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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 March 31, 2002
 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                                                       |  | 94-2805249                          
|(State or other jurisdiction of incorporation or organization) |  | (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)



---



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 practicable date.

|                                  |  |                              
|--------------------------------- |  | -----------------------------
|Class                             |  | Outstanding at April 25, 2002
|Common Stock  $0.00067 par value |  | 3,246,270,224                



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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 10.84                 
|Exhibit 10.94                 
|Exhibit 10.95                 



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##### Table of Contents



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                                  |    | 6 
|Item 2.                        | Managements Discussion and Analysis of Financial Condition and Results of Operations |    | 15
|Item 3.                        | Quantitative and Qualitative Disclosures About Market Risk                            |    | 33
|                              
|PART II  OTHER INFORMATION   
|                              
|Item 1.                        | Legal Proceedings                                                                     |    | 34
|Item 6.                        | Exhibits and Reports on Form 8-K                                                      |    | 34
|                              
|SIGNATURES                     |                                                                                       | 36



2



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##### Table of Contents






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 |       |      | Nine Months Ended |      
|                                                                               |                                                                          |                                                                                           |                          |                         |        | March 31, 2002     |       |      | April 1, 2001     |       |        | March 31, 2002 |         |       | April 1, 2001 |     
|Net revenues:                                                                  |                                                                          |                                                                                           |                          |                         |        |                    |       |      |                   |       |        |                |         |       |               |     
|                                                                               |                                                                          | Products                                                                                  |                          |                         |        | $                  | 2,269 |      |                   | $     | 3,262  |                |         | $     | 6,586         |      |        | $      | 11,922 | 
|                                                                               |                                                                          | Services                                                                                  |                          |                         | 838    |                    |       |      | 833               |       |        |                | 2,490   |       |               |      | 2,333  |       
|                                                                               |                                                                          |                                                                                           |                          |                         |        |                    |       |      |                   |       |        |               
|                                                                               |                                                                          |                                                                                           | Total net revenues       |                         |        | 3,107              |       |      |                   | 4,095 |        |                |         | 9,076 |               |      |        | 14,255 |       
|Cost of sales:                                                                 |                                                                          |                                                                                           |                          |                         |        |                    |       |      |                   |       |        |                |         |       |               |     
|                                                                               |                                                                          | Cost
of sales  products                                                                  |                          |                         | 1,306  |                    |       |      | 1,864             |       |        |                | 4,030   |       |               |      | 6,170  |       
|                                                                               |                                                                          | Cost
of sales  services                                                                  |                          |                         | 494    |                    |       |      | 539               |       |        |                | 1,544   |       |               |      | 1,519  |       
|                                                                               |                                                                          |                                                                                           |                          |                         |        |                    |       |      |                   |       |        |               
|                                                                               |                                                                          |                                                                                           | Total cost of sales      |                         |        | 1,800              |       |      |                   | 2,403 |        |                |         | 5,574 |               |      |        | 7,689  |       
|                                                                               |                                                                          |                                                                                           |                          |                         |        |                    |       |      |                   |       |        |               
|                                                                               |                                                                          |                                                                                           |                          | Gross margin            |        |                    | 1,307 |      |                   |       | 1,692  |                |         |       | 3,502         |      |        |        | 6,566  | 
|Operating expenses:                                                            |                                                                          |                                                                                           |                          |                         |        |                    |       |      |                   |       |        |                |         |       |               |     
|                                                                               |                                                                          | Research and development                                                                  |                          |                         | 468    |                    |       |      | 486               |       |        |                | 1,369   |       |               |      | 1,473  |       
|                                                                               |                                                                          | Selling, general and administrative                                                       |                          |                         | 991    |                    |       |      | 948               |       |        |                | 2,918   |       |               |      | 3,371  |       
|                                                                               |                                                                          | Restructuring charges                                                                     |                          |                         | (4)    |                    |       |      |                  |       |        |                | 521     |       |               |      |       |       
|                                                                               |                                                                          | Goodwill amortization                                                                     |                          |                         |       |                    |       |      | 105               |       |        |                |        |       |               |      | 160    |       
|                                                                               |                                                                          | Purchased in-process research and development                                             |                          |                         |       |                    |       |      | 1                 |       |        |                | 3       |       |               |      | 72     |       
|                                                                               |                                                                          |                                                                                           |                          |                         |        |                    |       |      |                   |       |        |               
|                                                                               |                                                                          |                                                                                           | Total operating expenses |                         |        | 1,455              |       |      |                   | 1,540 |        |                |         | 4,811 |               |      |        | 5,076  |       
|                                                                               |                                                                          |                                                                                           |                          |                         |        |                    |       |      |                   |       |        |               
|                                                                               |                                                                          |                                                                                           |                          | Operating income (loss) |        |                    | (148) |      |                   |       | 152    |                |         |       | (1,309)       |      |        |        | 1,490  | 
|Loss on equity investments, net                                                |                                                                          |                                                                                           | (23)                     |                         |        |                    | (13)  |      |                   |       | (81)   |                |         |       | (12)          |     
|Interest income, net                                                           |                                                                          |                                                                                           | 77                       |                         |        |                    | 110   |      |                   |       | 252    |                |         |       | 276           |     
|                                                                               |                                                                          |                                                                                           |                          |                         |        |                    |       |      |                   |       |        |               
|                                                                               |                                                                          | Income (loss) before income taxes and cumulative
effect of change in accounting principle |                          |                         | (94)   |                    |       |      | 249               |       |        |                | (1,138) |       |               |      | 1,754  |       
|Provision (benefit) for income taxes                                           |                                                                          |                                                                                           | (57)                     |                         |        |                    | 113   |      |                   |       | (490)  |                |         |       | 685           |     
|                                                                               |                                                                          |                                                                                           |                          |                         |        |                    |       |      |                   |       |        |               
|                                                                               |                                                                          | Income (loss) before cumulative effect of change in
accounting principle                  |                          |                         | (37)   |                    |       |      | 136               |       |        |                | (648)   |       |               |      | 1,069  |       
|Cumulative effect of change in accounting principle, net                       |                                                                          |                                                                                           |                         |                         |        |                    |      |      |                   |       |       |                |         |       | (54)          |     
|                                                                               |                                                                          |                                                                                           |                          |                         |        |                    |       |      |                   |       |        |               
|Net income (loss)                                                              |                                                                          | $                                                                                         | (37)                     |                         |        | $                  | 136   |      |                   | $     | (648)  |                |         | $     | 1,015         |     
|                                                                               |                                                                          |                                                                                           |                          |                         |        |                    |       |      |                   |       |        |                |         |      
|Net
income (loss) per common share  basic:                                    |                                                                          |                                                                                           |                          |                         |        |                    |       |      |                   |       |        |                |         |       |               |     
|                                                                               |                                                                          | Income (loss) before cumulative effect of change in
accounting principle                  |                          | $                       | (0.01) |                    |       | $    | 0.04              |       |        | $              | (0.20)  |       |               | $    | 0.33   |       
|Cumulative effect of change in accounting principle                            |                                                                          |                                                                                           |                         |                         |        |                    |      |      |                   |       |       |                |         |       | (0.02)        |     
|                                                                               |                                                                          |                                                                                           |                          |                         |        |                    |       |      |                   |       |        |               
|Net income (loss) per common share  basic                                     |                                                                          | $                                                                                         | (0.01)                   |                         |        | $                  | 0.04  |      |                   | $     | (0.20) |                |         | $     | 0.31          |     
|                                                                               |                                                                          |                                                                                           |                          |                         |        |                    |       |      |                   |       |        |                |         |      
|Net income (loss) per common share  diluted:                                  |                                                                          |                                                                                           |                          |                         |        |                    |       |      |                   |       |        |                |         |       |               |     
|                                                                               | Income (loss) before cumulative effect of change in
accounting principle |                                                                                           | $                        | (0.01)                  |        |                    | $     | 0.04 |                   |       | $      | (0.20)         |         |       | $             | 0.31 |       
|                                                                               |                                                                          | Cumulative effect of change in accounting principle                                       |                          |                         |       |                    |       |      |                  |       |        |                |        |       |               |      | (0.01) |       
|                                                                               |                                                                          |                                                                                           |                          |                         |        |                    |       |      |                   |       |        |               
|Net income (loss) per common share  diluted                                   |                                                                          | $                                                                                         | (0.01)                   |                         |        | $                  | 0.04  |      |                   | $     | (0.20) |                |         | $     | 0.30          |     
|                                                                               |                                                                          |                                                                                           |                          |                         |        |                    |       |      |                   |       |        |                |         |      
|Shares used in the calculation of net income (loss) per
common share  basic   |                                                                          |                                                                                           | 3,245                    |                         |        |                    | 3,256 |      |                   |       | 3,242  |                |         |       | 3,230         |     
|                                                                               |                                                                          |                                                                                           |                          |                         |        |                    |       |      |                   |       |        |                |         |      
|Shares used in the calculation of net income (loss) per
common share  diluted |                                                                          |                                                                                           | 3,245                    |                         |        |                    | 3,417 |      |                   |       | 3,242  |                |         |       | 3,428         |     
|                                                                               |                                                                          |                                                                                           |                          |                         |        |                    |       |      |                   |       |        |                |         |      

See accompanying notes.

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

|                                                 |                                           |                           |        |                |       |   |               |       |       | 
|------------------------------------------------ | ----------------------------------------- | ------------------------- | ------ | -------------- | ----- | - | ------------- | ----- | ----- | 
|                                                 |                                           |                           |        | March 31, 2002 |       |   | June 30, 2001 |      
|                                                 |                                           |                           |        | (unaudited)   
|ASSETS                                           |                                           |                           |        |                |       |   |               |      
|Current assets:                                  |                                           |                           |        |                |       |   |               |      
|                                                 | Cash and cash equivalents                 |                           | $      | 1,672          |       |   | $             | 1,472 |      
|                                                 | Short-term investments                    |                           |        | 712            |       |   |               | 387   |      
|                                                 | Accounts receivable, net                  |                           |        | 2,407          |       |   |               | 2,955 |      
|                                                 | Inventories                               |                           |        | 554            |       |   |               | 1,049 |      
|                                                 | Deferred and prepaid tax assets           |                           |        | 1,733          |       |   |               | 1,102 |      
|                                                 | Prepaid expenses and other current assets |                           |        | 615            |       |   |               | 969   |      
|                                                 |                                           |                           |        |                |       |  
|                                                 |                                           | Total current assets      |        |                | 7,693 |   |               |       | 7,934 | 
|Property, plant and equipment, net               |                                           |                           | 2,512  |                |       |   | 2,697         |      
|Long-term marketable debt securities             |                                           |                           | 3,564  |                |       |   | 4,312         |      
|Goodwill                                         |                                           |                           | 2,182  |                |       |   | 2,126         |      
|Other acquisition-related intangible assets, net |                                           |                           | 121    |                |       |   | 185           |      
|Other non-current assets, net                    |                                           |                           | 802    |                |       |   | 927           |      
|                                                 |                                           |                           |        |                |       |  
|                                                 |                                           | $                         | 16,874 |                |       | $ | 18,181        |      
|                                                 |                                           |                           |        |                |       |   |              
|LIABILITIES AND STOCKHOLDERS EQUITY             |                                           |                           |        |                |       |   |               |      
|Current liabilities:                             |                                           |                           |        |                |       |   |               |      
|                                                 | Short-term borrowings                     |                           | $      | 207            |       |   | $             | 3     |      
|                                                 | Accounts payable                          |                           |        | 935            |       |   |               | 1,050 |      
|                                                 | Accrued payroll-related liabilities       |                           |        | 520            |       |   |               | 488   |      
|                                                 | Accrued liabilities and other             |                           |        | 1,615          |       |   |               | 1,778 |      
|                                                 | Deferred revenues and customer deposits   |                           |        | 1,609          |       |   |               | 1,827 |      
|                                                 |                                           |                           |        |                |       |  
|                                                 |                                           | Total current liabilities |        |                | 4,886 |   |               |       | 5,146 | 
|Long-term debt                                   |                                           |                           | 1,384  |                |       |   | 1,565         |      
|Other non-current obligations                    |                                           |                           | 873    |                |       |   | 884           |      
|Total stockholders equity                       |                                           |                           | 9,731  |                |       |   | 10,586        |      
|                                                 |                                           |                           |        |                |       |  
|                                                 |                                           | $                         | 16,874 |                |       | $ | 18,181        |      
|                                                 |                                           |                           |        |                |       |   |              

See accompanying notes.



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

|                                                     |                   |                                                                                          |                                                                                   |                           |       |                   |         |       |               |     |       | 
|---------------------------------------------------- | ----------------- | ---------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------- | ----- | ----------------- | ------- | ----- | ------------- | --- | ----- | 
|                                                     |                   |                                                                                          |                                                                                   |                           |       | Nine Months Ended |        
|                                                     |                   |                                                                                          |                                                                                   |                           |       | March 31, 2002    |         |       | April 1, 2001 |    
|Cash flows from operating activities:                |                   |                                                                                          |                                                                                   |                           |       |                   |         |      
|                                                     | Net income (loss) |                                                                                          | $                                                                                 | (648)                     |       |                   | $       | 1,015 |              
|                                                     |                   | Adjustments to reconcile net income (loss) to net cash provided
by operating activities: |                                                                                   |                           |       |                   |         |       |               |    
|                                                     |                   |                                                                                          | Depreciation and amortization                                                     |                           |       | 717               |         |       |               | 610 |      
|                                                     |                   |                                                                                          | Amortization of goodwill (fiscal 2001 only) and other
acquisition-related charges |                           |       | 89                |         |       |               | 221 |      
|                                                     |                   |                                                                                          | Tax benefits from employee stock plans                                            |                           |       | 58                |         |       |               | 692 |      
|                                                     |                   |                                                                                          | Loss on equity investments, net                                                   |                           |       | 81                |         |       |               | 12  |      
|                                                     |                   |                                                                                          | Other                                                                             |                           |       | 3                 |         |       |               | 126 |      
|                                                     |                   |                                                                                          | Changes in operating assets and liabilities:                                      |                           |       |                   |         |       |               |     |      
|                                                     |                   |                                                                                          |                                                                                   | Accounts receivable, net  |       |                   | 548     |       |               |     | (215) | 
|                                                     |                   |                                                                                          |                                                                                   | Inventories               |       |                   | 495     |       |               |     | (340) | 
|                                                     |                   |                                                                                          |                                                                                   | Prepaids and other assets |       |                   | 407     |       |               |     | (461) | 
|                                                     |                   |                                                                                          |                                                                                   | Accounts payable          |       |                   | (115)   |       |               |     | 97    | 
|                                                     |                   |                                                                                          |                                                                                   | Other liabilities         |       |                   | (932)   |       |               |     | 266   | 
|                                                     |                   |                                                                                          |                                                                                   |                           |       |                  
|Net cash provided by operating activities            |                   |                                                                                          | 703                                                                               |                           |       |                   | 2,023   |      
|                                                     |                   |                                                                                          |                                                                                   |                           |       |                  
|Cash flows from investing activities:                |                   |                                                                                          |                                                                                   |                           |       |                   |         |      
|                                                     |                   | Net sales and maturities of (purchases of) marketable debt securities                    |                                                                                   |                           | 360   |                   |         |       | (819)         |    
|                                                     |                   | Net purchases of equity investments                                                      |                                                                                   |                           | (31)  |                   |         |       | (96)          |    
|                                                     |                   | Acquisitions of property, plant and equipment                                            |                                                                                   |                           | (461) |                   |         |       | (942)         |    
|                                                     |                   | Acquisitions of spare parts and other assets                                             |                                                                                   |                           | (67)  |                   |         |       | (164)         |    
|                                                     |                   | Payments for acquisitions, net of cash acquired                                          |                                                                                   |                           | (49)  |                   |         |       | (23)          |    
|                                                     |                   |                                                                                          |                                                                                   |                           |       |                  
|Net cash used in investing activities                |                   |                                                                                          | (248)                                                                             |                           |       |                   | (2,044) |      
|                                                     |                   |                                                                                          |                                                                                   |                           |       |                  
|Cash flows from financing activities:                |                   |                                                                                          |                                                                                   |                           |       |                   |         |      
|                                                     |                   | Principal payments on borrowings and other obligations                                   |                                                                                   |                           | (10)  |                   |         |       | (15)          |    
|                                                     |                   | Proceeds from issuance of common stock, net                                              |                                                                                   |                           | 121   |                   |         |       | 278           |    
|                                                     |                   | Acquisition of treasury stock                                                            |                                                                                   |                           | (366) |                   |         |       | (804)         |    
|                                                     |                   |                                                                                          |                                                                                   |                           |       |                  
|Net cash used in financing activities                |                   |                                                                                          | (255)                                                                             |                           |       |                   | (541)   |      
|                                                     |                   |                                                                                          |                                                                                   |                           |       |                  
|Net increase (decrease) in cash and cash equivalents |                   |                                                                                          | 200                                                                               |                           |       |                   | (562)   |      
|Cash and cash equivalents, beginning of period       |                   |                                                                                          | 1,472                                                                             |                           |       |                   | 1,849   |      
|                                                     |                   |                                                                                          |                                                                                   |                           |       |                  
|Cash and cash equivalents, end of period             |                   | $                                                                                        | 1,672                                                                             |                           |       | $                 | 1,287   |      
|                                                     |                   |                                                                                          |                                                                                   |                           |       |                   |        

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 ended 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 year financial statements 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 and
its quarterly reports on Form 10-Q for the fiscal quarters ended September 30,
2001 and December 30, 2001 filed with the Securities and Exchange Commission on
September 20, 2001, November 14, 2001, and February 12, 2002, respectively.

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 outstanding during the period; dilutive
common equivalent shares consist primarily of stock options. For the three and
nine months ended March 31, 2002, 97 million and 107 million common equivalent
shares, respectively, were excluded from the computation of diluted net income
(loss) per common share because they were anti-dilutive. For the three and nine
months ended April 1, 2001, 161 million and 198 million dilutive common
equivalent shares, respectively, were included in the computation of diluted
net income.



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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 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 accordance with SFAS 142, the Company discontinued the amortization of
goodwill effective July 1, 2001. In addition, the Company recharacterized
acquired workforce (and its related deferred tax liabilities) as goodwill
because it is no longer defined as an acquired intangible asset under SFAS 141.
Accordingly, no acquired workforce amortization was recognized during the three
months and the nine months ended March 31, 2002.

The provisions of SFAS 142 also require the completion of a transitional
impairment test within six months of adoption, with any impairments treated as
a cumulative effect of change in accounting principle. During the quarter ended
December 30, 2001, the Company completed the transitional impairment test,
which did not result in an impairment of recorded goodwill.

For further discussion, see Note 5, Goodwill and Other Acquisition-Related
Intangible Assets.



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

|                            |                                       |                        |      |                    |   |   |                   |      |      |                |       |        |               |   |       |      |      | 
|--------------------------- | ------------------------------------- | ---------------------- | ---- | ------------------ | - | - | ----------------- | ---- | ---- | -------------- | ----- | ------ | ------------- | - | ----- | ---- | ---- | 
|                            |                                       |                        |      | Three Months Ended |   |   | Nine Months Ended |     
|                            |                                       |                        |      | March 31, 2002     |   |   | April 1, 2001     |      |      | March 31, 2002 |       |        | April 1, 2001 |  
|Reported net income (loss)  |                                       | $                      | (37) |                    |   | $ | 136               |      |      | $              | (648) |        |               | $ | 1,015 |     
|                            | Add:                                  | Goodwill amortization  |      |                   |   |   |                   | 105  |      |                |       |       |               |   |       | 160  |     
|                            |                                       | Workforce amortization |      |                    |  |   |                   |      | 3    |                |       |        |              |   |       |      | 4    | 
|                            |                                       | Tax impact             |      |                    |  |   |                   |      | (14) |                |       |        |              |   |       |      | 10   | 
|                            |                                       |                        |      |                    |   |   |                   |      |      |                |       |       
|Adjusted net income (loss)  |                                       | $                      | (37) |                    |   | $ | 230               |      |      | $              | (648) |        |               | $ | 1,189 |     
|                            |                                       |                        |      |                    |   |   |                   |      |      |                |       |       
|Basic earnings per share:   |                                       |                        |      |                    |   |   |                   |      |      |                |       |        |               |   |       |     
|                            | Reported earnings per share  basic   |                        | $    | (0.01)             |   |   | $                 | 0.04 |      |                | $     | (0.20) |               |   | $     | 0.31 |     
|                            | Add:                                  | Goodwill amortization  |      |                   |   |   |                   | 0.03 |      |                |       |       |               |   |       | 0.05 |     
|                            |                                       | Workforce amortization |      |                    |  |   |                   |      |     |                |       |        |              |   |       |      |     | 
|                            |                                       | Tax impact             |      |                    |  |   |                   |      |     |                |       |        |              |   |       |      | 0.01 | 
|                            |                                       |                        |      |                    |   |   |                   |      |      |                |       |       
|                            | Adjusted earnings per share  basic   |                        | $    | (0.01)             |   |   | $                 | 0.07 |      |                | $     | (0.20) |               |   | $     | 0.37 |     
|                            |                                       |                        |      |                    |   |   |                   |      |      |                |       |       
|Diluted earnings per share: |                                       |                        |      |                    |   |   |                   |      |      |                |       |        |               |   |       |     
|                            | Reported earnings per share  diluted |                        | $    | (0.01)             |   |   | $                 | 0.04 |      |                | $     | (0.20) |               |   | $     | 0.30 |     
|                            | Add:                                  | Goodwill amortization  |      |                   |   |   |                   | 0.03 |      |                |       |       |               |   |       | 0.04 |     
|                            |                                       | Workforce amortization |      |                    |  |   |                   |      |     |                |       |        |              |   |       |      |     | 
|                            |                                       | Tax impact             |      |                    |  |   |                   |      |     |                |       |        |              |   |       |      | 0.01 | 
|                            |                                       |                        |      |                    |   |   |                   |      |      |                |       |       
|                            | Adjusted earnings per share  diluted |                        | $    | (0.01)             |   |   | $                 | 0.07 |      |                | $     | (0.20) |               |   | $     | 0.35 |     
|                            |                                       |                        |      |                    |   |   |                   |      |      |                |       |       

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. The
Company will adopt SFAS 144 for its fiscal year beginning July 1, 2002. At this
time, management does not expect the adoption of SFAS 144 to have a material
effect on the Companys financial position or results of operations.

3. BUSINESS COMBINATIONS

The Company completed three acquisitions in the first nine months of fiscal
2002. Suns acquisition of ISOPIA, Inc. (Isopia) on July 26, 2001 is described
below (the aggregate purchase price of the other two acquisitions was less than
$15 million and, accordingly, are not considered significant to
Suns financial
statements). 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 is
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.



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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. A subsidiary of Sun, organized for the
purpose of the acquisition, issued approximately 1.84 million exchangeable
shares (which Isopia stockholders may exchange for shares of Sun common stock)
at a fair value of $15.235 per share, or $28.0 million in the aggregate, and
Sun 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 AND STATEMENT OF CASH FLOW INFORMATION

Inventories consist of the following (in millions):

|                |  |                |     |  |               |   |       | 
|--------------- |  | -------------- | --- |  | ------------- | - | ----- | 
|                |  | March 31, 2002 |     |  | June 30, 2001 |  
|Raw materials   |  | $              | 206 |  |               | $ | 600   | 
|Work in process |  |                | 118 |  |               |   | 137   | 
|Finished goods  |  |                | 230 |  |               |   | 312   | 
|                |  |                |     |  |               |  
|                |  | $              | 554 |  |               | $ | 1,049 | 
|                |  |                |     |  |               |  

Long-term marketable debt securities of $3,564 million and $4,312 million as of
March 31, 2002 and April 1, 2001, respectively, consist primarily of corporate
bonds, floating-rate notes, and asset-backed securities with maturities greater
than one year from the balance sheet date. All marketable debt securities are
held in the Companys name and are held in custody with primarily one major
financial institution. The Companys policy is to protect the value of its
investment portfolio and minimize principal risk by earning returns based on
current interest rates. Earnings related to marketable debt securities,
including any realized gains and losses resulting from the sale of these
securities, are classified under interest income, net.

Other non-current assets, net, includes $303 million and $365 million of equity
investments as of March 31, 2002 and April 1, 2001, respectively. Equity
investments consist of marketable equity securities, which represent equity
holdings in publicly traded companies, and other equity holdings,which
represent equity holdings in non-publicly traded companies and investments in
third-party venture capital funds. Equity investments are contained within our
internally-managed venture capital fund. The Company monitors for potential
impairment of its equity investments and makes appropriate reductions in
carrying values when such impairments are determined to be
other-than-temporary. Loss on equity investments, net
consists of gains
and losses realized on the disposal of equity investments and impairment
charges recognized on equity investments.

Net sales and maturities of (purchases of) marketable debt securities consist
of the following for the nine months ended (in millions):

|                                                                 |  |                |          |  |               |   |         | 
|---------------------------------------------------------------- |  | -------------- | -------- |  | ------------- | - | ------- | 
|                                                                 |  | March 31, 2002 |          |  | April 1, 2001 |  
|Purchases of marketable debt securities                          |  | $              | (11,020) |  |               | $ | (9,610) | 
|Proceeds from sales and maturities of marketable
debt securities |  |                | 11,380   |  |               |   | 8,791   | 
|                                                                 |  |                |          |  |               |  
|                                                                 |  | $              | 360      |  |               | $ | (819)   | 
|                                                                 |  |                |          |  |               |  



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Net purchases of equity investments consist of the following for the nine
months ended (in millions):

|                                          |  |                |      |  |               |   |       | 
|----------------------------------------- |  | -------------- | ---- |  | ------------- | - | ----- | 
|                                          |  | March 31, 2002 |      |  | April 1, 2001 |  
|Purchases of equity investments           |  | $              | (38) |  |               | $ | (139) | 
|Proceeds from sales of equity investments |  |                | 7    |  |               |   | 43    | 
|                                          |  |                |      |  |               |  
|                                          |  | $              | (31) |  |               | $ | (96)  | 
|                                          |  |                |      |  |               |  

Cash paid for interest and income taxes for the nine months ended was (in
millions):

|             |  |                |     |  |               |   |     | 
|------------ |  | -------------- | --- |  | ------------- | - | --- | 
|             |  | March 31, 2002 |     |  | April 1, 2001 |  
|Interest     |  | $              | 113 |  |               | $ | 114 | 
|             |  |                |     |  |               |  
|Income taxes |  | $              | 142 |  |               | $ | 385 | 
|             |  |                |     |  |               |  

Supplemental schedule of noncash investing activities for the nine months ended
(in millions):

|                                                         |  |                |    |  |               |   |       | 
|-------------------------------------------------------- |  | -------------- | -- |  | ------------- | - | ----- | 
|                                                         |  | March 31, 2002 |    |  | April 1, 2001 |  
|Stock and options issued in connection with
acquisitions |  | $              | 29 |  |               | $ | 2,029 | 
|                                                         |  |                |    |  |               |  

5. GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS

Changes in the carrying amount of goodwill for the nine months ended March 31,
2002, are as follows (in millions):

|                                    |  |                  |       |  |            |   |    |       |  |   |       |  |  |   |       | 
|----------------------------------- |  | ---------------- | ----- |  | ---------- | - | -- | ----- |  | - | ----- |  |  | - | ----- | 
|                                    |  | Computer Systems |       |  |            |   |    |       |  |   |       |  |  |   |      
|                                    |  | and Network      |       |  | Enterprise |   |    |       |  |   |       |  |  |  
|                                    |  | Storage          |       |  | Services   |   |    | Other |  |   | Total | 
|                                    |  |                  |       |  |            |   |    |       |  |   |       | 
|Balance as of July 1, 2001          |  | $                | 2,071 |  |            | $ | 9  |       |  | $ | 46    |  |  | $ | 2,126 | 
|Workforce reclassified as goodwill  |  |                  | 10    |  |            |   | 1  |       |  |   | 1     |  |  |   | 12    | 
|Goodwill acquired during the period |  |                  | 3     |  |            |   | 39 |       |  |   | 2     |  |  |   | 44    | 
|                                    |  |                  |       |  |            |   |    |       |  |   |       | 
|Balance as of March 31, 2002        |  | $                | 2,084 |  |            | $ | 49 |       |  | $ | 49    |  |  | $ | 2,182 | 
|                                    |  |                  |       |  |            |   |    |       |  |   |       | 

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

|                     |  |                |     |  |               |   |       |     |  |   |        |          |       |              |             |  |     |   |       |  |  |   |     | 
|-------------------- |  | -------------- | --- |  | ------------- | - | ----- | --- |  | - | ------ | -------- | ----- | ------------ | ----------- |  | --- | - | ----- |  |  | - | --- | 
|                     |  | March 31, 2002 |     |  | June 30, 2001 |  
|                     |  |                |     |  |               |  
|                     |  | Gross          |     |  |               |   |       |     |  |   |        |          | Gross |              |             |  |     |   |       |  |  |  
|                     |  | Carrying       |     |  | Accumulated   |   |       |     |  |   |        | Carrying |       |              | Accumulated |  |     |   |       | 
|                     |  | Amount         |     |  | Amortization  |   |       | Net |  |   | Amount |          |       | Amortization |             |  | Net |  
|                     |  |                |     |  |               |   |       |     |  |   |        |          |       |              |             |  |     |  
|Developed technology |  | $              | 308 |  |               | $ | (210) |     |  | $ | 98     |          |       | $            | 290         |  |     | $ | (169) |  |  | $ | 121 | 
|Customer base        |  |                | 57  |  |               |   | (37)  |     |  |   | 20     |          |       |              | 57          |  |     |   | (19)  |  |  |   | 38  | 
|Other                |  |                | 7   |  |               |   | (4)   |     |  |   | 3      |          |       |              | 53          |  |     |   | (27)  |  |  |   | 26  | 
|                     |  |                |     |  |               |   |       |     |  |   |        |          |       |              |             |  |     |  
|                     |  | $              | 372 |  |               | $ | (251) |     |  | $ | 121    |          |       | $            | 400         |  |     | $ | (215) |  |  | $ | 185 | 
|                     |  |                |     |  |               |   |       |     |  |   |        |          |       |              |             |  |     |  

Amortization expense of other acquisition-related intangible assets was $24
million and $60 million for the three months and nine months ended March 31,
2002, respectively, and $16 million and $28 million for the three months and
nine months ended April 1, 2001, respectively. Amortization expense for fiscal
2002 includes a $6 million charge for impairment of certain intangible assets.
This amortization expense is included in Selling, general and administrative.



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

|     |  |   |     | 
|---- |  | - | --- | 
|2002 |  | $ | 79  | 
|2003 |  |   | 68  | 
|2004 |  |   | 32  | 
|2005 |  |   | 3   | 
|     |  |   |    
|     |  | $ | 182 | 
|     |  |   |    

6. EXPIRATION OF THE STRATEGIC DEVELOPMENT AND MARKETING AGREEMENT WITH
AOL-TIME WARNER, INC.

Pursuant to the Strategic Development and Marketing Agreement and related
agreements (collectively the SDMA) signed in November 1998, as amended, the
Sun and AOL-Time Warner (AOL) strategic alliance expired on March 17, 2002.
Following such expiration, Sun retained rights equivalent to ownership of
intellectual property developed by the strategic alliance, subject to AOLs
license rights; Sun retained broad licensing rights to intellectual property
that existed prior to formation of the strategic alliance; and Sun retained
limited licensing rights to certain third-party intellectual property. Sun has
no on-going obligations to AOL under the SDMA.

7. RESTRUCTURING CHARGES

Fiscal 2002 restructuring plan

In response to the continuing global economic slowdown, the Company began
implementing a workforce reduction and facility exit plan in the second quarter
of fiscal 2002. This restructuring resulted in a charge of $511 million
(consisting of a $146 million workforce reduction charge and a $365 million
excess facility charge) in the second quarter of fiscal 2002. The goal of the
restructuring is to reduce costs and improve operating efficiencies in order to
adjust to the current business environment. Specifically, it is the Companys
intent under this plan to reduce its headcount by approximately 9% (or 3,400
employees and 500 contractors) and to eliminate excess facility capacity in
light of revised facility requirements.

The Company recorded a workforce reduction charge of $146 million related to
severance and fringe benefits for terminated employees. The restructuring will
result in the termination of approximately 3,400 employees across all employee
levels, business functions, operating units, and geographic regions. As of
March 31, 2002, approximately 3,250 employees had been terminated as a result
of the restructuring. The majority of the remaining identified employees reside
outside of the United States, and the timing of their termination is dependent
upon the local employment laws that govern such employees. All remaining
employees are expected to be terminated by the fourth quarter of fiscal 2002.

In addition, the Company recorded a charge of $365 million related to the
consolidation of excess facilities. The facility exit charges include:



| |  |  | $282 million of estimated future obligations for
non-cancelable lease payments (net of $80 million of
estimated sublease income) or termination fees generated by
exiting excess rental facilities. The Company estimated the
cost of exiting and terminating the facility leases based on
the contractual terms of the agreements and then current
real estate market conditions. In addition, the Company
intends to sublease certain leased facilities and estimated
the sublease income based on then current real estate market
conditions or, where applicable, amounts being negotiated;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | $66 million for the impairment of in-process
construction costs related to the termination of certain
building construction projects; and                                                                                                                                                                                                                                                                                                                                                                                                                                                      



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| |  |  | $17 million for the impairment of property and
equipment (primarily leasehold improvements) for which there
are insufficient cash flows to support the carrying cost.
The property and equipment impairment was determined based
on the difference between the assets estimated fair value
and their carrying value as of December 30, 2001.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company expects to exit the facilities relating to the amounts accrued
under the restructuring by no later than December 31, 2002.

During the third quarter of fiscal 2002, the Company reduced its estimate of
the total costs associated with the above restructuring activities and recorded
an adjustment of $15 million. The adjustment reflects the settlement of one
particular lease obligation.

Fiscal 2001 facility exit plan

In the fourth quarter of fiscal 2001, Sun elected to exit certain building
leases and building projects. The Company charged approximately $75 million for
facility exit costs associated with this decision, of which $46 million was
reflected as an accrual as of June 30, 2001. As a result of the continued
deterioration of certain commercial real estate markets, Sun reduced its
sublease income assumptions and, accordingly, recorded an additional $25
million charge ($14 million and $11 million in the first and third quarters of
fiscal 2002, respectively) to reflect this change in estimates. As of March 31,
2002, the revised estimated facility exit cost of $100 million is net of
approximately $30 million in estimated sublease income.

The following table sets forth an analysis of the restructuring accrual
activity for the nine months ending March 31, 2002 (in millions):

|                                        |                                   |                                            |       |                          |     |   |             |      |     |             |     |                |    |   |       |     |     | 
|--------------------------------------- | --------------------------------- | ------------------------------------------ | ----- | ------------------------ | --- | - | ----------- | ---- | --- | ----------- | --- | -------------- | -- | - | ----- | --- | --- | 
|                                        |                                   |                                            |       |                          |     |   |             |      |     |             |     | FY'01 Facility |    |   |       |     |    
|                                        |                                   |                                            |       | FY'02 Restructuring Plan |     |   | Exit Plan   |      |     | Total       |    
|                                        |                                   |                                            |       |                          |     |   |             |      |     |             |    
|                                        |                                   |                                            |       | Severance and            |     |   | Facilities- |      |     | Facilities- |     |                |    |   |      
|                                        |                                   |                                            |       | Benefits                 |     |   | related     |      |     | related     |     |                |    |   |      
|                                        |                                   |                                            |       |                          |     |   |             |      |     |             |     |                |    |   |      
|Balance of accrual as of June 30, 2001  |                                   | $                                          |      |                          |     | $ |            |      |     | $           | 46  |                |    | $ | 46    |    
|                                        |                                   |                                            |       |                          |     |   |             |      |     |             |     |               
|Restructuring provision in fiscal 2002: |                                   |                                            |       |                          |     |   |             |      |     |             |     |                |    |   |       |    
|                                        | Severance and benefits            |                                            |       | 146                      |     |   |             |     |     |             |     |               |    |   |       | 146 |    
|                                        | Accrued lease costs               |                                            |       |                         |     |   |             | 282  |     |             |     |               |    |   |       | 282 |    
|                                        | Property and equipment impairment |                                            |       |                         |     |   |             | 83   |     |             |     |               |    |   |       | 83  |    
|                                        | Provision adjustments             |                                            |       |                         |     |   |             | (15) |     |             |     | 25             |    |   |       | 10  |    
|                                        |                                   |                                            |       |                          |     |   |             |      |     |             |     |               
|                                        |                                   | Total restructuring charges in fiscal 2002 |       |                          | 146 |   |             |      | 350 |             |     |                | 25 |   |       |     | 521 | 
|Cash paid                               |                                   |                                            | (116) |                          |     |   | (5)         |      |     |             | (9) |                |    |   | (130) |    
|Non-cash charges                        |                                   |                                            |      |                          |     |   | (83)        |      |     |             |    |                |    |   | (83)  |    
|                                        |                                   |                                            |       |                          |     |   |             |      |     |             |     |               
|Balance of accrual as of March 31, 2002 |                                   | $                                          | 30    |                          |     | $ | 262         |      |     | $           | 62  |                |    | $ | 354   |    
|                                        |                                   |                                            |       |                          |     |   |             |      |     |             |     |               

The remaining cash expenditures relating to workforce reductions and the
termination of lease agreements are expected to be paid by the second quarter
of fiscal 2003. The current estimates accrued for abandoned leases (net of
anticipated sublease proceeds) will be paid over their respective lease terms
through fiscal 2018. As of March 31, 2002, $165 million of the $354 million
accrual was classified as current and the remaining $189 million was classified
as non-current.

The above restructuring charges are based on certain estimates which are
subject to change. Changes to the estimates will be reflected as Provision
adjustments on the above table in the period the changes in estimates are
made.



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8. INCOME TAX RATE

The Companys effective income tax benefit rate was 60.8% and 43.1% for the
third quarter and first nine months of fiscal 2002, respectively, as compared
with effective income tax expense rates of 45.4% and 39.1% for the
corresponding periods of fiscal 2001.

The difference between the Companys current and prior quarter tax rates is
primarily due to a change in the Companys estimate in projected statutory credits to be
recognized in the current fiscal year.

The primary difference between the Companys current and prior nine-month tax
rates can be explained by: (1) the elimination of certain non-recurring,
non-deductible accounting charges resulting from the Companys adoption of SFAS
No. 142; (2) increased projected statutory credits to be recognized in the
current fiscal year; and (3) a reduction in benefits associated with decreased
profitability in certain low-tax, non-U.S. jurisdictions.

The Company currently expects the fourth quarter fiscal 2002 tax benefit rate
to be 46.0%. This expected rate, based on current tax law and current estimates
of earnings, is subject to change.

9. COMPREHENSIVE INCOME (LOSS)

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

|                                                                      |  |                    |       |  |                   |   |      |                |  |   |               |  |  |   |       | 
|--------------------------------------------------------------------- |  | ------------------ | ----- |  | ----------------- | - | ---- | -------------- |  | - | ------------- |  |  | - | ----- | 
|                                                                      |  | Three Months Ended |       |  | Nine Months Ended |  
|                                                                      |  | March 31, 2002     |       |  | April 1, 2001     |   |      | March 31, 2002 |  |   | April 1, 2001 | 
|Net income (loss)                                                     |  | $                  | (37)  |  |                   | $ | 136  |                |  | $ | (648)         |  |  | $ | 1,015 | 
|Change in unrealized value of investments, net                        |  |                    | (50)  |  |                   |   | (11) |                |  |   | (56)          |  |  |   | (87)  | 
|Change in unrealized fair value of foreign
exchange hedging contracts |  |                    | (8)   |  |                   |   | 37   |                |  |   | (25)          |  |  |   | 44    | 
|Translation adjustments, net                                          |  |                    | (18)  |  |                   |   | 23   |                |  |   | 18            |  |  |   | 4     | 
|                                                                      |  |                    |       |  |                   |   |      |                |  |   |               | 
|                                                                      |  | $                  | (113) |  |                   | $ | 185  |                |  | $ | (711)         |  |  | $ | 976   | 
|                                                                      |  |                    |       |  |                   |   |      |                |  |   |               | 

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

|                                                                |  |                |      |  |               |   |      | 
|--------------------------------------------------------------- |  | -------------- | ---- |  | ------------- | - | ---- | 
|                                                                |  | March 31, 2002 |      |  | June 30, 2001 |  
|Unrealized gains (losses) on investments, net                   |  | $              | (3)  |  |               | $ | 53   | 
|Unrealized gains (losses) on foreign exchange hedging contracts |  |                | (10) |  |               |   | 15   | 
|Cumulative translation adjustments                              |  |                | (79) |  |               |   | (97) | 
|                                                                |  |                |      |  |               |  
|                                                                |  | $              | (92) |  |               | $ | (29) | 
|                                                                |  |                |      |  |               |  

10. OPERATING SEGMENTS

The following table presents revenues, interdivisional revenues and operating
income (loss) for the Companys segments. 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. It is
not unusual for the Company to have minor reorganizations from time-to-time
during the year; under such circumstances, the historical information is
updated to reflect the changes in business.



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|                                 |  |                     |       |  |            |   |     |       |  |   |       |  |  |   |       | 
|-------------------------------- |  | ------------------- | ----- |  | ---------- | - | --- | ----- |  | - | ----- |  |  | - | ----- | 
|                                 |  | Computer Systems    |       |  | Enterprise |   |     |       |  |   |       |  |  |  
|Three Months Ended (in millions) |  | and Network Storage |       |  | Services   |   |     | Other |  |   | Total | 
|                                 |  |                     |       |  |            |   |     |       |  |   |       | 
|March 31, 2002                   |  |                     |       |  |            |   |     |       |  |   |       |  |  |   |       | 
|Revenues                         |  | $                   | 2,157 |  |            | $ | 838 |       |  | $ | 113   |  |  | $ | 3,107 | 
|Interdivisional revenues         |  |                     |      |  |            |   | 113 |       |  |   | (113) |  |  |   |      | 
|Operating income (loss)          |  |                     | 360   |  |            |   | 233 |       |  |   | (741) |  |  |   | (148) | 
|April 1, 2001                    |  |                     |       |  |            |   |     |       |  |   |       |  |  |   |       | 
|Revenues                         |  |                     | 3,088 |  |            |   | 833 |       |  |   | 173   |  |  |   | 4,095 | 
|Interdivisional revenues         |  |                     | 1     |  |            |   | 117 |       |  |   | (118) |  |  |   |      | 
|Operating income (loss)          |  | $                   | 728   |  |            | $ | 179 |       |  | $ | (755) |  |  | $ | 152   | 

|                                |  |                     |        |  |            |   |       |       |  |   |         |  |  |   |         | 
|------------------------------- |  | ------------------- | ------ |  | ---------- | - | ----- | ----- |  | - | ------- |  |  | - | ------- | 
|                                |  | Computer Systems    |        |  | Enterprise |   |       |       |  |   |         |  |  |  
|Nine Months Ended (in millions) |  | and Network Storage |        |  | Services   |   |       | Other |  |   | Total   | 
|                                |  |                     |        |  |            |   |       |       |  |   |         | 
|March 31, 2002                  |  |                     |        |  |            |   |       |       |  |   |         |  |  |   |         | 
|Revenues                        |  | $                   | 6,176  |  |            | $ | 2,490 |       |  | $ | 410     |  |  | $ | 9,076   | 
|Interdivisional revenues        |  |                     |       |  |            |   | 363   |       |  |   | (363)   |  |  |   |        | 
|Operating income (loss)         |  |                     | 826    |  |            |   | 621   |       |  |   | (2,756) |  |  |   | (1,309) | 
|April 1, 2001                   |  |                     |        |  |            |   |       |       |  |   |         |  |  |   |         | 
|Revenues                        |  |                     | 11,421 |  |            |   | 2,333 |       |  |   | 501     |  |  |   | 14,255  | 
|Interdivisional revenues        |  |                     | 2      |  |            |   | 343   |       |  |   | (345)   |  |  |   |        | 
|Operating income (loss)         |  | $                   | 3,757  |  |            | $ | 473   |       |  | $ | (2,740) |  |  | $ | 1,490   | 

11. LEGAL PROCEEDINGS

On February 11, 2002, Eastman Kodak Company (Kodak) filed a lawsuit in the US
District Court for the Western District of New York, making various patent
infringement claims against the Company with respect to aspects of the
Companys Java technologies. The lawsuit was subsequently amended and served
on the Company on April 3, 2002. The Lawsuit seeks injunctive relief against
future infringement, unspecified damages for past infringement together with
costs and attorneys fees. Based on discussions over many months with Kodak,
the Company believes that this suit is without merit, and, accordingly, will
defend itself vigorously. Sun cannot forecast at this time with reasonable
certainty the potential costs associated with an adverse outcome of this
matter.

On March 8, 2002, Sun filed suit against Microsoft Corporation (Microsoft) in
the United States District Court for the Northern District of California
pursuant to United States and State of California antitrust laws alleging
illegal efforts to acquire, maintain and expand a number of monopolies; illegal
tying arrangements; exclusive dealings; copyright infringement; unreasonable
restraint of trade; and unfair competition. Sun is seeking remedies that
include (1) preliminary injunctions that require Microsoft to distribute Suns
binary implementation of the Java Run-time Environment as part of Windows XP
and Internet Explorer and to stop the unlicensed distribution of Microsofts
Virtual Machine for Java in violation of the January 23, 2001 settlement
agreement; (2) a permanent injunction to restore competition to the markets in
which Microsoft is unlawfully attempting to acquire, maintain and expand a
number of monopolies; and (3) compensation for losses suffered by Sun as a
result of Microsofts unlawful actions.



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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 and products and services gross
margin, our expectations regarding further product cost reductions, our belief
that to maintain our competitive position we must continue to invest
significant resources 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 long-term objectives to invest 10-11%
of our net revenues in R&D, our expectations with regard 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 goal with regard to restructuring, our intent to reduce
headcount by approximately 9%, statements regarding the timing for termination
of the remaining employees to be terminated under our restructuring plan, and
expectations about the timing of our exit from certain facilities under our
restructuring plan, our intent to sublease certain leased facilities, our
expectations regarding the volatility of our marketable debt securities
portfolio and interest income, our expected tax benefit rate, our liquidity
strategy, 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, our belief that the level of financial reserves
is a competitive factor and our belief that the Kodak litigation is without
merit, and as set forth in the section entitled Purchased in-process research
and development expenses: statements regarding our belief about the
realization of expected economic return from acquired in-processed technology
and resulting or related products, our expected expense reductions or
synergies, our ability to continue making substantial progress in the
development and commercialization of acquired technologies, the expected total
cost to complete the 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 |       |  | Nine Months Ended |      
|                     |                                  |   |                    |       |  |                   |      
|                     |                                  |   | March 31, 2002     |       |  | April 1, 2001     |       |       | Change |  |         | March 31, 2002 |  |   | April 1, 2001 |       |  | Change |       
|Products net revenue |                                  | $ | 2,269              |       |  | $                 | 3,262 |       |        |  | (30.4)% |                |  | $ | 6,586         |       |  | $      | 11,922 |       |  |  | (44.8)% | 
|                     | Percentage of total net revenues |   |                    | 73.0% |  |                   |       | 79.7% |        |  |         |                |  |   |               | 72.6% |  |        |        | 83.6% |  |  |         |  | 
|Services net revenue |                                  | $ | 838                |       |  | $                 | 833   |       |        |  | 0.6%    |                |  | $ | 2,490         |       |  | $      | 2,333  |       |  |  | 6.7%    | 
|                     | Percentage of total net revenues |   |                    | 27.0% |  |                   |       | 20.3% |        |  |         |                |  |   |               | 27.4% |  |        |        | 16.4% |  |  |         |  | 
|Total net revenues   |                                  | $ | 3,107              |       |  | $                 | 4,095 |       |        |  | (24.1)% |                |  | $ | 9,076         |       |  | $      | 14,255 |       |  |  | (36.3)% | 

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. The
decrease in products net revenue in the third quarter as well as in the first
nine months of fiscal 2002, as compared with the corresponding periods of
fiscal 2001, was caused primarily by weak global macroeconomic conditions and a
resulting reduction in information technology (IT) spending.

Over 90% of our products net revenue in the third quarter as well as in the
first nine months 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. Substantially all of the
decrease in products net revenue during the third quarter and the first nine
months of fiscal 2002, when compared with the corresponding periods of fiscal
2001, was attributable to a decrease in revenues generated by our server and
storage products. Revenues from the sale of desktop systems represented
approximately 9% and 14% of products net revenue in the third quarter of fiscal
2002 and 2001, respectively, and 11% and 13% of products net revenue in the
first nine months of fiscal 2002 and 2001, respectively. While our product mix
fluctuates from quarter to quarter, we expect over the long-term an increasing
percentage of products net revenue will be from server and storage products and
a decreasing percentage of products net revenue will be from desktop systems.

The weak macroeconomic conditions have caused a significant reduction in IT
spending by our customers. We are unable to predict if the current adverse
macroeconomic conditions and reduced IT spending levels will continue or
further deteriorate. At this time, we expect our products net revenue in the
fourth quarter of fiscal 2002 to increase slightly, as compared with the third
quarter of fiscal 2002, assuming economic conditions and IT spending levels
remain the same. If the macroeconomic conditions and IT spending levels decline
further, then we expect our products net revenue in the fourth quarter of
fiscal 2002 to be less than products net revenues in the third quarter of
fiscal 2002. 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 0.6% and 6.7% growth in services net revenue in the
third quarter and first nine months of fiscal 2002, respectively, as compared
with the corresponding periods of fiscal 2001, was due to an increase in
revenue from Support Services, partially offset by decreases in revenue from
Professional Services and Educational Services. Support Services revenue, which
represents over 65% of services net revenue for all periods presented, consists
of maintenance contract revenue which is recognized ratably over the
contractual period. Support Services revenue growth was primarily a result of a
better mix of platinum, gold, silver and bronze service level contracts in our
portfolio. On a year-over-year basis, the Professional Services revenue
decrease was primarily due to a decline in the installation of new products,
while the Educational Services revenue decrease was due



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to a combination of:
(1) a reduction in customers discretionary spending; and (2) a decline in new
product sales.

Because a significant portion of our services net revenue is generated by
contracts related to product sales, our services net revenue could be
negatively impacted by the adverse macroeconomic conditions which have been and
continue to negatively impact our products net revenue.

Net revenues by geographic area
(dollars in millions)

|                                            |                            |   |                    |       |  |                   |       |       |        |  |         |                |  |   |               |       |  |        |        |       |  |  |         |  | 
|------------------------------------------- | -------------------------- | - | ------------------ | ----- |  | ----------------- | ----- | ----- | ------ |  | ------- | -------------- |  | - | ------------- | ----- |  | ------ | ------ | ----- |  |  | ------- |  | 
|                                            |                            |   | Three Months Ended |       |  | Nine Months Ended |      
|                                            |                            |   |                    |       |  |                   |      
|                                            |                            |   | March 31, 2002     |       |  | April 1, 2001     |       |       | Change |  |         | March 31, 2002 |  |   | April 1, 2001 |       |  | Change |       
|U.S.                                        |                            | $ | 1,404              |       |  | $                 | 1,639 |       |        |  | (14.3)% |                |  | $ | 4,130         |       |  | $      | 6,776  |       |  |  | (39.1)% | 
|Americas  Other (Canada and
Latin America) |                            |   | 176                |       |  |                   | 229   |       |        |  | (23.1)% |                |  |   | 474           |       |  |        | 684    |       |  |  | (30.7)% | 
|                                            |                            |   |                    |       |  |                   |       |       |        |  |         |                |  |   |               |       |  |        |        |      
|Americas  Total                            |                            |   | 1,580              |       |  |                   | 1,868 |       |        |  | (15.4)% |                |  |   | 4,604         |       |  |        | 7,460  |       |  |  | (38.3)% | 
|                                            | Percentage of net revenues |   |                    | 50.9% |  |                   |       | 45.6% |        |  |         |                |  |   |               | 50.7% |  |        |        | 52.3% |  |  |         |  | 
|EMEA (Europe, Middle East and
Africa)       |                            |   | 985                |       |  |                   | 1,395 |       |        |  | (29.4)% |                |  |   | 2,810         |       |  |        | 4,336  |       |  |  | (35.2)% | 
|                                            | Percentage of net revenues |   |                    | 31.7% |  |                   |       | 34.1% |        |  |         |                |  |   |               | 31.0% |  |        |        | 30.4% |  |  |         |  | 
|APAC (Asia, Australia and New
Zealand)      |                            |   | 542                |       |  |                   | 832   |       |        |  | (34.9)% |                |  |   | 1,662         |       |  |        | 2,459  |       |  |  | (32.4)% | 
|                                            | Percentage of net revenues |   |                    | 17.4% |  |                   |       | 20.3% |        |  |         |                |  |   |               | 18.3% |  |        |        | 17.3% |  |  |         |  | 
|Total net revenues                          |                            | $ | 3,107              |       |  | $                 | 4,095 |       |        |  | (24.1)% |                |  | $ | 9,076         |       |  | $      | 14,255 |       |  |  | (36.3)% | 

|                   |                            |   |                    |       |  |                   |       |       |        |  |         |                |  |   |               |       |  |        |        |       |  |  |         |  | 
|------------------ | -------------------------- | - | ------------------ | ----- |  | ----------------- | ----- | ----- | ------ |  | ------- | -------------- |  | - | ------------- | ----- |  | ------ | ------ | ----- |  |  | ------- |  | 
|                   |                            |   | Three Months Ended |       |  | Nine Months Ended |      
|                   |                            |   |                    |       |  |                   |      
|                   |                            |   | March 31, 2002     |       |  | April 1, 2001     |       |       | Change |  |         | March 31, 2002 |  |   | April 1, 2001 |       |  | Change |       
|U.S.               |                            | $ | 1,404              |       |  | $                 | 1,639 |       |        |  | (14.3)% |                |  | $ | 4,130         |       |  | $      | 6,776  |       |  |  | (39.1)% | 
|                   | Percentage of net revenues |   |                    | 45.2% |  |                   |       | 40.0% |        |  |         |                |  |   |               | 45.5% |  |        |        | 47.5% |  |  |         |  | 
|International      |                            | $ | 1,703              |       |  | $                 | 2,456 |       |        |  | (30.7)% |                |  | $ | 4,946         |       |  | $      | 7,479  |       |  |  | (33.9)% | 
|                   | Percentage of net revenues |   |                    | 54.8% |  |                   |       | 60.0% |        |  |         |                |  |   |               | 54.5% |  |        |        | 52.5% |  |  |         |  | 
|Total net revenues |                            | $ | 3,107              |       |  | $                 | 4,095 |       |        |  | (24.1)% |                |  | $ | 9,076         |       |  | $      | 14,255 |       |  |  | (36.3)% | 

Late in the second quarter of fiscal 2001, there was an unexpected and
significant reduction in capital spending in many industries, which resulted in
decreased demand in the U.S. for our products and a decline in our products net
revenue. The weak U.S. economic situation evolved into adverse macroeconomic
conditions beginning in the fourth quarter of fiscal 2001, resulting in
reductions in capital spending in many countries within the international
regions in which we do significant business and negatively impacting our
non-U.S. product net revenues. These adverse macroeconomic conditions have
continued throughout the third quarter of fiscal 2002, resulting in a 14.3% and
39.1% decrease in U.S. net revenues, and a 30.7% and 33.9% decrease in
international net revenues in the third quarter and first nine months of fiscal
year 2002, respectively, as compared with the corresponding periods of fiscal
2001.

Within the EMEA region, net revenues decreased by 29.4% and 35.2% (primarily
because of decreases in revenue in the United Kingdom, Northern Europe and
Germany) during the third quarter and the first nine months of fiscal 2002,
respectively, as compared with the corresponding periods 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 34.9% and 32.4% (primarily because
of decreases in revenue in Japan, Greater China and Korea) during the third
quarter and the first nine months of fiscal 2002, respectively, as compared
with the corresponding periods of fiscal 2001. Decreases in net revenues in the
United Kingdom, Northern Europe, Germany, Japan, Greater China and Korea
collectively accounted for approximately 70% of the total decrease in
international net revenues for the third



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quarter and the first nine months of
fiscal 2002, respectively, as compared with the corresponding periods of fiscal
2001.

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

Gross margin
(dollars in millions)

|                      |                                    |   |                    |       |  |                   |       |       |        |  |         |                |  |   |               |       |  |        |       |       |  |  |         |  | 
|--------------------- | ---------------------------------- | - | ------------------ | ----- |  | ----------------- | ----- | ----- | ------ |  | ------- | -------------- |  | - | ------------- | ----- |  | ------ | ----- | ----- |  |  | ------- |  | 
|                      |                                    |   | Three Months Ended |       |  | Nine Months Ended |      
|                      |                                    |   |                    |       |  |                   |      
|                      |                                    |   | March 31, 2002     |       |  | April 1, 2001     |       |       | Change |  |         | March 31, 2002 |  |   | April 1, 2001 |       |  | Change |      
|Products gross margin |                                    | $ | 963                |       |  | $                 | 1,398 |       |        |  | (31.1)% |                |  | $ | 2,556         |       |  | $      | 5,752 |       |  |  | (55.6)% | 
|                      | Percentage of products net revenue |   |                    | 42.4% |  |                   |       | 42.9% |        |  |         |                |  |   |               | 38.8% |  |        |       | 48.3% |  |  |         |  | 
|Services gross margin |                                    | $ | 344                |       |  | $                 | 294   |       |        |  | 17.0%   |                |  | $ | 946           |       |  | $      | 814   |       |  |  | 16.2%   | 
|                      | Percentage of services net revenue |   |                    | 41.1% |  |                   |       | 35.3% |        |  |         |                |  |   |               | 38.0% |  |        |       | 34.9% |  |  |         |  | 
|Total gross margin    |                                    | $ | 1,307              |       |  | $                 | 1,692 |       |        |  | (22.8)% |                |  | $ | 3,502         |       |  | $      | 6,566 |       |  |  | (46.7)% | 
|                      | Percentage of net revenues         |   |                    | 42.1% |  |                   |       | 41.3% |        |  |         |                |  |   |               | 38.6% |  |        |       | 46.1% |  |  |         |  | 

Products gross margin

In the third quarter of fiscal 2002, products gross margin decreased by 0.5
percentage point, as compared with the corresponding period of fiscal 2001. The
0.5 percentage point decline in products gross margin was primarily a result of
reductions in product pricing (normal price list reductions and competitive
transaction pricing), which were substantially offset by decreases in product
costs (lower vendor product component costs and lower product quality costs).

In the first nine months of fiscal 2002, products gross margin decreased by 9.5
percentage points, as compared with the corresponding period of fiscal 2001.
Substantially all of the 9.5 percentage point decline in products gross margin
in the first nine months of fiscal 2002, as compared with the corresponding
period of fiscal 2001, was due to: (1) reductions in product pricing (normal
price list reductions and competitive transaction pricing); (2) increased
product platform transition costs associated with the migration from
UltraSPARC® II to UltraSPARC III; and (3) lower volumes of products
manufactured. These impacts were exacerbated by a period of rapid decline in
products net revenue.

Our products gross margin increased to 42.4% for the three months ended March
31, 2002, from 36.4% for the three months ended December 30, 2001. The majority
of the sequential 6.0 percentage point increase in our products gross margin
was attributable to: (1) lower product platform transition costs in the third
quarter of fiscal 2002, as compared with the second quarter of fiscal 2002; and
(2) the reductions we made to our fixed manufacturing costs to adjust to our
current product volumes. We expect products gross margin in the fourth quarter
of fiscal 2002 to be in the range of the fiscal 2002 third quarter products
gross margin. Should the global macroeconomic conditions remain unfavorable, or
the pricing pressures associated with competition continue, products gross
margin could be adversely impacted.

Services gross margin

The 5.8 and 3.1 percentage point increases in services gross margin in the
third quarter and the first nine months of fiscal 2002, respectively, as
compared with the corresponding periods of fiscal 2001, reflect the impact of:
(1) variable costs decreasing as a result of discretionary spending controls;
(2) infrastructure headcount-related costs decreasing due to the restructuring
in the second quarter of fiscal 2002; and (3) support services revenue
increasing as a percentage of total services net revenue (support services
typically generates a higher gross margin than professional services or
educational services). The impact of these favorable items on services gross
margin in the third quarter and the first nine months of fiscal 2002, as
compared with the



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corresponding periods of fiscal 2001, was partially offset
by: (1) increased fixed infrastructure costs; and (2) increased third party
costs necessary to support global customer service expectations.

Our services gross margin increased to 41.1% for the three months ended March
31, 2002, from 37.3% for the three months ended December 30, 2001. The
sequential 3.8 percentage point increase in the services gross margin rate was
principally due to lower overall costs generated by the workforce reduction and
other actions taken to reduce services infrastructure. We expect our services
gross margin to remain in the low- to mid- 40% range in the fourth quarter of
fiscal 2002.

Operating expenses
(dollars in millions)

|                                              |                            |   |                    |        |  |                   |     |       |        |  |        |                |  |   |               |       |  |        |       |       |  |  |         |  | 
|--------------------------------------------- | -------------------------- | - | ------------------ | ------ |  | ----------------- | --- | ----- | ------ |  | ------ | -------------- |  | - | ------------- | ----- |  | ------ | ----- | ----- |  |  | ------- |  | 
|                                              |                            |   | Three Months Ended |        |  | Nine Months Ended |    
|                                              |                            |   |                    |        |  |                   |    
|                                              |                            |   | March 31, 2002     |        |  | April 1, 2001     |     |       | Change |  |        | March 31, 2002 |  |   | April 1, 2001 |       |  | Change |      
|Research and development                      |                            | $ | 468                |        |  | $                 | 486 |       |        |  | (3.7)% |                |  | $ | 1,369         |       |  | $      | 1,473 |       |  |  | (7.1)%  | 
|                                              | Percentage of net revenues |   |                    | 15.1%  |  |                   |     | 11.9% |        |  |        |                |  |   |               | 15.1% |  |        |       | 10.3% |  |  |         |  | 
|Selling, general and administrative           |                            | $ | 991                |        |  | $                 | 948 |       |        |  | 4.5%   |                |  | $ | 2,918         |       |  | $      | 3,371 |       |  |  | (13.4)% | 
|                                              | Percentage of net revenues |   |                    | 31.9%  |  |                   |     | 23.2% |        |  |        |                |  |   |               | 32.2% |  |        |       | 23.7% |  |  |         |  | 
|Restructuring charges                         |                            | $ | (4)                |        |  | $                 |    |       |        |  | N/M    |                |  | $ | 521           |       |  | $      |      |       |  |  | N/M     | 
|                                              | Percentage of net revenues |   |                    | (0.1)% |  |                   |     | %    |        |  |        |                |  |   |               | 5.7%  |  |        |       | %    |  |  |         |  | 
|Goodwill amortization                         |                            | $ |                   |        |  | $                 | 105 |       |        |  | N/M    |                |  | $ |              |       |  | $      | 160   |       |  |  | N/M     | 
|                                              | Percentage of net revenues |   |                    | %     |  |                   |     | 2.6%  |        |  |        |                |  |   |               | %    |  |        |       | 1.1%  |  |  |         |  | 
|Purchased in-process research and
development |                            | $ |                   |        |  | $                 | 1   |       |        |  | N/M    |                |  | $ | 3             |       |  | $      | 72    |       |  |  | (95.8)% | 
|                                              | Percentage of net revenues |   |                    | %     |  |                   |     | %    |        |  |        |                |  |   |               | %    |  |        |       | 0.5%  |  |  |         |  | 

Research and development expenses

R&D expenses, as a percentage of total net revenues, increased to 15.1% in the
third quarter and the first nine months of fiscal 2002, respectively, from
11.9% and 10.3% in the corresponding periods of fiscal 2001. The increases in
the percentage of R&D expenses to total net revenues are the result of a
decrease in revenues in the third quarter and first nine months of fiscal 2002,
as compared with the corresponding periods of fiscal 2001. In dollars, R&D
expenses decreased by 3.7% to $468 million in the third quarter of fiscal 2002,
as compared with $486 million for the corresponding period of fiscal 2001, and
by 7.1% to $1,369 million in the first nine months of fiscal 2002, as compared
with $1,473 million for the corresponding period of fiscal 2001.

In dollars, the decrease in R&D expenses for the third quarter of fiscal 2002,
as compared with the corresponding period of fiscal 2001, was a result of: (1)
significant cost cutting measures in the areas of consulting, travel and other
types of discretionary spending; and (2) lower costs incurred for pre-customer
release units (prototypes) developed during the early phases of product
development. These reductions in expenses were partially offset by: (1) higher
variable compensation; and (2) higher depreciation costs.

In dollars, the decrease in R&D expenses for the first nine months of fiscal
2002, as compared with the corresponding period of fiscal 2001, was a result
of: (1) significant cost cutting measures in the areas of consulting, travel
and other types of discretionary spending; (2) lower costs incurred for
prototype development; (3) a reduction in incentive compensation costs; and (4)
a decrease in compensation costs as a result of our mandatory shutdown in July
2001. These reductions were partially offset by higher depreciation costs. In
general, fluctuations in R&D expenses will occur depending on the timing of
product introductions, among other factors.

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



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products that utilize the Java
platform, Solaris Operating Environment 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 expect that the dollar
amount of R&D expenses for the fourth quarter of fiscal 2002 will be in the
same range as the amount of R&D expenses incurred during the third quarter of
fiscal 2002. It is managements long-term objective to invest 10
 11% of our
net revenues in R&D.

Selling, general and administrative expenses

SG&A expenses, as a percentage of total net revenues, increased to 31.9% and
32.2% in the third quarter and first nine months of fiscal 2002, respectively,
from 23.2% and 23.7% in the corresponding periods of fiscal 2001. The increases
in the percentage of SG&A expenses to total net revenues are the result of a
decrease in revenues in the third quarter and first nine months of fiscal 2002,
as compared with the corresponding periods of fiscal 2001.

In dollars, SG&A expenses increased by $43 million to $991 million in the third
quarter of fiscal 2002, as compared with $948 million in the third quarter of
fiscal 2001, due to higher variable compensation costs, partially offset by:
(1) cost cutting measures in the areas of travel, advertising, marketing,
facilities and other types of discretionary spending; and (2) lower
headcount-related costs as a result of our restructuring in the second quarter
of fiscal 2002.

In dollars, SG&A expenses decreased by $453 million to $2,918 million in the
first nine months of fiscal 2002, as compared with $3,371 million in the
corresponding period of fiscal 2001, as a result of: (1) significant cost
cutting measures in the areas of travel, advertising, marketing, facilities and
other types of discretionary spending; (2) lower headcount-related costs as a
result of our restructuring in the second quarter of fiscal 2002; and (3) a
decrease in compensation costs during the first quarter of fiscal 2002 (as a
result of our mandatory shutdown in July 2001).

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. Our company performance-based compensation
incentives costs could increase or decrease during the fourth quarter of fiscal
2002, as compared with the third quarter of fiscal 2002, depending on our
ability to achieve certain financial goals. If we are able to achieve our
financial goals for the fourth quarter of fiscal 2002, we would expect SG&A
expenses to increase slightly, as compared with the SG&A expenses we recognized
in the third quarter of fiscal 2002.

Restructuring charges

The following discussion should be read in connection with Note 7,
Restructuring Charges in the Notes to Condensed Consolidated Financial
Statements (Unaudited). Also, for the impact of the restructuring on our future
cash flows, see discussion under Liquidity and Capital Resources.

In the fourth quarter of fiscal 2001, Sun elected to exit certain building
leases and building projects and charged approximately $75 million for facility
exit costs associated with this decision. As a result of the continued
deterioration of certain commercial real estate markets, we reduced our
sublease income assumptions and, accordingly, recorded an additional $25
million charge ($14 million and $11 million in the first and third quarters of
fiscal 2002, respectively) to reflect this change in estimates. As of March 31,
2002, the revised estimated facility exit cost of $100 million is net of
approximately $30 million in estimated sublease income.

In the second quarter of fiscal 2002, we began implementing a workforce
reduction and facility exit plan in response to the continuing global economic
slowdown. This restructuring resulted in a charge of $511 million (consisting
of a $146 million workforce reduction charge and a $365 million excess facility
charge). The goal



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of the restructuring is to reduce costs and improve operating
efficiencies in order to adjust to the current business environment.
Specifically, it is our intent under the plan to reduce headcount by
approximately 9% (or 3,400 employees and 500 contractors) and to eliminate
excess facility capacity in light of revised facility requirements. During the
third quarter of fiscal 2002, we reduced our estimate of the total costs of
$511 million associated with this restructuring activity and recorded an
adjustment of $15 million. The amount reflects the settlement
for one particular lease obligation.

The following discussion relates to the restructuring activities implemented in
the second quarter of fiscal 2002.

Worldwide workforce reduction

We recorded a workforce reduction charge of $146 million related to severance
and fringe benefits for terminated employees. The restructuring will result in
the termination of approximately 3,400 employees across all employee levels,
business functions, operating units, and geographic regions.As of March 31,
2002, approximately 3,250 employees had been terminated as a result of the
restructuring. We anticipate that the remaining identified employees will be
terminated during the fourth quarter of fiscal 2002, depending on the local
employment laws that govern such employees.

Consolidation of excess facilities

We recorded a charge of $365 million related to the consolidation of excess
facilities. The facility exit charges include:



| |  |  | $282 million of estimated future obligations for
non-cancelable lease payments (net of $80 million of
estimated sublease income) or termination fees generated by
exiting excess rental facilities. The Company estimated the
cost of exiting and terminating the facility leases based on
the contractual terms of the agreements and then current
real estate market conditions. In addition, the Company
intends to sublease certain leased facilities and estimated
the sublease income based on then current real estate market
conditions or, where applicable, amounts being negotiated;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | $66 million for the impairment of in-process
construction costs related to the termination of certain
building construction projects; and                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  |  | $17 million for the impairment of property and
equipment (primarily leasehold improvements) for which there
are insufficient cash flows to support the carrying cost.
The property and equipment impairment was determined based
on the difference between the assets estimated fair value
and their carrying value as of December 30, 2001.                                                                                                                                                                                                                                                  

The Company expects to exit the facilities relating to the amounts accrued
under the restructuring by no later than December 31, 2002.

Goodwill amortization

On July 1, 2001, we early-adopted SFAS 142. In accordance with SFAS 142,
goodwill is no longer amortized. There was no impairment of goodwill upon
adoption of SFAS 142. We are required to perform goodwill impairment tests on
an annual basis, and on an interim basis in certain circumstances. There can be
no assurance that future goodwill impairments tests will not result in a charge
to earnings. See Note 2, Summary of Significant Accounting Policies in the
Notes to Condensed Consolidated Financial Statements (Unaudited) for further
discussion. The $105 million and $160 million goodwill amortization for the
third quarter and first nine months of fiscal 2001, respectively, was primarily
attributable to the acquisitions of Cobalt Networks, Inc.



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(acquired in December
2000), Star Division Corporation and certain assets of Star Division Software
Entwicklung und Vertriebs GmbH, and MAXSTRAT Corporation.

Purchased in-process research and development expenses

Overview

In the first nine months 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 second
and third quarter of fiscal 2002. During fiscal 2001, there was no purchased
IPRD in the first quarter, $71 million in the second quarter, and $1 million in
the third quarter. 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.

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. In determining the value assigned to IPRD, we
considered 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.

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.

Valuation assumptions

The following table summarizes the significant assumptions underlying the
valuation related to the IPRD for the nine months ended March 31, 2002 (dollars
in millions):

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



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Overview of significant purchased IPRD in the nine months ended March 31, 2002

Included below are further details regarding the nature of the purchased
technology acquired during the nine months ended March 31, 2002.

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. We completed the development of this technology in the third quarter
of fiscal 2002, and the total cost at completion was not materially different
from the estimated total costs as of the acquisition date.

Overall status of business combinations prior to fiscal 2002

With respect to acquisitions completed prior to fiscal 2002, 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
March 31, 2002.

Loss on equity investments
(dollars in millions)

|                                |                            |   |                    |        |  |                   |      |        |        |  |       |               |  |   |               |        |  |        |      |      |  |  |     |  | 
|------------------------------- | -------------------------- | - | ------------------ | ------ |  | ----------------- | ---- | ------ | ------ |  | ----- | ------------- |  | - | ------------- | ------ |  | ------ | ---- | ---- |  |  | --- |  | 
|                                |                            |   | Three Months Ended |        |  | Nine Months Ended |     
|                                |                            |   |                    |        |  |                   |     
|                                |                            |   | March 31, 2002     |        |  | April 1, 2001     |      |        | Change |  |       | March 31,2002 |  |   | April 1, 2001 |        |  | Change |     
|Loss on equity investments,
net |                            | $ | (23)               |        |  | $                 | (13) |        |        |  | 76.9% |               |  | $ | (81)          |        |  | $      | (12) |      |  |  | N/M | 
|                                | Percentage of net revenues |   |                    | (0.7)% |  |                   |      | (0.3)% |        |  |       |               |  |   |               | (0.9)% |  |        |      | 0.1% |  |  |     |  | 

Our equity investments portfolio, which primarily consists of publicly traded
and non-publicly traded technology companies contained within our
internally-managed venture capital fund, was negatively impacted by the decline
in The Nasdaq National Market and the adverse macroeconomic conditions of the
technology sector during the third quarter and first nine months of fiscal
2002, as compared with the corresponding periods of fiscal 2001. The loss on
equity investments in the third quarter and first nine months of fiscal 2002
included impairment losses on minority equity investments in publicly and
privately traded companies of $22 million and $74 million, respectively.

Our decision to sell equity investments in the future will depend upon numerous
factors, including economic and strategic factors, many of which are not
predictable nor within our control.



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Interest income, net
(dollars in millions)

|                     |                            |   |                    |      |  |                   |     |      |        |  |         |                |  |   |               |      |  |        |     |      |  |  |        |  | 
|-------------------- | -------------------------- | - | ------------------ | ---- |  | ----------------- | --- | ---- | ------ |  | ------- | -------------- |  | - | ------------- | ---- |  | ------ | --- | ---- |  |  | ------ |  | 
|                     |                            |   | Three Months Ended |      |  | Nine Months Ended |    
|                     |                            |   |                    |      |  |                   |    
|                     |                            |   | March 31, 2002     |      |  | April 1, 2001     |     |      | Change |  |         | March 31, 2002 |  |   | April 1, 2001 |      |  | Change |    
|Interest income, net |                            | $ | 77                 |      |  | $                 | 110 |      |        |  | (30.0)% |                |  | $ | 252           |      |  | $      | 276 |      |  |  | (8.7)% | 
|                     | Percentage of net revenues |   |                    | 2.5% |  |                   |     | 2.7% |        |  |         |                |  |   |               | 2.8% |  |        |     | 1.9% |  |  |        |  | 

The decline in interest income (net of interest expense) in the third quarter
and the first nine months of fiscal 2002, as compared with the corresponding
periods of fiscal 2001, is primarily due to a combination of lower interest
rates and lower cash and marketable debt securities balances, substantially
offset by a $38 million and $105 million gain realized on the sale of certain
fixed income marketable debt securities during the third quarter and the first
nine months of fiscal 2002, respectively.

The average duration of our portfolio of marketable debt securities decreased
to 1.24 years as of March 31, 2002 from 1.49 years as of April 1, 2001. In
general, we would expect that the volatility of this portfolio would decrease
as its duration decreases. 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 debt 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, net in the fourth quarter of fiscal 2002 will be
lower than our interest income, net earned in the third quarter of fiscal 2002,
primarily due to lower gains on sales of marketable debt securities.

Income taxes
(dollars in millions)

|                                     |                                                                                                  |   |                    |       |  |                   |     |       |        |  |          |                |  |   |               |       |  |        |     |       |  |  |          |  | 
|------------------------------------ | ------------------------------------------------------------------------------------------------ | - | ------------------ | ----- |  | ----------------- | --- | ----- | ------ |  | -------- | -------------- |  | - | ------------- | ----- |  | ------ | --- | ----- |  |  | -------- |  | 
|                                     |                                                                                                  |   | Three Months Ended |       |  | Nine Months Ended |    
|                                     |                                                                                                  |   |                    |       |  |                   |    
|                                     |                                                                                                  |   | March 31, 2002     |       |  | April 1, 2001     |     |       | Change |  |          | March 31, 2002 |  |   | April 1, 2001 |       |  | Change |    
|Provision (benefit)
for income taxes |                                                                                                  | $ | (57)               |       |  | $                 | 113 |       |        |  | (150.4)% |                |  | $ | (490)         |       |  | $      | 685 |       |  |  | (171.5)% | 
|                                     | Percentage of
income (loss)
before taxes and
cumulative effect
of change in
accounting
principle |   |                    | 60.8% |  |                   |     | 45.4% |        |  |          |                |  |   |               | 43.1% |  |        |     | 39.1% |  |  |          |  | 

Our effective income tax benefit rate was 60.8% and 43.1% for the third quarter
and first nine months of fiscal 2002, respectively, as compared with effective
income tax expense rates of 45.4% and 39.1% for the corresponding periods of
fiscal 2001.

The difference between our current and prior quarter tax rates is primarily due
to a change in our estimate of projected statutory credits to be recognized in
the current fiscal year.

The primary difference between our current and prior nine-month tax rates can
be explained by: (1) the elimination of certain non-recurring, non-deductible
accounting charges resulting from our adoption of SFAS No. 142; (2) increased
projected statutory credits to be recognized in the current fiscal year; and
(3) a reduction in benefits associated with decreased profitability in certain
low-tax, non-U.S. jurisdictions.

We currently expect the fourth quarter fiscal 2002 tax benefit rate to be
46.0%. Our expected rate, based on current tax law and current estimates of
earnings, is subject to change.



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LIQUIDITY AND CAPITAL RESOURCES
(dollars in millions)

|                             |                                                             |   |                |       |  |               |       |       |        |   |         |       | 
|---------------------------- | ----------------------------------------------------------- | - | -------------- | ----- |  | ------------- | ----- | ----- | ------ | - | ------- | ----- | 
|                             |                                                             |   | March 31, 2002 |       |  | June 30, 2001 |       |       | Change |  
|Cash and cash equivalents    |                                                             | $ | 1,672          |       |  | $             | 1,472 |       |        | $ | 200     |      
|Marketable debt securities   |                                                             |   | 4,276          |       |  |               | 4,699 |       |        |   | (423)   |      
|                             |                                                             |   |                |       |  |               |       |       |       
|                             | Total cash, cash equivalents and marketable debt securities |   | $              | 5,948 |  |               | $     | 6,171 |        |   | $       | (223) | 
|                             | Percentage of total assets                                  |   |                | 35.2% |  |               |       | 33.9% |        |   |         | 3.8%  | 
|Days sales outstanding (DSO) |                                                             |   | 70             |       |  |               | 67    |       |        |   | (4.5)%  |      
|Inventory turns              |                                                             |   | 10.6           |       |  |               | 12.5  |       |        |   | (15.2)% |      

|                                                     |  |                   |       |  |               |   |         |        |  |   |         | 
|---------------------------------------------------- |  | ----------------- | ----- |  | ------------- | - | ------- | ------ |  | - | ------- | 
|                                                     |  | Nine Months Ended |      
|                                                     |  | March 31, 2002    |       |  | April 1, 2001 |   |         | Change | 
|Cash provided by operating activities                |  | $                 | 703   |  |               | $ | 2,023   |        |  | $ | (1,320) | 
|Cash used in investing activities                    |  |                   | (248) |  |               |   | (2,044) |        |  |   | 1,796   | 
|Cash used in financing activities                    |  |                   | (255) |  |               |   | (541)   |        |  |   | 286     | 
|Net increase (decrease) in cash and cash equivalents |  | $                 | 200   |  |               | $ | (562)   |        |  | $ | 762     | 

Our long-term strategy is to maintain the minimum amount of liquidity necessary
in subsidiaries for operational purposes, and to invest the remaining amount of
our cash in highly liquid cash equivalents and marketable debt securities.
Accordingly, in addition to the $1,672 million in cash and cash equivalents we
currently have for shorter-term requirements, we have approximately $4,276
million in marketable debt securities that are available for future operating,
financing and investing activities, for a total liquidity position of $5,948
million.

We have a $500 million revolving credit facility (Facility) with a syndicate
of commercial banks. No amounts were outstanding under the Facility as of March
31, 2002. The Facility is available subject to compliance with certain
covenants and expires August 2002. If we failed to be in compliance with these
covenants, the banks would have no obligation to lend us any money under this
credit facility. Sun was in compliance with the financial covenants as of March
31, 2002.

In addition, Sun and its subsidiaries had uncommitted lines of credit
aggregating approximately $552 million. No amounts were drawn from these lines
of credit as of March 31, 2002. Interest rates and other terms of borrowing
under these lines of credit vary from country to country depending on local
market conditions at the time of borrowing. There is no guarantee that the
banks would approve our request for funds under these uncommitted lines of
credit.

Our future cash obligations consist primarily of our current liabilities and
our long-term debt. Our current liabilities include approximately $165 million
related to the restructuring charges expected to be paid in the next twelve
months. Also, we have $1.5 billion in unsecured debt securities (the Senior
Notes) that are due at various times between August 2002 and August 2009 ($200
million is due on August 15, 2002 and bears interest at 7%). The Senior Notes
are subject to compliance with certain covenants. As of March 31, 2002, Sun was
in material compliance with the covenants. If we failed to be in compliance
with these covenants, the Trustee or Holders of not less than 25% in principal
amount of the Senior Notes would have the ability to demand immediate payment
of all amounts outstanding.

The remaining non-current obligations totaling $873 million as of March 31,
2002 ($884 million as of April 1, 2001) consist primarily of deferred tax
liabilities, deferred revenue and amounts to be paid in excess of one year on
abandoned leases. As of March 31, 2002, we expect to pay $189 million of the
facility restructuring accrual over the respective facility lease terms through
fiscal 2018. The facility accrual includes estimates such as expected sublease
income or termination fees; actual results may materially differ from our
current estimates, resulting in a change in our expected cash flow
requirements. See Note 7, Restructuring Charges in the Notes to the Condensed
Consolidated Financial Statements (Unaudited) for further discussion. None of
these non-



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current obligations have covenants or other requirements which could
accelerate Suns obligation to pay these amounts.

We believe that the liquidity provided by existing cash, cash equivalents,
marketable debt securities, 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. 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.

Changes in Cash Flow

During the nine months ended March 31, 2002, cash, cash equivalents and
marketable debt securities decreased by $223 million ($200 million increase in
cash and cash equivalents and $423 million decrease in marketable debt
securities). This decrease is primarily attributable to the $245 million we
spent on our equity activities ($366 million spent to purchase our common stock
in the open market, less $121 million received as consideration for the
issuance of Suns common stock under our stock option and employee stock
purchase plans). In addition, we spent approximately $461 million for real
estate development and equipment additions to support product development and
infrastructure initiatives. This amount was offset by our positive cash flow
from operating activities of $703 million.

Cash flows provided by operating activities were generated primarily from net
income (as adjusted by noncash items) and decreases in accounts receivable
(net), inventory, as well as other assets; these cash influxes were partially
offset by decreases in accounts payable and other liabilities. Accounts
receivable (net) decreased to $2,407 million at March 31, 2002 from $2,955
million at June 30, 2001. The decrease in accounts receivable (net) was
primarily due to the lower volume of sales, partially offset by an increase in
days of sales outstanding (DSO). The increase in DSO was primarily attributable
to earning revenue later in the quarter, as well as the timing of customer
payments. Inventory decreased to $554 million at March 31, 2002 from $1,049
million at June 30, 2001. While we were successful in decreasing inventory
during the first nine months of fiscal 2002, inventory turns slightly declined.
The decrease in inventory turns was a reflection of increased inventory for new
product releases and lower shipment volumes, and was impacted further by the
decrease in demand for our products due to adverse macroeconomic conditions.
Inventory management will continue to be an area of focus as we balance the
need to maintain strategic inventory levels to help 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 $1,047 million in the first nine months of fiscal 2002
as compared with June 30, 2001 is primarily due to the reduction in inventory
levels and operating expenses. In addition, we reduced our other liabilities by
$116 million in severance and benefits payments and $14 million in
facilities-related payments in connection with our restructuring.

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.



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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
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. Two of our competitors, HP and
Compaq, have merged, creating an entity that is significantly larger than Sun.
To the extent that they are successful in integrating their businesses, the
combined company could have greater access to resources, and our business and
operating results could be adversely affected by the increased competitive
pressures.

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), the combined HP and
Compaq company, in addition to Intel and Microsoft.

This competition creates increased pressure, including pricing pressure, on
our products . We expect this competitive pressure to continue through calendar
year-end, due to continued new product introductions and aggressive marketing
programs from our competitors.

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. 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
will 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



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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.

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



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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.

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.



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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:

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.

Business Practices, Processes and Information Systems.In order to increase
efficiencies and remain competitive in a rapidly changing industry, we are
continually improving and changing our business practices, processes and
information systems. In this regard, during the first month of fiscal 2003, we
plan to upgrade our business practices and related information systems
affecting order entry, order fulfillment and accounts receivable (the
Upgrade). The timing and duration of the implementation of the Upgrade are
subject to a number of risks due to the complexity of the conversion process.
This includes verifying the accuracy of the business data and information prior
to conversion, the actual conversion of that data and information to the new
system and then using that business data and information in the new system
after the conversion. In addition, because the Upgrade is enterprise-wide,
there is a need for substantial and comprehensive enterprise-wide employee
training. While testing of these new systems and processes and training of
employees are done in advance of implementation, there are inherent limitations
in our ability to simulate a full-scale operating environment in advance of
implementation. Moreover, the implementation will require Sun to be without
automated order entry, order fulfillment and accounts receivable capabilities
for a period of time as the company shifts to the new systems. There can be no
assurance that this interruption in the use and availability of enterprise-wide
information systems will not have an adverse effect on our business and
operating results. Finally, to the extent that we encounter problems after
introduction of these new systems and practices that prevent or limit their
full utilization, our operating results could be adversely affected.

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.

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 we do not meet our long-term forecasts, 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.

Adverse Business Conditions in Specific Industries.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 adverse economic conditions,
such as we experienced over the last two quarters of fiscal 2001 and the first
three quarters of fiscal 2002, may continue to result in decreased



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revenues and
earnings. Our revenues are dependent on the level of technology capital
spending in the United States and international economies. A number of
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.

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 on-going decrease in IT
spending and resulting decrease in revenues has put pressure on high technology
companies to retain 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, is 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 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.



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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 March 31, 2002. Actual results
may differ materially.

Interest Rate Sensitivity

Our investment portfolio of marketable debt securities consists primarily of
fixed income instruments with an average duration of 1.24 years as of March 31,
2002. The primary objective of our investments in marketable 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 $59 million decrease in the fair value of our investments in
marketable debt securities as of March 31, 2002.

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 debt 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
$23 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. As a result, the Company purchases currency options and forward
contracts to reduce or eliminate certain foreign currency exposures that can be
identified and quantified. The Companys hedges are primarily intended to
protect changes in the value of the U.S. dollar.

Based on our foreign currency exchange instruments outstanding at March 31,
2002, we estimate a maximum potential one-day loss in fair value of
approximately $9 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 three month and nine month periods ended March
31, 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



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June 30, 2002. Issues
facing us as a result of the introduction of the Euro include converting
information technology systems, 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 equity 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 $5 million decrease in the fair
value of our available-for-sale equity investments as of March 31, 2002. At
March 31, 2002, three equity securities represented approximately $17 million
of the total fair value of the marketable equity securities of $24 million.




PART II  OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

On February 11, 2002, Eastman Kodak Company (Kodak) filed a lawsuit in the
U.S. District Court for the Western District of New York, making various patent
infringement claims against Sun with respect to aspects of our Java
technologies. The lawsuit was subsequently amended and served on the Company on
April 3, 2002. The Lawsuit seeks injunctive relief against future infringement,
unspecified damages for past infringement together with costs and attorneys
fees. Based on discussions over many months with Kodak, we believe that this
suit is without merit, and, accordingly, will defend ourselves vigorously. Sun
cannot forecast at this time with reasonable certainty the potential costs
associated with an adverse outcome of this matter.

On March 8, 2002, Sun filed a suit against Microsoft Corporation (Microsoft) in
the United States District Court for the Northern District of California
pursuant to United States and State of California antitrust laws alleging
illegal efforts to acquire, maintain and expand a number of monopolies; illegal
tying arrangements; exclusive dealings; copyright infringement; unreasonable
restraint of trade; and unfair competition. Sun is seeking remedies that
include: (1) preliminary injunctions requiring Microsoft to distribute Suns
binary implementation of the Java Run-time Environment as part of Windows XP
and Internet Explorer and to stop the unlicensed distribution of Microsofts
Virtual Machine for Java in violation of the January 23, 2001 settlement
agreement; (2) a permanent injunction to restore competition to the markets in
which Microsoft is unlawfully attempting to acquire, maintain and expand a
number of monopolies; and (3) compensation for losses suffered by Sun as a
result of Microsofts unlawful actions.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

| |       |  |                                                                                                               
| | ----- |  | --------------------------------------------------------------------------------------------------------------
| | 10.84 |  | Registrants Nonqualified Deferred Compensation Plan, as
amended June 30, 2002.                               
| | 10.94 |  | Promissory Notes issued to Robert L. Long on November 12, 2001 and January 10, 2002, and related documents (1)
| | 10.95 |  | Promissory Notes issued to Masood A. Jabbar on November 7, 2001, and related documents (1)                    



| | (1) | Loans paid in full as of February 8, 2002.
| | --- | ------------------------------------------



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(b)  Reports on Form 8-K



| | (1) | We filed a report on Form 8-K with the Securities and
Exchange Commission on February 14, 2002 announcing that we were
informed by Eastman Kodak Company that Kodak had filed a lawsuit
on February 11, 2002 in the U.S. District Court for the Western
District of New York, alleging patent infringement against Sun
with respect to aspects of Suns Java technologies.                                                                                                                                                                                                                                                                                                                        
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) | The Company filed a report on Form 8-K with the
Securities and Exchange Commission on May 3, 2002, announcing: (1)
on April 25, 2002, the resignation of Michael E. Lehman, Executive
Vice President, Corporate Resources and Chief Financial Officer
and the appointment of Stephen T. McGowan as Executive Vice
President, Corporate Resources and Chief Financial Officer
effective as of July 1, 2002; and (2) on May 1, 2002, the
resignation of Edward J. Zander, President and Chief Operating
Officer, and the appointment of Scott G. McNealy, Chairman of the
Board and Chief Executive Officer, as Chairman of the Board, Chief
Executive Officer and President, effective July 1, 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: May 13, 2002



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