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Sun Microsystems Exceeds Profit Target

SANTA CLARA, Calif., July 30 /PRNewswire-FirstCall/ -- Sun Microsystems, Inc. (Nasdaq: SUNW) reported results today for its fourth quarter and full fiscal year, which ended June 30, 2007, exceeding its operating margin target, improving gross margin and delivering another sequential quarter of profit.

SANTA CLARA, Calif., July 30 /PRNewswire-FirstCall/ — Sun Microsystems, Inc. (Nasdaq: SUNW) reported results today for its fourth quarter and full fiscal year, which ended June 30, 2007, exceeding its operating margin target, improving gross margin and delivering another sequential quarter of profit.

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Revenues for the fourth quarter of fiscal 2007 were $3.835 billion. For the full fiscal year, the Company reported revenues of $13.873 billion, an increase of 6.2 percent over fiscal year 2006. Total gross margin as a percent of revenues for the fourth quarter was 47.2 percent, and gross margin for the full fiscal year was 45.2 percent, an increase of 2.1 percentage points over fiscal year 2006. Operating margin for the fourth quarter was 8.5 percent.

Net income for the fourth quarter of fiscal 2007 on a GAAP basis was $329 million, or $0.09 per share on a diluted basis. For the full fiscal year, net income was $473 million, or $0.13 per share, on a diluted basis, as compared with a net loss of $864 million, or ($0.25) per share, for fiscal 2006.

Cash generated from operations for the fourth quarter of fiscal 2007 was $564 million, and cash and marketable debt securities balance at the end of the quarter was approximately $5.9 billion.

"With a solid strategy and consistent execution, we delivered on our commitment to achieve at least 4 percent operating margin in the fourth quarter. This milestone marks significant progress toward our longer-term growth plan of at least 10 percent operating margin for the full fiscal year 2009," said Jonathan Schwartz, president and CEO of Sun Microsystems. "The Solaris(TM) 10 Operating System continues to fuel opportunity for us and our partners, allowing customers to leverage built-in virtualization to harvest more value from their datacenters, without the unnecessary expense of separate software licenses."

Sun has scheduled a conference call today to discuss its financial results for the fourth quarter fiscal year 2007 at 1:30 p.m. (PT), which is being broadcast live at 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.

GAAP Net Income: GAAP net income for the fourth quarter of fiscal 2007 included: $48 million of stock-based compensation charges, $15 million of restructuring and related impairment of assets charges, $70 million of purchase price accounting adjustments and intangible asset amortization charges related to acquisitions in fiscal 2006, $1 million of gain on equity investments and a $5 million benefit of related tax effects. The net impact of these five items reduced earnings per share on a diluted basis by approximately $0.04.

This press release contains forward-looking statements regarding the future results and performance of Sun Microsystems, Inc., including statements regarding Sun's longer-term growth plan of at least a 10% operating margin for the full fiscal year 2009. 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 Sun's actual results to differ materially from those contained in such 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 and implementation of new products and technologies; the possibility of errors or defects in new products; a material acquisition, restructuring or other event that results in significant charges; competition; adverse business conditions; failure to retain key employees; the cancellation or delay of projects; Sun's reliance on single-source suppliers; risks associated with Sun's ability to purchase a sufficient amount of components to meet demand; inventory risks; risks associated with Sun's international customers and operations; delays in product development; Sun's dependence on significant customers and specific industries; and Sun's 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 Reports on Form 10-Q for the fiscal quarters ended October 1, 2006, December 31, 2006 and April 1, 2007. Sun assumes no obligation to, and does not currently intend to, update these forward-looking statements except as required by law.

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.

Contact: Investors, Bret Schaefer, +1-650-786-0123, or bret.schaefer@sun.com, or Press, Kristi Rawlinson, +1-650-786-6933, or kristi.rawlinson@sun.com, or Industry Analysts, Melissa Selcher, +1-650-787-1807, or melissa.selcher@sun.com, all of Sun Microsystems, Inc.

SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (in millions, except per share amounts) Three Months Ended Fiscal Years Ended June 30, June 30, June 30, June 30, 2007 2006 2007 2006 Net revenues: Products $2,492 $2,524 $8,771 $8,371 Services 1,343 1,304 5,102 4,697 Total net revenues 3,835 3,828 13,873 13,068 Cost of sales: Cost of sales-products (including stock-based compensation expense of $3, $2, $13 and $10) (1) 1,312 1,486 4,811 4,827 Cost of sales-services (including stock-based compensation expense of $8, $8, $31 and $29) (1) 711 703 2,797 2,612 Total cost of sales 2,023 2,189 7,608 7,439 Gross margin 1,812 1,639 6,265 5,629 Operating expenses: Research and development (including stock-based compensation expense of $14, $20, $64 and $74) (1) 514 543 2,008 2,046 Selling, general and administrative (including stock-based compensation expense of $23, $33, $106 and $112) (1) 958 1,135 3,851 4,039 Restructuring and related impairment of long-lived assets 15 296 97 354 Purchased in-process research and development – – – 60 Total operating expenses 1,487 1,974 5,956 6,499 Operating profit (loss) 325 (335) 309 (870) Gain (loss) on equity investments, net 1 (4) 6 27 Interest and other income, net 59 19 214 114 Settlement income – 54 54 54 Income (loss) before income taxes 385 (266) 583 (675) Provision for income taxes 56 35 110 189 Net income (loss) $329 $(301) $473 $(864) Net income (loss) per common share-basic $0.09 $(0.09) $0.13 $(0.25) Net income (loss) per common share-diluted $0.09 $(0.09) $0.13 $(0.25) Shares used in the calculation of net income (loss) per common share-basic 3,555 3,475 3,531 3,437 Shares used in the calculation of net income (loss) per common share-diluted 3,632 3,475 3,606 3,437

(1) For the three months ended June 30, 2007 and June 30, 2006 and fiscal year ended June 30, 2007 and June 30, 2006, respectively.

SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in millions) June 30, June 30, 2007 2006* (unaudited) ASSETS Current assets: Cash and cash equivalents $3,620 $3,569 Short-term marketable debt securities 962 496 Accounts receivable, net 2,964 2,702 Inventories 524 540 Deferred and prepaid tax assets 200 209 Prepaid expenses and other current assets 1,058 757 Total current assets 9,328 8,273 Property, plant and equipment, net 1,533 1,812 Long-term marketable debt securities 1,360 783 Goodwill 2,514 2,610 Other acquisition-related intangible assets, net 633 929 Other non-current assets 470 675 $15,838 $15,082 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt and short-term borrowings $1 $503 Accounts payable 1,428 1,446 Accrued payroll-related liabilities 842 777 Accrued liabilities and other 887 1,190 Deferred revenues 2,073 1,988 Warranty reserve 220 261 Total current liabilities 5,451 6,165 Long-term debt 1,264 575 Long-term deferred revenues 659 506 Other non-current obligations 1,285 1,492 Total stockholders' equity 7,179 6,344 $15,838 $15,082 * Derived from audited financial statements SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in millions) Fiscal Years Ended June 30, June 30, 2007 2006 Cash flows from operating activities: Net income (loss) $473 $(864) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 517 575 Amortization of other acquisition related intangible assets 313 330 Deferred taxes (23) (19) Impairment of assets 16 155 Gain on investments, net (42) (10) Stock-based compensation expense 214 225 Purchased in-process research and development – 60 Changes in operating assets and liabilities: Accounts receivable, net (235) (163) Inventories (5) 44 Prepaid and other assets (212) 245 Accounts payable (5) 130 Other liabilities (53) (68) Net cash provided by operating activities 958 640 Cash flows from investing activities: Increase in restricted cash (5) (69) Purchases of marketable debt securities (3,088) (1,831) Proceeds from sales of marketable debt securities 1,335 5,434 Proceeds from maturities of marketable debt securities 725 580 Proceeds from sales of equity investments, net 16 15 Purchases of property, plant and equipment (488) (388) Proceeds from sales of property, plant and equipment 451 – Payments for acquisitions, net of cash acquired (23) (3,162) Net cash provided by (used in) investing activities (1,077) 579 Cash flows from financing activities: Purchase of hedge on convertible notes (83) – Proceeds from issuance of common stock, net 44 249 Proceeds from borrowings and other obligations 720 50 Principal payments on borrowings and other obligations (511) – Net cash provided by financing activities 170 299 Net decrease in cash and cash equivalents 51 1,518 Cash and cash equivalents, beginning of period 3,569 2,051 Cash and cash equivalents, end of period $3,620 $3,569 SUN MICROSYSTEMS, INC. NON-GAAP CALCULATION OF NET INCOME (LOSS) EXCLUDING SPECIAL ITEMS (unaudited) (in millions, except per share amounts) Three Months Ended Fiscal Years Ended June 30, June 30, June 30, June 30, 2007 2006 2007 2006 Calculation of net income (loss) excluding special items: Net income (loss)*, ** $329 $(301) $473 $(864) Restructuring and related impairment of long-lived assets 15 296 97 354 Purchased in-process research and development – – – 60 Gain (loss) on equity investments, net (1) 4 (6) (27) Settlement income – (54) (54) (54) Related tax effects (5) (8) (24) (19) Net income (loss) excluding special items $338 $(63) $486 $(550) Net income (loss) excluding special items per common share – basic $0.10 $(0.02) $0.14 $(0.16) Net income (loss) excluding special items per common share – diluted $0.09 $(0.02) $0.13 $(0.16) Shares used in the calculation of net income (loss) excluding special items per common share – basic 3,555 3,475 3,531 3,437 Shares used in the calculation of net income (loss) excluding special items per common share – diluted 3,632 3,475 3,606 3,437 * Net income for the three months and year ended June 30, 2007 included $48 million and $214 million of stock-based compensation expense or approximately $0.01 per share and $0.06 per share, respectively. Net loss for the three months and year ended June 30, 2006 included $63 million and $225 million of stock-based compensation expense or approximately $0.02 per share and $0.07 per share, respectively. ** Net income for the three months and year ended June 30, 2007 included $70 million and $303 million of purchase price accounting adjustments and intangible asset amortization relating to our fiscal 2006 acquisitions or approximately $0.02 per share and $0.08 per share, respectively. Net loss for the three months and year ended June 30, 2006 included $86 million and $440 million of purchase price accounting adjustments and intangible asset amortization relating to our fiscal 2006 acquisitions or approximately $0.02 per share and $0.13 per share, respectively.

SOURCE Sun Microsystems, Inc.

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