SUN MICROSYSTEMS, INC. - 8-K filing on 2005-01-13

EXHIBIT 99.1

SUN MICROSYSTEMS REPORTS PROFIT FOR

FISCAL 2005 SECOND QUARTER

SANTA CLARA, Calif. - Jan 13, 2005 - Sun Microsystems, Inc., (NASDAQ: SUNW) reported results today for its fiscal second quarter, which ended December 26, 2004.

Revenues for the second quarter were $2.843 billion, a decrease of 1.6 percent as compared with $2.888 billion for the second quarter of fiscal 2004. Total gross margin as a percent of revenues was 42.3 percent, an increase of 0.5 percentage points as compared with the second quarter of fiscal 2004. Net profit for the second quarter of fiscal 2005 was $19 million or $0.01 per share as compared with a net loss of $125 million or a net loss of $0.04 per share for the second quarter of fiscal 2004. This Q2 fiscal 2005 profit includes a charge of $24 million for previously announced workforce and real estate restructuring, a $9 million gain on equity investments, and a $6 million benefit for related tax effects. Excluding these amounts, net income for Q2 fiscal 2005 on a non-GAAP basis was $28 million or $0.01 per share as compared with a net loss, on a non-GAAP basis, in Q2 fiscal 2004 of $99 million or a net loss of $0.03 per share.

Cash generated from operating activities was $52 million for the quarter, and the cash and marketable debt securities balance increased to $7.464 billion.

“The second quarter delivered many positives, including x64 and x86 server unit volume growth, positive cash flow from operations, and stunning market reviews of Solaris^TM 10 OS. It feels good to ring up a modest GAAP profit,” said Scott McNealy, chairman and chief executive officer, Sun Microsystems, Inc. “Sun has one of its most rock solid product line-ups in history today. Innovation is increasingly marked by business models as much as technology. Sun’s $1 per CPU/hour and the Sun Java^TM Enterprise System are emerging models for recurring revenue. We are clearly reestablishing relevance in key markets.”

Steve McGowan, Sun’s chief financial officer and executive vice president, corporate resources, said, “We’re pleased with our progress this quarter toward achieving our key financial goals. On a year-over-year basis, we increased our gross margin percentage, improved productivity by reducing R&D and SG&A expenses by $136 million and continued to generate positive cash flow from operations. This was all accomplished without compromising our product roadmaps.”

Sun has scheduled a conference call today to discuss its earnings for the second quarter at 1:30 p.m. (PT), which is being broadcast live at www.sun.com/investors.

About Sun Microsystems, Inc.

Since its inception in 1982, a singular vision — “The Network Is The Computer^TM” — has propelled Sun Microsystems, Inc. (Nasdaq: SUNW) to its position as a leading provider of industrial-strength hardware, software and services that make the Net work. Sun can be found in more than 100 countries and on the World Wide Web at http://www.sun.com.

FOR MORE INFORMATION

INVESTOR CONTACT:

Jeff Boldt (650) 786-0333

jeff.boldt@sun.com

MEDIA CONTACT:

May G. Petry (650) 786-0034

may.petry@sun.com

INDUSTRY ANALYST CONTACT:

Joanne Masters (650) 786-0847

joanne.masters@sun.com

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding that innovation is increasingly marked by business models as much as technology, that Sun’s $1 per CPU/hour and the Sun Java Enterprise System are emerging models for recurring revenue, that we have clearly reestablished relevance in key markets and that our key financial goals were all accomplished without compromising our product roadmaps. Factors that could cause results to differ include risks associated with lack of success in technological advancements; lack of acceptance of new products; lack of marketing success; and cancellation or delay of projects. These and other risks are detailed from time to time in Sun’s periodic reports that are filed with the Securities and Exchange Commission, including our annual report on Form 10-K for the fiscal year ended June 30, 2004 and our quarterly report on Form 10-Q for the fiscal quarter ended September 26, 2004.

The company believes that presentation of results including items such as net income (loss) and gross margin on a non-GAAP basis provides meaningful supplemental information to both management and investors that is indicative of the Company’s core operating results and facilitates comparison of operating results across reporting periods.

Sun, Sun Microsystems, the Sun logo, Solaris, Sun Java Enterprise System and The Network Is The Computer are trademarks or registered trademarks of Sun Microsystems, Inc. in the United States and in other countries.

SUN MICROSYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in millions, except per share amounts)


	Three Months Ended					Six Months Ended
	December 26, 2004		December 28, 2003			December 26, 2004			December 28, 2003
Net revenues:
Products	$	1,842	$	1,944		$	3,518		$	3,578
Services		1,001		944			1,953			1,846

Total net revenues		2,843		2,888			5,471			5,424
Cost of sales:
Cost of sales-products		1,068		1,107			2,072			2,072
Cost of sales-services		572		573			1,123			1,128

Total cost of sales		1,640		1,680			3,195			3,200

Gross margin		1,203		1,208			2,276			2,224
Operating expenses:
Research and development		447		471			863			938
Selling, general and administrative		716		828			1,400			1,626
Restructuring charges		24		(10	)		132			(9	)
Purchased in-process research and development		—		—			—			1

Total operating expenses		1,187		1,289			2,395			2,556

Operating income (loss)		16		(81	)		(119	)		(332	)
Gain (loss) on equity investments, net		9		(36	)		5			(61	)
Interest income, net		33		20			64			41

Income (loss) before income taxes		58		(97	)		(50	)		(352	)
Provision for income taxes		39		28			78			59

Net income (loss)	$	19	$	(125	)	$	(128	)	$	(411	)

Net income (loss) per common share – basic	$	0.01	$	(0.04	)	$	(0.04	)	$	(0.13	)

Net income (loss) per common share – diluted	$	0.01	$	(0.04	)	$	(0.04	)	$	(0.13	)

Shares used in the calculation of net income (loss) per common share – basic		3,360		3,262			3,349			3,248

Shares used in the calculation of net income (loss) per common share – diluted		3,400		3,262			3,349			3,248

SUN MICROSYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions)


	December 26, 2004		June 30, 2004*
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,863	$	2,141
Short-term marketable debt securities		1,776		1,460
Accounts receivable, net		1,842		2,339
Inventories		429		464
Deferred and prepaid tax assets		88		62
Prepaid expenses and other current assets		869		837

Total current assets		6,867		7,303

Property, plant and equipment, net		1,903		1,996
Long-term marketable debt securities		3,825		4,007
Goodwill		406		406
Other acquisition-related intangible assets, net		90		127
Other non-current assets, net		648		664

	$	13,739	$	14,503

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt and short-term borrowings	$	—	$	257
Accounts payable		963		1,057
Accrued payroll-related liabilities		604		622
Accrued liabilities and other		1,196		1,308
Deferred revenues		1,313		1,617
Warranty reserve		236		252

Total current liabilities		4,312		5,113

Long-term debt		1,145		1,175
Long-term deferred revenues		519		557
Other non-current obligations		1,242		1,220
Total stockholders’ equity		6,521		6,438

	$	13,739	$	14,503

*	Derived from audited financial statements

SUN MICROSYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in millions)


	Six Months Ended
	December 26, 2004			December 28, 2003
Cash flows from operating activities:
Net loss	$	(128	)	$	(411	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		323			361
Amortization of other intangible assets and unearned equity compensation		49			46
Deferred taxes		(3	)		—
Loss (gain) on equity investments, net		(5	)		61
Purchased in-process research and development		—			1
Changes in operating assets and liabilities:
Accounts receivable, net		508			178
Inventories		37			(63	)
Prepaid and other assets		(76	)		(59	)
Accounts payable		(88	)		4
Other liabilities		(441	)		(449	)

Net cash provided by (used in) operating activities		176			(331	)

Cash flows from investing activities:
Purchases of marketable debt securities		(2,943	)		(5,065	)
Proceeds from sales of marketable debt securities		2,287			5,029
Proceeds from maturities of marketable debt securities		508			—
Proceeds from sales of equity investments, net		13			10
Acquisition of property, plant and equipment, net		(141	)		(127	)
Acquisition of spare parts and other assets		(42	)		(26	)
Payments for acquisitions, net of cash acquired		—			(190	)

Net cash used in investing activities		(318	)		(369	)

Cash flows from financing activities:
Proceeds from issuance of common stock, net		114			113
Principal payments on borrowings and other obligations		(250	)		—

Net cash provided by (used in) financing activities		(136	)		113

Net decrease in cash and cash equivalents		(278	)		(587	)
Cash and cash equivalents, beginning of period		2,141			2,015

Cash and cash equivalents, end of period	$	1,863		$	1,428

SUN MICROSYSTEMS, INC.

NON-GAAP CALCULATION OF NET INCOME (LOSS) EXCLUDING SPECIAL ITEMS

(unaudited)

(in millions, except per share amounts)


	Three Months Ended						Six Months Ended
	December 26, 2004			December 28, 2003			December 26, 2004			December 28, 2003
Calculation of net income (loss) excluding special items:
Net income (loss)	$	19		$	(125	)	$	(128	)	$	(411	)
Restructuring charges		24			(10	)		132			(9	)
Purchased in-process research and development		—			—			—			1
Loss (gain) on equity investments, net		(9	)		36			(5	)		61
Settlement of litigation		—			—			55			—
Related tax effects		(6	)		—			(13	)		—

Net income (loss) excluding special items	$	28		$	(99	)	$	41		$	(358	)

Net income (loss) excluding special items per common share – basic	$	0.01		$	(0.03	)	$	0.01		$	(0.11	)

Net income (loss) excluding special items per common share – diluted	$	0.01		$	(0.03	)	$	0.01		$	(0.11	)

Shares used in the calculation of net income (loss) excluding special items per common share – basic		3,360			3,262			3,349			3,248

Shares used in the calculation of net income (loss) excluding special items per common share – diluted		3,400			3,262			3,378			3,248

SUN MICROSYSTEMS, INC.

OPERATIONS ANALYSIS – CONSOLIDATED (UNAUDITED)


STATEMENTS OF OPERATIONS	FY 2005						FY 2004										FY 2003
(in millions except per share amounts)	Q1		Q2		FY05		Q1		Q2		Q3		Q4		FY04		Q1		Q2		Q3		Q4		FY03
NET REVENUES
Products	1,676		1,842		3,518		1,634		1,944		1,711		2,066		7,355		1,880		2,013		1,897		2,003		7,793
Services	952		1,001		1,953		902		944		940		1,044		3,830		867		902		893		979		3,641
TOTAL	2,628		2,843		5,471		2,536		2,888		2,651		3,110		11,185		2,747		2,915		2,790		2,982		11,434
Growth vs. prior year (%)	3.6	%	-1.6	%	0.9	%	-7.7	%	-0.9	%	-5.0	%	4.3	%	-2.2	%	-4.0	%	-6.2	%	-10.2	%	-12.8	%	-8.5	%
Growth vs. prior quarter (%)	-15.5	%	8.2	%			-15.0	%	13.9	%	-8.2	%	17.3	%			-19.7	%	6.1	%	-4.3	%	6.9	%

COST OF SALES
Products	949		1,068		2,017		965		1,107		980		1,238		4,290		1,093		1,118		1,021		1,110		4,342
Cost of settlement	55		0		55		0		0		0		0		0		0		0		0		0		0

Total	1,004		1,068		2,072		965		1,107		980		1,238		4,290		1,093		1,118		1,021		1,110		4,342
Services	551		572		1,123		555		573		603		648		2,379		522		534		526		568		2,150
TOTAL	1,555		1,640		3,195		1,520		1,680		1,583		1,886		6,669		1,615		1,652		1,547		1,678		6,492
% of revenue	59.2	%	57.7	%	58.4	%	59.9	%	58.2	%	59.7	%	60.6	%	59.6	%	58.8	%	56.7	%	55.4	%	56.3	%	56.8	%

PRODUCTS GROSS MARGIN
Products	727		774		1,501		669		837		731		828		3,065		787		895		876		893		3,451
% of product revenue	43.4	%	42.0	%	42.7	%	40.9	%	43.1	%	42.7	%	40.1	%	41.7	%	41.9	%	44.5	%	46.2	%	44.6	%	44.3	%
Cost of settlement	(55	)	0		(55	)	0		0		0		0		-0		0		0		0		0		-0
% of product revenue	-3.3	%	0.0	%	-1.6	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%

Total product margin	672		774		1,446		669		837		731		828		3,065		787		895		876		893		3,451
% of product revenue	40.1	%	42.0	%	41.1	%	40.9	%	43.1	%	42.7	%	40.1	%	41.7	%	41.9	%	44.5	%	46.2	%	44.6	%	44.3	%

Services gross margin	401		429		830		347		371		337		396		1,451		345		368		367		411		1,491
% of service revenue	42.1	%	42.9	%	42.5	%	38.5	%	39.3	%	35.9	%	37.9	%	37.9	%	39.8	%	40.8	%	41.1	%	42.0	%	41.0	%

Total excluding settlement	1,128		1,203		2,331		1,016		1,208		1,068		1,224		4,516		1,132		1,263		1,243		1,304		4,942
% of revenue	42.9	%	42.3	%	42.6	%	40.1	%	41.8	%	40.3	%	39.4	%	40.4	%	41.2	%	43.3	%	44.6	%	43.7	%	43.2	%
Cost of settlement	(55	)	0		(55	)	0		0		0		0		0		0		0		0		0		0
% of revenue	-2.1	%	0.0	%	-1.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%

TOTAL GROSS MARGIN	1,073		1,203		2,276		1,016		1,208		1,068		1,224		4,516		1,132		1,263		1,243		1,304		4,942
% of revenue	40.8	%	42.3	%	41.6	%	40.1	%	41.8	%	40.3	%	39.4	%	40.4	%	41.2	%	43.3	%	44.6	%	43.7	%	43.2	%

R&D	416		447		863		467		471		470		518		1,926		437		451		467		482		1,837
% of revenue	15.8	%	15.7	%	15.8	%	18.4	%	16.3	%	17.7	%	16.7	%	17.2	%	15.9	%	15.5	%	16.7	%	16.2	%	16.1	%
PURCHASED IN PROCESS R&D	0		0		0		1		0		0		69		70		0		4		0		0		4
% of revenue	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	2.2	%	0.6	%	0.0	%	0.1	%	0.0	%	0.0	%	0.0	%
SG&A	684		716		1,400		798		828		842		849		3,317		882		830		791		826		3,329
% of revenue	26.0	%	25.2	%	25.6	%	31.5	%	28.7	%	31.8	%	27.3	%	29.7	%	32.1	%	28.5	%	28.4	%	27.7	%	29.1	%
RESTRUCTURING CHARGES	108		24		132		1		(10	)	203		150		344		24		357		(4	)	(6	)	371
% of revenue	4.1	%	0.8	%	2.4	%	0.0	%	-0.3	%	7.7	%	4.8	%	3.1	%	0.9	%	12.2	%	-0.1	%	-0.2	%	3.2	%
IMPAIRMENT EXPENSE	0		0		0		0		0		0		49		49		0		2,125		0		0		2125
% of revenue	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	1.6	%	0.4	%	0.0	%	72.9	%	0.0	%	0.0	%	18.6	%

TOTAL OPERATING EXPENSES	1,208		1,187		2,395		1,267		1,289		1,515		1,635		5,706		1,343		3,767		1,254		1,302		7,666
% of revenue	46.0	%	41.8	%	43.8	%	50.0	%	44.6	%	57.1	%	52.6	%	51.0	%	48.9	%	129.2	%	44.9	%	43.7	%	67.0	%

OPERATING INCOME (LOSS)	(135	)	16		(119	)	(251	)	(81	)	(447	)	(411	)	(1,190	)	(211	)	(2,504	)	(11	)	2		(2,724	)
Operating margin	-5.1	%	0.6	%	-2.2	%	-9.9	%	-2.8	%	-16.9	%	-13.2	%	-10.6	%	-7.7	%	-85.9	%	-0.4	%	0.1	%	-23.8	%

Interest income, net	31		33		64		21		20		23		30		94		39		38		33		45		155
Gain (loss) on equity investments, net	(4	)	9		5		(25	)	(36	)	3		(6	)	(64	)	(31	)	(11	)	(16	)	(26	)	(84	)
Settlement income	0		0		0		0		0		0		1,597		1,597		0		0		0		0		0
PRETAX INCOME (LOSS)	(108	)	58		(50	)	(255	)	(97	)	(421	)	1,210		437		(203	)	(2,477	)	6		21		(2,653	)
Pretax income (loss) margin	-4.1	%	2.0	%	-0.9	%	-10.1	%	-3.4	%	-15.9	%	38.9	%	3.9	%	-7.4	%	-85.0	%	0.2	%	0.7	%	-23.2	%

INCOME TAX PROVISION (BENEFIT)	39		39		78		31		28		339		427		825		(92	)	(194	)	2		1,060		776
TAX RATE (%)	N/A		N/A		N/A		N/A		N/A		N/A		N/A		N/A		45.5	%	7.8	%	44.0	%	N/A		N/A

NET INCOME (LOSS) (Reported)	(147	)	19		(128	)	(286	)	(125	)	(760	)	783		(388	)	(111	)	(2,283	)	4		(1,039	)	(3,429	)
Growth vs. prior year (%)	48.6	%	115.2	%	68.9	%	-157.7	%	94.5	%	-19100.0	%	175.4	%	88.7	%	38.3	%	-429.7	%	110.8	%	-1803.3	%	-484.2	%
Growth vs. prior quarter (%)	-118.8	%	112.9	%			72.5	%	56.3	%	-508.0	%	203.0	%			-282.0	%	-1956.8	%	100.2	%	-26075.0	%
Net income (loss) margin	-5.6	%	0.7	%	-2.3	%	-11.3	%	-4.3	%	-28.7	%	25.2	%	-3.5	%	-4.0	%	-78.3	%	0.1	%	-34.8	%	-30.0	%

EPS (Diluted) (Reported)	(0.04	)	0.01		(0.04	)	(0.09	)	(0.04	)	(0.23	)	0.23		(0.12	)	(0.04	)	(0.72	)	0.00		(0.32	)	(1.07	)
Growth vs. prior year (%)	55.6	%	125.0	%	69.2	%	-125.0	%	94.4	%	N/A		171.9	%	-88.8	%	33.3	%	-453.8	%	100.0	%	-1700.0	%	-494.4	%
Growth vs. prior quarter (%)	-117.4	%	125.0	%			71.9	%	55.6	%	-475.0	%	200.0	%			-300.0	%	-1700.0	%	100.0	%	N/A

SHARES (CSE)(Diluted)	3,343		3,400		3,349		3,235		3,262		3,286		3,348		3,277		3,168		3,181		3,218		3,219		3,190
OUTSTANDING SHARES	3,344		3,375		3,375		3,240		3,280		3,293		3,336		3,336		3,116		3,194		3,200		3,236		3,236


	FY 2005						FY 2004										FY 2003
(in millions)	Q1		Q2		FY05		Q1		Q2		Q3		Q4		FY04		Q1		Q2		Q3		Q4		FY03
REVENUE BY GEOGRAPHY
UNITED STATES ($M)	1,105		1,132		2,237		1,162		1,214		1,037		1,356		4,769		1,242		1,267		1,212		1,327		5,048
Growth vs. prior year (%)	-4.9	%	-6.8	%	-5.9	%	-6.4	%	-4.2	%	-14.4	%	2.2	%	-5.5	%	-7.8	%	-11.8	%	-15.8	%	-22.6	%	-14.9	%
Growth vs. prior quarter (%)	-18.5	%	2.4	%			-12.4	%	4.5	%	-14.6	%	30.8	%			-27.5	%	2.0	%	-4.3	%	9.5	%
EUROPE ($M)	918		975		1,893		780		966		941		1,026		3,713		806		932		886		954		3,578
Growth vs. prior year (%)	17.7	%	0.9	%	8.4	%	-3.2	%	3.6	%	6.2	%	7.5	%	3.8	%	-0.4	%	3.6	%	-4.1	%	-2.0	%	-0.8	%
Growth vs. prior quarter (%)	-10.5	%	6.2	%			-18.2	%	23.8	%	-2.6	%	9.0	%			-17.2	%	15.6	%	-4.9	%	7.7	%
JAPAN ($M)	183		190		373		185		192		207		178		762		250		243		243		200		936
Growth vs. prior year (%)	-1.1	%	-1.0	%	-1.1	%	-26.0	%	-21.0	%	-14.8	%	-11.0	%	-18.6	%	-12.9	%	-16.8	%	-12.6	%	-1.5	%	-11.7	%
Growth vs. prior quarter (%)	2.8	%	3.8	%			-7.5	%	3.8	%	7.8	%	-14.0	%			23.2	%	-2.8	%	0.0	%	-17.7	%
REST OF WORLD ($M)	422		546		968		409		516		466		550		1,941		449		473		449		501		1,872
Growth vs. prior year (%)	3.2	%	5.8	%	4.6	%	-8.9	%	9.1	%	3.8	%	9.8	%	3.7	%	7.4	%	-1.5	%	-3.6	%	-5.5	%	-1.2	%
Growth vs. prior quarter (%)	-23.3	%	29.4	%			-18.4	%	26.2	%	-9.7	%	18.0	%			-15.3	%	5.3	%	-5.1	%	11.6	%
% of Total Revenue
UNITED STATES (%)	42.0	%	39.8	%	40.9	%	45.8	%	42.1	%	39.1	%	43.6	%	42.6	%	45.2	%	43.5	%	43.4	%	44.5	%	44.1	%
EUROPE (%)	34.9	%	34.3	%	34.6	%	30.8	%	33.4	%	35.5	%	33.0	%	33.2	%	29.3	%	32.0	%	31.8	%	32.0	%	31.3	%
JAPAN (%)	7.0	%	6.7	%	6.8	%	7.3	%	6.6	%	7.8	%	5.7	%	6.8	%	9.1	%	8.3	%	8.7	%	6.7	%	8.2	%
REST OF WORLD (%)	16.1	%	19.2	%	17.7	%	16.1	%	17.9	%	17.6	%	17.7	%	17.4	%	16.4	%	16.2	%	16.1	%	16.8	%	16.4	%

PRODUCTS AND SERVICES REVENUE
COMPUTER SYSTEMS PRODUCTS ($M)	1,354		1,507		2,861		1,282		1,568		1,365		1,639		5,854		1,512		1,621		1,530		1,580		6,243
Growth vs. prior year (%)	5.6	%	-3.9	%	0.4	%	-15.2	%	-3.3	%	-10.8	%	3.7	%	-6.2	%	-10.6	%	-11.8	%	-17.9	%	-21.1	%	-15.6	%
Growth vs. prior quarter (%)	-17.4	%	11.3	%			-18.9	%	22.3	%	-12.9	%	20.1	%			-24.5	%	7.2	%	-5.6	%	3.3	%
NETWORK STORAGE PRODUCTS ($M)	322		335		657		352		376		346		427		1,501		368		392		367		423		1,550
Growth vs. prior year (%)	-8.5	%	-10.9	%	-9.8	%	-4.3	%	-4.1	%	-5.7	%	0.9	%	-3.2	%	0.8	%	-7.1	%	-9.4	%	-16.2	%	-8.7	%
Growth vs. prior quarter (%)	-24.6	%	4.0	%			-16.8	%	6.8	%	-8.0	%	23.4	%			-27.1	%	6.5	%	-6.4	%	15.3	%
SUPPORT SERVICES ($M)	745		774		1,519		731		745		731		792		2,999		683		702		704		755		2,844
Growth vs. prior year (%)	1.9	%	3.9	%	2.9	%	7.0	%	6.1	%	3.8	%	4.9	%	5.5	%	16.8	%	12.3	%	10.7	%	9.1	%	12.1	%
Growth vs. prior quarter (%)	-5.9	%	3.9	%			-3.2	%	1.9	%	-1.9	%	8.3	%			-1.3	%	2.8	%	0.3	%	7.2	%
CLIENT SOLUTIONS & KNOWLEDGE SERVICES ($M)	207		227		434		171		199		209		252		831		184		200		189		224		797
Growth vs. prior year (%)	21.1	%	14.1	%	17.3	%	-7.1	%	-0.5	%	10.6	%	12.5	%	4.3	%	-16.0	%	-10.3	%	-6.4	%	1.4	%	-7.9	%
Growth vs. prior quarter (%)	-17.9	%	9.7	%			-23.7	%	16.4	%	5.0	%	20.6	%			-16.7	%	8.7	%	-5.5	%	18.5	%

NET BOOKINGS ($M)	2,453		2,976		5,429		2,538		2,980		2,617		3,179		11,314		2,601		2,989		2,688		3,020		11,298
Growth vs. prior year (%)	-3.3	%	-0.1	%	-1.6	%	-2.4	%	-0.3	%	-2.6	%	5.3	%	0.1	%	-4.3	%	-6.4	%	-13.0	%	-13.4	%	-9.5	%
Growth vs. prior quarter (%)	-22.8	%	21.3	%			-16.0	%	17.4	%	-12.2	%	21.5	%			-25.4	%	14.9	%	-10.1	%	12.4	%

BACKLOG ($M)	659		792		792		707		799		765		834		834		695		769		667		705		705


BALANCE SHEETS	FY 2005						FY 2004										FY 2003
(in millions)	Q1		Q2				Q1		Q2		Q3		Q4				Q1		Q2		Q3		Q4
CASH & ST INVESTMENTS	3,520		3,639				2,520		2,160		2,372		3,601				2,632		2,606		2,636		3,062
ACCOUNTS RECEIVABLE, NET	1,730		1,842				1,905		2,214		2,201		2,339				2,133		2,291		2,296		2,381
RAW MATERIALS	66		60				103		93		92		78				103		85		73		93
WORK IN PROCESS	155		154				137		161		180		131				197		217		152		134
FINISHED GOODS	195		215				186		226		225		255				209		182		172		189

TOTAL INVENTORIES	416		429				426		480		497		464				509		484		397		416
OTHER CURRENT ASSETS	842		957				890		966		1,246		899				1,629		1,447		1,302		920

TOTAL CURRENT ASSETS	6,508		6,867				5,741		5,820		6,316		7,303				6,903		6,828		6,631		6,779
PP&E, NET	1,918		1,903				2,152		2,115		2,075		1,996				2,408		2,321		2,265		2,267
GOODWILL	406		406				389		466		470		406				2,182		326		326		326
LT MARKETABLE DEBT SECURITIES	3,913		3,825				3,006		3,001		3,111		4,007				2,612		2,671		2,902		2,679
OTHER NON-CURRENT ASSETS, NET	762		738				825		822		811		791				1,271		1,323		1,421		934

TOTAL ASSETS	13,507		13,739				12,113		12,224		12,783		14,503				15,376		13,469		13,545		12,985

SHORT TERM BORROWINGS	0		0				263		263		257		257				0		0		0		0
ACCOUNTS PAYABLE	807		963				780		906		1,011		1,057				798		809		870		903
ACCRUED LIABILITIES & OTHER	2,105		2,036				1,652		1,583		1,884		2,182				1,873		1,900		1,792		1,773
DEFERRED REVENUES	1,346		1,313				1,214		1,213		1,342		1,617				1,109		1,079		1,162		1,453

TOTAL CURRENT LIABILITIES	4,258		4,312				3,909		3,965		4,494		5,113				3,780		3,788		3,824		4,129
LT DEBT	1,163		1,145				1,215		1,214		1,209		1,175				1,500		1,519		1,495		1,531
LT DEFERRED REVENUES	524		519				462		463		537		557				547		520		512		450
OTHER NON-CURRENT OBLIGATIONS	1,264		1,242				364		343		990		1,220				240		369		354		384
STOCKHOLDERS’ EQUITY	6,298		6,521				6,163		6,239		5,553		6,438				9,309		7,273		7,360		6,491

TOTAL LIABILITIES & SE	13,507		13,739				12,113		12,224		12,783		14,503				15,376		13,469		13,545		12,985


CASH FLOW	Q1		Q2		FY05		Q1		Q2		Q3		Q4		FY04		Q1		Q2		Q3		Q4		FY03
OPERATING ACTIVITIES	124		52		176		(49	)	(282	)	385		2,172		2,226		182		141		379		335		1,037
INVESTING ACTIVITIES	157		(475	)	(318	)	(492	)	123		(338	)	(1,604	)	(2,311	)	126		(293	)	(108	)	(253	)	(528	)
FINANCING ACTIVITIES	(235	)	99		(136	)	7		106		31		67		211		(696	)	73		10		95		(518	)

KEY METRICS	Q1		Q2				Q1		Q2		Q3		Q4				Q1		Q2		Q3		Q4
INVENTORY TURNS (hist.)	15.9		14.7				13.7		13.3		14.5		15.2				10.9		12.8		14.3		12.9
INVENTORY TURNS-PRODUCT ONLY (hist.)	10.3		9.4				9.0		8.7		9.3		9.8				7.8		9.0		9.9		8.6
DAYS SALES OUTSTANDING	59		58				68		69		75		68				70		71		74		72
DAYS PAYABLES OUTSTANDING	(46	)	(53	)			(46	)	(49	)	(57	)	(50	)			(44	)	(44	)	(51	)	(48	)
DAYS OF SUPPLY ON HAND	24		24				25		26		28		22				28		26		23		22
L-T DEBT/EQUITY (%)	18.5	%	17.6	%			19.7	%	19.5	%	21.8	%	18.3	%			16.1	%	20.9	%	20.3	%	23.6	%
ROE (12 mo. avg.)(%)	-4.1	%	-1.7	%			-52.8	%	-22.0	%	-36.2	%	-6.4	%			-5.3	%	-26.3	%	-27.6	%	-45.1	%
BOOK VALUE PER SHARE ($)	1.88		1.93				1.90		1.90		1.69		1.93				2.99		2.28		2.30		2.01
PRICE PER SHARE @ CLOSE	4.13		5.44				3.84		4.38		4.11		4.33				2.67		3.25		3.43		4.65
ROA (12 mo. avg.)(%)	-1.9	%	-0.8	%			-27.7	%	-11.4	%	-17.6	%	-3.0	%			-3.1	%	-15.2	%	-15.8	%	-24.8	%
DEPREC. & AMORT. ($M)	187		185				218		189		175		231				272		275		216		265
CAPITAL EXPENDITURES ($M)	56		85				55		72		62		60				83		98		57		135
NUMBER OF EMPLOYEES	32,449		31,855				36,014		35,802		35,386		34,962				39,001		36,460		35,745		36,068
REV. PER EMP. (12 mo.)($K)	347.5		352.6				311.6		312.7		312.5		319.9				317.5		334.3		332.1		317.0
GM PER EMP. (12mo.)($K)	140.9		143.4				134.0		133.3		129.9		129.2				128.0		140.3		141.3		137.0
OP EXP AS % OF REV (12mo.)	50.1	%	49.4	%			67.6	%	45.7	%	48.6	%	51.0	%			48.9	%	65.0	%	65.0	%	67.0	%
NET INCOME (LOSS) PER EMP. (12mo.)($K)	(7.7	)	(3.3	)			(100.1	)	(40.4	)	(62.5	)	(11.1	)			(13.3	)	(65.0	)	(65.2	)	(95.1	)

SUN MICROSYSTEMS, INC.

OPERATIONS ANALYSIS – CONSOLIDATED (UNAUDITED)


NON-GAAP CALCULATION OF NET INCOME (LOSS) EXCLUDING SPECIAL ITEMS	FY 2005						FY 2004										FY 2003
(in millions except per share amounts)	Q1		Q2		FY05		Q1		Q2		Q3		Q4		FY04		Q1		Q2		Q3		Q4		FY03
GAAP net income (loss)	(147	)	19		(128	)	(286	)	(125	)	(760	)	783		(388	)	(111	)	(2,283	)	4		(1,039	)	(3,429	)
In-process research and development	0		0		0		1		0		0		69		70		0		4		0		0		4
Restructuring charges	108		24		132		1		(10	)	203		150		344		24		357		(4	)	(6	)	371
Loss (gain) on equity investments, net	4		(9	)	(5	)	25		36		(3	)	6		64		31		11		16		26		84
Impairment expense	0		0		0		0		0		0		49		49		0		2,125		0		0		2,125
Settlement income	0		0		0		0		0		0		(1,597	)	(1,597	)	0		0		0		0		0
Settlement of litigation**	55		0		55		0		0		0		0		0		0		0		0		0		0
Valuation allowance on deferred tax assets	0		0		0		0		0		300		0		300		0		0		0		1,051		1,051
Related tax effects	(7	)	(6	)	(13	)	0		0		0		367		367		(22	)	(204	)	(5	)	(8	)	(239	)

Net income (loss) excluding special items	13		28		41		(259	)	(99	)	(260	)	(173	)	(791	)	(78	)	10		11		24		(33	)
Growth vs. prior year (%)	105.0	%	128.3	%	111.5	%	-232.1	%	-1090.0	%	-2463.6	%	-820.8	%	-2297.0	%	50.6	%	110.1	%	155.0	%	-65.2	%	84.1	%
EPS (Diluted) excluding special items *	0.00		0.01		0.01		(0.08	)	(0.03	)	(0.08	)	(0.05	)	(0.24	)	(0.02	)	0.00		0.00		0.01		(0.01	)
Growth vs. prior year (%)	100.0	%	133.3	%	109.1	%	-300.0	%	N/A		N/A		-600.0	%	-2300.0	%	60.0	%	100.0	%	100.0	%	-50.0	%	83.3	%

SHARES (CSE)(Diluted)	3,343		3,400		3,349		3,235		3,262		3,286		3,348		3,277		3,168		3,181		3,218		3,219		3,190
OUTSTANDING SHARES	3,344		3,375		3,375		3,240		3,280		3,293		3,336		3,336		3,116		3,194		3,200		3,236		3,236

*	For the quarters ended September 26, 2004, June 30, 2004, and 2003 and December 29, 2002, Sun used 3,356, 3,327, 3,251 shares and 3,205 shares, respectively, to calculate the “Net income (loss) excluding special items.”

For all other periods, the number of shares used to calculate “EPS (Diluted) (Reported)” and “EPS (Diluted) excluding special items” were the same.

**	Included in cost of sales – products