SUN MICROSYSTEMS, INC. - 8-K filing on 2006-01-24

Exhibit 99.1

SUN MICROSYSTEMS REPORTS RESULTS FOR

SECOND QUARTER FISCAL YEAR 2006

—Revenues up 17%

—New Products Drive Bookings and Backlog Growth

SANTA CLARA, Calif. - January 24, 2006 - Sun Microsystems, Inc., (NASDAQ: SUNW) reported results today for its fiscal second quarter, which ended December 25, 2005.

Revenues for the second quarter of fiscal 2006 were $3.337 billion, an increase of 17 percent as compared with $2.841 billion for the second quarter of fiscal 2005. The year over year revenue increase was driven by recent acquisitions. Total gross margin as a percent of revenues was 42.6 percent, an increase of 0.4 percentage points, as compared with the second quarter of fiscal 2005.

Net loss for the second quarter of fiscal 2006 on a GAAP basis was $223 million or a net loss of ($0.07) per share, as compared with net income of $4 million, or earnings per share of $0.00, for the second quarter of fiscal 2005.

GAAP net loss for the second quarter of fiscal 2006 includes: $145 million of purchase price accounting adjustments and intangible asset amortization relating to our recent acquisitions, $10 million of restructuring charges, $14 million of a gain on equity investments, and a $3 million benefit for related tax effects. The net impact of these four items is approximately ($0.04) cents per share. In addition, GAAP net loss also includes stock-based compensation charges relating to the implementation of SFAS 123R of $55 million.

Cash flow used in operations for the second quarter was $191 million and cash and marketable debt securities balance at the end of the quarter was $4.276 billion.

“The backlog is the highest in years and this increase in bookings and demand is driving improved business fundamentals,” said Scott McNealy, chairman and CEO, Sun Microsystems. “The uptick in demand is due to the game changing technologies we’ve delivered to market over the last several quarters that are setting new standards for performance, price and efficiency. From our x64 Sun Fire^™ servers and the Sun Fire T2000 server based on the CoolThreads^™ T1 processor, to UltraSPARC^® IV+ to Solaris^™ Operating System demand has clearly improved as a result of our investment in R&D.”

Steve McGowan, Sun’s chief financial officer and executive vice president, corporate resources, said, “we saw positive demand in bookings and backlog growth across numerous server and data management product areas. Our gross margin performance of 42.6 percent continued to be strong and we came directly in line with our operating expense guidance for the quarter. We continue to be pleased with the overall strength of our balance sheet including a cash and marketable debt securities position of approximately $4.3 billion.”

Sun has scheduled a conference call today to discuss its earnings for Q2 fiscal year 2006 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:

Bret Schaefer (650) 786-0123

bret.schaefer@sun.com

MEDIA CONTACT:

Stephanie Vonallmen (650) 786-8589

stephanie.vonallmen@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 regarding the future results and performance of Sun Microsystems, Inc., including statements regarding an increase in bookings and demand driving improved business fundamentals. These forward-looking statements involve risks and uncertainties and actual results could differ materially from those predicted in any such forward-looking statements. Factors that could cause actual results to differ materially from those contained in our projections and forward-looking statements include: increased competition; failure to rapidly and successfully develop and introduce new products; our reliance on single-source suppliers; risks associated with our international customers and operations; delays in product development or customer acceptance and implementation of new products and technologies; pricing pressures; our dependence on significant customers and specific industries; our dependence on channel partners; and failure to successfully integrate acquisition candidates. Please also refer to Sun’s periodic reports that are filed from time to time with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended June 30, 2005 and our Quarterly Report on Form 10-Q for the fiscal quarter ended September 25, 2005. Sun assumes no obligation and does not intend to update these forward-looking statements.

To supplement Sun’s consolidated financial statements presented in accordance with GAAP, Sun provides non-GAAP net income (loss) and non-GAAP net income (loss) per share data. The presentation of these non-GAAP financial measures should be considered in addition to our GAAP results and is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.

Sun’s management believes that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain charges, gains and tax effects that may not be indicative of our core business operating results. Sun believes that both management and investors benefit from referring to these non-GAAP financial measures in assessing Sun’s performance. These non-GAAP financial measures also facilitate comparisons to Sun’s historical performance and our competitors’ operating results. We include these non-GAAP financial measures because we believe they are useful to investors in allowing for greater transparency with respect to supplemental information used by management in its financial and operational decision making. Non-GAAP measures are reconciled to comparable GAAP measures in the table entitled “Non-GAAP Calculation of Net Income (Loss) Excluding Special Items” following the text of this press release.

Sun, Sun Microsystems, the Sun logo, Sun Fire, Solaris, Cool Threads and The Network Is The Computer are trademarks or registered trademarks of Sun Microsystems, Inc. in the United States and in other countries. All SPARC trademarks are used under license and are trademarks or registered trademarks of SPARC International, Inc. in the US and other countries. Products bearing SPARC trademarks are based upon an architecture developed by Sun Microsystems, Inc.

SUN MICROSYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in millions, except per share amounts)


	Three Months Ended					Six Months Ended
	December 25, 2005			December 26, 2004		December 25, 2005			December 26, 2004
Net revenues:
Products	$	2,108		$	1,840	$	3,812		$	3,516
Services		1,229			1,001		2,251			1,953

Total net revenues		3,337			2,841		6,063			5,469
Cost of sales:
Cost of sales-products (including stock-based compensation expense of $3 and $5) ⁽¹⁾		1,223			1,065		2,189			2,069
Cost of sales-services (including stock-based compensation expense of $7 and $14) ⁽¹⁾		693			578		1,251			1,129

Total cost of sales		1,916			1,643		3,440			3,198

Gross margin		1,421			1,198		2,623			2,271
Operating expenses:
Research and development (including stock-based compensation expense of $18 and $35) ⁽¹⁾		541			447		980			863
Selling, general and administrative (including stock-based compensation expense of $27 and $51) ⁽¹⁾		1,056			726		1,884			1,396
Restructuring charges		10			24		22			132
Purchased in-process research and development		—			—		60			—

Total operating expenses		1,607			1,197		2,946			2,391

Operating income (loss)		(186	)		1		(323	)		(120	)
Gain on equity investments, net		14			9		27			5
Interest and other income, net		25			33		69			64

Income (loss) before income taxes		(147	)		43		(227	)		(51	)
Provision for income taxes		76			39		119			78

Net income (loss)	$	(223	)	$	4	$	(346	)	$	(129	)

Net income (loss) per common share-basic	$	(0.07	)	$	—	$	(0.10	)	$	(0.04	)

Net income (loss) per common share-diluted	$	(0.07	)	$	—	$	(0.10	)	$	(0.04	)

Shares used in the calculation of net income (loss) per common share-basic		3,424			3,360		3,415			3,349

Shares used in the calculation of net income (loss) per common share-diluted		3,424			3,400		3,415			3,349

⁽¹⁾	For the three and six months ended December 25, 2005, respectively.

SUN MICROSYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions)


	December 25, 2005		June 30, 2005*
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,193	$	2,051
Short-term marketable debt securities		1,256		1,345
Accounts receivable, net		2,289		2,231
Inventories		550		431
Deferred and prepaid tax assets		275		255
Prepaid expenses and other current assets		658		878

Total current assets		6,221		7,191

Property, plant and equipment, net		1,914		1,769
Long-term marketable debt securities		1,827		4,128
Goodwill		2,472		441
Other acquisition-related intangible assets, net		1,181		113
Other non-current assets, net		693		548

	$	14,308	$	14,190

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt and short-term borrowings	$	508	$	—
Accounts payable		1,214		1,167
Accrued payroll-related liabilities		673		713
Accrued liabilities and other		990		1,014
Deferred revenues		1,541		1,648
Warranty reserve		242		224

Total current liabilities		5,168		4,766

Long-term debt		593		1,123
Long-term deferred revenues		469		544
Other non-current obligations		1,585		1,083
Total stockholders’ equity		6,493		6,674

	$	14,308	$	14,190

*	Derived from audited financial statements

SUN MICROSYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in millions)


	Six Months Ended
	December 25, 2005			December 26, 2004
Cash flows from operating activities:
Net loss	$	(346	)	$	(129	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		301			329
Amortization of other intangible assets		153			36
Deferred taxes		4			(3	)
Stock-based compensation expense		105			13
Purchased in-process research and development		60			—
Gain on investments, net		(27	)		(5	)
Changes in operating assets and liabilities:
Accounts receivable, net		236			510
Inventories		66			37
Prepaid and other assets		232			(79	)
Accounts payable		(88	)		(88	)
Other liabilities		(663	)		(445	)

Net cash provided by operating activities		33			176

Cash flows from investing activities:
Increase in restricted cash		(54	)		—
Purchases of marketable debt securities		(1,227	)		(2,943	)
Proceeds from sales of marketable debt securities		3,440			2,287
Proceeds from maturities of marketable debt securities		163			508
Proceeds from sales of equity investments, net		14			13
Purchases of property, plant and equipment, net		(130	)		(141	)
Purchases of spare parts and other assets		(40	)		(42	)
Payments for acquisitions, net of cash acquired		(3,150	)		—

Net cash used in investing activities		(984	)		(318	)

Cash flows from financing activities:
Proceeds from issuance of common stock, net		93			114
Principal payments on borrowings and other obligations		—			(250	)

Net cash provided by (used in) financing activities		93			(136	)

Net decrease in cash and cash equivalents		(858	)		(278	)
Cash and cash equivalents, beginning of period		2,051			2,141

Cash and cash equivalents, end of period	$	1,193		$	1,863

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 25, 2005			December 26, 2004			December 25, 2005			December 26, 2004
Calculation of net income (loss) excluding special items:
Net income (loss), *	$	(223	)	$	4		$	(346	)	$	(129	)
Restructuring charges		10			24			22			132
Purchased in-process research and development		—			—			60			—
Gain on equity investments, net		(14	)		(9	)		(27	)		(5	)
Settlement of litigation*		—			—			—			55
Related tax effects		(3	)		(6	)		(7	)		(13	)

Net income (loss) excluding special items	$	(230	)	$	13		$	(298	)	$	40

Net income (loss) excluding special items per common share
- basic	$	(0.07	)	$	—		$	(0.09	)	$	0.01

Net income (loss) excluding special items per common share
- diluted	$	(0.07	)	$	—		$	(0.09	)	$	0.01

Shares used in the calculation of net income (loss) excluding special items per common share – basic		3,424			3,360			3,415			3,349

Shares used in the calculation of net income (loss) excluding special items per common share – diluted		3,424			3,400			3,415			3,378

*	Included in Cost of sales – products

**	Net loss for the three and six months ended December 25, 2005 included $55 million and $105 million of stock-based compensation expense or approximately $0.02 per share and $0.03 per share, respectively.

***	Net loss for the three and six months ended December 25, 2005 included $145 million and $267 million of purchase price accounting adjustments and intangible asset amortization relating to our recent acquisitions or approximately $0.04 per share and $0.08 per share, respectively.

SUN MICROSYSTEMS, INC.

OPERATIONS ANALYSIS – CONSOLIDATED (UNAUDITED)


STATEMENTS OF OPERATIONS	FY 2006						FY 2005										FY 2004
(in millions except per share amounts)	Q1		Q2		FY06		Q1		Q2		Q3		Q4		FY05		Q2		Q3		Q4		FY04
							(Restated)		(Restated)		(Restated)						(Restated)		(Restated)		(Restated)
NET REVENUES
Products	1,704		2,108		3,812		1,676		1,840		1,683		1,927		7,126		1,944		1,711		2,066		7,355
Services	1,022		1,229		2,251		952		1,001		944		1,047		3,944		944		940		1,044		3,830
TOTAL	2,726		3,337		6,063		2,628		2,841		2,627		2,974		11,070		2,888		2,651		3,110		11,185
Growth vs. prior year (%)	3.7	%	17.5	%	10.9	%	3.6	%	-1.6	%	-0.9	%	-4.4	%	-1.0	%	-0.9	%	-5.0	%	4.3	%	-2.2	%
Growth vs. prior quarter (%)	-8.3	%	22.4	%			-15.5	%	8.1	%	-7.5	%	13.2	%			13.9	%	-8.2	%	17.3	%

COST OF SALES
Products	966		1,223		2,189		949		1,065		975		1,130		4,119		1,107		980		1,238		4,290
Cost of settlement	0		0		0		55		0		0		0		55		0		0		0		0

Total	966		1,223		2,189		1,004		1,065		975		1,130		4,174		1,107		980		1,238		4,290
Services	558		693		1,251		551		578		565		613		2,307		573		603		648		2,379
TOTAL	1,524		1,916		3,440		1,555		1,643		1,540		1,743		6,481		1,680		1,583		1,886		6,669
% of revenue	55.9	%	57.4	%	56.7	%	59.2	%	57.8	%	58.6	%	58.6	%	58.5	%	58.2	%	59.7	%	60.6	%	59.6	%

PRODUCTS GROSS MARGIN
Products	738		885		1,623		727		775		708		797		3,007		837		731		828		3,065
% of product revenue	43.3	%	42.0	%	42.6	%	43.4	%	42.1	%	42.1	%	41.4	%	42.2	%	43.1	%	42.7	%	40.1	%	41.7	%
Cost of settlement	0		0		0		(55	)	0		0		0		(55	)	0		0		0		0
% of product revenue	0.0	%	0.0	%	0.0	%	-3.3	%	0.0	%	0.0	%	0.0	%	-0.8	%	0.0	%	0.0	%	0.0	%	0.0	%

Total product margin	738		885		1,623		672		775		708		797		2,952		837		731		828		3,065
% of product revenue	43.3	%	42.0	%	42.6	%	40.1	%	42.1	%	42.1	%	41.4	%	41.4	%	43.1	%	42.7	%	40.1	%	41.7	%

Services gross margin	464		536		1,000		401		423		379		434		1,637		371		337		396		1,451
% of service revenue	45.4	%	43.6	%	44.4	%	42.1	%	42.3	%	40.1	%	41.5	%	41.5	%	39.3	%	35.9	%	37.9	%	37.9	%

Total excluding settlement	1,202		1,421		2,623		1,128		1,198		1,087		1,231		4,644		1,208		1,068		1,224		4,516
% of revenue	44.1	%	42.6	%	43.3	%	42.9	%	42.2	%	41.4	%	41.4	%	42.0	%	41.8	%	40.3	%	39.4	%	40.4	%
Cost of settlement	0		0		0		(55	)	0		0		0		(55	)	0		0		0		0
% of revenue	0.0	%	0.0	%	0.0	%	-2.1	%	0.0	%	0.0	%	0.0	%	-0.5	%	0.0	%	0.0	%	0.0	%	0.0	%

TOTAL GROSS MARGIN	1,202		1,421		2,623		1,073		1,198		1,087		1,231		4,589		1,208		1,068		1,224		4,516
% of revenue	44.1	%	42.6	%	43.3	%	40.8	%	42.2	%	41.4	%	41.4	%	41.5	%	41.8	%	40.3	%	39.4	%	40.4	%

R&D	439		541		980		416		447		450		472		1,785		471		470		518		1,926
% of revenue	16.1	%	16.2	%	16.2	%	15.8	%	15.7	%	17.1	%	15.9	%	16.1	%	16.3	%	17.7	%	16.7	%	17.2	%
PURCHASED IN PROCESS R&D	60		0		60		0		0		0		0		0		0		0		69		70
% of revenue	2.2	%	0.0	%	1.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	2.2	%	0.6	%
SG&A	828		1,056		1,884		670		726		735		788		2,919		828		842		849		3,317
% of revenue	30.4	%	31.6	%	31.1	%	25.5	%	25.6	%	28.0	%	26.5	%	26.4	%	28.7	%	31.8	%	27.3	%	29.7	%
RESTRUCTURING CHARGES	12		10		22		108		24		44		86		262		(10	)	203		150		344
% of revenue	0.4	%	0.3	%	0.4	%	4.1	%	0.8	%	1.7	%	2.9	%	2.4	%	-0.3	%	7.7	%	4.8	%	3.1	%
IMPAIRMENT EXPENSE	0		0		0		0		0		0		0		0		0		0		49		49
% of revenue	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	1.6	%	0.4	%

TOTAL OPERATING EXPENSES	1,339		1,607		2,946		1,194		1,197		1,229		1,346		4,966		1,289		1,515		1,635		5,706
% of revenue	49.1	%	48.2	%	48.6	%	45.4	%	42.1	%	46.8	%	45.3	%	44.9	%	44.6	%	57.1	%	52.6	%	51.0	%

OPERATING INCOME (LOSS)	(137	)	(186	)	(323	)	(121	)	1		(142	)	(115	)	(377	)	(81	)	(447	)	(411	)	(1,190	)
Operating margin	-5.0	%	-5.6	%	-5.3	%	-4.6	%	0.0	%	-5.4	%	-3.9	%	-3.4	%	-2.8	%	-16.9	%	-13.2	%	-10.6	%

Interest and other income, net	44		25		69		31		33		37		32		133		20		23		30		94
Gain (loss) on equity investments, net	13		14		27		(4	)	9		2		(1	)	6		(36	)	3		(6	)	(64	)
Settlement income	0		0		0		0		0		54		0		54		0		0		1,597		1,597
PRETAX INCOME (LOSS)	(80	)	(147	)	(227	)	(94	)	43		(49	)	(84	)	(184	)	(97	)	(421	)	1,210		437
Pretax income (loss) margin	-2.9	%	-4.4	%	-3.7	%	-3.6	%	1.5	%	-1.9	%	-2.8	%	-1.7	%	-3.4	%	-15.9	%	38.9	%	3.9	%

INCOME TAX PROVISION (BENEFIT)	43		76		119		39		39		(21	)	(134	)	(77	)	29		333		430		825
TAX RATE (%)	N/A		N/A		N/A		N/A		N/A		N/A		N/A		N/A		N/A		N/A		N/A		N/A

NET INCOME (LOSS) (Reported)*****	(123	)	(223	)	(346	)	(133	)	4		(28	)	50		(107	)	(126	)	(754	)	780		(388	)
Growth vs. prior year (%)	7.5	%	-5675.0	%	168.2	%	53.8	%	103.2	%	96.3	%	-93.6	%	72.4	%	94.5	%	-18950.0	%	178.5	%	88.5	%
Growth vs. prior quarter (%)	-346.0	%	-81.3	%			-117.1	%	103.0	%	-800.0	%	278.6	%			56.3	%	-498.4	%	203.4	%
Net income (loss) margin	-4.5	%	-6.7	%	-5.7	%	-5.1	%	0.1	%	-1.1	%	1.7	%	-1.0	%	-4.4	%	-28.4	%	25.1	%	-3.5	%

EPS (Diluted) (Reported)	(0.04	)	(0.07	)	(0.10	)	(0.04	)	0.00		(0.01	)	0.01		(0.03	)	(0.04	)	(0.23	)	0.23		(0.12	)
Growth vs. prior year (%)	0.0	%	-100.0	%	-150.0	%	55.6	%	100.0	%	95.7	%	-95.7	%	75.0	%	94.4	%	N/A		174.2	%	-88.7	%
Growth vs. prior quarter (%)	-500.0	%	-75.0	%			-117.4	%	100.0	%	N/A		100.0	%			55.6	%	-475.0	%	200.0	%

SHARES (CSE)(Diluted)	3,407		3,424		3,415		3,343		3,400		3,376		3,410		3,368		3,262		3,286		3,348		3,277
OUTSTANDING SHARES	3,410		3,443		3,443		3,344		3,375		3,383		3,410		3,410		3,280		3,293		3,336		3,336

The information above has been restated to reflect the adjustments that are further discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2005, filed with the SEC on September 13, 2005.


	FY 2006						FY 2005										FY 2004
(in millions)	Q1		Q2		FY06		Q1		Q2		Q3		Q4		FY05		Q2		Q3		Q4		FY04
REVENUE BY GEOGRAPHY
UNITED STATES ($M)	1,159		1,373		2,532		1,105		1,130		982		1,175		4,392		1,214		1,037		1,355		4,768
Growth vs. prior year (%)	4.9	%	21.5	%	13.3	%	-4.9	%	-6.9	%	-5.3	%	-13.3	%	-7.9	%	-4.2	%	-14.4	%	2.1	%	-5.5	%
Growth vs. prior quarter (%)	-1.4	%	18.5	%			-18.5	%	2.3	%	-13.1	%	19.7	%			4.5	%	-14.6	%	30.7	%
INTERNATIONAL AMERICAS ($M)	141		194		335		110		165		144		171		590		152		136		158		562
Growth vs. prior year (%)	-0.3	%	17.6	%	21.8	%	-5.2	%	8.6	%	5.9	%	8.2	%	5.0	%	3.4	%	4.6	%	9.7	%	3.5	%
Growth vs. prior quarter (%)	-14.4	%	37.6	%			-30.4	%	50.0	%	-12.7	%	18.8	%			31.0	%	-10.5	%	16.2	%
EMEA ($M)	970		1,239		2,209		973		1,037		1,009		1,133		4,152		1,031		1,002		1,087		3,942
Growth vs. prior year (%)	3.6	%	19.5	%	9.9	%	18.4	%	0.6	%	0.7	%	4.2	%	5.3	%	4.5	%	7.3	%	7.6	%	4.2	%
Growth vs. prior quarter (%)	-7.9	%	27.7	%			-10.5	%	6.6	%	-2.7	%	12.3	%			25.4	%	-2.8	%	8.5	%
APAC ($M)	456		531		987		440		509		492		495		1,936		491		476		510		1,913
Growth vs. prior year (%)	28.2	%	4.3	%	4.0	%	0.9	%	3.7	%	3.4	%	-2.9	%	1.2	%	-4.5	%	-7.4	%	1.8	%	-7.1	%
Growth vs. prior quarter (%)	-17.5	%	16.4	%			-13.7	%	15.7	%	-3.3	%	0.6	%			12.6	%	-3.1	%	7.1	%
% of Total Revenue
UNITED STATES (%)	42.5	%	41.2	%	41.8	%	42.1	%	39.8	%	37.4	%	39.6	%	39.7	%	42.0	%	39.1	%	43.5	%	42.7	%
INTERNATIONAL AMERICAS (%)	5.2	%	5.8	%	5.5	%	4.2	%	5.8	%	5.5	%	5.7	%	5.3	%	5.3	%	5.1	%	5.1	%	5.0	%
EMEA (%)	35.6	%	37.1	%	36.4	%	37.0	%	36.5	%	38.4	%	38.1	%	37.5	%	35.7	%	37.8	%	35.0	%	35.2	%
APAC (%)	16.7	%	15.9	%	16.3	%	16.7	%	17.9	%	18.7	%	16.6	%	17.5	%	17.0	%	18.0	%	16.4	%	17.1	%

PRODUCTS AND SERVICES REVENUE
COMPUTER SYSTEMS PRODUCTS ($M)	1,274		1,438		2,712		1,354		1,505		1,391		1,576		5,826		1,568		1,365		1,639		5,854
Growth vs. prior year (%)	-5.9	%	-4.5	%	-5.1	%	5.6	%	-4.0	%	1.9	%	-3.8	%	-0.5	%	-3.3	%	-10.8	%	3.7	%	-6.2	%
Growth vs. prior quarter (%)	-19.2	%	12.9	%			-17.4	%	11.2	%	-7.6	%	13.3	%			22.3	%	-12.9	%	20.1	%
DATA MANAGEMENT PRODUCTS ($M)	430		670		1,100		322		335		292		351		1,300		376		346		427		1,501
Growth vs. prior year (%)	33.5	%	100.0	%	67.4	%	-8.5	%	-10.9	%	-15.6	%	-17.8	%	-13.4	%	-4.1	%	-5.7	%	0.9	%	-3.2	%
Growth vs. prior quarter (%)	22.5	%	55.8	%			-24.6	%	4.0	%	-12.8	%	20.2	%			6.8	%	-8.0	%	23.4	%
SUPPORT SERVICES ($M)	835		953		1,788		745		774		734		778		3,031		745		731		792		2,999
Growth vs. prior year (%)	12.1	%	23.1	%	17.7	%	1.9	%	3.9	%	0.4	%	-1.8	%	1.1	%	6.1	%	3.8	%	4.9	%	5.5	%
Growth vs. prior quarter (%)	7.3	%	14.1	%			-5.9	%	3.9	%	-5.2	%	6.0	%			1.9	%	-1.9	%	8.3	%
CLIENT SOLUTIONS & EDUCATIONAL SERVICES ($M)	187		276		463		207		227		210		269		913		199		209		252		831
Growth vs. prior year (%)	-9.7	%	21.6	%	6.7	%	21.1	%	14.1	%	0.5	%	6.7	%	9.9	%	-0.5	%	10.6	%	12.5	%	4.3	%
Growth vs. prior quarter (%)	-30.5	%	47.6	%			-17.9	%	9.7	%	-7.5	%	28.1	%			16.4	%	5.0	%	20.6	%

NET BOOKINGS, SUN ONLY ($M)	2,413		3,018		5,431		2,453		2,976		2,536		3,078		11,043		2,980		2,617		3,179		11,314
Growth vs. prior year (%)	-1.6	%	1.4	%	0.0	%	-3.3	%	-0.1	%	-3.1	%	-3.2	%	-2.4	%	-0.3	%	-2.6	%	5.3	%	0.1	%
Growth vs. prior quarter (%)	-21.6	%	25.1	%			-22.8	%	21.3	%	-14.8	%	21.4	%			17.4	%	-12.2	%	21.5	%
PRODUCT BACKLOG, SUN ONLY ($M)*	718		1,021				659		792		701		805				799		765		834

*	Our product backlog includes orders for which customer-requested delivery is scheduled within six months and orders that have been specified by the customers for which products have been shipped but revenue has been deferred.


BALANCE SHEETS	FY 2006						FY 2005										FY 2004
(in millions)	Q1		Q2		FY06		Q1		Q2		Q3		Q4		FY05		Q2		Q3		Q4		FY04
							(Restated)		(Restated)		(Restated)						(Restated)		(Restated)		(Restated)
CASH & ST INVESTMENTS	2,501		2,449				3,520		3,639		3,135		3,396				2,160		2,372		3,601
ACCOUNTS RECEIVABLE, NET	2,087		2,289				1,730		1,840		2,020		2,231				2,214		2,201		2,339
RAW MATERIALS	82		95				71		64		75		48				98		144		82
WORK IN PROCESS	183		134				158		157		121		121				164		123		134
FINISHED GOODS	286		321				187		208		192		262				218		230		248

TOTAL INVENTORIES	551		550				416		429		388		431				480		497		464
OTHER CURRENT ASSETS	998		933				1,102		1,220		1,419		1,133				1,244		1,524		1,159

TOTAL CURRENT ASSETS	6,137		6,221				6,768		7,128		6,962		7,191				6,098		6,594		7,563
PP&E, NET	1,901		1,914				1,918		1,903		1,851		1,769				2,115		2,075		1,996
GOODWILL	2,466		2,472				406		406		441		441				466		470		406
LT MARKETABLE DEBT SECURITIES	2,032		1,827				3,913		3,825		4,222		4,128				3,001		3,111		4,007
OTHER NON-CURRENT ASSETS, NET	1,938		1,874				804		774		704		661				856		853		833

TOTAL ASSETS	14,474		14,308				13,809		14,036		14,180		14,190				12,536		13,103		14,805

SHORT TERM BORROWINGS	512		508				0		0		0		0				263		257		257
ACCOUNTS PAYABLE	1,091		1,214				807		963		1,071		1,167				906		1,011		1,057
ACCRUED LIABILITIES & OTHER	2,147		1,905				2,108		2,049		2,090		1,951				1,595		1,898		2,199
DEFERRED REVENUES	1,507		1,541				1,346		1,313		1,399		1,648				1,213		1,342		1,617

TOTAL CURRENT LIABILITIES	5,257		5,168				4,261		4,325		4,560		4,766				3,977		4,508		5,130
LT DEBT	603		593				1,163		1,145		1,116		1,123				1,214		1,209		1,175
LT DEFERRED REVENUES	549		469				524		519		519		544				463		537		557
OTHER NON-CURRENT OBLIGATIONS	1,410		1,585				1,504		1,482		1,429		1,083				601		1,248		1,460
STOCKHOLDERS’ EQUITY	6,655		6,493				6,357		6,565		6,556		6,674				6,281		5,601		6,483

TOTAL LIABILITIES & SE	14,474		14,308				13,809		14,036		14,180		14,190				12,536		13,103		14,805


CASH FLOW	Q1		Q2		FY06		Q1		Q2		Q3		Q4		FY05		Q2		Q3		Q4		FY04
OPERATING ACTIVITIES	224		(191	)	33		124		52		(2	)	195		369		(282	)	385		2,172		2,226
INVESTING ACTIVITIES	(770	)	(214	)	(984	)	157		(475	)	(345	)	238		(425	)	123		(338	)	(1,604	)	(2,311	)
FINANCING ACTIVITIES	3		90		93		(235	)	99		18		84		(34	)	106		31		67		211

KEY METRICS	Q1		Q2				Q1		Q2		Q3		Q4				Q2		Q3		Q4
INVENTORY TURNS (hist.)	13.4		13.7				15.9		14.7		15.0		14.5				13.3		14.5		15.2
INVENTORY TURNS-PRODUCT ONLY (hist.)	8.6		8.8				10.3		9.4		9.7		9.3				8.7		9.3		9.8
DAYS SALES OUTSTANDING	69		62				59		58		69		68				69		75		68
DAYS PAYABLES OUTSTANDING	(64	)	(57	)			(47	)	(53	)	(63	)	(60	)			(49	)	(57	)	(50	)
DAYS OF SUPPLY ON HAND	33		26				24		23		23		22				26		28		22
L-T DEBT/EQUITY (%)	9.1	%	9.1	%			18.3	%	17.4	%	17.0	%	16.8	%			19.3	%	21.6	%	18.1	%
ROE (12 mo. avg.)(%)	-1.5	%	-4.9	%			-3.8	%	-1.6	%	9.6	%	-1.6	%			-21.3	%	-35.1	%	-6.3	%
BOOK VALUE PER SHARE ($)	1.95		1.89				1.90		1.95		1.94		1.96				1.91		1.70		1.94
PRICE PER SHARE @ CLOSE	3.87		4.36				4.13		5.44		4.03		3.73				4.38		4.11		4.33
ROA (12 mo. avg.)(%)	-0.7	%	-2.3	%			-1.7	%	-0.7	%	4.4	%	-0.8	%			-10.8	%	-16.8	%	-2.9	%
DEPREC. & AMORT. ($M)	189		265				187		191		191		198				189		175		231
CAPITAL INVESTMENTS ($M)	48		82				56		85		58		58				72		62		60
SPARES INVESTMENTS ($M)	20		20				12		30		26		22				7		30		15
NUMBER OF EMPLOYEES	38,588		38,802				32,449		31,855		31,999		31,117				35,802		35,386		34,962
REV. PER EMP. (12 mo.)($K)	289.4		300.6				347.5		352.5		350.2		355.8				312.7		312.5		319.9
GM PER EMP. (12mo.)($K)	122.3		127.3				140.9		143.2		143.2		147.5				133.3		129.9		129.2
OP EXP AS % OF REV (12mo.)	45.8	%	47.3	%			50.0	%	49.3	%	46.9	%	44.9	%			45.7	%	48.6	%	51.0	%
NET INCOME (LOSS) PER EMP. (12mo.)($K)	(2.5	)	(8.4	)			(7.2	)	(3.2	)	19.5		(3.4	)			(39.2	)	(61.1	)	(11.1	)

SUN MICROSYSTEMS, INC.

OPERATIONS ANALYSIS – CONSOLIDATED (UNAUDITED)


NON-GAAP CALCULATION OF NET INCOME (LOSS) EXCLUDING SPECIAL ITEMS (in millions except per share amounts)	FY 2006						FY 2005										FY 2004
	Q1		Q2		FY06		Q1		Q2		Q3*		Q4****		FY05*		Q2		Q3		Q4		FY04
							(Restated)		(Restated)		(Restated)						(Restated)		(Restated)		(Restated)
GAAP net income (loss)***, ****	(123	)	(223	)	(346	)	(133	)	4		(28	)	50		(107	)	(126	)	(754	)	780		(388	)
In-process research and development	60		0		60		0		0		0		0		0		0		0		69		70
Restructuring charges	12		10		22		108		24		44		86		262		(10	)	203		150		344
Loss (gain) on equity investments, net	(13	)	(14	)	(27	)	4		(9	)	(2	)	1		(6	)	36		(3	)	6		64
Impairment expense	0		0		0		0		0		0		0		0		0		0		49		49
Settlement income	0		0		0		0		0		(54	)	0		(54	)	0		0		(1,597	)	(1,597	)
Settlement of litigation**	0		0		0		55		0		0		0		55		0		0		0		0
Valuation allowance on deferred tax assets	0		0		0		0		0		(34	)	0		(34	)	0		300		0		300
Related tax effects	(4	)	(3	)	(7	)	(7	)	(6	)	(7	)	(6	)	(26	)	0		0		367		367

Net income (loss) excluding special items	(68	)	(230	)	(298	)	27		13		(81	)	131		90		(100	)	(254	)	(176	)	(791	)
Growth vs. prior year (%)	-351.9	%	-1869.2	%	-845.0	%	110.3	%	113.0	%	68.1	%	174.4	%	111.4	%	-1100.0	%	-2409.1	%	-355.1	%	-6691.7	%
EPS (Diluted) excluding special items ***	(0.02	)	(0.07	)	(0.09	)	0.01		0.00		(0.02	)	0.04		0.03		(0.03	)	(0.08	)	(0.05	)	(0.24	)
Growth vs. prior year (%)	-300.0	%	-100.0	%	-1000.0	%	112.5	%	100.0	%	75.0	%	180.0	%	112.5	%	-100.0	%	-100.0	%	-350.0	%	-100.0	%

SHARES (CSE)(Diluted)	3,407		3,424		3,415		3,343		3,400		3,376		3,410		3,368		3,262		3,286		3,348		3,277
OUTSTANDING SHARES	3,410		3,443		3,443		3,344		3,375		3,383		3,410		3,410		3,280		3,293		3,336		3,336

The non-GAAP calculation of Net income (loss) excluding special items for the three month period ended March 27, 2005 and year ended June 30, 2005 includes a $69 million benefit for the impact of the change in Dutch withholding tax legislation which was effected in the third quarter of fiscal 2005 and a $213 million benefit arising from adjustments to our income tax reserves resulting from the conclusion of a U.S. and foreign income tax audit.

**	Included in Cost of sales – products

***

For the year ended June 30, 2005, and the quarters ended September 26, 2004, and June 30, 2004, Sun used 3,392, 3,356, and 3,327 shares, respectively, to calculate the “EPS (Diluted) excluding special items”. For all other periods, the number of shares used to calculate “EPS (Diluted) (Reported)” and “EPS (Diluted) excluding special items” was the same.

****	The non-GAAP calculation of net income excluding special items for the three months ended June 30, 2005 includes a $213 million benefit arising from adjustments to our income tax reserves resulting from the conclusion of a U.S. and foreign income tax audit.

*****

Net loss for the three months ended December 25, 2005 and the three months ended September 25, 2005 included $55 million and $50 million of stock-based compensation expense or approximately $0.02 and $0.01 per share, respectively.

******

Net loss for the three months ended December 25, 2005 and the three months ended September 25, 2005 included $145 million and $122 million of purchase price accounting adjustments and intangible asset amortization relating to our recent acquisitions or approximately $0.04 per share and $0.04 per share, respectively.