Sun Microsystems Returns to Profitability; Reports Results for Second Quarter Fiscal Year 2007

February 3 2007

Sun Microsystems, Inc. (Nasdaq: SUNW) reported results today for its fiscal second quarter, which ended December 31, 2006.

Revenues for the second quarter of fiscal 2007 were $3.566 billion, an increase of 7 percent as compared with $3.337 billion for the second quarter of fiscal 2006. The year-over-year revenue increase was due to sales of SPARC(R) chip multithreading (CMT) servers and x64-based servers as well as the increased acceptance of the Solaris(TM) 10 Operating System. Computer Systems products revenues increased 14 percent year-over-year, the fourth consecutive quarter of year-over-year revenue growth.

Net income for the second quarter of fiscal 2007 on a GAAP basis was $126 million or $0.03 per share on a diluted basis, as compared with a net loss of $223 million, or ($0.07) per share, for the second quarter of fiscal 2006.

GAAP net income for the second quarter of fiscal 2007 included: $58 million of stock-based compensation charges, $26 million of restructuring and related impairment of assets charges and a related tax benefit of $4 million. The net impact of these three items was approximately ($0.02) per share on a diluted basis.

Cash generated from operations for the second quarter of fiscal 2007 was $153 million, and cash and marketable debt securities balance at the end of the quarter was $4.837 billion.

"Sun's financial performance this quarter demonstrates that our strategy and discipline are paying off," said Jonathan Schwartz, CEO of Sun Microsystems. "The steady increase in adoption of our key developer platforms, the outstanding performance of our systems group, coupled with yesterday's endorsement of Solaris by Intel and today's landmark investment by KKR Private Equity Investors, L.P., are all validation of our momentum, and key drivers behind our push towards sustained growth and profitability."

Sun has scheduled a conference call today to discuss its financial results for Q2 fiscal year 2007 at 1:30 p.m. (PT), which is being broadcast live at http://www.sun.com/investors .

About Sun Microsystems, Inc.

A singular vision -- "The Network Is The Computer(TM)" -- guides Sun in the development of technologies that power the world's most important markets. Sun's philosophy of sharing innovation and building communities is at the forefront of the next wave of computing: the Participation Age. Sun can be found in more than 100 countries and on the Web at http://sun.com .

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including the statement regarding the key drivers behind our push towards sustained growth and profitability. 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 these projections and forward-looking statements include: risks associated with developing, designing, manufacturing and distributing new products; lack of success in technological advancements; pricing pressures; lack of customer acceptance of new products; the possibility of errors or defects in new products; competition; adverse business conditions; failure to retain key employees; the cancellation or delay of projects; the cancellation or delay of the alliance with Intel; our reliance on single-source suppliers; risks associated with our ability to purchase a sufficient amount of components to meet demand; inventory risks; risks associated with our international customers and operations; delays in product development or customer acceptance and implementation of new products and technologies; our dependence on significant customers and specific industries; and our dependence on channel partners. Please also refer to Sun's periodic reports that are filed from time to time with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended June 30, 2006 and its Quarterly Report on Form 10-Q for the fiscal quarter ended October 1, 2006. Sun assumes no obligation to, and does not currently 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 Sun's 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 its performance by excluding certain charges, gains and tax effects that may not be indicative of Sun's 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 its competitors' operating results. Sun includes these non-GAAP financial measures because management believes 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.

NOTE: Sun, Sun Microsystems, the Sun logo, Solaris, and The Network Is The Computer are trademarks or registered trademarks of Sun Microsystems, Inc. in the United States and 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.

Investor Contact:

Bret Schaefer

650-786-0123

bret.schaefer@sun.com

Press Contact:

Kristi Rawlinson

650-786-6933

kristi.rawlinson@sun.com

SUN MICROSYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in millions, except per share amounts)

Three Months Ended Six Months Ended

Dec. 31, Dec. 25, Dec. 31, Dec. 25,

2006 2005 2006 2005

Net revenues:

Products $2,260 $2,108 $4,219 $3,812

Services 1,306 1,229 2,536 2,251

Total net revenues 3,566 3,337 6,755 6,063

Cost of sales:

Cost of sales-products (including

stock-based compensation expense of

$4, $3, $7 and $5) (1) 1,225 1,223 2,348 2,189

Cost of sales-services (including

stock-based compensation expense of

$8, $7, $16 and $14) (1) 728 693 1,406 1,251

Total cost of sales 1,953 1,916 3,754 3,440

Gross margin 1,613 1,421 3,001 2,623

Operating expenses:

Research and development (including

stock-based compensation expense of

$17, $18, $34 and $35) (1) 507 541 980 980

Selling, general and administrative

(including stock-based compensation

expense of $29, $27, $59 and $51) (1) 978 1,056 1,936 1,884

Restructuring and related impairment

of long-lived assets 26 10 47 22

Purchased in-process research and

development -- -- -- 60

Total operating expenses 1,511 1,607 2,963 2,946

Operating income (loss) 102 (186) 38 (323)

Gain on equity investments, net -- 14 -- 27

Interest and other income, net 47 25 89 69

Income (loss) before income taxes 149 (147) 127 (227)

Provision for income taxes 23 76 57 119

Net income (loss) $126 $(223) $70 $(346)

Net income (loss) per common share-

basic $0.04 $(0.07) $0.02 $(0.10)

Net income (loss) per common share-

diluted $0.03 $(0.07) $0.02 $(0.10)

Shares used in the calculation of net

income (loss) per common share-basic 3,525 3,424 3,511 3,415

Shares used in the calculation of net

income (loss) per common share-

diluted 3,626 3,424 3,566 3,415

(1) For the three months ended December 31, 2006 and December 25, 2005 and

the six months ended December 31, 2006 and December 25, 2005,

respectively.

SUN MICROSYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions)

December 31, June 30,

2006 2006*

(unaudited)

ASSETS

Current assets:

Cash and cash equivalents $2,613 $3,569

Short-term marketable debt securities 843 496

Accounts receivable, net 2,331 2,702

Inventories 605 540

Deferred and prepaid tax assets 233 209

Prepaid expenses and other current assets 737 757

Total current assets 7,362 8,273

Property, plant and equipment, net 1,579 1,812

Long-term marketable debt securities 1,381 783

Goodwill 2,571 2,610

Other acquisition-related intangible

assets, net 772 929

Other non-current assets, net 637 675

$14,302 $15,082

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Current portion of long-term debt and

short-term borrowings $1 $503

Accounts payable 1,331 1,446

Accrued payroll-related liabilities 748 777

Accrued liabilities and other 1,049 1,190

Deferred revenues 1,631 1,988

Warranty reserve 236 261

Total current liabilities 4,996 6,165

Long-term debt 579 575

Long-term deferred revenues 567 506

Other non-current obligations 1,396 1,492

Total stockholders' equity 6,764 6,344

$14,302 $15,082

* Derived from audited financial statements

SUN MICROSYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in millions)

Six Months Ended

December 31, December 25,

2006 2005

Cash flows from operating activities:

Net income (loss) $70 $(346)

Adjustments to reconcile net income (loss)

to net cash provided by operating

activities:

Depreciation and amortization 257 301

Amortization of other acquisition related

intangible assets 161 153

Deferred taxes (20) 4

Impairment of assets 12 --

Gain on investments, net -- (27)

Stock-based compensation expense 116 105

Purchased in-process research and

development -- 60

Changes in operating assets and liabilities:

Accounts receivable, net 390 236

Inventories (89) 66

Prepaid and other assets 51 232

Accounts payable (106) (88)

Other liabilities (532) (663)

Net cash provided by operating activities 310 33

Cash flows from investing activities:

Increase in restricted cash (10) (54)

Purchases of marketable debt securities (1,894) (1,227)

Proceeds from sales of marketable debt

securities 662 3,440

Proceeds from maturities of marketable

debt securities 296 163

Proceeds from sales of equity investments,

net 7 14

Proceeds from sale (purchases) of property,

plant and equipment, net 79 (130)

Acquisition of spare parts and other assets (58) (40)

Payments for acquisitions, net of cash

acquired (10) (3,150)

Net cash used in investing activities (928) (984)

Cash flows from financing activities:

Proceeds from issuance of common stock, net 138 93

Principal payments on borrowings and other

obligations, net (476) --

Net cash provided by (used in) financing

activities (338) 93

Net decrease in cash and cash equivalents (956) (858)

Cash and cash equivalents, beginning of period 3,569 2,051

Cash and cash equivalents, end of period $2,613 $1,193

SUN MICROSYSTEMS, INC.

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

(unaudited)

(in millions, except per share amounts)

Three Months Six Months

Ended Ended

Dec. 31, Dec. 25, Dec. 31, Dec. 25,

2006 2005 2006 2005

Calculation of net income (loss)

excluding special items:

Net income (loss)*, ** $126 $(223) $70 $(346)

Restructuring and related impairment

of long-lived assets 26 10 47 22

Purchased in-process research and

development -- -- -- 60

Gain on equity investments, net -- (14) -- (27)

Related tax effects (4) (3) (11) (7)

Net income (loss) excluding special

items $148 $(230) $106 $(298)

Net income (loss) excluding special

items per common share - basic $0.04 $(0.07) $0.03 $(0.09)

Net income (loss) excluding special

items per common share - diluted $0.04 $(0.07) $0.03 $(0.09)

Shares used in the calculation of net

income (loss) excluding special

items per common share - basic 3,525 3,424 3,511 3,415

Shares used in the calculation of net

income (loss) excluding special

items per common share - diluted 3,626 3,424 3,566 3,415

* Net income for the three and six months ended December 31, 2006

included $58 million and $116 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 $55 million and $105 million of stock-based compensation

expense or approximately $0.02 per share and $0.03 per

share, respectively.

** Net income for the three and six months ended December 31, 2006 included

$79 million and $158 million of purchase price accounting adjustments

and intangible asset amortization relating to our fiscal 2006

acquisitions or approximately $0.02 per share and $0.05 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 fiscal 2006

acquisitions or approximately $0.04 per share and $0.08 per share,

respectively.