscal 2001
and the first quarter of fiscal 2002, may continue to result in decreased
revenues and earnings. Our revenues are dependent on the level of technology
capital spending in the United States and international economies. A number of
telecommunications companies recently filed for bankruptcy protection, and
others announced significant reductions and deferrals in capital spending. If
capital spending continues to decline in these industries over an extended
period of time, our business will continue to be adversely affected.

Our acquisition and alliance activities could disrupt our ongoing business.

We intend to continue to make investments in companies, products, and
technologies, either through acquisitions or investment alliances. For example,
we have purchased several companies in the past and have also formed alliances,
such as our recently announced alliance with Hitachi for the collaboration on,
and delivery of, a broad range of storage products and services. Acquisitions
and alliance activities often involve risks, including: difficulty in
assimilating the acquired operations and employees; difficulty in managing
product codevelopment activities with our alliance partners; retaining the key
employees of the acquired operation; disruption of our ongoing business;
inability to successfully integrate the acquired technology and operations into
our business and maintain uniform standards, controls, policies, and
procedures; and lacking the experience to enter into new product or technology
markets.

Failure to manage these alliance activities effectively and to integrate
entities or assets that we acquire could adversely affect our operating results
or financial condition.

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We depend on key employees and face competition in hiring and retaining
qualified employees.

Our employees are vital to our success, and our key management, engineering,
and other employees are difficult to replace. We generally do not have
employment contracts with our key employees. Further, we do not maintain key
person life insurance on any of our employees. The expansion of high technology
companies in Silicon Valley and Colorado, as well as in other regions, has
increased demand and competition for highly qualified technical personnel. We
may not be able to attract, assimilate, or retain highly qualified technical
employees in the future. These factors could adversely affect our business.

Business interruptions could adversely affect our business.

Our operations are vulnerable to interruption by fire, earthquake, power loss,
telecommunications failure and other events beyond our control. A substantial
portion of our facilities, including our corporate headquarters and other
critical business operations, are located near major earthquake faults. In
addition, many of our facilities are located on filled land and, therefore, may
be more susceptible to damage if an earthquake occurs. We do not carry
earthquake insurance for direct earthquake related losses. Our facilities in
the State of California, including our corporate headquarters and other
critical business operations, may be subject to electrical blackouts as a
consequence of a shortage of available electrical power. In the event these
blackouts occur, they could disrupt the operations of our affected facilities.
In addition, we do not carry business interruption insurance or carry financial
reserves against business interruptions arising from earthquakes and certain
electrical blackouts. If a business interruption occurs, our business could be
adversely affected.

Our marketable strategic equity securities are subject to equity price risk and
their value may fluctuate.

From time to time, we make equity investments for the promotion of business and
strategic objectives in publicly traded and non-publicly traded companies. The
market price and valuation of the securities that we hold in these companies
may fluctuate due to market conditions and other circumstances over which we
have little or no control. Many of the companies in which we have invested have
experienced significant volatility in their stock prices. We typically do not
attempt to reduce or eliminate this equity price risk, through hedging or
similar techniques, and market price and valuation fluctuations could impact
our financial results. To the extent that the fair value of these securities
was less than our cost over an extended period of time, our net income would be
reduced. See Item 3. Quantitative and Qualitative Disclosures about Market
Risk for further discussion.

Our stock price can be volatile.

Our stock price, like that of other technology companies, can be volatile. For
example, our stock price can be affected by many factors such as quarterly
increases or decreases in our earnings; speculation in the investment community
about our financial condition or results of operations and changes in revenue
or earnings estimates, announcement of new products, technological
developments, alliances, acquisitions or divestitures by us or one of our
competitors. In addition, general adverse macroeconomic and market conditions
unrelated to our performance may also adversely affect our stock price.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk related to changes in interest rates, foreign
currency exchange rates, and equity security prices. To mitigate some of these
risks, we utilize derivative financial instruments to hedge these exposures. We
do not use derivative financial instruments for speculative or trading
purposes. All of the potential changes noted below are based on sensitivity
analyses performed on our financial position at September 30, 2001. Actual
results may differ materially.

Interest Rate Sensitivity

Our investment portfolio consists primarily of fixed income instruments with an
average duration of 1.36 years as of September 30, 2001. The primary objective
of our investments in debt securities is to preserve principal while maximizing
yields, without significantly increasing risk. These available-for-sale
securities are subject to interest rate risk. The fair market value of these
securities may fluctuate with changes in interest rates. A sensitivity analysis
was performed on this investment portfolio based on a modeling technique that
measures the hypothetical fair market value changes (using a three month
horizon) that would result from a parallel shift in the yield curve of plus 150
basis points (BPS). Based on this analysis, a hypothetical 150 BPS increase in
interest rates would result in an approximate $50 million decrease in the fair
value of our investments in debt securities as of September 30, 2001.

We also have various interest-rate swap agreements which modify the interest
characteristics of the Senior Notes so that the interest payable on the Senior
Notes effectively becomes variable and thus matches the variable interest rate
received from our cash and marketable securities. Accordingly, interest rate
fluctuations impact the fair value of our Senior Notes outstanding, which will
be offset by corresponding changes in the fair value of the swap agreements.
However, by entering into these swap agreements, we have a cash flow exposure
related to the risk interest rates may increase. For example, a hypothetical
150 BPS increase in interest rates would result in an approximate $20 million
decrease in cash.

Foreign Currency Exchange Risk

The majority of our revenue, expense, and capital purchasing activities are
transacted in U.S. dollars. However, since a portion of our operations consists
of manufacturing and sales activities outside of the U.S., we enter into
transactions in other currencies, primarily the Japanese yen, the British pound
and the Euro. We enter into foreign exchange forward and option contracts to
hedge certain balance sheet exposures and intercompany balances against future
movements in foreign exchange rates. Based on our foreign currency exchange
instruments outstanding at September 30, 2001, we estimate a maximum potential
one-day loss in fair value of approximately $15 million, using a Value-at-Risk
(VAR) model. The VAR model estimates were made assuming normal market
conditions and a 95% confidence level. We used a Monte Carlo simulation type
model that valued foreign currency instruments against three thousand randomly
generated market price paths. Anticipated transactions, firm commitments,
receivables, and accounts payable denominated in foreign currencies were
excluded from the model. The VAR model is a risk estimation tool, and as such
is not intended to represent actual losses in fair value that will be incurred
by us. Additionally, as we utilize foreign currency instruments for hedging
anticipated and firmly committed transactions, a loss in fair value for those
instruments is generally offset by increases in the value of the underlying
exposure. Foreign currency fluctuations did not have a material impact on our
results of operations and financial position during the first three months of
fiscal 2002.

Euro Conversion

On January 1, 1999, certain member countries of the European Union established
fixed conversion rates between their existing currencies and the Euro. The
transition period for the introduction of the Euro ends June 30, 2002. Issues
facing us as a result of the introduction of the Euro include converting
information technology systems,

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reassessing currency risk, negotiating and
amending licensing agreements and contracts, and processing tax and accounting
records. We continue to address these issues and do not currently expect the
Euro to have a material effect on our financial conditions or results of
operations.

Equity Security Price Risk

We are exposed to price fluctuations on the marketable portion of equity
securities included in our portfolio of strategic investments. These
investments are generally in companies in the high-technology industry sector,
many of which are small capitalization stocks. We typically do not attempt to
reduce or eliminate the market exposure on these securities. A 20% adverse
change in equity prices would result in an approximate $6 million decrease in
the fair value of our available-for-sale strategic equity investments as of
September 30, 2001. At September 30, 2001, three equity securities represented
approximately $22 million of the total fair value of the marketable strategic
equity securities of $31 million.




PART II  OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

From time to time, Sun becomes involved in claims and legal proceedings that
arise in the ordinary course of its business. We are currently subject to
several such claims and legal proceedings. We do not believe that the
resolution of these legal proceedings will have a material adverse effect on
us.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

|         |  |                                                                                                   
|-------- |  | --------------------------------------------------------------------------------------------------
|10.65(1) |  | Registrants 1990 Long-Term Equity Incentive Plan, as amended on August 15, 2001.                 
|         |  |                                                                                                   
|10.82A   |  | Letter Amendment to Revolving Credit Agreement dated November 9, 2001.                            
|         |  |                                                                                                   
|10.85    |  | Registrants Section 162(m) Performance-Based Executive Bonus Plan dated August 15, 2001.         
|         |  |                                                                                                   
|         |  | (1) Incorporated by reference to Registrants Registration on Form
S-8 filed on November 13, 2001.

(b)  Reports on Form 8-K

No reports on Form 8-K were filed during the first quarter of fiscal
2002.

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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. LehmanExecutive Vice President, Corporate
Resources
and Chief Financial Officer
(Principal Financial Officer)

| |                                                                                   
| | ----------------------------------------------------------------------------------
| | /s/ Michael L. Popov                                                              
| |                                                                                   
| | Michael L. PopovVice President and Corporate
Controller
(Chief Accounting Officer)

Dated: November 14, 2001

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EXHIBITS INDEX

(a)  Exhibits

|         |  |                                                                                                   
|-------- |  | --------------------------------------------------------------------------------------------------
|10.65(1) |  | Registrants 1990 Long-Term Equity Incentive Plan, as amended on August 15, 2001.                 
|         |  |                                                                                                   
|10.82A   |  | Letter Amendment to Revolving Credit Agreement dated November 9, 2001.                            
|         |  |                                                                                                   
|10.85    |  | Registrants Section 162(m) Performance-Based Executive Bonus Plan dated August 15, 2001.         
|         |  |                                                                                                   
|         |  | (1) Incorporated by reference to Registrants Registration on Form
S-8 filed on November 13, 2001.

(b)  Reports on Form 8-K

No reports on Form 8-K were filed during the first quarter of fiscal
2002.