10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)
x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2006
¨	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

SUN MICROSYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware	94-2805249
(State of incorporation)	(I.R.S. Employer Identification No.)
4150 Network Circle	(650) 960-1300
Santa Clara, CA 95054	(Registrant’s telephone number, including area code)
(Address of principal executive offices,	http://www.sun.com/aboutsun/investor
including zip code)	(Registrant’s url)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock	The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:    None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.    YES    ¨        No    x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”).    YES    ¨        No    x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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    ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K    YES    x        No    ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer    x Accelerated filer    ¨ Non-accelerated filer    ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES    ¨        No    x

The aggregate market value of the voting stock (Common Stock) held by non-affiliates of the registrant, as of December 23, 2005 (the last business day of registrant’s second quarter of fiscal 2006), was approximately $15 billion based upon the last sale price reported for such date on The NASDAQ Stock Market. For purposes of this disclosure, shares of Common Stock held by persons who hold more than 5% of the outstanding shares of Common Stock and shares held by officers and directors of the Registrant have been excluded because such persons may be deemed to be affiliates. This determination is not necessarily conclusive.

The number of shares of the registrant’s Common Stock (par value $0.00067) outstanding as of September 6, 2006 was 3,509,259,866.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Proxy Statement for the 2006 Annual Meeting of Stockholders are incorporated by reference into Items 10, 11, 12, 13 and 14 hereof.

INDEX

PART I
Item 1.	Business	3
	Executive Officers of the Registrant	14
Item 1A.	Risk Factors	15
Item 1B.	Unresolved Staff Comments	25
Item 2.	Properties	25
Item 3.	Legal Proceedings	26
Item 4.	Submission of Matters to a Vote of Security Holders	26
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	27
Item 6.	Selected Financial Data	28
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 8.	Financial Statements and Supplementary Data	49
	Consolidated Statements of Operations	50
	Consolidated Balance Sheets	51
	Consolidated Statements of Cash Flows	52
	Consolidated Statements of Stockholders’ Equity	53
	Notes to Consolidated Financial Statements	54
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	91
Item 9A.	Controls and Procedures	91
Item 9B.	Other Information	92
PART III
Item 10.	Directors and Executive Officers of the Registrant	93
Item 11.	Executive Compensation	93
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	93
Item 13.	Certain Relationships and Related Transactions	93
Item 14.	Principal Accountant Fees and Services	93
PART IV
Item 15.	Exhibits and Financial Statement Schedules	94
SIGNATURES		96

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PART I

ITEM 1.    BUSINESS

GENERAL

Sun provides innovative products and services for network computing. Our customers use those innovations to create and operate the network services upon which they run their businesses. “The Network Is The Computer”^™ has articulated the consistent vision at the core of our offerings throughout the 24 years of our existence. Every day, this vision becomes increasingly real, as consumers use and experience a richer array of network based services, including online banking, tax filing, auctions and interactive media and entertainment. Customers’ growing use of advanced digital services fuels the demand for industrial-grade, reliable, secure and highly scalable computing infrastructures — systems, software, storage and related services. We focus on creating, selling and managing those infrastructures. Our core brands include the open and multi-platform Solaris^™ Operating System, our Java^™ Platform software and programming offerings, our SPARC^® and AMD Opteron^™ based lines of Sun Fire^™ servers, the StorageTek^™ line of storage systems and our SunSpectrum^SM service offerings. Our world-class software solution and system partners, together with our extensive network of value-added resellers, help create a strong ecosystem around Sun’s core innovation, thereby bringing greater value to customers.

Our customers use our products and services to build and operate mission-critical network computing environments running essential elements of their businesses, including a wide range of technical, scientific, business and engineering applications. Our systems power the infrastructure underlying a range of business and technical processes — from webserving to high-performance technical computing to enterprise-wide resource planning, customer relationship management and database management — in a wide range of industries, including telecommunications, government, financial services, manufacturing, education, retail, life sciences, media and entertainment, transportation, energy/utilities and healthcare.

Customers do business with Sun in part because of the value our business brings to their business, particularly our thought leadership, innovative products and solutions and our ability to create and nurture large communities of developers around our software platforms. The reliability, security and scalability of our offerings are key differentiators along with interoperability and long-term investment protection across many different computing platforms. We have built our business around a multi-platform strategy that includes our Solaris Operating System running on x86 and SPRAC machines, the “Write Once, Run Anywhere”^™ concept of the Java Platform, and the ability for our systems to support Solaris, Windows and Linux platforms and for our storage products to support both UNIX^® and mainframe environments.

Sun relies upon, and contributes much to, the power of open source and community development. A core premise of our software business is that long term success depends on the ability to successfully attract innovative application developers to our platforms (Solaris, Java and the Java Enterprise System). Those innovative applications in turn lead to design wins for Sun deployments, thereby driving demand for the full array of our offerings. Our long standing belief that openness, community, sharing and collaboration speed innovation and create markets faster is key to our success. Sun contributes to a wide variety of open source communities including OpenSolaris^™, Java, Netbeans^™, OpenOffice.org, OpenSPARC^™ and many other industry-wide community development efforts.

For the fiscal year ended June 30, 2006 we had net revenues of $13.1 billion, employed approximately 38,000 employees and conducted business in over 100 countries. We were incorporated in California in February 1982 and reincorporated in Delaware in July 1987.

Our Internet address is http://www.sun.com. On our Investor Relations web site, located at http://www.sun.com/aboutsun/investor, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the U.S. Securities and Exchange Commission (SEC): our annual reports on Form 10-K, quarterly reports on Form 10-Q, our current reports on Form 8-K, our proxy statement on Form 14A related to our annual shareholders’ meeting and any amendments to those reports or statements filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. All such filings are available free of charge on our Investor Relations web site. The contents of these web sites are not intended to be incorporated by reference into this report or in any other report or document we file, and our references to these web sites are intended to be inactive textual references only.

BUSINESS STRATEGY

Our business strategy is to provide superior offerings that rely on innovation as a core differentiator. We take a holistic systems approach to the critical elements customers require — systems, software, storage and services. The elements of our business strategy include:

Innovation.    We rely on on-going innovation in systems design, networking integration, microprocessor architecture, operating systems and software to ensure continuing technology leadership, which our customers experience in the form of both new enabling capability and/or greater cost efficiencies.

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Interoperability.    We focus on standards-based designs and implementations, including standards-based networking protocols and webservices, identity management and other elements, thereby allowing customers to build heterogeneous network computing environments.

Customers’ Investment Protection.    We emphasize protecting our customers’ infrastructure investments and lowering their total cost of ownership. We demonstrate that commitment through legacy application support, binary compatibility with previous versions of our operating systems, and the ability to selectively upgrade a single processor board within a larger system.

Solutions-Based Selling Model.    We use a solutions-based selling model that emphasizes our end-to-end network computing architecture platform, with integrated product and service offerings that address customers’ strategic business challenges and not just their information technology needs.

Innovative Business Models.    We utilize innovative business models that address specific customer needs. Examples include our Sun Grid utility computing offering priced at $1 per CPU-hour and our innovative per-employee indexed pricing for all of our middleware software offerings. Both appeal to customers struggling to make their IT expenditure more predictable while lowering the overall IT cost.

Robust Partner Community.    We cultivate a robust partner community, including independent software vendors (ISVs), system integrators, resellers and original equipment manufacturers (OEMs), whose members collaborate in building new and innovative solutions based on our products and services, thus extending our reach and expertise.

Environmentally Responsible Products.    Our aim is “Sustainable Computing.” We strive to design, develop and ship environmentally friendly products that not only meet regulatory requirements, but also have minimal impact on the environment.

Each of these elements of our business strategy are discussed in more detail below.

Innovation

In order to maintain our position as a leading developer of enterprise and network computing products and technologies, we must continue to invest and innovate. Over the past few years, in addition to significant investments in research and development, we have also made significant investments in several product and services technology acquisitions. Our investments in research and development and acquisitions include the following:

• Innovation at the operating system level is evidenced by the Solaris 10 operating system, which is the market share leading UNIX operating environment. We believe it provides significant advantages over traditional UNIX offerings as well as Linux implementations and has won numerous awards for its technological features. The Solaris 10 operating system is multi-platform and runs on Dell, HP, IBM and numerous other platforms. It includes several major advancements in availability, performance and security to help customers proactively manage their computing resources.

• Our latest UltraSPARC^® processor technology incorporates chip multithreading at the processor level as part of our throughput computing initiative. We are driving toward significant gains in performance for the same physical size and power consumption. The introduction of the innovative “Niagara” CoolThreads^™ technology has led the way to next generation processor chip architecture with an 8 core processor with 4 threads per core, for a total of 32 threads per processor. This is particularly critical for the new breed of webservices and Java applications which need a high degree of ‘parallel’ processing of separate ‘threads’. Sun’s leading implementation in the Sun Fire T1000 and T2000 systems provide significant advantages in throughput, power consumption, and space consumed, which we believe is very compelling to customers experiencing power, cooling, and space constraints.

• Our x64 systems offerings based on AMD’s Opteron processor are creating new opportunities for Sun in a variety of customer and industry environments, including grid computing environments for high-performance technical computing. Innovation at the system architecture level allows Sun to leverage the ‘off-the-shelf’ processor offerings available in the industry from suppliers such as AMD and innovate at the system architecture level. This is evidenced by our Sun Fire x64 line, which offers competitive price/performance and enterprise class reliability features. These systems allow the customer to choose Solaris, Windows or Linux platforms making them versatile for multi-OS deployments in small and large enterprises.

• We currently offer a full range of middleware including mission-critical clustering, messaging, identity management, directory and webservices infrastructure software known as Java Enterprise System and an industry-leading business model based on per employee pricing.

• The cross-platform Java software development environment, spanning smart cards, cellular handsets, set top boxes, desktops, computers and servers, provides our customers and ISV partners with an end-to-end architecture that extends our common Java^™ technology-based programming environment across many different platforms, making real the concept of “Write Once, Run Anywhere.” Our products provide exceptional price-performance, flexibility, scalability and choice for devices as small as smart cards and cell phones up through large, multi-million dollar systems.

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• Our enterprise desktop technologies, including Java Desktop System, StarOffice^™, and the Secure Global Desktop family of products that we acquired through our acquisition of Tarantella, Inc., combined with our SunRay^™ thin clients, can provide access to the customer’s desktop in virtually any application environment.

• We offer a robust line of network-based storage systems and software, including products added through our acquisition of StorageTek’s technologies and product portfolio, providing a comprehensive storage portfolio for data management. Our network computing vision has expanded to include the combination of identity management with data storage technology, which enables us to help customers store, manage and retrieve information in an increasingly complex technical and regulatory environment.

• Our new services technologies, including Sun Connection and a suite of proactive managed services, provide remote diagnostics and preventive services for our customers, and are now enhanced to include multi-platform support.

• Our software offerings include virtualization, provisioning and monitoring software for network computing resource optimization and systems management simplification.

• Open Source Initiatives such as OpenSolaris, OpenSPARC, Open Source Availability of Netbeans, Java Development Tools, Java Middleware and Java Platform Technologies are aimed to significantly increase participation in processor architecture development, software and application design by making cutting-edge hardware and software intellectual property freely available. This helps lower barriers to the next big build-out of the Internet, encourage innovation and foster bringing new products to market.

We believe that many of these technologies provide us with a competitive advantage and differentiation in the marketplace. By investing in research and development, as well as product and services technology acquisitions, we believe we are able to develop and deliver more valuable systems technology and better address the complex issues our customers face. We intend to continue our investments into new computing technologies and are focused on the development and delivery of leading-edge network computing products based upon our innovations.

Interoperability

From our inception, we have focused on developing products and technologies based upon open standards. We believe the real power in computing lies in the ability to freely access and share information over the network, unconstrained by proprietary software and hardware standards. We pioneered this approach with the invention of Network File System technology in 1985 and since then have focused on optimizing the interoperability of different systems on different networks.

For our customers, interoperability means the freedom to build heterogeneous networks and to choose best-of-breed hardware and software solutions for their IT environments. Interoperability, and the simplicity and flexibility that it provides, constitute an important element of our value proposition to customers. With the advent of webservices, the Java platform has proven itself as a key enabler of an entire generation of new applications and dynamic content in the form of new consumer services for phones, PCs and other devices. The thought leadership displayed by Sun is valued by customers because the window it provides them into critical developments in the industry is relevant to the success of their business infrastructures.

Investment Protection

Our customers have made significant investments in hardware and software assets. To help them to maximize the return on their investments, we make investment protection a priority in all our products. Applications running on earlier versions of Solaris will run on our newest version, Solaris 10, without the need to recompile, thus helping to avoid cost and risk. As the Solaris OS runs on both our UltraSPARC-based data center servers as well as our x64 systems, customers are able to leverage the same application environment and skill sets thereby lowering their cost of operations.

Our hardware also supports heterogeneous environments so that customers not only have the choice but also have the flexibility to change operating systems as their needs change. Our customers can purchase our x64 servers and storage and deploy them with the Solaris OS, Linux, or Microsoft Windows. They can then redeploy as needed the very same hardware using a different operating system choice without the daunting task of purchasing and porting to a new hardware platform. On our data center servers, we also provide the ability to selectively upgrade single processor boards within the same system, meaning customers have the ability to gradually adopt faster processors without having to buy completely new hardware. By building investment protection into our product offerings, we make it easier for customers to manage change, complexity and costs in their IT infrastructure.

The focus on providing multiplatform implementations provides customers with greater choice and confidence. Solaris is available on over 500 different systems, Java Enterprise System middleware is available on RedHat, Windows and HP-UX in addition to Solaris. Our x64 Systems are certified for Solaris, Windows, RedHat and SuSe. Our SPARC systems are available with Solaris and Ubuntu Linux.

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Solutions-Based Selling Model

Our solutions-based selling model offers an integrated set of networking architecture solutions and methodologies, bringing together a combination of servers, software, storage and services to help customers address complex problems, including business compliance, providing secure global access and designing next-generation data centers. Beginning in Fiscal 2007, we will be focusing on the following four competencies that drive demand for our systems infrastructure offerings:

• Systems:    Focused on enabling enterprises to leverage our systems products, architectures and best practices at the heart of next-generation, service-oriented data centers by boosting capacity and application performance while driving space and energy savings;

• Storage:    Focused on information life cycle management, and the products and processes necessary to manage business continuity, regulatory compliance, storage consolidation, and content repositories at the heart of the global storage industry;

• Software:    Focused on leveraging open-source products such as the Solaris OS and Java Desktop Systems to drive cost savings in servers and desktop deployments; Identity Management for securing the enterprise; Enterprise Web Services for enabling enterprises to leverage Java 2 Enterprise Edition (Java EE) web services platform, and evolving service oriented architectures (SOAs) and service delivery platforms (SDPs); and

• Services:    Focused on our global service offerings, enabling increased system service levels, data center operational efficiency and effectiveness, as well as next-generation automation technologies to provide predictive, preemptive and proactive service to heterogeneous infrastructures.

These competencies will line up directly with the key strategies presented to our customers as part of our vision. We believe our solution-based selling approach allows us to engage with our customers over the entire lifecycle of their key infrastructure projects, improving the delivery of sustainable value from the products and services we produce.

Innovative Business Model Opportunities

As a company, we are continually exploring new ways of doing business and collaborating with our partners and customers to deliver greater value.

Open Source:    A community is built through the sharing of ideas, technologies and markets. Accordingly, we offer OpenSolaris, which makes a version of the source code for Solaris 10 available under the Open Source Initiative (OSI) approved Common Development and Distribution License (CDDL). Consistent with our heritage of open source and open standards-based software, our intention in making Solaris 10 freely available is to help foster the innovation and collaboration needed to provide for new opportunities for developers, customers and partners. Making Solaris source code an open environment encourages a deeper understanding of Solaris and its innovations by providing a direct channel of feedback from the engineering community, thus helping to drive the cycle of innovation even further and faster. OpenSPARC is a community created around the SPARC CoolThreads technology. With OpenSPARC we aim to broaden the footprint of the SPARC architecture by fostering community development.

Subscription:    We continue to use our subscription model to greatly simplify the pricing, licensing, delivery and maintenance of our product and service offerings for our customers. We combine our software and services into an integrated package to facilitate quick deployment and reduce cost, complexity and risks to our customers over the lifetime of the subscription. Customers receive new unspecified products and upgrades automatically over the term of the subscription. The subscription model offers customers a simple, predictable and affordable way to buy our software and services.

Utility Computing:    We have introduced the Sun Grid offering, a utility computing capability available at www.network.com. We have developed a number of hardware and software products, service offerings, solution architectures and business models aligned with our vision of utility computing such as Sun Storage Grid Utility and Sun Storage Grid Rack. Our Sun N1^™ Grid Engine is the software that enables all the individual components of the grid to act together as one system. We have built service offerings specifically to help customers build their own “private” grid or buy into our “public” grid utility.

Remote Services Delivery:    Sun Connection is an integrated, secured service connection that links customers, partners, developers and Sun in a dynamic and collaborative network-based community. Our Connected Systems Network group, which is driving the Remote Services Delivery effort, delivers advanced Support and Educational Services through software innovation. Sun Management Connection, which incorporates the remote managed services technology from our recent SevenSpace Inc. acquisition, allows us to deliver scalable, 24x7x365 remote management of heterogeneous IT environments over the Internet without customer investment in IT infrastructure.

Alliances and Partner Community

Our partner community is essential to our success. While our product and service offerings are very broad, we recognize that no single supplier of computing solutions can meet all of the needs of all of its customers. We have established relationships with

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leading ISVs, value-added resellers (VARs), OEMs, channel development providers, independent distributors, computer systems integrators and SDPs to deliver solutions that our customers demand. Through these relationships, our goal is to optimize our ability to be the technology of choice, the platform of choice, the partner of choice and to provide the end-to-end solutions that customers require to compete.

We seek out partners with whom we share common interest. We continue to partner with Advanced Micro Devices, Inc. (AMD) to expand our entry-level line of Opteron processor-based x64 systems. We also maintain a strategic alliance with Fujitsu to collaborate on the development, delivery and support of a future generation of SPARC-based systems. This alliance is intended to enlarge the Solaris footprint, drive increased market share for our enterprise-class systems and allow us to dedicate additional resources to our throughput computing initiative and our next generation of processor products. In addition, we continue our relationship with Hitachi Data Systems to provide high-end storage solutions and extend our storage offering into enterprise environments.

Environmentally Responsible Products

We are committed to developing and selling products that are environmentally responsible because we think this is good for the planet and good for the business. Our business benefits because these initiatives directly make our products more competitive and provide our customers with lower cost and more efficient solutions. We are a leader in energy efficient computing technologies and committed to reducing factors contributing to global climate change through what we call “sustainable computing.” We create technologies that we believe will enable, at least, four significant shifts in the computing industry, changes which hold enormous potential for positive environmental impact: (i) transition to thin client computing from traditional desktop PCs thereby increasing overall energy efficiency and reducing material waste; (ii) increases in computing resource utilization with throughput computing technology and Sun N1 Grid virtualization technology across data centers; (iii) transition to increased teleworking allowing large employers to unleash the social, environmental and economic benefits of mobility with security and (iv) transition to products that consume significantly less energy than current industry-standard products.

SALES, MARKETING AND DISTRIBUTION

Our Global Sales and Services organization manages and has primary responsibility for our field sales, relationships with our selling partners, technical sales support, sales operations and delivery of support, managed and professional services covering our competency areas. We sell end-to-end networking architecture platform solutions, including products and services, in most major markets globally through a combination of direct and indirect channels. We also offer component products, such as central processor unit (CPU) chips and embedded boards, on an OEM basis to other hardware manufacturers and supply after-market and peripheral products to their end-user installed base, both directly and through independent distributors and VARs. In addition, our strategic alliance with Fujitsu provides expanded distribution of both companies’ existing SPARC product lines.

We have a wide range of marketing activities. Our Worldwide Marketing Organization oversees our marketing planning, determines product and pricing strategy, coordinates advertising, demand creation and public relations activities, maintains strategic partnerships with major ISVs and performs competitive analyses. Although our sales and other operating results can be influenced by a number of factors, and historical results are not necessarily indicative of future results, our sequential quarterly operating results generally fluctuate downward in the first and third quarters of each fiscal year when compared with the immediately preceding quarter.

Our sales force serves the telecommunications, government, financial services, manufacturing, education, retail, life sciences, media and entertainment, transportation, energy/utilities and healthcare industries. We have organized our sales coverage within 16 geographically established markets (GEMs) around the world. We have approximately 78 sales and service offices in the United States and an additional 145 sales and service offices in 47 other countries. We employ independent distributors in over 100 countries. In general, our sales coverage model calls for independent distributors to be deployed in partnership with our direct sales force. However, in some smaller markets, independent distributors may be our sole means of sales, marketing and distribution.

Our relationships with channel partners are very important to our future revenues and profitability. Channel relationships accounted for more than 63%, 67% and 63% of our total net revenues in fiscal 2006, 2005 and 2004, respectively. Our channel partners include:

• Systems integrators, who serve the market for large commercial projects requiring substantial analysis, design, development, implementation and support of custom solutions;

• Channel development providers who supply our products and provide product marketing and technical support services to our smaller resellers;

• VARs who provide added value in the form of software packages, proprietary software development, high-end networking integration, vertical integration, vertical industry expertise, training, installation and support;

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• OEMs who integrate our products with their hardware and software; and

• Independent distributors who primarily serve foreign markets where we do not have a direct presence.

Additionally, ISV partners help us maximize our technology footprint by integrating their software products with our platforms and technologies. SDPs, such as Internet Service Providers (ISPs) and Application Service Providers (ASPs), allow us to expand our service coverage without new large-scale investments.

Revenues from outside the United States (U.S.) were approximately 59%, 60% and 57% of our total net revenues in fiscal 2006, 2005 and 2004, respectively. Direct sales we make outside of the U.S. are generally priced in local currencies and can be subject to currency exchange fluctuations. The net foreign currency impact on our total net revenues and operating results is difficult to precisely measure. However, because of the general strengthening of the U.S. dollar, our best estimate of the foreign exchange detriment approximated 2% of total net revenues for fiscal 2006.

The countries primarily contributing to our international sales are the United Kingdom (U.K.), Germany and Japan. The U.K. represented approximately 9%, 9% and 8% of our total net revenues in fiscal 2006, 2005 and 2004, respectively. Germany represented approximately 7%, 8% and 7% of our total net revenues in fiscal 2006, 2005 and 2004, respectively. Japan represented approximately 6%, 7% and 7% of our total net revenues in fiscal 2006, 2005 and 2004, respectively. For information about sales to unaffiliated customers and revenues by geographic areas, refer to Note 15 to the Consolidated Financial Statements — Industry Segment, Geographic, and Customer Information and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations.

Some of our sales to international customers are made under export licenses that must be obtained from the U.S. Department of Commerce. In addition, all of our export transactions are subject to U.S. export control laws, and certain transactions could require prior approval of the U.S. Department of Commerce. Protectionist trade legislation in either the U.S. or other countries, such as a change in the current tariff structures, export compliance laws or other trade policies, could adversely affect our ability to sell or to manufacture in international markets or to secure adequate supplies of component parts. Furthermore, revenues from outside the U.S. are subject to inherent risks, including the general economic and political conditions in each country. See Note 15 to the Consolidated Financial Statements for additional information concerning sales to international customers and business segments. For a discussion of risks attendant to Sun’s foreign operations, see “Risk Factors — Our international customers and operations subject us to a number of risks,” in Item 1A, which is incorporated herein by reference.

Sales to General Electric Company (GE) and its subsidiaries in the aggregate accounted for approximately 15%, 16%, and 14% of our fiscal 2006, 2005 and 2004 total net revenues, respectively. More than 70% of the revenue attributed to GE was generated through GE subsidiaries acting as either a reseller or financier of our products. The vast majority of the revenue included in the amounts above is from sales through a single GE subsidiary, having comprised 11%, 13%, and 11% of total net revenues in fiscal 2006, 2005 and 2004, respectively. This GE subsidiary acts as a distributor of our products to resellers who in turn sell those products to end-users. Our business could be adversely affected if GE or another significant customer terminated its business relationship with us or significantly reduced the amount of business it did with us.

Our product order backlog at June 30, 2006 was $1.1 billion, as compared with $805 million at June 30, 2005. Our product backlog includes orders for which customer-requested delivery is scheduled within six months and orders that have been specified by the customer for which products have been shipped but revenue has been deferred. Backlog orders are supported by evidence of a customer arrangement (typically a customer purchase order), or customer pre-payment (whereby customer delivery occurs over a period of time or through specific milestones). In either case, sufficient evidence of an arrangement exists and final delivery has yet to be completed. Although actual customer delivery can occur over several periods, product backlog can be used to identify potential revenue coverage for pending periods. The larger the percentage coverage of targeted pending revenue, the lower the potential risk of non-achievement. Backlog levels vary with demand, product availability, product revenue recognition treatment, and our delivery lead times and are subject to significant decreases as a result of, among other things, customer order delays, changes or cancellations. As such, backlog levels may not be a reliable indicator of future operating results. As we explore new ways of doing business and collaborate with our partners and customers to deliver greater value, our backlog metric may evolve to better identify potential revenue coverage for pending periods.

WORLDWIDE OPERATIONS

Our Worldwide Operations organization manages company-wide purchasing of materials used in making our products, assists in product design enhancements, oversees our own manufacturing operations and those of our manufacturing partners and coordinates logistics operations.

Our manufacturing operations consist primarily of final assembly, test and quality control of enterprise and data center servers and storage systems. For all other systems, we rely on external manufacturing partners. We manufacture primarily in Oregon,

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Puerto Rico and Scotland and distribute much of our hardware products from our facilities and our partner facilities located in California, Puerto Rico, the Netherlands and Japan. We are in the process of closing our Puerto Rico facilities and outsourcing those manufacturing operations.

We are expanding our direct ship capabilities, using a customer fulfillment architecture which enables us to ship some products directly from our suppliers to our customers, with the goal of reducing cost, risk and complexity in the supply chain. We have continued efforts to simplify the manufacturing process by reducing the diversity of system configurations offered and increasing the standardization of components across product types. In addition, we have continued to increase our focus on quality and processes that are intended to proactively identify and solve quality issues. The early identification of products containing defects in engineering, design and manufacturing processes, as well as defects in third-party components included in our products, could prevent or reduce delays of product shipments.

RESEARCH AND DEVELOPMENT

Our research and product development programs are intended to sustain and enhance our competitive position by incorporating the latest advances in hardware, software, graphics, networking, data communications and storage technologies. In addition, we have extended our product offerings and intellectual property through acquisitions of businesses or technologies or other arrangements with our partners. Our product development continues to focus on enhancing the performance, scalability, reliability, availability and serviceability of our existing systems and the development of new technology standards. Additionally, we remain focused on system software platforms for Internet and intranet applications, telecommunications and next-generation service provider networks, developing advanced workstation, server and storage architectures and advanced service offerings. We devote substantial resources to research and development as we believe it provides and will continue to provide significant competitive differentiation.

We conduct research and development principally in the U.S., U.K., France, Ireland, Germany, Japan, China, Russia, Czech Republic and India. Research and development (R&D) expenses were $2.0 billion, $1.8 billion, and $1.9 billion in fiscal 2006, 2005 and 2004, respectively.

SEGMENT INFORMATION

During fiscal 2006, our operations were organized into two business segments: products and services. Our product classes comprise revenue from computer systems products and data management products. Our services revenue consists of sales from two classes of services: (1) support services which consists of maintenance contracts and (2) client solutions and educational services, which consists of technical consulting to help customers plan, implement, and manage distributed network computing environments and developing integrated learning solutions for enterprises, IT organizations, and individual IT professionals. In each of the last three fiscal years, computer systems, data management products and support services each accounted for more than 10% of our consolidated net revenues. A table providing external revenue for similar classes of products and services for the last three fiscal years is found in Note 15 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. A table presenting revenues, interdivision revenues, operating income (loss) and total assets for our segments for the three years ended June 30, 2006 is found in Note 15 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.

PRODUCTS

Our products consist of computer systems and storage product lines, and a variety of software and services related to both systems and storage. For information about external revenue for similar classes of products and services, refer to Note 15 to the Consolidated Financial Statements — Industry Segment, Geographic, and Customer Information and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations.

SYSTEMS

Our computer systems products and technologies, including our full line of scalable workgroup and enterprise servers, our UltraSPARC microprocessors and our software, are designed, developed and produced as integrated systems for network computing environments.

Servers.    We offer a full range of servers from our data center/high-performance computing servers through our entry servers and blade systems.

Data center servers.    Our data center servers, including the Sun Fire^™ E25K and Sun Fire E20K, are designed to offer greater performance and lower total cost of ownership than mainframe systems and are used for server consolidations, application migrations, data mining and warehousing, custom applications, on-line transaction support, enterprise resource planning, high

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performance technical computing and databases. The Sun Fire E25K server is one of the most scalable UNIX^® platform-based systems in the marketplace and incorporates our UltraSPARC IV+ microprocessor, bringing dual-threaded capability to the data center.

Enterprise servers.    Our enterprise servers, including Sun Fire E6900, Sun Fire E4900, Sun Fire E2900 and Sun Fire V1280 servers, address the needs of data centers and enterprise-scale network computing at a moderate cost. These servers are available with various options in processor and memory expandability, hardware redundancy and component accessibility and run on the Solaris OS. The UltraSPARC IV+ processor is built to deliver dual-threaded capability and fault management technology into our family of mid-range Sun Fire servers.

Entry server systems.    We also offer a wide range line of entry server systems differentiated by their size, their processor architecture (SPARC or x64), their form factor (rack, blade or stand-alone systems) and the environment for which they are targeted (general purpose or specialized systems).

In fiscal 2006 we introduced the T1000/T2000 CoolThreads servers with chip multi-threaded technology and a SPARC processor architecture. These servers offer improved throughput performance as well as energy and space efficiencies and are aimed at web and application tier deployments.

Additional Entry SPARC-based systems include our Sun Fire V240, Sun Fire V210 and Sun Fire V440 servers, which deliver network computing in a compact, low-cost package. In fiscal 2005, we introduced the Sun Fire V890 and the Sun Fire V490 servers, which use the new 1.5GHz UltraSPARC IV+ processor and Solaris 10 OS.

We also have introduced a complete new line of x64 servers, based on AMD’s Opteron processor. Our X2100, X4100, X4200, X4600 servers provide the highest performance level in their class, support multiple operating environments and are targeted at web tier, application, databases, HPTC/Grid as well as development environments.

We also offer a line of products aimed at the unique needs of OEMs and Network Equipment Providers (NEPs). Rack-optimized systems and our blade product offerings combine high-density hardware architecture and system management software that OEMs find particularly useful in building their own solution architectures. Our NEP-certified Netra^™ systems are designed to meet the specialized needs of NEPs. This year, we introduced the Netra 1290, and the Netra CT900 ATCA server.

Desktops and Workstations.    Our desktops and workstations provide powerful solutions for a wide range of business and technical activities such as software development, mechanical design, financial analysis and education. Our product line includes high-performance 64-bit workstations, graphics accelerator boards, x64-based workstations and thin Sun Ray Ultra-Thin Client products. In fiscal 2006, we introduced the Sun Ultra^™ 25, Sun Ultra 45, and Sun Ultra 3 mobile workstation, using SPARC processors, which are designed to meet the needs of demanding graphics, visualization and compute applications. We also introduced the Sun Ultra 20 and Sun Ultra 40 workstations, which are AMD Opteron-based workstations that support Linux (Red Hat and SuSe, 32-Bit and 64-Bit) and the Solaris OS (32-Bit and 64-Bit) and are Microsoft certified.

Processor and Network Products.    In fiscal 2006, the UltraSPARC processor lines were reoriented to reflect the two main types of workloads our customers experience. Our data-intensive processor line includes the refreshed 1.5GHz UltraSPARC IV+, with dual-core processors, which furthers our throughput computing initiative. For network-intensive workloads which require more horizontal scaling, we offer the updated 1.5GHz UltraSPARC IIIi+ processors, which are mainly used on our entry and workgroup servers. In addition, we introduced the UltraSPARC T1 processor featuring CoolThreads technology. This processor offers up to eight 4-threaded cores, with typical processor power consumption of only 72 watts while delivering 32 simultaneous threads.

SOFTWARE

Our software offerings consist primarily of enterprise infrastructure software systems, software desktop systems, developer software and infrastructure management software.

Solaris Operating System (OS).    The Solaris OS is a high performance, highly reliable, scalable and secure operating environment for SPARC and x64 platforms that is easy to install and use, is optimized for the Java platform and supports more than 8,000 applications. It is optimized for enterprise computing, Internet and intranet business requirements, powerful databases and high performance technical computing environments. With Solaris 10, customers now have access to our latest technical innovations such as Solaris Containers, Predictive Self-healing and Solaris Dynamic Tracing (DTrace) capability, all while maintaining binary compatibility with previous Solaris versions. Solaris Containers is an advanced approach to system virtualization with multiple software partitions per single instance of the Solaris OS, making consolidation simple, safe and secure. Predictive Self-Healing delivers improved service availability with on-line error detection and auto recovery. Dynamic Tracing (DTrace) equips users with a tool for analyzing and diagnosing elusive bottlenecks in real-time. The Solaris 10 source code is available through an OSI-approved open source license as a project called OpenSolaris.

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Java Technology.    Our Java platform application environment allows development of application software independent of the underlying operating system or microprocessor based on open standards. Java technology allows a developer to write applications once for a wide range of platforms and devices. Our Java platforms are based on a common core architecture and include the Java Platform, Standard Edition (Java SE^™) technology used on personal computers and workstation clients and available on Solaris OS, Linux, HP UX, AIX, Tru64 UNIX, Windows, MacOS X and other platforms; Java Platform, Enterprise Edition (Java EE) technology used to develop and deploy web services; Java Platform, Micro Edition (Java ME) technology, which extends Java technology to consumer and embedded devices such as mobile phones, personal digital assistants (PDAs), digital set top boxes and residential gateways; and Java Card^™ smart card technology.

Sun Java Enterprise System.    Our Sun Java Enterprise System (Java ES) software enables enterprises to utilize their information and applications and deploy services offered on intranets and the Internet. Our new release of Java ES includes a composite application platform for service oriented architecture (SOA) deployments along with more targeted Java Suites covering Identity management, Application platform services, System availability, Web infrastructure and Enterprise communications.

Sun Java Studio Developer Tools.    We develop and market software development tools designed to aid in application development and integration. The Java 2 Software Development Kit enables developers to create and run both applets (miniature applications written in the Java programming language) that run inside a web browser and applications that run outside of a browser. Our Sun Java Studio Developer Platform provides a desktop-to-mainframe development and test environment for programming in C, C++ and Java programming languages.

Sun Java Desktop System.    Our desktop software includes all the key components of a user’s environment, ranging from the user interface and desktop utilities to a browser, multimedia capabilities and the StarOffice personal productivity suite. The StarOffice office productivity suite has an integrated set of applications including word processing, spreadsheet, graphic design, presentations, database access, HTML editor, mail/news reader, event planner and formula editor tools. It runs on most major operating environments and platforms, including the Solaris OS, Microsoft Windows, Linux, OS/2 and Java platforms.

Sun Java Composite Application Suite:    The Sun Java Composite Application Suite complements the other suites of the Java Enterprise System and contains all the components to develop and deploy a SOA (service oriented architecture) platform for the re-use of existing applications, the delivery of new services, and to enable legacy and packaged applications to rapidly integrate within an existing infrastructure. The Suite is SOA-based, fully integrated, and delivers a rich set of integration and composite application capabilities including Business Process Management (BPM), messaging, rich transformation, and a broad and deep array of connectors. The Java Composite Application Platform Suite also features Business Activity Monitoring (BAM) for development of sophisticated dashboards and alerting; Extraction, Transformation and Loading (ETL) capabilities for moving bulk data; extensive B2B support and an advanced facility for enabling the development of a single master index for entities such as customer, patient, product or supplier.

STORAGE

Our storage systems comprise storage, storage components, software, and services to complete our end-to-end data management solutions across heterogeneous environments. With the acquisition of Storage Technology Corporation (StorageTek) in August 2005, our storage portfolio includes:

Tape Storage:    Our tape storages include tape libraries, tape drives, tape virtualization systems as well as tape media and tape device software.

Enterprise Tape Libraries:    Tape libraries help to better manage and protect data with highly productive consolidated storage. Our high-end tape storage systems enable traditional data protection and archive based solutions. The SL8500 and the SL9310 tape library systems are fast, highest-quality and space-efficient tape libraries. The capacity tapes libraries T9940 and T10000 store large amounts of data and provide onsite back-up and archive and/or offsite disaster recovery. The tape drive T9840 is used for quick data retrieval and in line data storage that provides a low cost alternative to disk. The Virtual Storage Manager (VSM) 4e and 5 systems, which consist of a server, disks and software, positioned between mainframe servers, and tape libraries, help aggregate storage from heterogeneous devices providing a single storage resource pool, thereby providing the ability to access data faster, allowing legacy and newer technologies to co-exist.

Entry and Midrange Tape Libraries:    We offer a wide range of entry and midrange tape systems, which enable traditional data protection and archive based solutions, with high levels of reliability, longevity and expandability. The C2/C4 tape libraries are entry products. The SL500 tape library provides modular scalability and enterprise level RAS feature in a space efficient, recounted library. The SL700 and SL1400 provide capacity and performance approaching the entry capabilities of an enterprise library. The tape drives used in these libraries are mainly industry standard tape drives that Sun buys from third party manufacturers.

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Disk Systems:    Our extensive disk system product line includes data center disks, midrange and workgroup systems as well as specialized storage arrays providing heterogeneous support.

Data Center:    Our high-end data storage systems provide a platform for direct attach storage or storage area network (SAN) solutions. Our high-end data storage systems, including the Sun StorEdge^™ 9990, combine Hitachi Data Systems’ (HDS) high-end storage hardware with our resource management and file management software under an OEM agreement with HDS first signed in fiscal 2002.

Midrange Disks:    We offer a wide range of flexible, scalable mid-range storage systems, including the Sun StorEdge 6120/30/40, Sun StorEdge 6320, and Sun StorEdge 6920 which support high-performance computing and enterprise SAN implementations, as well as storage virtualization technology. The 6920 is a midrange scalable disk system that provides a cost effective combination of performance, availability, scalability and centralized data management features for business critical enterprise applications. Our network attached storage (NAS) products, including the Sun Storage 5310 NAS are simple, integrated, plug and play storage systems which provide multi protocol support, multi level redundancy clustering and scalability.

Entry Level/Workgroup Disks:    The entry level low cost modular arrays provide direct attached and SAN attached storage for task critical applications. We offer a wide range of entry level products including the Sun StorEdge 3120, 3320, 3510 and 3511.

We also offer specialized storage arrays, including nearline storage solutions that deliver very low cost/MB storage capacity for nearline or archival applications, HPTC storage that cost effectively supports extreme data throughput performance requirements, Thin/Boot Storage that meets the small form factor and low cost requirements for rack systems or system boot devices, and NEBS/MilSpec Storage that meets rigorous environmental requirements.

Storage Networking Products:    Sun OEMs SAN switch technology that provides flexibility required to scale to business needs, helping reduce overall network costs by enabling access through lower cost edge switches and distribution sites versus utilizing more expensive ports across the entire network.

Storage Management Software:    Storage Management software includes Storage Resource Management, Data Protection, Data Management software as well as the Java StorEdge software. Sun storage management software locates storage resources; assesses utilization levels; provides capacity planning, trending and forecasting; identifies back up failures; streamlines provisioning; automates tasks; helps with data classification and provides reports on data placement and movement.

Enterprise Storage Manager:    The Enterprise Storage Manager (ESM) is a storage and data management portfolio consisting of multiple modules. These are standards based modules, enabling heterogeneous platform and application support. The innovative ESM portal provides a dashboard across all modules, displaying relevant business information to each user. The enterprise storage manager includes multiple business modules such as base device management, business analytics and operations management. It is a single, integrated tool for configuration, utilization, performance and provisioning, supporting devices and environments from multiple vendors.

Data and Archive Management:    Sun’s powerful data and archive management software classifies and manages data across tiers of storage (disk, tape, optical), automatically backs up and replicates files, migrates and archives legacy data and performs large scale tape migrations.

Java StorEdge Software:    Our Java StorEdge software is based on the Java ES architecture and comprises an open, integrated and automated storage management software family. The Sun StorEdge software suites are focused on availability, utilization, performance and storage resource management. Our Sun Java StorEdge Software (Java SS) and suites allow customers to acquire and deploy our comprehensive suite of storage and data management software and services in-house on an annual per-employee or capacity basis. Our targeted Java SS Suites cover StorEdge Consolidation, StorEdge Continuity, StorEdge Content and StorEdge Compliance.

Sun Grid Storage Utility:

Our Sun Grid Storage Utility is part of our vision for a standardized, open, grid-based computing infrastructure available to customers as a utility, pay-as-you-go model. This offering includes fully integrated hardware, software and services, provided, managed and serviced by us on a 24x7x365 basis.

SERVICES

Our services team provides expertise in helping our customers deploy and maintain network computing environments through a broad range of services comprised of support services for hardware and software and Client solutions and Educational services. Sun Services assists customers globally, provides support services to nearly 850,000 units under contracts in more than 100 countries, trains approximately 400,000 students annually and provides consulting, integration and operations assistance to IT organizations globally.

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Support and Managed Services:    The SunSpectrum Support services product offerings allow customers the power and flexibility to customize their support services contracts. Customers can choose from four levels of support that range from mission critical to self-support. This service is sold separately or packaged with hardware, software and peripherals as a single-price support service. Each contract type is specifically designed to enable high availability and continuous operation for our customers. Our resources in the field for services delivery are complemented by third-party service providers who primarily deliver hardware support services such as spares inventories and manpower. Investments by these third-party service providers help us expand our geographic coverage without additional fixed cost investments on our part. Software support is primarily delivered by our software support engineers. Sun Connection, an integrated, secure network services connection, is intended to simplify and standardize IT as a service. Customers who pay the annual subscription fee can turn on a secure connection to allow us to automatically and systematically manage their security updates, systems monitoring and predictive diagnostic tests over that connection, thereby reducing management costs and increasing system availability.

Professional and Educational Services:    Our Professional Services organization brings together more than 10,000 experts across Sun, focused on our competencies: Systems, Storage, Software and Services. Our Professional Services teams specialize in providing customers with advanced systems, software, storage and network architecture design consulting, platform integration, enterprise systems management and operation such as network security and identity management, wireless network-based systems and advanced Sun Java System software integration solutions. We provide people, processes and technology and we partner with third-party systems integrators, to deliver solutions tailored to meet our customers’ needs. Our technical and project management experts help design IT architectures and plan migrations from legacy systems to network computing or help customers upgrade existing network computing environments. Operations experts help customers manage the complexity of heterogeneous systems and networks.

Our Educational Services organization develops and delivers integrated learning solutions for enterprises, IT organizations and individual IT professionals. These solutions help ensure that the necessary talent is available and properly aligned to meet our clients’ network computing needs, as well as business objectives. Our learning solutions include education consulting services, learning management technologies, multi-mode learning content and professional certifications.

COMPETITION

We compete in the computer systems (hardware and software), storage (hardware and software) and services markets. These markets are intensely competitive. Our competitors are some of the largest, most successful companies in the world. They include International Business Machines Corporation (IBM), Dell, Inc. (Dell), Hewlett-Packard Company (HP), EMC Corporation (EMC), Fujitsu Limited (Fujitsu), Hitachi Data Systems, Inc. and the Fujitsu-Siemens joint venture. We also compete with systems manufacturers and resellers of systems based on microprocessors manufactured by Intel Corporation (Intel) and the Windows family of operating systems software from Microsoft and the Linux family of operating systems.

Customers make buying decisions based on many factors, including, among other things, new product and service offerings and features; product performance and quality; availability and quality of support and other services; price; platform; interoperability with hardware and software of other vendors; quality; reliability; security features and availability of products; breadth of product line; ease of doing business; a vendor’s ability to adapt to customers’ changing requirements; responsiveness to shifts in the marketplace; business model (e.g., utility computing, subscription-based software usage, consolidation versus outsourcing); contractual terms and conditions; vendor reputation and vendor viability. We believe competition will be at least as intense in the next fiscal year as it was over the last fiscal year. In this environment, each factor on which we compete is critical and the lack of competitive advantage with respect to one or more of these factors could lead to a loss of competitive position resulting in fewer customer orders, reduced revenues, reduced margins, reduced levels of profitability and loss of market share. For more information about the competitive risks we face, refer to Item 1A. Risk Factors — If we are unable to compete effectively with existing or new competition, the lost of competitive position could result in price reductions, fewer customer orders, reduced revenue, reduced margins, reduced levels of profitability and loss of market share.

PATENTS, TRADEMARKS AND INTELLECTUAL PROPERTY LICENSES

We have used, registered or applied to register certain trademarks and service marks to distinguish genuine Sun products, technologies and services from those of our competitors in the U.S. and in foreign countries and jurisdictions. We enforce our trademark, service mark and trade name rights in the U.S. and abroad.

We hold a number of U.S. and foreign patents relating to various aspects of our products and technology. While we believe that patent protection is important, we believe that factors such as innovative skills and technological expertise provide even greater competitive differentiators. From time to time we have been notified that we may be infringing certain patents or other intellectual property rights of others. Such notices are in various stages of evaluation, but as of June 30, 2006, no claims had been made that we believe to be material. We are evaluating the desirability of entering into licensing agreements in certain of

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these matters. Based on industry practice, we believe that any necessary licenses or other rights could be obtained on commercially reasonable terms. However, no assurance can be given that licenses can be obtained on acceptable terms or that litigation will not occur. The failure to obtain necessary licenses or other rights, or litigation arising out of such claims, could adversely affect our business.

EMPLOYEES

As of June 30, 2006 we had approximately 38,000 employees. 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. Although we have entered into a limited number of employment contracts with certain current and former executive officers, 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.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following sets forth certain information regarding our Executive Officers as of September 6, 2006.

Name	Age	Position
Jonathan I. Schwartz	40	Chief Executive Officer and President
Michael A. Dillon	47	Executive Vice President, General Counsel and Secretary
John F. Fowler	45	Executive Vice President, Systems Group
Anil P. Gadre	49	Executive Vice President and Chief Marketing Officer
Donald C. Grantham	49	Executive Vice President, Global Sales and Services
Richard L. Green	50	Executive Vice President, Software Group
Michael E. Lehman	56	Chief Financial Officer and Executive Vice President, Corporate Resources
William N. MacGowan	49	Executive Vice President, People and Places, and Chief Human Resources Officer
Eugene G. McCabe	53	Executive Vice President, World Wide Operations
Gregory M. Papadopoulos	48	Executive Vice President, Research and Development and Chief Technology Officer
Barry J. Plaga	44	Vice President and Corporate Controller
David W. Yen	54	Executive Vice President, Storage Group

Mr. Schwartz has served as President and Chief Executive Officer since April 2006, as President and Chief Operating Officer from April 2004 to April 2006, as Executive Vice President, Software from July 2002 to April 2004, as Senior Vice President, Corporate Strategy and Planning from July 2000 to July 2002, as Vice President, Ventures Fund from October 1999 to July 2000. Prior to that, Mr. Schwartz served in several other positions with Sun.

Mr. Dillon has served as Executive Vice President, General Counsel and Secretary since April 2006, as Senior Vice President, General Counsel and Secretary from April 2004 to April 2006, and previously held the position of Vice President, Products Law Group, from July 2002 to March 2004. From October 1999 until June 2002, he served as Vice President, General Counsel and Corporate Secretary of ONI Systems Corp, an optical networking company. Mr. Dillon initially joined Sun in 1993 and thereafter held successive management positions in several legal support groups until October 1999.

Mr. Fowler has served as Executive Vice President, Systems Group of Sun since May 2006, as Executive Vice President, Network Systems Group from May 2004 to May 2006, as Chief Technology Officer, Software Group from July 2002 to May 2004 and Director, Corporate Development from July 2000 to July 2002.

Mr. Gadre has served as Executive Vice President, Chief Marketing Officer of Sun since November 2004, as Vice President, Software Marketing from May 2002 to November 2004 and Vice President and General Manager Software from April 1999 to May 2002.

Mr. Grantham has served as Executive Vice President, Global Sales and Services since April 2006, as Executive Vice President Sun Services from March 2005 to March 2006, as Senior Vice President, Global Services Delivery from January 2004 to March 2005, as Vice President, Global Sales Operations April 2002 to December 2004, as Vice President Sales Operations EMEA January 2001 to March 2002, and as Director of Product Sales and Marketing EMEA from October 1999 to December 2000. Prior to joining Sun, Mr. Grantham served in a variety of management and executive positions at IBM, for the period from 1983 to 1999.

Mr. Green has served as Executive Vice President, Software Group of Sun since May 2006. From May 2004 to May 2006, Mr. Green served as Executive Vice President, Products for Cassatt Corporation. From April 2004 to May 2004, Mr. Green served as Vice President, Java and Developer Programs of Sun and as Vice President, Java from December 1999 to April 2004.

Mr. Lehman has served as Chief Financial Officer and Executive Vice President, Corporate Resources since February 2006 and as Executive Vice President from July 2002 until his resignation from employment in September 2002. From September 2002 to February 2006, he was a member of the board of directors of Sun. He resigned from the Board when he returned to full-time

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employment at Sun. During that time, he served as a self-employed business consultant. From July 2000 to July 2002, he served as Executive Vice President, Corporate Resources and Chief Financial Officer of Sun, and from January 1998 to July 2000, as Vice President, Corporate Resources and Chief Financial Officer. He is a director of MGIC Investment Corporation.

Mr. MacGowan has served as Chief Human Resources Officer and Executive Vice President of People and Places since April 2006, as Senior Vice President, Human Resources, from April 2004 to April 2006, as Vice President, Human Resources, Global Centers of Expertise, from May 2003 to April 2004, as Vice President, Human Resources, Systems, Storage and Operations, from May 2002 to May 2003, Vice President, Human Resources, Enterprise Services, from May 2000 to May 2002 and as Director, Human Resources, Enterprise Services, from June 1998 to May 2000.

Mr. McCabe has served as Executive Vice President, World Wide Operations of Sun since March 2005, as Senior Vice President, Worldwide Operations from January 2003 to March 2005 and as Vice President, High-End Operations from September 1999 through January 2003. From July 1998 through September 1999, Mr. McCabe served as Vice President, High-End Operations for Compaq Computer Corporation.

Mr. Papadopoulos has served as Executive Vice President, Research and Development and Chief Technology Officer since May 2006, as Executive Vice President and Chief Technology Officer of Sun from December 2002 to May 2006, as Senior Vice President and Chief Technology Officer from July 2000 to December 2002 and as Vice President and Chief Technology Officer from April 1998 to July 2000. He served as Vice President and Chief Technology Officer of Sun Microsystems Computer Corporation (SMCC), a wholly-owned subsidiary of Sun from March 1996 to April 1998, as Chief Technology Officer of SMCC from December 1995 to March 1996 and as Chief Scientist, Server Systems Engineering from September 1994 to December 1995. Mr. Papadopoulos had a part-time, non-compensated appointment as a Visiting Professor of Electrical Engineering and Computer Science at the Massachusetts Institute of Technology from September 2002 to August 2003.

Mr. Plaga has served as Vice President and Corporate Controller since November 2005 and as Vice President, Investor Relations from September 2005 to November 2005. Mr. Plaga served as Executive Vice President and Chief Financial Officer of SeeBeyond Technology Corporation from November 1999 to August 2005.

Mr. Yen has served as Executive Vice President, Storage Group of Sun since May 2006, as Executive Vice President, Scalable Systems Group from April 2004 to May 2006, as Executive Vice President, Processor and Network Products from July 2002 to April 2004, as Vice President and General Manager, Processor Products Group from February 2001 to June 2002, as Vice President and General Manager, Integrated Products Group from July 2000 to January 2001 and as Vice President and General Manager, Enterprise Servers Products from September 1996 to June 2000.

ITEM 1A.    RISK FACTORS

Because of the following factors, as well as other factors affecting our operating results and financial condition, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.

If we are unable to compete effectively with existing or new competitors, the loss of our 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 computer systems (hardware and software) and storage (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 fewer customer orders, reduced revenues, pricing pressures, reduced margins, reduced levels of profitability and loss of market share. These competitive pressures could materially and adversely affect our business and operating results.

Our competitors are some of the largest, most successful companies in the world. They include International Business Machines Corporation (IBM), Hewlett-Packard Company (HP), EMC Corporation (EMC), Fujitsu Limited (Fujitsu), Hitachi Data Systems, Inc. and the Fujitsu-Siemens joint venture. We also compete with systems manufacturers and resellers of systems based on microprocessors from Intel Corporation (Intel), the Windows family of operating systems software from Microsoft Corporation (Microsoft) and the Linux family of operating systems software. These competitors include Dell Inc. (Dell) and HP, in addition to Intel and Microsoft. Certain of these competitors compete aggressively on price and seek to maintain very low cost structures. Some of these competitors are seeking to increase their market share in the enterprise server market, which creates increased pressure, including pricing pressure, on our workstation and lower-end server product lines. In particular, we are seeing increased competition and pricing pressures from competitors offering systems running Linux software and other open source software. In addition, certain of our competitors, including IBM and HP, have financial and human resources that are substantially greater than ours, which increases the competitive pressures we face. These competitors also have significant installed bases, and it can be very difficult to win a new customer that has made significant investments in a competitor’s platform.

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Customers make buying decisions based on many factors, including among other things, new product and service offerings and features; product performance and quality; availability and quality of support and other services; price; platform; interoperability with hardware and software of other vendors; quality; reliability, security features and availability of products; breadth of product line; ease of doing business; a vendor’s ability to adapt to customers’ changing requirements; responsiveness to shifts in the marketplace; business model (e.g., utility computing, subscription-based software usage, consolidation versus outsourcing); contractual terms and conditions; vendor reputation and vendor viability. As competition increases, each factor on which we compete becomes more important and the lack of competitive advantage with respect to one or more of these factors could lead to a loss of competitive position, resulting in fewer customer orders, reduced revenues, reduced margins, reduced levels of profitability and loss of market share. We expect competitive pressure to remain intense.

Fujitsu and its subsidiaries have, for many years, been key strategic channel partners for Sun, distributing substantial quantities of our products throughout the world. In addition, on May 31, 2004, we entered into a number of agreements with Fujitsu intended to substantially increase the scope of our relationship with them, including through collaborative selling efforts and joint development and marketing of a future generation of server products. However, Fujitsu is also a competitor of Sun and, as a licensee of various technologies from Sun and others, it has developed products that currently compete directly with our products.

Over the last several years, we have invested significantly in our storage products business, including through the acquisition of StorageTek, with a view to increasing the sales of these products both on a stand-alone basis to customers using the systems of our competitors, and as part of the systems that we sell. The storage products business is intensely competitive. EMC is currently a leader in the Data Management products market and our primary competitor.

We are continuing the implementation of a solution-based selling approach. While we believe that strategy will enable us to increase our revenues and margins, there can be no assurance that we will be successful in this approach. In fact, our implementation of this selling model may result in reductions in our revenues and/or margins, particularly in the short term, as we compete to attract business. In addition, if our emphasis on solution-based sales increases, we face strong competition from systems integrators such as IBM, Fujitsu-Siemens and HP. Our inability to successfully implement this model would have a material adverse impact on our revenues and margins.

We maintain higher research and development costs, as a percentage of total net revenues, than many of our competitors and our earnings are dependent upon maintaining revenues and gross margins at a sufficient level to offset these costs.

One of our business strategies is to derive a competitive advantage and a resulting enhancement of our gross margins from our investment in innovative new technologies which customers value. As a result, as a percentage of total net revenues, we incur higher fixed R&D costs than many of our competitors. To the extent that we are unable to develop and sell products with attractive gross margins in sufficient volumes, our earnings may be materially and adversely affected by our cost structure. We continue to add new products to our entry-level server product line that are offered at a lower price point and that may provide us with a lower gross margin percentage than our products as a whole. Although our strategy is to sell these products as part of overall systems which include other products with higher gross margin percentages, to the extent that the mix of our overall revenues represented by sales of lower gross margin products increases, our gross margins and earnings may be materially and adversely affected.

In addition, one of our business strategies is to grow incremental revenue through recurring service models, such as subscriptions, leasing and pay-per-use. Under these recurring service models, we would recognize revenue for the contract over time or based upon usage rather than all at once upon the initial sale of a hardware or software product. However, if we increase our recurring service model base either while (1) not maintaining or increasing our point product sales; or (2) not growing them sufficiently to cover the decline in point product sales, we will incur a near-term reduction in our revenues, as revenues that ordinarily would have been recognized upon the initial sale of products will be deferred until future periods, which would have a material adverse effect on our revenues, gross margins and earnings.

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 that incorporate certain UltraSPARC microprocessors and the Solaris Operating System (Solaris OS), the Java platform, Sun Java System portfolio and Sun N1 Grid architecture, among others. 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

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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 new products into the market on a timely basis, if at all, and our business and operating results would be materially and adversely affected.

The manufacture and introduction of our new 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 sufficient volumes so that we can have an adequate supply of new products to meet customer demand. We must also 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 mix of our products, and the correct configurations of these products. We must manage new product introductions and transitions 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 or write down inventory, which could result in lower gross margins. Additionally, our customers may delay orders for existing products in anticipation of new product introductions. As a result, we may decide to adjust prices of our existing products during this process to try to increase customer demand for these products. Our future operating results would be materially and adversely affected if such pricing adjustments 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 sales 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.

We face numerous risks associated with our strategic alliance with Fujitsu.

On May 31, 2004, we entered into a number of agreements with Fujitsu intended to substantially increase the scope of our relationship with them. These agreements contemplate collaborative sales and marketing efforts and the joint development and manufacturing of a future generation of server products known as the Advanced Product Line (APL). We anticipate that the APL will ultimately replace a portion of our server product line. In addition, the agreements contemplate that Sun and Fujitsu dedicate substantial financial and human resources to this new relationship. As such, our future performance and financial condition may be impacted by the success or failure of this relationship.

Joint development and marketing of a complex new product line is an inherently difficult undertaking and is subject to numerous risks. If we do not satisfy certain development or supply obligations under the agreements, or if we otherwise violate the terms of the agreements, we may be subject to significant contractual or legal penalties. Further, if Fujitsu encounters any of a number of potential problems in its business, such as intellectual property infringement claims, supply difficulties, difficulties in meeting development milestones or financial challenges, these could impact our strategic relationship with them and could result in a material adverse effect on our business or results of operations.

The contractual arrangements contain objectives and deliverables that are to be concluded in the near term, known in the agreements as the “Interim Period.” At the time the alliance was formed, the Interim Period commitments were believed to be foundational to the overall alliance and, unless those commitments are waived or modified, failure to achieve those commitments could place the overall alliance at risk.

There can be no assurance that our strategic relationship with Fujitsu will be successful or that the economic terms of the agreements establishing the relationship will ultimately prove to be favorable to us. If any of the risks described above come to pass, they may result in a material adverse effect on our business, results of operations or financial condition.

We have licensed significant elements of our intellectual property, including our Solaris Operating System, as open source software and intend to license additional intellectual property in the future under open source licenses, which could reduce the competitive advantage we derive from this intellectual property.

We have released significant elements of our intellectual property, including the Solaris OS, the Java Enterprise System infrastructure software platform, the Sun N1 Management software and various developer tools, to the open source development community as open source software under an open source license and have made the hardware source code of our UltraSPARC T1 processor available under an open source license. We have also announced an intention to release our Java SE and Java ME technologies under an open source license. Although open source licensing models vary, generally open source software licenses permit the liberal copying, modification and distribution of a software program allowing a diverse programming community to contribute to the software. As a result of such release, there could be an impact on revenue related to this intellectual property, and we may no longer be able to exercise control over some aspects of the future development of this

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intellectual property. In particular, the feature set and functionality of the Solaris OS may diverge from those that best serve our strategic objectives, move in directions in which we do not have competitive expertise or fork into multiple, potentially incompatible variations. We currently derive a significant competitive advantage from our development, licensing and sale of the Solaris OS and system products based on the UltraSPARC family of microprocessors, and any of these events could reduce our competitive advantage or impact market demand for our products, software and services. In addition, disclosing the content of our source code could limit the intellectual property protection we can obtain or maintain for that source code or the products containing that source code and could facilitate intellectual property infringement claims against Sun.

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, technology or other business constraints. For example, we currently depend on Texas Instruments for the manufacture of our UltraSPARC microprocessors, AMD for the Opteron processors used in our Sun Fire x64 servers, Imation for tape media used in certain tape storage products and several other companies for custom integrated circuits. If we were unable to purchase on acceptable terms or experienced significant delays or quality issues in the delivery of necessary parts and/or components from a particular vendor and we had to find a new supplier for these parts and components, our new and existing product shipments could be delayed which could have a material adverse effect on our business, results of operations and financial conditions.

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 design, manufacture, and deliver on a timely basis the necessary components for our products. While many of the components we purchase are standard, we do purchase some components, including color monitors, custom power supplies, application specific integrated circuits (ASICs) and custom memory and graphics devices, 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 components (including, ASICs, dynamic random access memories (DRAMs) and static random access memories (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 materially and adversely affected.

Because we may order components from suppliers in advance of receipt of customer orders for our products which include these components, we could face a material inventory risk.

As part of our component planning, we place orders with or pay certain suppliers for components in advance of receipt of customer orders. We occasionally enter into negotiated orders 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 anticipated 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 supply orders are generally based on forecasts of customer orders rather than actual customer orders. In addition, in some cases, we make noncancelable order commitments to our suppliers for work-in-progress, supplier’s finished goods, custom sub-assemblies and Sun unique raw materials that are necessary to meet our lead times for finished goods. If we cannot change or be released from supply orders, we could incur costs from the purchase of unusable components, either due to a delay in the production of the components or other supplies or as a result of inaccurately predicting supply orders in advance of customer orders. Our business and operating results could be materially and 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 various hardware and software products that we sell, such as UltraSPARC microprocessors, various software elements, from the Solaris OS to the Java platform, Sun Java System portfolio, Sun N1 Grid, the SL8500 modular library system and Sun StorEdge array products. Any delay in the development, delivery or acceptance of key elements of the hardware or software 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.

In addition, if customers decided to delay the adoption and implementation of new releases of our Solaris OS, this could also delay customer acceptance of new hardware products tied to that release. Implementing a new release of an operating

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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 materially and adversely affect our business.

Our products may have quality issues that could adversely affect our sales and reputation.

In the course of conducting our business, we experience and address quality issues. Some of our hardware and software products contain defects, including defects in our engineering, design and manufacturing processes, as well as defects in third-party components included in our products, which may be beyond our control. Often defects are identified during our design, development and manufacturing processes and we are able to correct many of these. Sometimes defects are identified after introduction and shipment of new products or enhancements to existing products.

When a quality issue is identified, we work extensively with our customers to remedy such issues. We may test the affected product to determine the root cause of the problem and to determine appropriate solutions. We may find an appropriate solution (often called a “patch”) or offer a temporary fix while a permanent solution is being determined. If we are unable to determine the root cause, find an appropriate solution or offer a temporary fix, we may delay shipment to customers. We may, however, ship products while we continue to explore a suitable solution if we believe the defect is not significant to the product’s functionality. Defects in our products can harm our reputation, delay or prevent sales, result in significant expense and could materially and adversely affect our business.

Our international customers and operations subject us to a number of risks.

Currently, more than half of our revenues come from international sales. In addition, a portion of our operations consists of manufacturing and sales activities outside of the U.S. Our ability to sell our products and conduct our operations internationally is subject to a number of risks. Local economic, political and labor conditions in each country could adversely affect demand for our products and services or disrupt our operations in these markets. We may also experience reduced intellectual property protection or longer and more challenging collection cycles as a result of different customary business practices in certain countries where we do business which could have a material adverse effect on our business operations and financial results. Currency fluctuations could also materially and adversely affect our business in a number of ways. Although we take steps to reduce or eliminate certain foreign currency exposures that can be identified or quantified, we may incur currency translation losses as a result of our international operations. Further, in the event that currency fluctuations cause our products to become more expensive in overseas markets in local currencies, there could be a reduction in demand for our products or we could lower our pricing in some or all of these markets resulting in reduced revenue and margins. Alternatively, a weakening dollar could result in greater costs to us for our overseas operations. 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. In addition, we could be subject to regulations, fines and penalties for violations of import and export regulations. Although we implement policies and procedures designed to ensure compliance with these laws, there can be no assurance that all of our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, including those based in or from countries where practices which violate such United States laws may be customary, will not take actions in violations of our policies. These violations could result in penalties, including prohibiting us from exporting our products to one or more countries, and could materially and adversely affect our business.

Moreover, local laws and customs in many countries differ significantly from those in the U.S. We incur additional legal compliance costs associated with our international operations and could become subject to legal penalties in foreign countries if we do not comply with local laws and regulations, which may be substantially different from those in the United States. In many foreign countries, particularly in those with developing economies, it is common for local business people to engage in business practices that violate their local laws and that are prohibited by United States laws applicable to us such as the Foreign Corrupt Practices Act. Although we implement policies, training, and procedures designed to ensure compliance with these laws, there can be no assurance that all of our employees, contractors and agents, as well as our resellers and those companies to which we outsource certain of our business operations, including those based in or from countries where practices which violate such United States laws may be common, will not engage in actions which violate the law or our policies. Any such violation, even if prohibited by our policies, could have a material adverse effect on our business.

Failure to successfully implement our global resourcing activities could adversely affect our results of operations.

We continuously seek to make our cost structure more efficient and focus on our core strengths. We continue to develop and implement our global resourcing strategy and operating model which includes activities that are focused on increasing workforce flexibility and scalability, and improving overall competitiveness by leveraging external talent and skills worldwide.

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We rely on partners or third party service providers for the provision of certain key business process functions, including IT services and the human resources function, and as a result, we may incur increased business continuity risks. We may no longer be able to exercise control over some aspects of the future development, support or maintenance of outsourced operations and processes, including the internal controls associated with those outsourced business operations and processes, which could adversely affect our business. If we are unable to effectively develop and implement our resourcing strategy due to, among other things, data protection, contract and regulatory compliance issues, we may not realize cost structure efficiencies and our operating and financial results could be materially and adversely affected. Given the uncertainty in forecasting and other variables, actual financial impact from outsourcing may materially differ from our projections. In addition, if we are unable to effectively utilize or integrate and interoperate with external resources or if our partners or third party service providers experience business difficulties or are unable to provide business process services as anticipated, we may need to seek alternative service providers or resume providing these business processes internally, which could be costly and time consuming and have a material adverse material effect on our operating and financial results.

We expect our quarterly revenues, cash flows and operating results to fluctuate for a number of reasons.

Future operating results and cash flows will continue to be subject to quarterly fluctuations based on a wide variety of factors, including:

Seasonality.    Although our sales and other operating results can be influenced by a number of factors and historical results are not necessarily indicative of future results, our sequential quarterly operating results generally fluctuate downward in the first and third quarters of each fiscal year when compared with the immediately preceding quarter.

Linearity.    Our quarterly sales have historically reflected a pattern in which a disproportionate percentage of such quarter’s total revenues occur in the last month of the quarter. This pattern can make prediction of revenues, earnings and working capital for each financial period difficult and uncertain and increase the risk of unanticipated variations in quarterly results and financial condition.

Foreign Currency Fluctuations.    As a large portion of our business takes place outside of the U.S., we enter into transactions in other currencies. Although we employ various hedging strategies, we are exposed to changes in exchange rates, which causes fluctuations in our quarterly operating results. See Part I, Item 3. “Quantitative and Qualitative Disclosures About Market Risk — Foreign Currency Exchange Risk.”

Deferred Tax Assets.    Estimates and judgments are required in the calculation of certain tax liabilities and in the determination of the recoverability of certain of the deferred tax assets, which arise from net operating losses, tax carryforwards and temporary differences between the tax and financial statement recognition of revenue and expense. SFAS 109, “Accounting for Income Taxes,” also requires that the deferred tax assets be reduced by a valuation allowance, if based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods.

In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent fiscal years and our forecast of future taxable income on a jurisdiction by jurisdiction basis. In determining future taxable income, we are responsible for the assumptions utilized including the amount of state, federal and international pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses. Cumulative losses incurred in the U.S. and certain foreign jurisdictions in recent years and insufficient forecasted future taxable income in certain other foreign jurisdictions represented sufficient negative evidence to require full and partial valuation allowances in these jurisdictions. We have established a valuation allowance against the deferred tax assets in these jurisdictions, which will remain until sufficient positive evidence exists to support reversal. Future reversals or increases to our valuation allowance could have a significant impact on our future earnings.

Goodwill and Other Intangible Assets.    We perform an analysis on our goodwill balances to test for impairment on an annual basis or whenever events occur that may indicate impairment possibly exists. Goodwill is deemed to be impaired if the net book value of the reporting unit exceeds the estimated fair value. The impairment of a long-lived intangible asset is only deemed to have occurred if the sum of the forecasted undiscounted future cash flows related to the asset are less than the carrying value of the intangible asset we are testing for impairment. If the forecasted cash flows are less than the carrying value, then we must write down the carrying value to its estimated fair value. We recognized an impairment charge of $70 million related to acquired intangible assets during the fourth quarter of fiscal 2006; an impairment charge of $49 million related to our goodwill during the fourth quarter of fiscal 2004. As of June 30, 2006, we had a goodwill balance of $2,610 million. Going forward we will continue to review our goodwill and other intangible assets for possible impairment. Any additional impairment charges could adversely affect our future earnings.

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Income tax laws and regulations subject us to a number of risks and could result in significant liabilities and costs.

As a multinational corporation, we are subject to income taxes in both the U.S. and various foreign jurisdictions. Our domestic and foreign tax liabilities are subject to the allocation of revenues and expenses in different jurisdictions. Additionally, the amount of income taxes paid is subject to our interpretation of applicable tax laws in the jurisdictions in which we operate. We are regularly subject to audits by tax authorities. While we endeavor to comply with all applicable income tax laws, there can be no assurance that a governing tax authority will not have a different interpretation of the law than we do or that we will comply in all respects with applicable tax laws, which could result in additional taxes. We regularly review the likelihood of adverse outcomes resulting from tax audits to determine if additional income taxes, penalties and interest would be assessed. There can be no assurance that the outcomes from these audits will not have an adverse effect on the Company’s results of operations in the period for which the review is made.

We are dependent on significant customers and specific industries.

Sales to General Electric Company (GE) and its subsidiaries in the aggregate accounted for approximately 15%, 16%, and 14% of our fiscal 2006, 2005 and 2004 net revenues, respectively. More than 70% of the revenue attributed to GE was generated through GE subsidiaries acting as either a reseller or financier of our products. The vast majority of this revenue is from a single GE subsidiary, comprising 11%, 13%, and 11% of net revenues in fiscal 2006, 2005 and 2004, respectively. This GE subsidiary acts as a distributor of our products to resellers who in turn sell those products to end users. No other customer accounted for more than 10% of net revenues. The revenues from GE are generated in the Products and Services segments.

We also depend on the telecommunications, financial services and government sectors for a significant portion of our revenues. Our revenues are dependent on the level of technology capital spending in the U.S. and international economies. If capital spending declines in these industries over an extended period of time, our business will continue to be materially and adversely affected. We continue to execute on our strategy to reduce our dependence on these industries by expanding our product reach into new industries, but no assurance can be given that this strategy will be successful.

We are dependent upon our channel partners for a significant portion of our revenues.

Our channel partners include distributors, original equipment manufacturers (OEMs), independent software vendors (ISVs), system integrators, service providers and resellers. We continue to see an increase in revenues via our reseller channel. We face ongoing business risks due to our reliance on our channel partners to maintain customer relationships and create customer demand with customers where we have no direct relationships. Should our relationships with our channel partners or their effectiveness decline, we face risk of declining demand which could affect our results of operations.

Our business may suffer if it is alleged or found that we have infringed the intellectual property rights of others.

From time to time we have been notified that we may be infringing certain patents or other intellectual property rights of others. Responding to such claims, regardless of their merit, can be time consuming, result in costly litigation, divert management’s attention and resources and cause us to incur significant expenses. There are often several pending claims in various stages of evaluation at any particular time. From time to time, we consider the desirability of entering into licensing agreements in certain of these claims. No assurance can be given that licenses can be obtained on acceptable terms or that litigation will not occur. In the event there is a temporary or permanent injunction entered prohibiting us from marketing or selling certain of our products, or a successful claim of infringement against us requiring us to pay royalties to a third party, and we fail to license such technology on acceptable terms and conditions or to develop or license a substitute technology, our business, results of operations or financial condition could be materially adversely affected.

Our acquisition, divestiture and alliance activities could disrupt our ongoing business and subject us to significant risks.

We expect to continue to make investments in companies, products, and technologies, either through acquisitions or investments or alliances. For example, we have purchased several companies in the past, including StorageTek and SeeBeyond, and have also formed alliances, such as our strategic relationship with Fujitsu for the development, manufacturing and marketing of server products and our OEM relationship with Hitachi Data Systems for the collaboration on, and delivery of, a broad range of storage products and services. We also rely on IT services partners and independent software developers to enhance the value to our customers of our products and services. Acquisitions and alliance activities often involve risks, including: (1) difficulty in assimilating the acquired operations and employees; (2) difficulty in managing product co-development activities with our alliance partners; (3) retaining the key employees of the acquired operation; (4) disruption of our or the acquired company’s ongoing business; (5) inability to successfully integrate the acquired technology and operations into our business and maintain uniform standards, controls, policies, and procedures; and (6) lacking the experience to enter into new product or technology markets. In particular, although the acquisitions of StorageTek and SeeBeyond were completed in August 2005, the full operational and legal integration of certain non-US subsidiaries of SeeBeyond and StorageTek into Sun has been delayed due in

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part to compliance with local laws in certain jurisdictions. We are also still in the process of fully integrating the US operations of StorageTek and SeeBeyond into our operations. If we fail to successfully address integration challenges in a timely manner, or at all, we may not realize the anticipated benefits or synergies of the transactions to the extent, or in the time frame, anticipated. Even if these acquisitions are successfully integrated, we may not receive the expected benefits of the transactions, which are based on forecasts which are subject to numerous assumptions which may prove to be inaccurate. Any one of these integration challenges or any combination thereof could materially affect our results of operations. In addition, from time to time, our competitors acquire or enter into exclusive arrangements with companies with whom we do business or may do business in the future. Reductions in the number of partners with whom we may do business in a particular context may reduce our ability to enter into critical alliances on attractive terms or at all, and the termination of an existing alliance by a business partner may disrupt our operations.

From time to time we evaluate our products and service offerings and may adjust our strategic priorities by reducing investment in or divesting certain business operations. Decisions to eliminate or divest certain business operations may involve a number of risks, including the diversion of management’s attention, significant costs and expenses, the assumption of contractual obligations, realization of losses, facility consolidation, the loss or disruption of customer relationships, the loss of employees, the elimination of revenues along with associated costs and the disruption of operations in the affected business or related businesses, any of which could cause our operating results to decline and may fail to yield the expected benefits.

We may be materially affected by a decrease in demand for our tape products or by an inability to maintain key competitive advantages in tape.

As a result of the acquisition of StorageTek, a significant portion of storage products revenue is generated by sales of our tape products. If overall demand for tape storage products declines, or if we lose significant market share in tape, our financial condition and results of operations could be materially affected.

One of the key competitive advantages that our tape products have over competing disk products is that tape products store data at a fraction of the price of disk storage. The price of disk storage continues to decrease rapidly due to competition and decreasing manufacturing costs associated with new disk drive technologies such as ATA disk. We must continue to develop and introduce new tape products that reduce the cost of tape storage at a rate that is similar to or greater than the decline in disk storage costs in order to maintain this competitive advantage. For a discussion of risk associated with new products, see “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,” above. We cannot provide any assurance that we will be able to reduce the price of our tape products at a rate similar to the decline in disk storage costs.

Credit rating downgrades could adversely affect our business and financial condition.

Three credit rating agencies follow Sun. Fitch Ratings has rated us BBB-, which is an investment grade rating. Moody’s Investor Services has assigned us a non-investment grade rating of Ba1. Standard & Poor’s has assigned us a long-term non-investment grade rating of BB+ and a short-term investment-grade rating of A-3. All three credit rating agencies have placed us on stable outlook. These ratings reflect those credit agencies’ expectations that the intense competitive environment facing Sun in its core markets will continue to challenge Sun’s revenue and profitability, at least over the near term. If we were to be downgraded by these ratings agencies, such downgrades could increase our costs of obtaining, or make it more difficult to obtain or issue, new debt financing. In addition, downgrades could affect our interest rate swap agreements that we use to modify the interest characteristics of any new debt. Any of these events could materially and adversely affect our business and 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. Because our compensation packages include equity-based incentives, pressure on our stock price could affect our ability to offer competitive compensation packages to current employees. In addition, we must continue to motivate employees and keep them focused on our strategies and goals, which may be difficult due to morale challenges posed by our workforce reductions, global resourcing strategies and related uncertainties. Should these conditions continue, we may not be able to retain highly qualified employees in the future which could adversely affect our business.

Our use of a self-insurance program to cover certain claims for losses suffered and costs or expenses incurred could negatively impact our business upon the occurrence of an uninsured event.

Sun is insured by third-party insurers for certain potential liabilities, including worker’s compensation, general liability, automobile liability, employer’s liability, errors and omissions liability, employment practices liability, property, cargo and

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crime and directors and officers liability. We have, however, adopted a program of self-insurance with regard to certain risks such as California earthquakes and for certain potential liabilities including, but not limited to general liability, directors and officers liability, workers compensation, errors and omissions liability, property and employee life insurance. Effective July 1, 2006, we reduced certain types of third-party insurance coverage of our directors and officers such that we now self-insure for all indemnification or defense payments we, as a company, may make to or on behalf of our directors and officers as a result of obligations under applicable agreements, Sun’s bylaws and applicable law. As our indemnification obligations to directors and officers are substantial, the elimination of third-party coverage of our directors and officers liability insurance could adversely affect Sun’s financial condition, liquidity, cash flows and results of operations if a material claim or loss occurred. We self-insure when we believe the lack of availability and high cost of commercially available insurance products do not make the transfer of this risk a reasonable approach. In the event that the frequency of losses experienced by Sun increased unexpectedly, the aggregate of such losses could materially increase our liability and adversely affect our financial condition, liquidity, cash flows and results of operations. In addition, because the insurance market continues to limit the availability of certain insurance products and because the costs of certain products continue to increase, we will continue to evaluate the types and magnitudes of claims we include in our self-insurance program. Additions and changes to this self insurance program may increase our risk exposure and therefore increase the risk of a material adverse effect on our financial condition, liquidity, cash flows and results of operations. In addition, we have made certain judgments as to the limits on our existing insurance coverage that we believe are in line with industry standards, as well as in light of economic and product availability considerations. Unforeseen catastrophic loss scenarios could prove our limits to be inadequate, and losses incurred in connection with the known claims we self-insure could be substantial. Either of these circumstances could materially adversely affect our financial and business condition.

Business interruptions could adversely affect our business.

Our operations and those of our suppliers are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure, terrorist attacks and other events beyond our control. A substantial portion of our facilities, including our corporate headquarters and other critical business operations, are located near major earthquake faults. In addition, some of our facilities are located on filled land and, therefore, may be more susceptible to damage if an earthquake occurs. We generally do not carry earthquake insurance for direct earthquake-related losses. In addition, we do not carry business interruption insurance for, nor do we carry financial reserves against, business interruptions arising from earthquakes or certain other events. If a business interruption occurs, our business could be materially and adversely affected.

Our failure to comply with contractual obligations may result in significant penalties.

We offer terms to some of our distributors and other customers that, in some cases, include complex provisions for pricing, data protection and other terms. In connection with these contracts, we are in some cases required to allow the customer to audit certain of our records to verify compliance with these terms. In particular, government agency customers audit and investigate government contractors, including us. These agencies review our performance under the applicable contracts as well as compliance with applicable laws, regulations and standards. The government also may review the adequacy of, and our compliance with, contractual obligations, our internal control systems and policies, including our purchasing, property, estimating, compensation, management information systems and data protection requirements. If an audit uncovers improper or illegal activities, we may be subject to penalties and other sanctions. In addition, we could suffer serious harm to our reputation if allegations of impropriety were made against us. The General Services Administration is currently auditing the schedule contract it has with us.

Our sales to U.S. governmental agencies may suffer if our primary GSA schedule contract expires.

A portion of the revenue generated from our U.S. government customers derived from our primary contract with the GSA. It is the general practice of government agencies to renegotiate contracts with commercial companies, such as ours, upon expiration. Our primary GSA schedule contract expires on September 11, 2006. Although we are continuing negotiations with the GSA, these negotiations may not result in a new contract. Sales to U.S. government customers may continue through resellers or under direct contracts with specific agencies; however, the revenue resulting from these arrangements may be less than past revenues under the GSA schedule contract, and sales through resellers may generate reduced margins.

Some of our Restructuring Plans may not result in the anticipated cost saving and benefits.

Since March 2004, our Board of Directors and our management approved Restructuring Plans IV, V and VI. Our ability to achieve the cost savings and operating efficiencies anticipated by these restructuring plans is dependent on our ability to effectively implement the workforce and excess capacity reductions contemplated. If we are unable to implement these initiatives effectively, we may not achieve the level of cost savings and efficiency benefits expected for fiscal 2007 and beyond.

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Commercial real estate market conditions could affect our ability to sublease properties in our portfolio.

We implemented facility exit plans in each of the last six fiscal years as part of our ongoing efforts to consolidate excess facilities. The commercial real estate market conditions in the United States and in many of the countries in which we have significant leased properties have resulted in a surplus of business facilities making it difficult to sublease properties. We may be unable to sublease our excess properties, or we may not meet our expected estimated levels of sublease income, and accordingly our results of operations could be materially and adversely affected.

Environmental laws and regulations subject us to a number of risks and could result in significant liabilities and costs.

Some of our operations are subject to state, federal, and international laws governing protection of the environment, human health and safety, and regulating the use of certain chemical substances. We endeavor to comply with these environmental laws, yet compliance with such laws could increase our operations and product costs; increase the complexities of product design, procurement, and manufacture; limit our ability to manage excess and obsolete non-compliant inventory; limit our sales activities; and impact our future financial results. Any violation of these laws can subject us to significant liability, including fines, penalties, and prohibiting sales of our products into one or more states or countries, and result in a material adverse effect on our financial condition.

Currently, a significant portion of our revenues come from international sales. Recent environmental legislation within the European Union (EU) may increase our cost of doing business internationally and impact our revenues from EU countries as we comply with and implement these new requirements.

In addition, similar environmental legislation has been or may be enacted in other jurisdictions, including the U.S. (under federal and state laws), China, Japan, Canada, Korea and certain Latin American countries, the cumulative impact of which could be significant. We are committed to offering products that are environmentally responsible and to complying with any current or future laws protecting the environment, human health and safety.

We may not realize the economic return expected from the acquired in-process research and development (IPRD).

During fiscal 2006, we recorded total in-process research and development expense of $60 million related to our acquisitions of StorageTek and SeeBeyond. At the time of the acquisitions, we believed there was a reasonable chance of realizing the economic return expected from the acquired in-process technology. However, as there is risk associated with the realization of benefits related to commercialization of an in-process project due to rapidly changing customer needs, the complexity of technology, and growing competitive pressures, there can be no assurance that any project will meet 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 may become impaired.

Our ongoing restructuring plans may also impact the expected economic return from acquired in-process technology. During the fourth quarter of fiscal 2006, as a result of our Phase VI restructuring activities, we exited certain StorageTek product lines comprising $9 million of the total $49 million assigned to IPRD as of the acquisition date. Future economic benefits for these IPRD projects will not be realized.

Our stock price can be volatile.

Our stock price, like that of other technology companies, continues to 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, downgrades in our credit ratings, announcement of new products, technological developments, alliances, acquisitions or divestitures by us or one of our competitors or the loss of key management personnel. In addition, general macroeconomic and market conditions unrelated to our financial performance may also affect our stock price.

FORWARD-LOOKING STATEMENTS

This annual report, including the foregoing sections, contains forward-looking statements, particularly statements regarding: Sun’s vision and business strategy; future investments in companies, products and technologies; the environmental impact of our technologies; the expansion of our direct ship capabilities; our ability to secure licenses to third-party technology on commercially reasonable terms; the effect on us of pending litigation matters and intellectual property claims; our plans to eliminate excess facility capacity; estimates of future sublease income to be generated from sublease contracts not yet negotiated; estimated future restructuring liabilities; expected operating cost savings; expectations regarding future severance payments; expected cash flow from operations for the fiscal year ending June 30, 2007; future payments to settle the current portion of our Senior notes; the utilization and funding of the StorageTek workforce reduction assumed liabilities; our belief that

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the final outcome of an Internal Revenue Service examination of our tax returns filed for fiscal years 2001 and 2002 will not have a material affect on our results of operations; and our belief that the liquidity provided by existing cash, cash equivalents, marketable debt securities and cash generated from operations will provide sufficient capital to meet our requirements for at least the next 12 months.

These forward-looking statements involve risks and uncertainties, and the cautionary statements set forth above 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; increased pricing pressures; failure to maintain sufficient revenues and gross margin to offset our higher research and development costs; the complexity of our products and the importance of rapidly and successfully developing and introducing new products; failure associated with the Fujitsu strategic alliance; reduction in the competitive advantages we derive from certain elements of our intellectual property, including the Solaris operating system, the Java Enterprise System infrastructure software platform, the N1 Management software, the UltraSPARC TI hardware source code and various developer tools, as a result of licensing such intellectual property under open source licenses to the open source development community; reliance on single source suppliers; lack of acceptance of new products and services; unexpected changes in the demand for our products and services; the difficulties in forecasting demand for and obtaining adequate supply of components from suppliers; delays in product introductions and projects; lack of success implementing new selling models; failure to further reduce costs or improve operating efficiencies; adverse business conditions; quality issues associated with our hardware or software products; the effects of currency fluctuations; fluctuation in our quarterly revenues, cash flows and operating results; our dependence on significant customers and specific industries; our dependence upon our channel partners for a significant portion of our revenue; our failure to comply with export control laws; disruptions on our ongoing business caused by our acquisitions and alliance activities; our failure to fully integrate StorageTek into our operations; our reliance on tape storage products and our ability to retain our price advantage over disk storage products; our dependence upon key employees; that commercial real estate market conditions could affect our ability to sublease properties in our portfolio, and the risks and costs of complying with environmental laws and regulations. Sun assumes no obligation to, and does not currently intend to, update these forward-looking statements.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.    PROPERTIES

At June 30, 2006, Sun’s worldwide facilities represented aggregate floor space of 16.2 million square feet both in the U.S. and in 47 other countries. In square feet, our properties consisted of (in millions):

	U.S.	Rest of the World	Total
Owned facilities	6.5	0.8	7.3
Leased facilities	4.5	4.4	8.9
Total facilities	11.0	5.2	16.2

At June 30, 2006, our owned properties consisted of:

Location	Square Footage of Facility
Broomfield, Colorado	916,045
Burlington, Massachusetts	693,846
Farnborough (Guillemount Park), England	320,024
Linlithgow, Scotland	423,070
Louisville, Colorado	1,630,243
Menlo Park, California	1,022,008
Newark, California(1)	1,404,309
Ponce, Puerto Rico	83,105
Santa Clara, California	816,240
Total	7,308,890

(1) In July 2006, we completed the sale of our Newark facility.

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At June 30, 2006, we had no offices under construction, however we have approximately 1.2 million square feet of existing shell facilities available for future build-out. We continually evaluate our facility requirements in light of our business needs and stage the future construction accordingly. In addition, we own approximately 352 acres of undeveloped land in Colorado and Texas.

Starting in fiscal 2001, we began to vacate properties in the U.S. and internationally. Of the properties that were vacated under all facility exit plans, 3.4 million square feet remain vacant or sub-leased of which 1.4 million square feet are under sub-lease to non-Sun businesses and 2.0 million square feet are vacant.

Substantially all of our facilities are used jointly by our Product groups, Sun Services group, Global Sales Organization and other functions. Our manufacturing facilities are located in Ponce, Puerto Rico; Toulouse, France; Linlithgow, Scotland and Beaverton, Oregon.

ITEM 3.    LEGAL PROCEEDINGS

From time to time, Sun becomes involved in claims and legal proceedings that arise in the ordinary course of its business. We are currently subject to several such claims and legal proceedings. We presently do not believe that the resolution of these legal proceedings will have a material adverse effect on us.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of stockholders of Sun during the fourth quarter of fiscal 2006.

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PART II

ITEM 5.    MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock trades on The NASDAQ Stock Market under the symbol “SUNW”. As of September 6, 2006, there were approximately 21,241 stockholders of record and the closing price of Sun’s common stock was $4.93 per share as reported by The NASDAQ Stock Market.

The following table sets forth for the fiscal periods indicated the high and low sale prices for our common stock as reported by The NASDAQ Stock Market:

	Fiscal 2006				Fiscal 2005
	High		Low		High		Low
First Quarter	$	4.29	$	3.57	$	4.33	$	3.29
Second Quarter		4.56		3.62		5.62		3.93
Third Quarter		5.00		4.14		5.65		3.87
Fourth Quarter		5.38		3.93		4.16		3.42

No cash dividends were declared or paid in fiscal 2006 or 2005. We anticipate retaining available funds to finance future growth and have no present intention to pay cash dividends.

Effective January 2006, we modified our policies concerning trading windows applicable to executive officers and directors under our insider trading compliance programs, document retention and joint representation of Sun and its officers and directors in litigation, which policies were originally instituted in connection with the settlement of certain litigation. The modification was approved by the majority of our independent directors.

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ITEM 6.    SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data.”

	Fiscal Years Ended June 30,
	2006					2005					2004					2003					2002
	Dollars			%		Dollars			%		Dollars			%		Dollars			%		Dollars			%
	(In millions, except per share amounts)
Net revenues	$	13,068		100.0		$	11,070		100.0		$	11,185		100.0		$	11,434		100.0		$	12,496		100.0
Cost of sales		7,439		56.9			6,481		58.5			6,669		59.6			6,492		56.8			7,580		60.7
Gross margin		5,629		43.1			4,589		41.5			4,516		40.4			4,942		43.2			4,916		39.3
Operating expenses:
Research and development		2,046		15.7			1,785		16.1			1,926		17.2			1,837		16.1			1,832		14.7
Selling, general and administrative		4,039		30.9			2,919		26.4			3,317		29.7			3,329		29.1			3,806		30.5
Restructuring charges		284		2.2			262		2.4			344		3.1			371		3.2			517		4.1
Impairment of goodwill and other intangible assets		70		0.5			—		—			49		0.4			2,125		18.6			6		—
Purchased in-process research and development		60		0.5			—		—			70		0.6			4		—			3		—
Total operating expenses		6,499		49.8			4,966		44.9			5,706		51.0			7,666		67.0			6,164		49.3
Operating loss		(870	)	(6.7	)		(377	)	(3.4	)		(1,190	)	(10.6	)		(2,724	)	(23.8	)		(1,248	)	(10.0	)
Gain (loss) on equity investments, net		27		0.2			6		—			(64	)	(0.6	)		(84	)	(0.7	)		(99	)	(0.8	)
Interest and other income, net		114		0.9			133		1.2			94		0.8			155		1.3			299		2.4
Settlement income		54		0.4			54		0.5			1,597		14.3			—		—			—		—
Income (loss) before taxes		(675	)	(5.2	)		(184	)	(1.7	)		437		3.9			(2,653	)	(23.2	)		(1,048	)	(8.4	)
Provision (benefit) for income taxes		189		1.4			(77	)	(0.7	)		825		7.4			731		6.4			(461	)	(3.7	)
Net loss	$	(864	)	(6.6	)	$	(107	)	(1.0	)	$	(388	)	(3.5	)	$	(3,384	)	(29.6	)	$	(587	)	(4.7	)
Net loss per common share—basic and diluted	$	(0.25	)			$	(0.03	)			$	(0.12	)			$	(1.06	)			$	(0.18	)
Shares used in the calculation of net loss per common share—basic and diluted		3,437					3,368					3,277					3,190					3,242

	As of June 30,
	2006			2005		2004			2003		2002
Cash, cash equivalents and marketable debt securities	$	4,848		$	7,524	$	7,608		$	5,741	$	5,864
Total assets	$	15,082		$	14,190	$	14,805		$	13,295	$	16,522
Long-term debt	$	1,078	(1)	$	1,123	$	1,432	(1)	$	1,531	$	1,654	(1)
Other non-current obligations(2)	$	1,492		$	1,083	$	1,460		$	642	$	202

(1) Includes approximately $503 million, $257 million and $205 million classified as current portion of long-term debt as of June 30, 2006, 2004 and 2002, respectively.

(2) Includes deferred settlement income from Microsoft as of June 30, 2006, 2005 and 2004, long-term tax liabilities as of June 30, 2006, 2005 and 2004 and long-term restructuring liabilities for all periods presented.

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ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Overview

Sun provides network computing infrastructure solutions that include Computer Systems (hardware and software), Data Management (hardware and software), Support Services and Client Solutions and Educational Services. Sun’s solutions are based on major Sun technology innovations such as the Java technology platform, the Solaris Operating System (Solaris OS), Sun Java products and the UltraSPARC microprocessor technology, as well as other widely deployed technologies such as the Linux operating system and AMD Opteron microprocessor-based systems. Our network computing infrastructure solutions are used in a wide range of technical/scientific, business and engineering applications in industries such as telecommunications, government, financial services, manufacturing, education, retail, life sciences, media and entertainment, transportation, energy/utilities and healthcare. We sell complete networking solutions, including products and services, in most major markets worldwide through a combination of direct and indirect channels.

In the first quarter of fiscal 2006, we completed the acquisition of Storage Technology Corporation (StorageTek) which allowed us to broaden our offerings of storage products, services and solutions. Our results of operations for the year ended June 30, 2006 included the results for StorageTek from August 31, 2005, the date of acquisition and the beginning of the last month of StorageTek’s fiscal quarter. StorageTek has historically experienced a disproportionately high product revenue volume in the last month of each fiscal quarter while operating expenses are relatively linear throughout the quarter. Therefore, the results of operations included for the year ended June 30, 2006 are not indicative of the results for a full year. StorageTek’s products revenues are included in Data Management products and StorageTek’s services revenues are included in Support services. Due to certain integration activities, it is no longer possible to accurately separately quantify the results of the former StorageTek business.

During the fourth quarter of fiscal 2006, we experienced a year over year increase in total net revenues of approximately 29%, which included an unfavorable foreign currency impact of approximately 2%. During fiscal 2006, as compared with with fiscal 2005, total net revenues increased approximately 18%, which included an unfavorable foreign currency impact of approximately 2%. Our Products net revenue for the fourth quarter and fiscal year 2006 was favorably impacted by storage revenue related to the operations of StorageTek; increased sales of our entry level servers due to the introduction of certain UltraSPARC IV+, UltraSPARC T1, and Opteron-based systems. These increases were partially offset by reduced sales of our enterprise and datacenter servers resulting from intense competition and a continuing shift in overall computer systems demand towards our lower-priced entry-level systems. Our Services net revenue for the fourth quarter and fiscal year 2006 was favorably impacted by services revenue related to the operations of StorageTek and an increase in our on-site support and managed services revenues. These increases were partially offset by a continued change in the mix towards maintenance contracts sold or renewed with lower levels of services and a shift in product sales mix to a greater proportion of low-end products, which are typically sold with reduced levels of services.

During the fourth quarter of fiscal 2006, our year over year total gross margin increased by approximately 1.4 percentage points. During fiscal 2006, as compared with fiscal 2005, total gross margin increased by approximately 1.6 percentage points. During the fourth quarter of fiscal 2006, our year over year Products gross margin decreased by approximately 0.3 percentage points due to the unfavorable impact of discounting pricing actions and an increase in amortization of acquisition-related intangible assets, partially offset by manufacturing and component cost reductions. Our Products gross margin during fiscal 2006 increased by 0.9 percentage points due to cost saving initiatives, partially offset by the changes in product mix to a greater proportion of lower-margin products and an increase in amortization of acquisition-related intangible assets. Our fourth quarter year over year Services gross margin increased by 4.6 percentage points primarily due to the favorable impact of delivery efficiencies, partially offset by stock based compensation charges. Our Services gross margin for the full fiscal year 2006 increased by 2.9 percentage points over fiscal 2005, primarily due to cost savings associated with delivery efficiencies.

In fiscal 2006, as compared with fiscal 2005, our research and development expenses increased $261 million and our sales, general and administrative expenses increased $1.1 billion. These increases were primarily due to the inclusion of StorageTek related operating expenses, an increase in amortization cost associated with acquisition-related intangible assets and the inclusion of charges related to stock-based compensation. We also recorded a $70 million charge associated with the impairment of acquired intangible assets. During fiscal 2006, we continued to focus on reducing our on-going operating costs by initiating global workforce reductions of between 4,000 and 5,000 employees, consolidation of our global property portfolio and other cost savings initiatives. As a result of these actions we have incurred total restructuring charges of $284 million in fiscal 2006 and expect to incur severance charges between $270 and $350 million over the next three quarters. The fiscal 2006 restructuring charges included an $80 million impairment charge associated with the intended sale of our Newark, California facility. Upon completion of these fiscal 2006 initiatives, we expect to realize annual operating cost savings of between $480 and $590 million.

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Beginning in the first quarter of fiscal 2006, our results of operations were significantly impacted by the adoption of Statement of Financial Accounting Standards 123R (revised 2004), “Share-Based Payments” (SFAS 123R), which requires us to recognize a non-cash expense related to the fair value of our stock-based compensation awards. We elected to use the modified prospective transition method of adoption which required us to include this stock-based compensation charge in our fiscal 2006 results without restating prior periods. In fiscal 2006, $225 million in stock-based compensation expense was recognized, of which $10 million was included in cost of goods sold-products, $29 million was included in cost of goods sold-services, $74 million was included in research and development expense and $112 million was included in selling, general and administrative expense.

On April 27, 2006, our Chief Executive Officer and Board of Directors approved our domestic reinvestment plan. As a result, we repatriated $2 billion in unremitted foreign earnings during the fourth quarter of fiscal 2006, the majority of which was eligible to be taxed at a reduced effective tax rate under the Foreign Earnings Repatriation Provision of the American Jobs Creation Act. Upon repatriation, we incurred a tax charge of $58 million and realized a loss of approximately $14 million associated with the liquidation of a portion of our marketable debt securities portfolio.

During fiscal 2006, our operating activities generated cash in-flows of $640 million. Cash management remains a priority and we plan to remain focused on our cash conversion cycle. At June 30, 2006, we had total cash, cash equivalents and marketable debt securities of approximately $4.8 billion, which decreased from $7.5 billion as of June 30, 2005, primarily due to the cash paid for our acquisitions of StorageTek and SeeBeyond Technology Corporation (SeeBeyond) during the first quarter of fiscal 2006.

Subsequent to the announcement of our preliminary fourth quarter and fiscal year 2006 results on July 25, 2006, we adjusted our fiscal 2006 consolidated balance sheet primarily for reclassifications among deferred tax assets, deferred tax liabilities and goodwill. There was no impact to our consolidated statements of operations resulting from these fiscal 2006 reclassifications. As a result, our deferred tax assets increased by approximately $109 million, deferred tax liabilities increased by approximately $150 million, and goodwill increased by approximately $41 million.

Critical Accounting Policies

The accompanying discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP). Note 2 to the Consolidated Financial Statements describes the significant accounting policies and estimates used in preparation of the Consolidated Financial Statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances, however, to the extent there are material differences between these estimates, judgments or assumptions and our actual results, our financial statements will be affected. We believe the accounting policies discussed below reflect our more significant assumptions, estimates and judgments and are the most critical to aid in fully understanding and evaluating our reported financial results. Our senior management has discussed the development, selection and disclosure of these critical accounting policies and related disclosures with the Audit Committee of our Board of Directors.

Revenue Recognition

As discussed in Note 2 to our Consolidated Financial Statements, we enter into agreements to sell hardware, software, services and multiple deliverable arrangements that include combinations of products and/or services. Additionally, while the majority of our sales transactions contain standard business terms and conditions, there are some transactions that contain non-standard business terms and conditions. As a result, significant contract interpretation is sometimes required to determine the appropriate accounting including: (1) whether an arrangement exists; (2) how the arrangement consideration should be allocated among the deliverables if there are multiple deliverables; (3) when to recognize revenue on the deliverables; and (4) whether undelivered elements are essential to the functionality of delivered elements. In addition, our revenue recognition policy requires an assessment as to whether collectibility is reasonably assured, which requires us to evaluate the creditworthiness of our customers. Changes in judgments on these assumptions and estimates could materially impact the timing of revenue recognition.

We recognize revenue as work progresses on fixed price professional services contracts when we can reliably evaluate progress to completion. We perform periodic analyses of these contracts in order to determine if the applicable estimates regarding total revenue, total cost and the extent of progress toward completion require revision. For fixed price professional services contracts, when the current estimates of total contract revenue and contract cost indicate a loss, the estimated loss is recognized in the period the loss becomes evident. Changes in assumptions underlying these estimates and costs could materially impact the timing of revenue recognition and loss recognition.

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Resellers (Channel Partners) selling our high-volume products generally carry Sun products as inventory. If our revenue recognition criteria are met, we recognize revenue when we sell to the Channel Partners. Channel Partners selling our high-end products generally purchase our products at the time an end-user is identified. The revenue we recognize associated with channel sales transactions requires us to make estimates in several areas including: (1) creditworthiness of the Channel Partner; (2) the amount of credits we will give for subsequent changes in our price list (i.e., price protection); (3) the amount of credits we will give for additional discounts in certain competitive transactions (i.e., margin protection); (4) the amount of stock rotation; and (5) the likelihood of returns. We reduce revenue in these areas using assumptions that are based on our historical experience. Changes in these assumptions could require us to make significant revisions to our estimates that could materially impact the amount of net revenue recognized.

Business Combinations

In accordance with Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combination”, we are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired, liabilities assumed, as well as in-process research and development (IPRD) based on their estimated fair values. We engage independent third-party appraisal firms to assist us in determining the fair values of assets acquired and liabilities assumed. This valuation requires management to make significant estimates and assumptions, especially with respect to long-lived and intangible assets.

Critical estimates in valuing certain of the intangible assets include but are not limited to: future expected cash flows from customer contracts, customer lists, distribution agreements, and acquired developed technologies and patents; expected costs to develop the IPRD into commercially viable products and estimating cash flows from the projects when completed; the acquired company’s brand awareness and market position, as well as assumptions about the period of time the brand will continue to be used in the combined company’s product portfolio; and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur.

To estimate restructuring liabilities, management utilized assumptions of the number of employees that would be involuntarily terminated and of costs associated with the disposition of duplicate or excess acquired facilities. Decreases to the estimates of currently approved acquisition related restructuring plans are recorded as an adjustment to goodwill indefinitely, whereas increases to the estimates are recorded as an adjustment to goodwill during the purchase price allocation period and as operating expenses thereafter.

Goodwill

Our methodology for allocating the purchase price relating to purchase acquisitions is determined through established valuation techniques in the high-technology industry. Goodwill is measured as the excess of the cost of the acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. We review goodwill for impairment on an annual basis and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. In testing for a potential impairment of goodwill, we: (1) allocate goodwill to the various Sun businesses to which the acquired goodwill relates; (2) estimate the fair value of those Sun businesses to which goodwill relates based on future expected discounted cash flows (income approach); and (3) determine the carrying value (book value) of those businesses, as some of the assets and liabilities related to those businesses, such as property and equipment and accounts receivable, are not held by those businesses but by functional departments (for example, our Global Sales Organization and Worldwide Operations organization). Prior to this allocation of the assets to the reporting units, we are required to assess long-lived assets for impairment in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144). Furthermore, if the estimated fair value is less than the carrying value for a particular business, then we are required to estimate the fair value of all identifiable assets and liabilities of the business, in a manner similar to a purchase price allocation for an acquired business. This can require independent valuations of certain internally generated and unrecognized intangible assets such as IPRD technology. Only after this process is completed is the amount of any goodwill impairment determined.

We perform our goodwill impairment analysis at one level below the operating segment level as defined in SFAS 142. The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis. In estimating the fair value of the businesses with recognized goodwill for the purposes of our annual or periodic analyses, we make estimates and judgments about the future cash flows of these businesses. Although our cash flow forecasts are based on assumptions that are consistent with the plans and estimates we are using to manage the underlying businesses, there is significant judgment in determining the cash flows attributable to these businesses over their estimated remaining useful lives. In addition, we make certain judgments about allocating shared assets such as accounts receivable and property and equipment to the balance sheet for those businesses. We also consider our market capitalization (adjusted for unallocated monetary assets such as cash, marketable debt securities and debt) on the date we perform the analysis.

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At June 30, 2006, our goodwill had a carrying value of $2.6 billion. We performed our fiscal 2006 annual goodwill impairment analysis in the fourth quarter of fiscal 2006. Based on our estimates of forecasted discounted cash flows as well as our market capitalization, at that time, we concluded that our goodwill was not impaired. We may incur charges for impairment of goodwill in the future if the net book value of our operating reporting units exceeds the estimated fair value. Any future impairments could have an adverse impact on our operating results in the period in which any such charge is taken.

Other Long-lived Assets

SFAS 144 is the authoritative standard on the accounting for the impairment of other long-lived assets. In accordance with SFAS 144 and our internal accounting policy, we perform tests for impairment of intangible assets other than goodwill (Other Intangible Assets) semi-annually and whenever events or circumstances suggest that Other Intangible Assets may be impaired. This analysis differs from our goodwill analysis in that an impairment is only deemed to have occurred if the sum of the forecasted undiscounted future cash flows related to the assets are less than the carrying value of the intangible asset we are testing for impairment. If the forecasted cash flows are less than the carrying value, then we must write down the carrying value to its estimated fair value.

At June 30, 2006, we had Other Intangible Assets with a carrying value of approximately $948 million. These Other Intangible Assets consist of $929 million in acquisition-related intangible assets and $19 million in intangible assets primarily associated with patent licenses acquired through our settlement with Kodak. To evaluate potential impairment, SFAS 144 requires us to assess whether the future cash flows related to these assets will be greater than their carrying value at the time of the test. Accordingly, while our cash flow assumptions are consistent with the plans and estimates we are using to manage the underlying businesses, there is significant judgment in determining the cash flows attributable to our Other Intangible Assets over their respective estimated useful lives. For example, if we reduced the projected cash flows by 20%, up to $863 million of our Other Intangible Assets could be considered to be impaired and we could be required to recognize an impairment based on the difference between the fair value of these Other Intangible Assets and their carrying value.

As a consequence of product-line rationalization decisions taken as part of our restructuring action in the fourth quarter of fiscal 2006 and resulting reductions in estimates of forecasted undiscounted cashflows, we concluded that an impairment charge of $67 million was necessary to reduce certain StorageTek acquisition-related intangible asset balances to their estimated fair value. Furthermore, during the fourth quarter of fiscal 2006, as a result of operating shortfalls and budget cuts which impacted our ability to realize the expected future benefits of developed technology assets acquired as part of our January 2004 acquisition of Nauticus, we recorded non-cash impairment charges of $3 million in our Product group segment. Any additional impairments could have an adverse impact on our operating results in the period in which any such charges are taken.

Restructuring

We have engaged and may continue to engage in restructuring actions and activities associated with productivity improvement initiatives and expense reduction measures, which are accounted for under SFAS 112, “Employers’ Accounting for Post Employment Benefits” (SFAS 112) and SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146). Our restructuring actions require us to make significant estimates in several areas including: 1) realizable values of assets made redundant, obsolete or excess; 2) expenses for severance and other employee separation costs; 3) the ability to generate sublease income, as well as our ability to terminate lease obligations at the amounts we have estimated; and 4) other exit costs. The amounts we have accrued represent our best estimate of the obligations we expect to incur in connection with these actions, but could be subject to change due to various factors including market conditions and the outcome of negotiations with third parties. Should the actual amounts differ from our estimates, the amount of the restructuring charges could be materially impacted.

In fiscal 2006, we recognized $284 million in charges associated with our restructuring actions. For a full description of our restructuring actions, refer to our discussion of restructuring charges and workforce rebalancing efforts in the Results of Operations section.

Stock-Based Compensation Expense

We account for stock-based compensation in accordance with the provisions of SFAS 123R. Under the fair value recognition provisions of SFAS 123R, stock-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period of the award. Determining the appropriate fair value model and calculating the fair value of stock-based awards, which includes estimates of stock price volatility, forfeiture rates and expected lives, requires judgment that could materially impact our operating results.

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Income Taxes

Estimates and judgments are required in the calculation of certain tax liabilities and in the determination of the recoverability of certain of the deferred tax assets, which arise from net operating losses, tax carryforwards and temporary differences between the tax and financial statement recognition of revenue and expense. SFAS No. 109, “Accounting for Income Taxes” (SFAS 109), also requires that the deferred tax assets be reduced by a valuation allowance, if based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods.

In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent fiscal years and our forecast of future taxable income on a jurisdiction by jurisdiction basis. In determining future taxable income, we are responsible for assumptions utilized including the amount of state, federal and international pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses. Cumulative losses incurred in the U.S. and certain foreign jurisdictions in recent years represented sufficient negative evidence to require valuation allowances in these jurisdictions, which we intend to maintain until sufficient positive evidence exists to support reversal of the valuation allowance. Future reversals or increases to our valuation allowance could have a significant impact on our future earnings.

In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions. We recognize potential liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes and interest will be due. If events occur and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 2 to the Consolidated Financial Statements for a description of certain other recent accounting pronouncements including the expected dates of adoption and effects on our results of operations and financial condition.

Net Revenues

For the fiscal year ended June 30,

(dollars in millions, except revenue per employee dollars in thousands)

	2006			Change	2005			Change	2004
Computer Systems products	$	5,997		2.9%	$	5,826		(0.5)%	$	5,854
Data Management products		2,374		82.6%		1,300		(13.4)%		1,501
Products net revenue	$	8,371		17.5%	$	7,126		(3.1)%	$	7,355
Percentage of total net revenues		64.1	%	(0.3) pts		64.4	%	(1.4) pts		65.8	%
Support services	$	3,678		21.3%	$	3,031		1.1%	$	2,999
Client solutions and Educational services		1,019		11.6%		913		9.9%		831
Services net revenue	$	4,697		19.1%	$	3,944		3.0%	$	3,830
Percentage of total net revenues		35.9	%	0.3 pts		35.6	%	1.4 pts		34.2	%
Total net revenues	$	13,068		18.0%	$	11,070		(1.0)%	$	11,185
Revenue per employee(1)	$	348		1.8%	$	342		9.3%	$	313

⁽¹⁾ Revenue per employee is calculated by dividing the revenue during the period by the average number of employees during the period, including contractors. We use this as a measure of our productivity.

Due to the general strengthening of the U.S. dollar during fiscal 2006, our total net revenues were unfavorably impacted by foreign currency exchange rates as compared with fiscal 2005. The net foreign currency impact to our total net revenues is difficult to precisely measure. However, our best estimate of the foreign exchange rate impact in fiscal 2006 as compared with fiscal 2005, approximated a detriment of 2% to Products net revenue and a detriment of 2% to Services net revenue. Due to the general weakening of the U.S. Dollar during fiscal 2005, our total net revenues were favorably impacted by foreign currency exchange rates as compared with fiscal 2004. Our best estimate of the foreign exchange benefit in fiscal 2005 as compared with fiscal 2004, approximated a benefit of 2% to Products net revenue and a benefit of 4% to Services net revenue.

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Products Net Revenue

Products net revenue consists of revenue generated from the sale of Computer Systems and Data Management products.

During fiscal 2006, as compared with fiscal 2005, Computer Systems revenue increased primarily due to increased unit sales of our entry level servers due to the introduction of certain UltraSPARC IV+, UltraSPARC IV T1 and Opteron-based systems. This increase was partially offset by reduced sales of our enterprise servers resulting from intense competition and a continuing shift in overall computer system demand towards the usage of our lower-priced entry-level systems. During fiscal 2006, as compared with fiscal 2005, Data Management Products revenue increased primarily due to the inclusion of StorageTek’s high and low end tape and low end disk storage product revenue and increased sales of our data center storage systems, partially offset by reduced sales of our entry level storage systems.

During fiscal 2005, as compared with fiscal 2004, Computer Systems revenue decreased, primarily due to reduced sales of our data center servers resulting from intense competition and a continuing market shift in overall computer system demand towards the usage of our lower-priced entry level servers. The decrease in Computer Systems revenue was partially offset by increased unit sales of our entry level servers, which included servers running on our SPARC and AMD’s Opteron processors. During fiscal 2005, as compared with fiscal 2004, Data Management revenue decreased due to intense competition and reduced sales of our entry level and data center storage systems and low-end storage components, which were only partially offset by increased unit sales of our mid-range storage systems.

Services Net Revenue

Services net revenue consists of revenue generated from Support services, Client solutions and Educational services.

Support services revenue consists primarily of maintenance contract revenue, which is recognized ratably over the contractual period and represents approximately 78%, 77% and 78% of services net revenue in fiscal 2006, 2005 and 2004, respectively. During fiscal 2006, Support services net revenue increased due to the inclusion of the operations of StorageTek, partially offset by the unfavorable impact of foreign exchange, a continued change in the mix towards maintenance contracts sold or renewed with lower service levels, a shift in product sales mix to a greater proportion of low-end products, which are typically sold with reduced levels of services and reduced price due to intense competition.

During fiscal 2005, as compared with fiscal 2004, Support services net revenue increased due to the benefit of foreign exchange and an increase in the number of systems under a Support services contract. These increases were substantially offset by competitive pricing pressures. The increase in the number of systems under a Support services contract is primarily due to our continuing emphasis on our solution-based selling strategy, which includes Support services as a key element of a sale.

Client solutions and Educational services revenue consist primarily of revenue generated from professional services, such as technical consulting that helps our customers plan, implement, and manage distributed network computing environments. During fiscal 2006, Client solutions and Educational services revenue increased due to the inclusion of the operations of StorageTek and an increase in revenues from employee development and web-learning initiatives adopted by our customers in fiscal 2006, partially offset by revenue recognized related to a solution-based sale to a health care services provider and an educational institution in the first quarter of fiscal 2005 which did not recur in fiscal 2006.

During fiscal 2005, as compared with fiscal 2004, the overall increase in Client solutions and Educational services revenues was largely due to revenue recognized on a significant solution sale in the United Kingdom and our solution-based selling strategy internationally, particularly in EMEA.

Net Revenues by Geographic Area

For the fiscal year ended June 30,

(dollars in millions)

	2006			Change	2005			Change	2004
U.S.	$	5,380		22.5%	$	4,392		(7.9)%	$	4,768
Percentage of net revenues		41.2	%	1.5 pts		39.7	%	(2.9) pts		42.6	%
International Americas (Canada and Latin America)	$	815		38.1%	$	590		5.0%	$	562
Percentage of net revenues		6.2	%	0.9 pts		5.3	%	0.3 pts		5.0	%
EMEA (Europe, Middle East and Africa)	$	4,703		13.3%	$	4,152		5.3%	$	3,942
Percentage of net revenues		36.0	%	(1.5) pts		37.5	%	2.2 pts		35.3	%
APAC (Asia, Australia and New Zealand)	$	2,170		12.1%	$	1,936		1.2%	$	1,913
Percentage of net revenues		16.6	%	(0.9) pts		17.5	%	0.4 pts		17.1	%
International revenues	$	7,688		15.1%	$	6,678		4.1%	$	6,417
Percentage of net revenues		58.8	%	(1.5) pts		60.3	%	2.9 pts		57.4	%
Total net revenues	$	13,068		18.0%	$	11,070		(1.0)%	$	11,185

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United States (U.S.)

During fiscal 2006, as compared with fiscal 2005, net revenues in the U.S. increased by $988 million primarily due to the inclusion of the operations of StorageTek and SeeBeyond, increased sales of our entry level servers due to the introduction of certain UltraSPARC IV+, UltraSPARC T1 and Opteron-based systems in the second quarter of fiscal 2006 and increased demand in certain segments of the government and telecommunications sectors.

During fiscal 2005, as compared with fiscal 2004, net revenues in the U.S. declined primarily due to a decrease in products net revenue. In the U.S., our sales mix has traditionally included a higher proportion of product sales, which has contributed to the challenge in growing revenue in this geographic market as we experienced intense competitive pressures, especially in selling our high-end datacenter servers in the government and telecommunications sectors. During fiscal 2005, increased merger and acquisition activity in the telecommunication sector correlated to reduced customer spending in key accounts. Partially offsetting the decline in net revenue from the government and telecommunications sectors during fiscal 2005, was year over year growth in sales to our Wall Street financial services customer base.

The following table sets forth net revenues in geographic markets contributing significantly to changes in international net revenues during the last three fiscal years ended June 30:

(dollars in millions)

	2006		Change		2005		Change		2004
United Kingdom	$	1,122	12.2	%	$	1,000	5.8	%	$	945
Germany	$	935	6.6	%	$	877	5.9	%	$	828
Japan	$	780	6.8	%	$	730	(4.2	)%	$	762
Central and North EMEA(1)	$	799	12.9	%	$	708	4.9	%	$	675

(1) CNE consists primarily of Finland, Norway, Sweden, the Netherlands, Belgium, Luxembourg and Switzerland.

United Kingdom (U.K.)

During fiscal 2006, as compared with fiscal 2005, net revenues in the UK increased by $122 million primarily due to the inclusion of StorageTek products and services revenue offset by the unfavorable impact of foreign currency exchange rates and a large solution-based sale recognized in fiscal 2005 which did not recur in fiscal 2006.

During fiscal 2005, as compared with fiscal 2004, net revenues in the U.K. increased due to our solution-based selling approach as well as overall growth in the U.K. economy and the benefit of foreign currency exchange rates. These increases were offset by a continuing market shift in overall computer system demand towards the use of entry-level servers. Our revenue mix in the U.K. included a higher proportion of services revenues when compared to other geographic markets such as the U.S. and Japan, which contributed to our overall revenue growth in this geographic market for the fiscal year. The government sector primarily contributed to the increase in revenue during fiscal 2005, as compared with fiscal 2004, and included $62 million of revenue recognized in the first quarter of fiscal 2005, related to the first phase of a multi-year, solution-based sale to a health care services provider.

Germany

During fiscal 2006, as compared with fiscal 2005, net revenues in Germany increased by $58 million primarily due to the inclusion of StorageTek products and services revenue offset by the unfavorable impact of foreign currency exchange rates and continued intense competitive pressure impacting prices and volume for certain products and support services. Further, we experienced weak demand for our data center servers in certain industry sectors.

During fiscal 2005, as compared with fiscal 2004, net revenues in Germany increased due to the benefit of foreign currency exchange rates and the benefits arising from certain elements of our strategic alliance with Fujitsu. These increases were partially offset by intense competition, the weak demand for our data center servers and a challenging macroeconomic environment. Despite these challenges, the government sector remained a source of overall revenue strength during fiscal 2005.

Japan

During fiscal 2006, as compared with fiscal 2005, net revenues in Japan increased by $50 million primarily due to the inclusion StorageTek products and services revenue offset by the unfavorable impact of foreign currency exchange rates and continued intense competitive pressure impacting prices and volume for certain products. Further, we continued to experience a shift in our sales mix towards our lower priced entry-level products.

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During fiscal 2005, as compared with fiscal 2004, net revenues in Japan decreased, primarily due to a decrease in Products net revenue, partially offset by a slight increase in Support services and Client solutions revenues and the benefit of foreign currency exchange rates. The decrease in Products net revenue in Japan is primarily a result of the implementation of certain elements of our broad-based strategic alliance with Fujitsu. As noted above, the revenue impact of this alliance in Japan was partially offset by other financial benefits received. Irrespective of the impact of the Fujitsu alliance in Japan, the actions we initiated in fiscal 2004 to adjust to the intense competitive business environment have contributed towards stabilization of this geographic market’s revenue.

Central and Northern Europe (CNE)

During fiscal 2006, as compared with fiscal 2005, net revenues in CNE increased by $91 million primarily due to the inclusion StorageTek products and services revenue offset by the weak demand for our data center servers and price erosion associated with the competitive environment.

During fiscal 2005, as compared with fiscal 2004, net revenues in CNE increased primarily due to increases in both Products and Client solutions revenues. The increase in net revenue occurred in a variety of sectors and across the majority of products and services categories that, in part, can be attributed to the success of our solution-based sales approach in this geographic market.

Gross Margin

For the fiscal year ended June 30,

(dollars in millions)

	2006			Change	2005			Change	2004
Products gross margin	$	3,544		20.1%	$	2,952		(3.7)%	$	3,065
Percentage of products net revenue		42.3	%	0.9 pts		41.4	%	(0.3) pts		41.7	%
Services gross margin	$	2,085		27.4%	$	1,637		12.8%	$	1,451
Percentage of services net revenue		44.4	%	2.9 pts		41.5	%	3.6 pts		37.9	%
Total gross margin	$	5,629		22.7%	$	4,589		1.6%	$	4,516
Percentage of net revenues		43.1	%	1.6 pts		41.5	%	1.1 pts		40.4	%

Products Gross Margin

Products gross margin percentage is influenced by numerous factors including product volume and mix, pricing, geographic mix, foreign currency exchange rates, the mix between sales to resellers and end-users, third-party costs (including both raw material and manufacturing costs), warranty costs and charges related to excess and obsolete inventory. Many of these factors influence, or are interrelated with, other factors. As a result, it is difficult to precisely quantify the impact of each item individually. Accordingly, the following quantification of the reasons for the change in the Products gross margin percentage is an estimate only.

During fiscal 2006, as compared with fiscal 2005, our Products gross margin increased 0.9 percentage points due to cost reductions resulting from supply chain restructuring and product cost engineering which collectively benefited gross margin by approximately 4 percentage points. Offsetting this increase was changes in product mix to a greater proportion of lower-margin products of approximately 2 percentage points and an increase in amortization of acquisition-related intangible assets of approximately 1 percentage point.

During fiscal 2005, as compared with fiscal 2004, our products gross margin percentage decreased by 0.3 percentage points due to planned list price reductions and sales discounting actions of approximately 5 percentage points, changes in product mix to a greater proportion of lower-margin products of approximately 1 percentage point and the impact of our settlement with Kodak of approximately 1 percentage point. Offsetting these decreases were cost reductions due to supply chain restructuring, product cost engineering and continued use of dynamic bidding events, which collectively benefited gross margin by approximately 6 percentage points.

Services Gross Margin

Services gross margin percentage is influenced by numerous factors including services mix, pricing, geographic mix, foreign currency exchange rates and third-party costs. Many of these factors influence, or are interrelated with, other factors. As a result, it is difficult to precisely quantify the impact of each item individually. Accordingly, the following quantification of the reasons for the change in the Services gross margin percentage is an estimate only.

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During fiscal 2006, as compared with fiscal 2005, our Services gross margin increased by 2.9 percentage points due to cost savings associated with delivery efficiencies of approximately 3 percentage points and the positive impact of changes in services mix of approximately 1 percentage point. These increases were partially offset by the impact of stock based compensation expense of approximately 1 percentage point.

During fiscal 2005, as compared with fiscal 2004, our services gross margin increased by 3.6 percentage points due to revenue volume efficiencies of approximately 3 percentage points and costs savings associated with renegotiated contracts with our partners and our workforce reductions of approximately 2 percentage points. These increases were partially offset by the negative impact of increased costs associated with a change in services mix to a higher proportion of Client solutions with lower margins of approximately 1 percentage point.

Operating Expenses

For the fiscal year ended June 30,

(dollars in millions)

	2006			Change	2005			Change	2004
Research and development	$	2,046		14.6%	$	1,785		(7.3)%	$	1,926
Percentage of net revenues		15.7	%	(0.4) pts		16.1	%	(1.1) pts		17.2	%
Selling, general and administrative	$	4,039		38.4%	$	2,919		(12.0)%	$	3,317
Percentage of net revenues		30.9	%	4.5 pts		26.4	%	(3.3) pts		29.7	%
Restructuring charges	$	284		8.4%	$	262		(23.8)%	$	344
Percentage of net revenues		2.2	%	(0.2) pts		2.4	%	(0.7) pts		3.1	%
Impairment of other intangible assets	$	70		N/M*	$	—		(100)%	$	49
Percentage of net revenues		0.5	%	0.5 pts		—		(0.4) pts		0.4	%
Purchased in-process research and development	$	60		N/M*	$	—		(100)%	$	70
Percentage of net revenues		0.5	%	0.5 pts		—		(0.6) pts		0.6	%
Total operating expenses	$	6,499		30.9%	$	4,966		(13.0)%	$	5,706
*N/M — Not meaningful

Research and Development (R&D) Expenses

During fiscal 2006, as compared with fiscal 2005, R&D expenses increased by $261 million primarily due to the inclusion of expense associated with the operations of StorageTek and SeeBeyond. Included in the $261 million increase was $74 million of stock-based compensation expense and a $41 million increase in prototype expenses associated with new product introductions. These increases were partially offset by a $51 million decrease in depreciation and amortization.

During fiscal 2005, as compared with fiscal 2004, R&D expenses decreased by $141 million, primarily due to $125 million in cost savings associated with workforce reductions, $50 million in cost savings associated with discretionary and outside services spending and an $18 million decrease in depreciation and amortization. These decreases were partially offset by a $38 million increase in compensation costs associated with salaries and bonuses and a $10 million increase in prototype expenses associated with new product introductions.

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.

Selling, General and Administrative (SG&A) Expenses

During fiscal 2006, as compared with fiscal 2005, SG&A expenses increased by $1.1 billion primarily due to the inclusion of expense associated with the operations of StorageTek and SeeBeyond. Included in the $1.1 billion increase was $159 million in other acquisition-related intangible asset amortization resulting from these acquisitions, a $157 million increase in outside services costs and $112 million of stock-based compensation expense. These increases were partially offset by $38 million in cost savings resulting from workforce reductions and $36 million decrease in depreciation and amortization.

During fiscal 2005, as compared with fiscal 2004, SG&A expenses decreased by $398 million primarily due to $263 million in cost savings associated with workforce reductions, $107 million in occupancy cost savings associated with facilities exit actions, $56 million in reductions in legal costs, a $48 million decrease in depreciation and amortization and $22 million in reductions in marketing costs. These decreases were partially offset by a $66 million increase in compensation costs associated with salaries and bonuses.

We are continuing to focus our efforts on achieving additional operating efficiencies by reviewing and improving upon our existing business processes and cost structure.

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Restructuring Charges and Workforce Rebalancing Efforts

In fiscal 2006, 2005 and 2004, we recognized restructuring charges of $284 million, $262 million and $344 million, respectively, associated with our workforce reduction and excess facility exit plans These costs have been accounted for in accordance with SFAS 112, “Employers’ Accounting for Post Employment Benefits” (SFAS 112) and SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities”. Our estimated excess facility charges were based on our contractual obligation, net of estimated sublease income, and based on current comparable rates for leases in their respective real estate markets. As of June 30, 2006, our estimated sublease income to be generated from sublease contracts not yet negotiated approximated $38 million. Our ability to generate this amount of sublease income, as well as our ability to terminate lease obligations at the amounts we have estimated, is highly dependent upon the commercial real estate market conditions in certain geographies at the time we perform our evaluations or negotiate the lease termination and sublease arrangements with third parties. The amounts we have accrued represent our best estimate of the obligations we expect to incur and could be subject to adjustment as market conditions change.

Restructuring liabilities of $460 million at June 30, 2006 are composed primarily of the remaining cash payments to be made for severance relating to the Plan V and Plan VI restructuring plans, certain non-US severance benefits and contract termination costs, including abandoned facility leases for Phase V and prior plans. We expect to make the majority of the severance payments by the end of fiscal 2007 and to settle the non-severance obligations by the end of fiscal 2023.

Restructuring plans associated with the acquisitions of StorageTek and SeeBeyond in fiscal 2006, have resulted in $172 million and $11 million being recorded as of the acquisition dates as part of the StorageTek and SeeBeyond purchase price allocations, respectively. See Note 4 to the Consolidated Financial Statements for a description of acquisition-related restructuring costs that are not included below as these cost have been recorded as an adjustment to goodwill in the allocation of the purchase price rather than as restructuring expenses.

Restructuring Plan VI

In May 2006, we implemented a plan to better align our resources with our strategic business objectives by further reducing our workforce by approximately 4,000 to 5,000 employees across certain business functions, operating units and geographic regions as well as implementing other expense reduction measures (Restructuring Plan VI). Through the end of fiscal 2006, we reduced our workforce by approximately 300 and recognized a total of $138 million, primarily in workforce reduction charges associated with Restructuring Plan VI. During the first three quarters of fiscal 2007, we expect to incur additional charges between $270 and $350 million under this plan.

Restructuring Plan V

In June 2005, we implemented a workforce reduction and in July 2005, we committed to a facility exit plan (Restructuring Plan V). This plan included reducing our workforce across all levels, business functions, operating units and geographic regions. Through the end of fiscal 2006, we reduced our workforce by approximately 1,400 employees, and recognized cumulative expenses relating to severance and benefit costs of $101 million, associated with Restructuring Plan V. As of June 30, 2006, substantially all employees to be terminated as a result of Restructuring Plan V had been notified. In the fourth quarter of fiscal 2006, we committed to the closure of our Newark, California campus and as a result recognized an impairment loss of approximately $80 million in accordance with FAS 144. With the exception of the Newark campus, which has been accounted for as an asset held for sale under FAS 144, all facilities relating to the amounts accrued under this restructuring plan were exited by June 30, 2006 in accordance with SFAS 146.

Restructuring Plan IV

In March 2004, we implemented a plan to reduce our cost structure and improve operating efficiencies by reducing our workforce, exiting facilities, and implementing productivity improvement initiatives and expense reduction measures (Restructuring Plan IV). This plan included reducing our workforce across all levels, business functions, operating units, and geographic regions. Through the end of fiscal 2006, we reduced our workforce by approximately 4,300 employees under this plan. This plan also included eliminating excess facility capacity in light of revised facility requirements and other actions. Through the end of fiscal 2006, we recognized $567 million in total charges, consisting of $294 million in workforce reduction charges and $273 million in excess facility charges. As of June 30, 2006, all employees to be terminated as a result of Restructuring Plan IV had been notified. During fiscal 2004, the $128 million charge relating to the consolidation of excess facilities included:

• $95 million of estimated future obligations for non-cancelable lease payments (net of estimated sublease income of $35 million) and/or termination fees resulting from exiting excess rental facilities. All facilities relating to the amounts accrued under this restructuring plan were exited by June 30, 2005; and

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• $33 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.

Restructuring Plans and Workforce Rebalancing Efforts Prior to Phase IV

Prior to the initiation of our Restructuring Plan IV, we had initiated certain workforce rebalancing efforts during the first six months of fiscal 2004. As a result, we incurred $55 million of separation costs during this period. Approximately $3 million, $14 million and $38 million of these separation costs were included in cost of sales, research and development and selling, general and administrative expenses, respectively. During fiscal 2005 and fiscal 2004, we paid $1 million and $54 million in cash, respectively.

We committed to restructuring plans in fiscal 2003 and 2002 and a facility exit plan in fiscal 2001. These plans included eliminating excess facility capacity in light of revised facility requirements and other actions. All facilities relating to the amounts accrued under these restructuring plans were exited by June 30, 2005.

The following table sets forth an analysis of the restructuring accrual activity for the fiscal years ended June 30, 2006, 2005 and 2004 (in millions):

	Restructuring Plans																								Total
	VI						V						IV						Prior to IV
	Severance and Benefits			Facilities Related and Other			Severance and Benefits			Facilities Related and Other			Severance and Benefits			Facilities Related			Severance and Benefits			Facilities Related
Balance as of June 30, 2003	$	—		$	—		$	—		$	—		$	—		$	—		$	24		$	351		$	375
Severance and benefits		—			—			—			—			215			—			—			—			215
Accrued lease costs		—			—			—			—			—			95			—			—			95
Property and equipment impairment		—			—			—			—			—			33			—			—			33
Provision adjustments		—			—			—			—			—			—			(3	)		4			1
Total restructuring charges		—			—			—			—			215			128			(3	)		4			344
Cash paid		—			—			—			—			(49	)		(6	)		(21	)		(70	)		(146	)
Non-cash		—			—			—			—			—			(34	)		1			3			(30	)
Balance as of June 30, 2004		—			—			—			—			166			88			1			288			543
Severance and benefits		—			—			44			—			83			—			—			—			127
Accrued lease costs and other		—			—			—			—			—			111			—			—			111
Property and equipment impairment		—			—			—			—			—			16			—			—			16
Provision adjustments		—			—			—			—			(8	)		6			—			10			8
Total restructuring charges		—			—			44			—			75			133			—			10			262
Cash paid		—			—			—			—			(204	)		(47	)		(1	)		(65	)		(317	)
Non-cash		—			—			—			—			—			(17	)		—			(1	)		(18	)
Balance as of June 30, 2005		—			—			44			—			37			157			—			232			470
Severance and benefits		133			—			57			—			4			—			—			—			194
Accrued lease costs		—			—			—			1			—			11			—			—			12
Property and equipment impairment		—			5			—			80			—			—			—			—			85
Provision adjustments		—			—			—			—						1			—			(8	)		(7	)
Total restructuring charges		133			5			57			81			4			12			—			(8	)		284
Cash paid		(1	)		—			(80	)		—			(35	)		(44	)		—			(49	)		(209	)
Non-cash		—			(5	)		—			(80	)		—			—			—			—			(85	)
Balance as of June 30, 2006	$	132		$	—		$	21		$	1		$	6		$	125		$	—		$	175		$	460

The above restructuring charges are based on estimates that are subject to change. Changes to the previous estimates have been reflected as “Provision adjustments” in the above table in the period the changes in estimates were made. Accrued lease costs include accretion adjustments associated with the passage of time.

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We anticipate recording additional charges related to our workforce and facilities reductions over the next several quarters, the timing of which will depend upon the timing of notification of the employees leaving Sun as determined by local employment laws and as we exit facilities. In addition, we anticipate incurring additional charges associated with productivity improvement initiatives and expense reduction measures. The total amount and timing of these charges will depend upon the nature, timing, and extent of these future actions.

Impairment of Goodwill and Other Intangible Assets

Impairment of Goodwill

We performed our annual goodwill impairment analyses in the fourth quarter of each of fiscal 2006, 2005 and 2004. Based on our estimates of forecasted discounted cash flows as well as our market capitalization, at each of these dates, we concluded that goodwill impairment charges were not necessary in fiscal 2006 and 2005, and recognized $49 million of goodwill impairment charges in fiscal 2004.

Impairment charges taken during fiscal 2004 related to the goodwill in our Educational services reporting unit. The lower discounted cash flows attributable to our Educational services reporting unit in fiscal 2004 were primarily due to a decrease in revenue and gross margin, mostly resulting from the end-of-life of new enterprise learning platform licensing and hosting agreements, as well as reduced expectations for other products. Educational services revenues declined in fiscal 2004 by approximately 16% as compared to fiscal 2003. In measuring the amount of goodwill impairment, we estimated the fair value of the reporting unit based on our estimates of forecasted discounted cash flows as well as our market capitalization and concluded it was negative. Any allocation of such negative fair value would have resulted in no implied value of the existing goodwill. As a result, we concluded that all of the recorded goodwill in the Educational services reporting unit was impaired and needed to be expensed as a non-cash charge to continuing operations during the fourth quarter of 2004. The resulting impairment charge of $49 million primarily related to goodwill acquired from our acquisitions of ISOPIA, Inc. of $39 million and Ed Learning Systems, Inc. of $7 million.

Impairment of Other Intangible Assets

In accordance with SFAS 144 and our internal accounting policy, we performed semi-annual analyses of other intangible assets impairment in the second and fourth quarters of each of our past three fiscal years. As a consequence of product-line rationalization decisions taken as part of our restructuring action in the fourth quarter of fiscal 2006 and resulting reductions in estimates of forecasted undiscounted cashflows, we concluded that an impairment charge of $67 million was necessary to reduce certain StorageTek acquisition-related intangible asset balances to their estimated fair value. In addition, during the fourth quarter of fiscal 2006, as a result of operating shortfalls and budget cuts which impacted our ability to realize the expected future benefits of developed technology assets acquired as part of our January 2004 acquisition of Nauticus, we recorded non-cash impairment charges to continuing operations of $3 million in our Product group segment. No impairment charges on other acquisition-related intangible asset were recorded in fiscal 2005 and 2004.

In-process Research and Development (IPRD)

IPRD expense was $60 million, nil and $70 million in fiscal 2006, 2005 and 2004, respectively. IPRD is a result of acquired in-process technology projects that had not yet reached technological feasibility and the IPRD had no alternative future uses. Accordingly, these amounts were expensed on the respective acquisition dates of each of the acquired companies listed below.

Amounts allocated to IPRD are calculated using established valuation techniques accepted in the high-technology industry. These calculations give consideration to relevant market sizes and growth factors, expected industry trends, the anticipated nature and timing of new product introductions by the company and our competitors, individual product sales cycles, and the estimated lives of each of the products’ underlying technology. The value of the IPRD reflects the relative value and contribution of the acquired research and development. We gave consideration to 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 expected cost to complete the project in determining the value assigned to IPRD.

The values assigned to developed technologies related to each acquisition were based upon discounted cash flows related to the future 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. As 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. In addition, we did not expect to achieve a material amount of expense

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reductions or synergies; or, in the case of StorageTek and SeeBeyond, such expected expense reductions or synergies were not included in our estimates because they would not have had a material impact on the value of IPRD assigned therefore, the valuation assumptions did not include significant anticipated cost savings.

The following table summarizes the significant assumptions underlying the valuations related to the IPRD from each of our acquired companies in fiscal 2006 and 2004 (dollars in millions):

Acquired Company	IPRD		Estimated Cost to Complete Technology at Time of Acquisition		Percentage Completed at Time of Acquisition		Percentage of Revenue
							Average COS		Average SG&A		Average R&D		Discount Rate Used
Fiscal 2006
StorageTek:
Titanium project	$	29	$	6	40	%	30	%	25	%	8	%	13	%
Other projects		20		52	37	%	47	%	20	%	16	%	14	%
Total	$	49	$	58	37	%	42	%	24	%	14	%	13	%
SeeBeyond	$	11	$	3	75	%	5	%	39	%	4	%	21	%
Fiscal 2004
Kealia, Inc. (Kealia)	$	69	$	8	5	%	65	%	20	%	2	%	35	%
Pixo, Inc. (Pixo)	$	1	$	—	50	%	N/A		48	%	2	%	18	%

Given the uncertainties of the commercialization process, no assurance can be given that deviations from our estimates will not occur. At the time of the acquisitions, we believed there was a reasonable chance of realizing the economic return expected from the acquired in-process technology. However, as there is risk associated with the realization of benefits related to commercialization of an in-process project due to rapidly changing customer needs, the complexity of the technology, and growing competitive pressures, there can be no assurance that any project will meet 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.

Our ongoing restructuring plans may also impact the expected economic return from acquired in-process technology. During the fourth quarter of fiscal 2006, as a result of our Phase VI restructuring activities, we exited certain StorageTek product lines comprising $9 million of the total $49 million assigned to IPRD as of the acquisition date. Future economic benefits for these IPRD projects will not be realized.

The following table provides information regarding the status of IPRD projects at the date of acquisition and as of June 30, 2006 (in millions):

Acquired Company/Business	Estimated Cost to Complete at Time of Acquisition		Actual Costs Incurred as of June 30, 2006		Actual/Expected Product Release Date
StorageTek
Titanium project	$	7	$	9	Q3FY2006
Other projects	$	51	$	23	Various (A)
Total	$	58	$	32
SeeBeyond	$	3	$	3	Q3FY2006
Kealia	$	8	$	15	Q2FY2006
Pixo	$	—	$	1	Q2FY2005

(A) Key product releases and major enhancements contemplated by acquired IRPD projects were completed for all significant projects during FY06, with the exception of VSM Open which is scheduled for release during Q3FY2008. Note that ongoing feature and function enhancements on all of our acquired IPRD projects are expected to continue for several more years.

We believe that the projections we used in performing our valuations for each acquisition, are still valid in all material respects, with the exception of products impacted by our Phase VI restructuring activities for which impairment charges were recorded during the fourth quarter of fiscal 2006. However, we cannot offer assurance 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

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expected total costs to complete such technologies have not materially increased, individually or in the aggregate, from our estimates at the time of the acquisitions. 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. Refer to Note 4 of our Consolidated Financial Statements for additional detail.

Gain (Loss) on Equity Investments, Net

For the fiscal year ended June 30,

(dollars in millions)

	2006			Change		2005		Change	2004
Gain (loss) on equity investments, net	$	27		N/M	*	$	6	N/M*	$	(64	)
Percentage of net revenues		0.2	%	0.2 pts			—	0.6 pts		(0.6	)%

*N/M — Not meaningful

Our equity investments portfolio primarily consists of investments in publicly traded and privately-held technology companies. In fiscal 2006, our gain on equity investments of $27 million was primarily related to $11 million in gains on the sale of certain equity investments held in publicly traded companies, $6 million in income from our joint ventures and venture capital fund investments, and $10 million in gains on the sale of certain equity investments held in publicly traded companies, net of impairment.

The net gain on equity investments in fiscal 2005 of $6 million was comprised of investment gains of $22 million partially offset by investment losses of $16 million. Investment gains of $22 million for fiscal 2005 primarily related to the sale of certain equity investments and income from our joint ventures and venture capital fund investments. Investment losses on equity investments of $16 million for fiscal 2005, were primarily related to a decline in the value of our portfolio that was considered other than temporary. Investment gains of $22 million in fiscal 2004, primarily related to the valuation of warrants and the sale of certain marketable equity securities. Investment losses on equity investments of $86 million in fiscal 2004, were primarily related to a decline in the value of our portfolio that was considered other than temporary.

As of June 30, 2006, our equity investment portfolio of $77 million consisted of $37 million in marketable equity securities, $21 million in equity investments in privately-held companies and $19 million in investments in venture capital funds and joint ventures. The ongoing valuation of our investment portfolio remains uncertain and may be subject to fluctuations based on whether we participate in additional investment activity or as a result of the occurrence of events outside of our control.

Interest and Other Income, Net

For the fiscal year ended June 30,

(dollars in millions)

	2006			Change	2005			Change	2004
Interest and other income, net	$	114		(14.3)%	$	133		41.5%	$	94
Settlement income		54		—		54		(96.6)%		1,597
Interest and other income, net	$	168		(10.2)%	$	187		(88.9)%	$	1,691
Percentage of net revenues		1.3	%	(0.4) pts		1.7	%	(13.4) pts		15.1	%

During fiscal 2006, as compared with fiscal 2005, interest and other income, net, decreased $19 million due to the significant reduction in our cash equivalents and marketable debt securities balances due to cash paid for the acquisitions of StorageTek and SeeBeyond early in fiscal 2006. On April 27, 2006, our Chief Executive Officer and Board of Directors approved our domestic reinvestment plan. As a result, we repatriated $2 billion in unremitted foreign earnings during the fourth quarter of fiscal 2006 and realized a loss of $14 million associated with the liquidation of a portion of our marketable debt securities portfolio.

During fiscal 2005, as compared with fiscal 2004, interest and other income, net increased primarily due to higher cash and marketable debt securities balances throughout fiscal 2005 as a result of the settlement income received from Microsoft. This increase was offset by a loss on marketable debt securities, which is included in interest and other income, net, of $15 million associated with our intent to liquidate a portion of our June 30, 2005 securities portfolio, due to our acquisition of StorageTek in the first quarter of fiscal 2006.

Our interest income and expense 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, which are

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predominantly short-term fixed income instruments. To better match the interest rate characteristics of our investment portfolio and 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. The average duration of our portfolio of marketable debt securities was 0.21 years, 0.68 years and 0.82 years as of June 30, 2006, 2005 and 2004, respectively. In general, we would expect the volatility of this portfolio to decrease as its duration decreases. The significant decrease in the average duration of our portfolio at June 30, 2006, was due to a strategic repositioning of our portfolio and the liquidation of securities in order to repatriate $2 billion of foreign earnings.

Income Taxes

For the fiscal year ended June 30,

(dollars in millions)

	2006	Change	2005	Change	2004
Provision for (benefit from) income taxes	$189	N/M*	$(77)	N/M*	$825

*N/M — Not meaningful

During fiscal 2006, we recorded tax expense of $189 million, which was primarily related to taxes due on income generated in our foreign tax jurisdictions and in the U.S. associated with the repatriation of foreign earnings pursuant to the American Jobs Creation Act. The tax expense included a charge of approximately $20 million recorded in the second quarter of fiscal 2006 associated with corrections of previously filed tax returns, which was partially offset by a benefit recorded in the third quarter associated with adjusting estimated amounts to actual liabilities resulting from the filing of prior years’ tax returns. These adjustments are immaterial to our results of operations and financial condition for the current year as well as the prior affected periods. A charge of $58 million was recorded in the fourth quarter of fiscal 2006 associated with our repatriation of $1,965 million in unremitted foreign earnings, of which $1,600 million is eligible to be taxed at a reduced effective tax rate under the Foreign Earnings Repatriation Provision of the American Jobs Creation Act.

During fiscal 2005, we recorded a net tax benefit of $77 million. This benefit included a $213 million tax benefit arising from adjustments to our income tax reserves resulting from the conclusion of both a U.S. income tax audit and a foreign income tax audit and a benefit of $69 million related to the impact of a change in the U.S.-Dutch withholding tax treaty. This was offset by a tax expense of $205 million on income generated in certain foreign jurisdictions and adjustments for the differences between estimated amounts recorded and actual liabilities resulting from the filing of prior periods’ tax returns.

The tax expense for fiscal 2004 was due primarily to taxes on income generated from the Microsoft settlement, a $300 million non-cash increase in the valuation allowance for U.S. and Japan deferred tax assets and income generated in certain foreign jurisdictions and adjustments for the difference between estimated amounts recorded and actual liabilities resulting from the filing of prior years’ tax returns.

On April 27, 2006, our Chief Executive Officer and Board of Directors approved our domestic reinvestment plan. As a result, we repatriated $2 billion in unremitted foreign earnings during the fourth quarter of fiscal 2006, the majority of which was eligible, to be taxed at a reduced effective tax rate under the Foreign Earnings Repatriation Provision of the American Jobs Creation Act. U.S. income taxes have been provided on all undistributed earnings of our foreign subsidiaries. As a result of the aforementioned repatriation, as of June 30, 2006, there are no earnings that are considered to be permanently invested in operations outside of the U.S, however, we may elect to permanently invest in operations outside of the U.S. in the future. During the current year, we changed the calculation for estimating the deferred tax liability on foreign unremitted earnings to more closely reflect the tax consequences that would result from filing our actual tax returns, assuming those earnings were remitted as dividends.

We currently have provided a full valuation allowance on our U.S. deferred tax assets and a full or partial valuation allowance on certain overseas deferred tax assets. We intend to maintain this valuation allowance until sufficient positive evidence exists to support reversal of the valuation allowance. Likewise, the occurrence of negative evidence with respect to our foreign deferred tax assets could result in an increase to the valuation allowance. Our income tax expense recorded in the future will be reduced or increased to the extent of offsetting decreases or increases to our valuation allowance.

During the third quarter of fiscal 2006, we received a revenue agent report from the Internal Revenue Service relating to an examination of our tax returns filed for fiscal years 2001 and 2002. Pursuant to the report, the Internal Revenue Service has proposed various adjustments resulting in a tax assessment of approximately $27 million. On April 17, 2006, we filed a protest with the Internal Revenue Service to contest several items. Although the ultimate outcome is unknown, we believe that we have adequately reserved for these potential adjustments and the final outcome will not have a material adverse affect on our results of operations.

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We have also provided adequate amounts for other anticipated tax audit adjustments in the U.S., state and foreign tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes and interest may be due. In addition, although specific foreign country transfer pricing exposures have not been identified, the risk of potential adjustment exists. If our estimate of the federal, state and foreign income tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. If events occur which indicate payment of these amounts are unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. Any reversals of assumed tax liabilities established by acquired companies will be recorded through a reallocation of the purchase price.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION

As of and for the fiscal year ended June 30,

(dollars in millions)

	2006			Change			2005			Change			2004
Cash and cash equivalents	$	3,569		$	1,518		$	2,051		$	(90	)	$	2,141
Marketable debt securities		1,279			(4,197	)		5,473			6			5,467
Total cash, cash equivalents and marketable debt securities	$	4,848		$	(2,676	)	$	7,524		$	(84	)	$	7,608
Percentage of total assets		32.1	%		(20.6) pts			53.0	%		1.6 pts			51.4	%
Cash provided by operating activities	$	640		$	271		$	369		$	(1,857	)	$	2,226
Cash provided by (used in) investing activities		579			1,004			(425	)		1,886			(2,311	)
Cash provided by (used in) financing activities		299			333			(34	)		(245	)		211
Net increase (decrease) in cash and cash equivalents	$	1,518		$	1,608		$	(90	)	$	(216	)	$	126

Changes in Cash Flow

During fiscal 2006, our operating activities generated cash flows of $640 million, which is $271 million higher than the cash flows provided by operating activities during fiscal 2005. The following items significantly impacted our cash provided by operating activities during fiscal 2006:

• Net loss of $864 million included $60 million in purchased IPRD and $1,256 million in non-cash charges, which are comprised primarily of $575 million in depreciation and amortization, $330 million in amortization of acquisition-related intangible assets, $225 million in stock-based compensation expense and $155 million in impairment of long-lived assets; and

• Payments of $209 million associated with severance and facilities restructuring liabilities.

The reasons for certain changes in our working capital are discussed further in the cash conversion cycle section below.

During fiscal 2006, our cash provided by investing activities of $579 million was primarily attributable to $4,183 million in proceeds from sales and maturities of marketable debt securities, net of purchases, offset by $3,162 million in cash used for acquisitions, net of cash acquired. Cash provided by financing activities of $299 million was primarily attributable to $249 million of proceeds from the issuance of common stock and $50 million of proceeds from a capital lease financing arrangement.

During fiscal 2005, our operating activities generated cash flows of $369 million, which is $1,857 million lower than the cash flows provided by operating activities during fiscal 2004, primarily due to $1,950 million received in fiscal 2004 related to our settlement with Microsoft. The following items significantly impacted our cash provided by operating activities during fiscal 2005:

• Net loss of $107 million included non-cash charges of approximately $486 million, which included depreciation and amortization of $671 million, offset by $315 million of deferred taxes;

• Payments of $317 million associated with severance and facilities restructuring liabilities;

• Payments of approximately $180 million to the Internal Revenue Services related to tax examinations for tax returns filed in fiscal years 1997 through 2000.

During fiscal 2005, our cash used in investing activities of $425 million was primarily attributable to capital and spares purchases of $347 million and cash used for acquisitions of $95 million. Cash used in financing activities of $34 million was primarily attributable to a $252 million principal payment of our Senior Notes and other borrowings outstanding in the first quarter of fiscal 2005, partially offset by $218 million of proceeds from the sale of common stock.

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We generated positive cash flow from operations for the last 17 fiscal years, and anticipate being able to continue to generate positive cash flow from operations unless competition intensifies and we are unable to increase our revenues and gross margins faster than we are able to reduce our costs of operations. Based on our current plan of record, we expect to generate positive cash flow from operations for the fiscal year ending June 30, 2007, although there can be no assurance of this. Also, in the first quarter of fiscal 2007, we made a payment of $500 million to settle the current portion of our Senior note and have received cash proceeds of approximately $210 million from the sale of our Newark, California facility.

For the quarter ended June 30,

(dollars in millions)

	2006		Change		2005		Change		2004
Days sales outstanding (DSO)(1)	64		4		68		—		68
Days of supply in inventory (DOS)(2)	22		—		22		—		22
Days payable outstanding (DPO)(3)	(59	)	(1	)	(60	)	10		(50	)
Cash conversion cycle	27		3		30		10		40
Inventory turns-products only	9.9		0.6		9.3		(0.5	)	9.8

(1) DSO measures the number of days it takes, based on a 90-day average, to turn our receivables into cash.

(2) DOS measures the number of days it takes, based on a 90-day average, to sell our inventory.

(3) DPO measures the number of days it takes, based on a 90-day average, to pay the balances of our accounts payable.

We ended the fourth quarter of fiscal 2006 with a cash conversion cycle of 27 days, an improvement of 3 days from June 30, 2005. The cash conversion cycle is the duration between the purchase of inventories and services and the collection of the cash for the sale of our products and services and is a quarterly metric on which we have focused as we continue to try to efficiently manage our assets. The cash conversion cycle results from the calculation of days sales outstanding (DSO) added to days of supply in inventories (DOS), reduced by days payable outstanding (DPO). Our cash conversion cycle, as compared to June 30, 2005, was impacted by our August 31, 2005 acquisition of StorageTek. DSO improved 4 days due to improved billings and collections throughout fiscal 2006. DOS remained flat compared to June 30, 2005. Our products inventory turn rate increased 0.6 points from June 30, 2005. Inventory turns is annualized and represents the number of times product inventory is replenished during the year. Inventory management will continue to be an area of focus as we balance the need to maintain sufficient inventory levels to help ensure competitive lead times with the risk of inventory obsolescence due to rapidly changing technology and customer requirements. DPO worsened by 1 day, primarily due to the impact of the StorageTek acquisition.

We ended the fourth quarter of fiscal 2005 with a cash conversion cycle of 30 days, an improvement of 10 days from June 30, 2004. DSO and DOS remained relatively flat from June 30, 2004. However, inventories decreased $33 million from June 30, 2004 and our products inventory turn rate remained relatively flat at 9.3 turns at June 30, 2005 from 9.8 turns at June 30, 2004. DPO improved 10 days and accounts payable increased $110 million from June 30, 2004 due to negotiation of more favorable terms with our vendors.

Completed Acquisitions

We completed two significant acquisitions during fiscal 2006. On August 25, 2005, we acquired SeeBeyond to strengthen our software portfolio and offerings for the development, deployment and management of enterprise applications and Service Oriented Architectures. On August 31, 2005, we acquired StorageTek in order to offer customers the most complete range of products, services and solutions available for securely managing mission-critical data assets. See Note 4 of our Consolidated Financial Statements for a detailed discussion of our acquisitions.

Stock Repurchases

From time to time, our Board of Directors approves common stock repurchase programs allowing management to repurchase shares of our common stock in the open market pursuant to price-based formulas. In February 2001, we announced our intention to acquire up to $1.5 billion of our outstanding common stock under a stock repurchase program authorized by our Board of Directors. Under the February 2001 program, the timing and actual number of shares subject to repurchase are at the discretion of management and are contingent on a number of factors, including our projected cash flow requirements, our return to sustained profitability and our share price. During the fiscal years ended June 30, 2006 and 2005, we did not repurchase common stock under our repurchase program. All prior repurchases were made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. As of June 30, 2006, approximately $230 million of the $1.5 billion authorized remains unused and available for stock repurchase.

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Dividend Repatriation Plan

On April 27, 2006, our Chief Executive Officer and Board of Directors approved our domestic reinvestment plan. Prior to June 30, 2006, we repatriated approximately $2 billion in unremitted foreign earnings, of which $1.6 billion is eligible to be taxed at a reduced effective tax rate under the Foreign Earnings Repatriation Provision of the American Jobs Creation Act (“AJCA”). In adopting the plan, which was implemented in fiscal year 2006, we considered the goals of the AJCA, and we have invested the repatriated funds consistent with the requirements of the AJCA and in a manner that we believe will achieve the benefits intended under the AJCA. Among the types of permissible investments of these repatriated funds are non-executive compensation in the US and acquisitions of domestic companies. During fiscal year 2006, we paid qualifying compensation in excess of the amount repatriated and also engaged in the SeeBeyond and StorageTek acquisitions at a combined price in excess of the amount repatriated, either of which activity more than satisfies the AJCA’s requirements for reinvestment.

Borrowings

Our $1.1 billion Senior Notes outstanding are due at various times between August 2006 and August 2009. The Senior Notes are subject to compliance with certain covenants that do not contain financial ratios. We are currently in compliance with these covenants. If we failed to be in compliance with these covenants, the trustee of the Senior Notes 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. See Note 9 to our Consolidated Financial Statements for further detail.

In January 2005, our Board of Directors authorized our management to repurchase debt from time to time in partial or full tranches based on available cash and market conditions. As of June 30, 2006, we have not repurchased any debt.

Contractual Obligations and Contingencies

The following table summarizes our contractual obligations at June 30, 2006 (in millions):

Contractual Obligations	Total		Payments Due in Less Than 1 Year		Payments Due in 1-3 Years		Payments Due in 4-5 Years		Payments Due After 5 Years
Senior Notes	$	1,050	$	500	$	550	$	—	$	—
Non-cancelable operating leases	$	1,189	$	244	$	336	$	241	$	368
Asset retirement obligations	$	41	$	17	$	4	$	9	$	11

The Senior Notes consist of $500 million (due on August 15, 2006 and bearing interest at 7.5%) and $550 million (due on August 15, 2009 and bearing interest at 7.65%). Interest on the Senior Notes is payable semi-annually. We may redeem all or any part of any tranche of the Senior Notes at any time at a price equal to 100% of the principal plus accrued and unpaid interest in addition to an amount determined by a quotation agent, representing the present value of the remaining scheduled payments. We have hedged against the risk of changes in fair value associated with our fixed rate Senior Notes by entering into fixed-to-variable interest rate swap agreements, designated as fair value hedges, of which eight are outstanding, with a total notional amount of $1.1 billion as of June 30, 2006. Due to these interest rate swap agreements, the interest associated with the Senior Notes effectively becomes variable.

Our asset retirement obligations arise from leased facilities where we have contractual commitments to remove leasehold improvements and return the property to a specified condition when the lease terminates.

Through the normal course of our business, we purchase or place orders for the necessary components of our products from various suppliers and have also committed to purchase certain outsourced services where we would incur a penalty if the agreement was canceled prior to a contractual minimum term. We estimate that our contractual obligations at June 30, 2006 were no more than $155 million and were primarily due in less than 1 year from June 30, 2006. This amount does not include contractual obligations recorded on the balance sheet as current liabilities. Contractual obligations for the purchase of goods or services are comprised of agreements that are enforceable and legally binding on Sun and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions, and the appropriate timing of the transactions. Our purchase orders are based on our current manufacturing needs and are fulfilled by our vendors within a short time. In addition, we have a contractual obligation under the terms of our strategic alliance with Fujitsu, whereby we have committed to buy, provided certain conditions are met, Fujitsu products with a list price of $230 million within the first twelve months following full implementation of Sun’s distribution of Fujitsu products and approximately $265 million during the second twelve months following full implementation of Sun’s distribution of Fujitsu products, at a predetermined discount from list price, depending upon the type of product purchased.

Sun is insured by third-party insurers for certain potential liabilities, including worker’s compensation, general liability, automobile liability, employer’s liability, errors and omissions liability, employment practices liability, property, cargo and

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crime and directors and officers liability. We have self insured with regard to certain risks such as California earthquakes and as supplemental coverage for certain potential liabilities including, but not limited to general liability, automobile liability, employer’s liability, employment practices liability, directors and officers liability, workers compensation, errors and omissions liability, property, cargo, crime and employee life insurance. Effective July 1, 2006, we self-insure for all indemnification or defense payments we, as a company, may make to or on behalf of our directors and officers as a result of obligations under applicable agreements, Sun’s by-laws and applicable law. We have self-insured between $2 million and $25 million per occurrence on these lines of coverage. Sun performs an annual actuarial analysis to develop an estimate of amounts to be paid for both claims reported and potential losses on activities that have occurred but have not yet been reported. Loss accruals were $35 million and $33 million as of June 30, 2006 and 2005, respectively.

During the normal course of our business, we issue guarantees and letters of credit to numerous third-parties and for various purposes such as lease obligations, performance guarantees and state and local governmental agencies requirements. At June 30, 2006, we had approximately $30 million of outstanding financial letters of credit.

In the normal course of business, we may enter into contractual arrangements under which we may agree to indemnify the third party to such arrangement from any losses incurred relating to the services they perform on behalf of Sun or for losses arising from certain events as defined within the particular contract, which may include, for example, litigation or claims relating to past performance. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have not been material.

In addition, we have uncommitted lines of credit aggregating approximately $459 million. No amounts were drawn from these lines of credit as of June 30, 2006. 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.

During the third quarter of fiscal 2006, we received a revenue agent report from the Internal Revenue Service relating to their examination of our tax returns filed for fiscal years 2001 and 2002. Pursuant to the report, the Internal Revenue Service has proposed various adjustments resulting in a tax assessment of approximately $27 million. On April 17, 2006, we filed a protest with the Internal Revenue Service to contest several items. Although the ultimate outcome is unknown, we believe that we have adequately reserved for these potential adjustments and the final outcome will not have a material adverse affect on our results of operations.

In fiscal 2005, the General Services Administration (GSA) began auditing our records under the schedule contracts it had with us to verify our compliance with various contract provisions from October 1997 to February 2005. If the audit determines that we did not comply with such provisions, we may be required to pay the GSA a potential settlement. We have made a preliminary assessment of our exposure for such amounts potentially due and such assessment is reflected in our fiscal 2006 and 2005 consolidated financial statements. We cannot predict with reasonable certainty when the audit and the subsequent negotiation process will be concluded and it may take several quarters for all issues to be resolved.

In fiscal 2006 as part of a service-based sales arrangement involving a governmental institution in Mexico, we were required to deposit approximately $41 million with a surety company as collateral guaranteeing our performance under the arrangement. This cash is classified as other non-current assets, net, in our Consolidated Balance Sheet.

Off-Balance-Sheet Arrangements

As of June 30, 2006, we did not have any significant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Capital Resources and Financial Condition

Our long-term strategy is to maintain a minimum amount of cash and cash equivalents in subsidiaries for operational purposes and to invest the remaining amount of our cash in interest bearing and highly liquid cash equivalents and marketable debt securities At June 30, 2006, principally as a result of our repatriation of $2 billion of unremitted foreign earnings (previously held as marketable debt securities) our cash and cash equivalents balance increased to $3,569 million. Our remaining investments of $1,279 million were held in marketable debt securities. Our cash and marketable debt securities position at June 30, 2006, was approximately $4,848 million.

We believe that the liquidity provided by existing cash, cash equivalents, marketable debt securities 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 to strengthen our financial position, facilitate growth, and provide us with additional flexibility to take advantage of business opportunities that arise.

47

NON-AUDIT SERVICES OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Our Audit Committee has pre-approved tax compliance services, including those resulting from our acquisitions of StorageTek and SeeBeyond, which are being transitioned to other service providers.

ITEM 7A.    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 June 30, 2006. Actual results may differ materially.

Interest Rate Sensitivity

Our debt investment portfolio consists primarily of fixed income instruments with an average duration of 0.21 years as of June 30, 2006, as compared to 0.68 years as of June 30, 2005 and 0.82 years as of June 30, 2004. The significant decrease in the average duration of our portfolio at June 30, 2006, was due to the liquidation of securities in order to repatriate $2 billion of foreign earnings and a strategic repositioning of our portfolio. The primary objective of our investments in 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, for example, a hypothetical 150 BPS increase in interest rates would result in an approximate $12 million decrease in the fair value of our investments in debt securities as of June 30, 2006, as compared with a $67 million decrease as of June 30, 2005.

We also entered into various interest-rate swap agreements to modify the interest characteristics of the Senior Notes so that the interest payable on the Senior Notes effectively becomes variable and thus matches the shorter-term rates received from our cash and marketable 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 that interest rates may increase. For example, at June 30, 2006, a hypothetical 150 BPS increase in interest rates would result in an approximate $9 million increase in interest expense over a one-year period.

Foreign Currency Exchange Risk

Our revenue, expense, and capital purchasing activities are primarily 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. We are primarily exposed to changes in exchange rates for the Euro, Japanese yen, and British pound.

We are a net receiver of currencies other than the U.S. dollar and, as such, can benefit from a weaker dollar, and can be adversely affected by a stronger dollar relative to major currencies worldwide. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, may adversely affect our consolidated sales and operating margins as expressed in U.S. dollars. To minimize currency exposure gains and losses, we often borrow funds in local currencies, enter into forward exchange contracts, purchase foreign currency options and promote natural hedges by purchasing components and incurring expenses in local currencies. Currently, we have no plans to discontinue our hedging programs, however, we continually evaluate the benefits of our hedging strategies and may choose to discontinue them in the future.

Based on our foreign currency exchange instruments outstanding at June 30, 2006, we estimate a maximum potential one-day loss in fair value of approximately $3 million, as compared with $2 million as of June 30, 2005, 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.

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

48

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 $7 million decrease in the fair value of our available-for-sale equity investments as of June 30, 2006, as compared with $7 million as of June 30, 2005. At June 30, 2006, two equity securities represented substantially all of the $37 million total fair value of the marketable equity securities, as compared with June 30, 2005, at which time three equity securities represented approximately $33 million of the $34 million total fair value of the marketable equity securities. Refer to Note 2 to the Consolidated Financial Statements for additional discussion on Sun’s marketable equity securities.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Consolidated Financial Statements of Sun Microsystems, Inc.:
Consolidated Statements of Operations for each of the three fiscal years ended June 30, 2006	50
Consolidated Balance Sheets at June 30, 2006 and June 30, 2005	51
Consolidated Statements of Cash Flows for each of the three fiscal years ended June 30, 2006	52
Consolidated Statements of Stockholders’ Equity for each of the three fiscal years ended June 30, 2006	53
Notes to Consolidated Financial Statements	54
Reports of Independent Registered Public Accounting Firm	89

Schedules not listed above have been omitted since they are not applicable or are not required, or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto.

49

SUN MICROSYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

	Fiscal Years Ended June 30,
	2006			2005			2004
Net revenues:
Products	$	8,371		$	7,126		$	7,355
Services		4,697			3,944			3,830
Total net revenues		13,068			11,070			11,185
Cost of sales:
Cost of sales-products, including stock-based compensation expense of $10(1)		4,827			4,174			4,290
Cost of sales-services, including stock-based compensation expense of $29(1)		2,612			2,307			2,379
Total cost of sales		7,439			6,481			6,669
Gross margin		5,629			4,589			4,516
Operating expenses:
Research and development, including stock-based compensation expense of $74(1)		2,046			1,785			1,926
Selling, general and administrative, including stock-based compensation expense of $112(1)		4,039			2,919			3,317
Restructuring and related impairment of long-lived assets		284			262			344
Impairment of goodwill and other intangible assets		70			—			49
Purchased in-process research and development		60			—			70
Total operating expenses		6,499			4,966			5,706
Operating loss		(870	)		(377	)		(1,190	)
Gain (loss) on equity investments, net		27			6			(64	)
Interest and other income, net		114			133			94
Settlement income		54			54			1,597
Income (loss) before income taxes		(675	)		(184	)		437
Provision for (benefit from) income taxes		189			(77	)		825
Net loss	$	(864	)	$	(107	)	$	(388	)
Net loss per common share-basic and diluted	$	(0.25	)	$	(0.03	)	$	(0.12	)
Shares used in the calculation of net loss per common share-basic and diluted		3,437			3,368			3,277

(1) For the year ended June 30, 2006.

See accompanying notes.

50

SUN MICROSYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(in millions, except par values)

	June 30,
	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	3,569		$	2,051
Short-term marketable debt securities		496			1,345
Accounts receivable, net of bad debt reserves of $81 in 2006 and $86 in 2005		2,702			2,231
Inventories		540			431
Deferred and prepaid tax assets		209			255
Prepaid expenses and other current assets		757			878
Total current assets		8,273			7,191
Property, plant and equipment, net		1,570			1,769
Assets held for sale		242			—
Long-term marketable debt securities		783			4,128
Goodwill		2,610			441
Other acquisition-related intangible assets, net		929			113
Other non-current assets, net		675			548
	$	15,082		$	14,190
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt and short-term borrowings	$	503		$	—
Accounts payable		1,446			1,167
Accrued payroll-related liabilities		777			713
Accrued liabilities and other		1,190			1,014
Deferred revenues		1,988			1,648
Warranty reserve		261			224
Total current liabilities		6,165			4,766
Long-term debt		575			1,123
Long-term deferred revenue		506			544
Other non-current obligations		1,492			1,083
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, $0.001 par value, 10 shares authorized; no shares issued and outstanding		—			—
Common stock and additional paid-in-capital, $0.00067 par value, 7,200 shares authorized; issued and outstanding: 3,602 shares in 2006 and 3,602 shares in 2005		6,803			6,490
Treasury stock, at cost: 99 shares in 2006 and 194 shares in 2005		(382	)		(1,411	)
Retained earnings (accumulated deficit)		(257	)		1,387
Accumulated other comprehensive income		180			208
Total stockholders’ equity		6,344			6,674
	$	15,082		$	14,190

See accompanying notes.

51

SUN MICROSYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

	Fiscal Years Ended June 30,
	2006			2005			2004
Cash flows from operating activities:
Net loss	$	(864	)	$	(107	)	$	(388	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		575			671			730
Amortization of other acquisition-related intangible assets		330			75			66
Stock-based compensation expense		225			19			16
Purchased in-process research and development		60			—			70
Loss (gain) on investments, net		(10	)		9			64
Impairment of long-lived assets		155			—			49
Tax benefits from employee stock plans		—			25			4
Deferred taxes		(19	)		(315	)		620
Changes in operating assets and liabilities:
Accounts receivable, net		(163	)		111			61
Inventories		44			32			(44	)
Prepaid and other assets		245			(19	)		(288	)
Accounts payable		130			105			158
Other liabilities		(68	)		(237	)		1,108
Net cash provided by operating activities		640			369			2,226
Cash flows from investing activities:
Increase in restricted cash		(69	)		—			—
Purchases of marketable debt securities		(1,831	)		(7,154	)		(8,469	)
Proceeds from sales of marketable debt securities		5,434			6,181			5,795
Proceeds from maturities of marketable debt securities		580			941			854
Proceeds from sales of equity investments, net of purchases		15			49			30
Acquisition of property, plant and equipment, net		(315	)		(257	)		(249	)
Acquisition of spare parts and other assets		(73	)		(90	)		(71	)
Payments for acquisitions, net of cash acquired		(3,162	)		(95	)		(201	)
Net cash provided by (used in) investing activities		579			(425	)		(2,311	)
Cash flows from financing activities:
Proceeds from issuance of common stock, net		249			218			239
Proceeds from (principal payments on) borrowings and other obligations		50			(252	)		(28	)
Net cash provided by (used in) financing activities		299			(34	)		211
Net increase (decrease) in cash and cash equivalents		1,518			(90	)		126
Cash and cash equivalents, beginning of year		2,051			2,141			2,015
Cash and cash equivalents, end of year	$	3,569		$	2,051		$	2,141
Supplemental disclosures of cash flow information:
Interest paid (net of interest received from swap agreements of $34, $62 and $72 in fiscal 2006, 2005 and 2004, respectively)	$	46		$	27		$	26
Income taxes paid (net of refunds of $196, $34 and $143 in fiscal 2006, 2005 and 2004, respectively)	$	74		$	371		$	70
Supplemental schedule of noncash investing activities:
Stock and options issued in connection with acquisitions	$	88		$	1		$	125
Net issuance of nonvested stock awards	$	183			—			—

See accompanying notes.

52

SUN MICROSYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in millions)

	Common Stock and Additional Paid-in-Capital				Treasury Stock					Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	Shares	Amount			Shares		Amount
Balances as of June 30, 2003	3,587	$	6,614		(351	)	$	(3,169	)	$	2,914		$	177		$	6,536
Net loss	—		—		—			—			(388	)		—			(388	)
Change in unrealized gain (loss) on investments, net of taxes	—		—		—			—			—			(48	)		(48	)
Change in unrealized gain (loss) on derivative instruments and other, net of taxes	—		—		—			—			—			14			14
Translation adjustments	—		—		—			—			—			30			30
Total comprehensive loss	—		—		—			—			—			—			(392	)
Issuance of stock, net of repurchases	—		(157	)	85			393			—			—			236
Tax benefit from employee stock transactions and other	—		4		—			—			—			—			4
Issuance of common stock and assumption of stock options in connection with acquisitions	15		75		—			—			—			—			75
Amortization of unearned equity compensation	—		24		—			—			—			—			24
Balances as of June 30, 2004	3,602		6,560		(266	)		(2,776	)		2,526			173			6,483
Net loss	—		—		—			—			(107	)		—			(107	)
Change in unrealized gain on investments, net of taxes	—		—		—			—			—			28			28
Change in unrealized gain on derivative instruments and other, net of taxes	—		—		—			—			—			8			8
Translation adjustments	—		—		—			—			—			(1	)		(1	)
Total comprehensive loss	—		—		—			—			—			—			(72	)
Issuance of stock, net of repurchases	—		(115	)	72			1,365			(1,032	)		—			218
Tax benefit from employee stock transactions and other	—		25		—			—			—			—			25
Issuance of common stock and assumption of stock options in connection with acquisitions	—		1		—			—			—			—			1
Amortization of unearned equity compensation	—		19		—			—			—			—			19
Balances as of June 30, 2005	3,602		6,490		(194	)		(1,411	)		1,387			208			6,674
Net loss	—		—		—			—			(864	)		—			(864	)
Change in unrealized gain on investments, net of taxes	—		—		—			—			—			(2	)		(2	)
Change in unrealized gain on derivative instruments and other, net of taxes	—		—		—			—			—			(22	)		(22	)
Translation adjustments	—		—		—			—			—			(4	)		(4	)
Total comprehensive loss	—		—		—			—			—			—			(892	)
Issuance of stock, net of repurchases	—		—		95			1,029			(780	)		—			249
Issuance of common stock and assumption of stock options in connection with acquisitions	—		88		—			—			—			—			88
Stock based compensation	—		225		—			—			—			—			225
Balances as of June 30, 2006	3,602	$	6,803		(99	)	$	(382	)	$	(257	)	$	180		$	6,344

See accompanying notes.

53

SUN MICROSYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Description of Business

Sun Microsystems Inc. (Sun) provides network computing infrastructure solutions that include Computer Systems (hardware and software), Data Management (hardware and software), Support Services and Client Solutions and Educational Services. Sun’s solutions are based on Sun technology innovations such as the Java technology platform, the Solaris Operating System, Sun Java products and the UltraSPARC microprocessor technology, as well as other widely deployed technologies such as the Linux operating system and AMD Opteron microprocessor-based systems. Our network computing infrastructure solutions are used in a wide range of technical/scientific, business and engineering applications in industries such as telecommunications, government, financial services, manufacturing, education, retail, life sciences, media and entertainment, transportation, energy/utilities and healthcare. We sell complete networking solutions, including products and services, in most major markets worldwide through a combination of direct and indirect channels. In the first quarter of fiscal 2006, we completed the acquisition of Storage Technology Corporation (StorageTek) which allowed us to broaden our offerings of storage products, services and solutions.

2.    Summary of Significant Accounting Policies

Basis of Presentation

Our consolidated financial statements include the accounts of Sun and its subsidiaries. Intercompany accounts and transactions have been eliminated. Our consolidated financial statements also include the results of companies acquired by Sun from the date of each acquisition. We completed two significant acquisitions, StorageTek and SeeBeyond Technology Corporation (SeeBeyond), on August 31, 2005 and August 25, 2005, respectively. See Note 4 for further details. Certain amounts from prior years, primarily relating to unearned equity compensation presented on the Consolidated Balance Sheets and Consolidated Statements of Stockholders’ Equity have been reclassified to conform to the current year presentation as a result of our fiscal 2006 adoption of Statement of Financial Accounting Standards (SFAS) 123 (revised 2004), “Share-Based Payment” (SFAS 123R).

Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts in the consolidated financial statements and accompanying notes. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. These estimates are based on management’s knowledge about current events and expectation about actions the company may undertake in the future. Actual results could differ materially from those estimates.

Cash Equivalents

Cash equivalents consist primarily of highly liquid investments with insignificant interest rate risk and original maturities of three months or less at the date of purchase. We classify cash with restrictions as other current or non-current assets, depending on the nature of the underlying restriction unless the restriction is short-term in nature and is for a period of less than three months. At June 30, 2006 and 2005, cash and cash equivalents included $21 million and nil, respectively, of restricted cash with restriction periods of three months or less.

Investments

We invest in marketable debt securities, marketable equity securities and other investments.

Marketable Debt Securities

Investments in marketable debt securities consist primarily of corporate notes and bonds, asset and mortgage backed securities and U.S. government notes and bonds with original maturities beyond three months. Short-term investments are marketable debt securities with maturities of less than one year from the balance sheet date (except cash equivalents), while long-term investments represent all other marketable debt securities. All marketable debt securities are held in Sun’s name and deposited primarily with one major financial institution. Sun’s policy is to protect the value of its investment portfolio and minimize principal risk by earning returns based on current interest rates. We only invest in marketable debt securities with a minimum rating of BBB- or above from a nationally recognized credit rating agency. At June 30, 2006 and 2005, all of Sun’s marketable debt securities were classified as available-for-sale and were carried at fair market value. The unrealized gains (losses) on available-for-sale securities, net of taxes, are recorded in “Accumulated other comprehensive loss” in the Consolidated Statements of Stockholders’ Equity. See Note 7 for further detail.

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We monitor our investment portfolio for impairment on a periodic basis. In the event that the carrying value of an investment exceeds its fair value and the decline in value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis for the investment is established. In order to determine whether a decline in value is other-than-temporary, we evaluate, among other factors: the duration and extent to which the fair value has been less than the carrying value; our financial condition and business outlook, including key operational and cash flow metrics, current market conditions and future trends in our industry; our relative competitive position within the industry; and our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value.

Marketable Equity Securities

Investments in marketable equity securities consist of equity holdings in public companies. Marketable equity securities are initially recorded at cost upon acquisition and are classified as available-for-sale when there are no restrictions on Sun’s ability to liquidate such securities within 12 months. Investments in marketable equity securities were $37 million and $34 million at June 30, 2006 and 2005, respectively. At June 30, 2006, all marketable equity investments were classified as available-for-sale and are included in “Other non-current assets, net” in the Consolidated Balance Sheets. Changes in the fair value of these securities are recognized in “Accumulated other comprehensive income,” in the Consolidated Statements of Stockholders’ Equity. Net unrealized gains on marketable equity investments were $20 million, $23 million and $7 million at June 30, 2006, 2005 and 2004, respectively. Marketable equity securities at June 30, 2006 and 2005 were (in millions):

	2006
	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Marketable equity securities with no unrealized losses	$	17	$	20	$	—	$	37
Total marketable equity securities	$	17	$	20	$	—	$	37
	2005
	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Marketable equity securities with no unrealized losses	$	11	$	23	$	—	$	34
Total marketable equity securities	$	11	$	23	$	—	$	34

Realized gains on sales of marketable equity securities totaled $11 million, $5 million and $2 million in fiscal 2006, 2005 and 2004, respectively, and are recognized in “Gain (loss) on equity investments, net” in the Consolidated Statements of Operations. In addition, we review all marketable equity securities for other than temporary declines in fair value. In doing so, we evaluate the length of the time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the portfolio company, and our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value. We consider circumstances where, as of the end of any quarter, the carrying value of a marketable equity security has been greater than its market value for the last six consecutive months, to be de-facto evidence of other than temporary impairment. We perform our evaluation of other than temporary impairment on a quarterly basis. Based on our evaluation, if a security is considered to be other than temporarily impaired, an impairment charge is recognized in “Gain (loss) on equity investments, net” in the Consolidated Statements of Operations. For fiscal 2005, $1 million was recorded as impairment charges related to marketable equity securities. There was no impairment charge recorded in fiscal 2006 and 2004.

Other Investments

Other investments include equity investments in privately-held companies that develop products, markets and services that are strategic to Sun, investments in venture capital funds and other joint ventures, securities lent under our securities lending program and the cash surrender value of life insurance policies.

Our equity investments are generally made in connection with a round of financing with other third-party investors. As our investments in privately-held companies do not permit us to exert significant influence or control over the entity in which we are investing, the recorded amounts generally represent our cost of the investment less any adjustments we make when we determine that an investment’s carrying value is other-than-temporarily impaired. At June 30, 2006 and 2005, we had 33 and 35 investments, respectively, in a number of technology companies. These investments totaled $21 million and $26 million at June 30, 2006 and 2005, respectively, and were included in “Other non-current assets, net” in the Consolidated Balance Sheets.

55

The process of assessing whether a particular equity investment’s fair value is less than its carrying cost requires a significant amount of judgment due to the lack of a mature and stable public market for these securities. In making this judgment, we carefully consider the investee’s most recent financial results, cash position, recent cash flow data, projected cash flows (both short and long-term), financing needs, recent financing rounds, most recent valuation data, the current investing environment, management or ownership changes, and competition. This process is based primarily on information that we request and receive from these privately-held companies, and is performed on a quarterly basis. Although we evaluate all of our privately-held equity investments for impairment based on the criteria established above, each investment’s fair value is only estimated when events or changes in circumstances have occurred that may have a significant effect on its fair value (because the fair value of each investment is not readily determinable). Where these factors indicate that the equity investment’s fair value is less than its carrying cost, and where we consider such diminution in value to be other than temporary, we record an impairment charge to reduce such equity investment to its estimated net realizable value. We recognized gains on sales, net of impairment charges, related to our investments in privately-held companies of $10 million for fiscal 2006. We recorded impairment charges, net of realized gains on sales, related to our investments in privately-held companies of nil and $67 million for fiscal 2005 and 2004, respectively.

Investments in venture capital funds and other joint ventures totaled $19 million and $16 million as of June 30, 2006 and 2005, respectively, and were accounted for using the equity method of accounting. We recorded income of $6 million, $2 million and $1 million for fiscal 2006, 2005 and 2004, respectively, related to these investments which was reflected in “Gain (loss) on equity investments, net.”

From time to time, we enter into securities lending agreements with financial institutions to enhance investment income. Selected securities are loaned and are secured by collateral equal to at least 102% of the fair market value of the securities. Collateral is in the form of cash or securities issued or guaranteed by the U.S. government, and our securities lending agent has provided us with counterparty indemnification in the event of borrower default. Loaned securities continue to be classified as Other non-current assets, net in the Consolidated Balance Sheets. Cash collateral is recorded as an asset with a corresponding liability. For lending agreements collateralized by securities, no accompanying asset or liability is recorded as we are not permitted to sell or repledge the associated collateral. The maximum amount loaned under Sun’s securities lending program in fiscal 2006 was $1,087 million. As of June 30, 2006, there were no outstanding securities lending transactions.

We maintain certain investments in life insurance contracts to generate returns that offset changes in certain liabilities related to deferred compensation arrangements. These assets consist of the cash surrender value of the life insurance policies and are stated at fair value. Both realized and unrealized gains and losses, which have not been material, are included in income and expense and generally offset the change in the deferred compensation liability.

Bad Debt Reserves

We evaluate the collectibility of our accounts receivable based on a combination of factors. In cases where we are aware of circumstances that may impair a specific customer’s ability to meet its financial obligations to us, we record a specific allowance against amounts due to us, and thereby reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize allowances for doubtful accounts based on the length of time the receivables are past due, the current business environment and our historical experience. At June 30, 2006, 2005 and 2004, our bad debt reserves were $81 million, $86 million and $91 million, respectively. We expensed amounts related to bad debt reserves of $3 million, $10 million and $4 million for fiscal 2006, 2005 and 2004, respectively. During fiscal years 2006, 2005 and 2004, we wrote-off bad debt reserves against gross accounts receivable of approximately $8 million, $15 million and $25 million, respectively.

Inventories

Inventories are stated at the lower of cost (first in, first out) or market (net realizable value). Inventory in-transit (included in finished goods) consists of products shipped but not recognized as revenue because they did not meet the revenue recognition criteria. We evaluate our ending inventories for estimated excess quantities and obsolescence. This evaluation includes analyses of sales levels by product and projections of future demand within specific time horizons (generally six months or less). Inventories in excess of future demand are reserved. In addition, we assess the impact of changing technology on our inventory-on-hand and we write-off inventories that are considered obsolete.

Long-lived Assets

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets. The estimated useful lives for machinery and equipment range

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from one to ten years, buildings and building improvements range from five to thirty-five years and furniture and fixtures range from five to ten years. Leasehold improvements are depreciated over the life of the lease or the assets, whichever is shorter. Land is not depreciated.

Intangible Assets Other than Goodwill

Long-lived assets, such as property, plant and equipment and purchased identifiable intangible assets with finite lives, are evaluated for impairment semi-annually in accordance with Sun’s policy, and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144). We assess the recoverability of long-lived assets (other than goodwill) by comparing the estimated undiscounted cash flows associated with the related asset or group of assets against their respective carrying amounts. The amount of an impairment, if any, is calculated based on the excess of the carrying amount over the fair value of those assets.

As a consequence of product-line rationalization decisions taken as part of our restructuring action in the fourth quarter of Fiscal 2006 and resulting reductions in estimates of forecasted undiscounted cashflows, we concluded that an impairment charge of $67 million was necessary to reduce certain StorageTek acquisition-related intangible asset balances to their estimated fair value. In addition, during the fourth quarter of fiscal 2006, as a result of operating shortfalls and budget cuts which impacted our ability to realize the expected future benefits of developed technology assets acquired as part of our January 2004 acquisition of Nauticus, we recorded non-cash impairment charges of $3 million in our Product group segment.

Goodwill

We test goodwill for impairment on an annual basis or whenever events occur which may indicate possible impairment in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). We perform the impairment analysis at one level below the operating segment level (see Note 15) as defined in SFAS 142. This analysis requires management to make a series of critical assumptions to: (1) evaluate whether any impairment exists, and (2) measure the amount of impairment.

In testing for a potential impairment of goodwill, SFAS 142 requires us to: (1) allocate goodwill to the various Sun businesses to which the acquired goodwill relates; (2) estimate the fair value of those Sun businesses to which goodwill relates; and (3) determine the carrying value (book value) of those businesses, as some of the assets and liabilities related to those businesses, such as accounts receivable and property, plant and equipment, are not held by those businesses but by functional departments (for example, our Global Sales Organization and Worldwide Operations organization). Prior to this allocation of the assets to the reporting units, we are required to assess long-lived assets for impairment in accordance with SFAS 144. Furthermore, if the estimated fair value is less than the carrying value for a particular business, then we are required to estimate the fair value of all identifiable assets and liabilities of the business in a manner similar to a purchase price allocation for an acquired business. This can require independent valuations of certain internally generated and unrecognized intangible assets such as in-process research and development and developed technology. Only after this process is completed is the amount of goodwill impairment determined.

In estimating the fair value of the businesses with recognized goodwill for the purposes of our annual or periodic analyses, we make estimates and judgments about the future cash flows of these businesses. Our cash flow forecasts are based on assumptions that are consistent with the plans and estimates we are using to manage the underlying businesses. In addition, we make certain judgments about allocating shared assets such as accounts receivable and property, plant and equipment to the estimated balance sheet for those businesses. We also consider our market capitalization (adjusted for unallocated monetary assets such as cash, marketable debt securities and debt) on the date we perform the analysis.

Capitalized Software

Costs related to internally-developed software and software purchased for internal use, which are required to be capitalized pursuant to Statement of Position (SOP) No. 98-1, “Accounting for Costs of Computer Software Developed or Obtained for Internal Use,” are included in property, plant and equipment under machinery and equipment. Capitalized software costs were $173 million and $108 million at June 30, 2006 and 2005, respectively.

Concentration of Credit Risk

Cash deposits in foreign countries of approximately $514 million are subject to local banking laws and may bear higher or lower risk than cash deposited in the United States. As part of our cash and investment management processes, we perform periodic evaluations of the credit standing of the financial institutions and we have not sustained any credit losses from instruments held at these financial institutions.

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Financial instruments that potentially subject Sun to concentrations of credit risk consist principally of trade receivables, marketable securities, foreign exchange contracts and interest rate instruments. The counterparties to the agreements relating to Sun’s investments, foreign exchange contracts and interest rate instruments consist of various major corporations and financial institutions of high credit standing. We do not believe there is significant risk related to non-performance by these counterparties because the amount of credit exposure is limited. The credit risk on receivables due from counterparties related to foreign exchange and currency options contracts was insignificant at June 30, 2006 and 2005. With regard to our investment portfolio, we generally limit our exposure to any investment to no more 5% of our total portfolio excluding U.S. government and agency securities. Our trade receivables are derived primarily from sales of Computer Systems and Data Management products and services to end-user customers in diversified industries, as well as various resellers. We perform ongoing credit evaluations of our customers’ financial condition and limit the amount of credit extended when deemed necessary, but generally require no collateral.

Revenue Recognition

Sun enters into revenue arrangements to sell products (hardware and software) and services in which we are obligated to deliver to our customers multiple products and/or services (multiple deliverables). Revenue arrangements with multiple deliverables are evaluated to determine if the deliverables (items) can be divided into more than one unit of accounting. An item can generally be considered a separate unit of accounting if all of the following criteria are met:

• The delivered item(s) has value to the customer on a standalone basis;

• There is objective and reliable evidence of the fair value of the undelivered item(s); and

• If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of Sun.

Items which do not meet these criteria are combined into a single unit of accounting. If there is objective and reliable evidence of fair value for all units of accounting, the arrangement consideration is allocated to the separate units of accounting based on their relative fair values. In cases where there is objective and reliable evidence of the fair value of the undelivered item(s) in an arrangement but no such evidence for the delivered item(s), the residual method is used to allocate the arrangement consideration. For units of accounting which include more than one deliverable, we generally defer all revenue for the unit of accounting until the period over which the last undelivered item is delivered. The revenue policies described below are then applied to each unit of accounting.

We recognize revenue when the following criteria are met: 1) persuasive evidence of an arrangement exists; 2) delivery has occurred or services have been rendered; 3) the sales price is fixed or determinable; and 4) collectibility is reasonably assured. Our standard agreements generally do not include customer acceptance provisions. However, if there is a customer acceptance provision or there is uncertainty about customer acceptance, the associated revenue is deferred until we have evidence of customer acceptance.

Products Revenue

Products revenue for sales to both end-user customers and resellers is generally recognized upon the passage of title if all other revenue recognition criteria have been met. End-user customers generally do not have return rights. Our program offerings to certain of our resellers and distributors (Channel Partners) provide for the limited right to return our product for stock rotation. We reduce revenue for rights to return our product based upon our historical experience with the Channel Partners. In accordance with contractual provisions, we offer price protection to certain of our Channel Partners. We also offer margin protection to our Channel Partners on certain transactions. For our price protection and margin protection programs, we reduce revenue based upon our historical experience or specific announced price adjustments. In accordance with contractual provisions, to certain of our Channel Partners we also offer co-operative marketing funds based on a fixed dollar percentage of product sales. We record the amount as a reduction to revenue or, if we have evidence of fair value of the advertising benefit received, as marketing expense.

In addition, we sell products to leasing companies that, in turn, lease these products to end-users. In transactions where the leasing companies have no recourse to Sun in the event of default by the end-user, we recognize revenue at point of shipment or point of delivery, depending on the shipping terms and if all the other revenue recognition criteria have been met. In arrangements where the leasing companies have full recourse to Sun in the event of default by the end-user (defined as recourse leasing), we recognize both the product revenue and the related cost of the product as the payments are made to the leasing company by the end-user, generally ratably over the lease term. We had deferred revenue and related deferred costs of $22 million and $12 million, respectively, at June 30, 2006 and $37 million and $16 million, respectively, at June 30, 2005, related to recourse leases which will be recognized in future periods.

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For revenue arrangements with multiple deliverables that include or represent software products and services as well as any non-software deliverables for which a software deliverable is essential to its functionality, we apply the accounting guidance in SOP 97-2, “Software Revenue Recognition” in determining the timing of revenue recognition. The criteria assessed include the following: 1) the functionality of the delivered element(s) is not dependent on the undelivered element; 2) there is Sun-specific objective evidence of fair value of the undelivered element(s), and 3) delivery of the delivered element(s) represents the culmination of the earnings process for those element(s). If these criteria are not met, revenue is deferred until such criteria are met or until the last element is delivered. For arrangements within the scope of SOP 97-2, revenue is recognized ratably only in situations where one of the limited exceptions described in paragraph 12 of SOP 97-2 is met, such as where we agree to deliver unspecified additional software products in the future.

Services Revenue

Maintenance contract revenue is generally recognized ratably over the contractual period. Educational services revenue is recognized as the services are rendered. Time and material, and fixed price Client solutions contract revenue is recognized as the professional services are rendered, or upon completion of the services contract. If we can reliably evaluate progress to completion (based on total projected hours to be incurred as compared with hours already incurred), we recognize the revenue as the services are rendered and recognize the related costs as they are incurred. In instances where we cannot reliably estimate the total projected hours, we recognize revenue and the associated costs upon completion of the services contract. For fixed price Client solutions contracts when the current estimates of total contract revenue and contract cost indicate a loss, the estimated loss is recognized in the period the loss becomes evident.

Research and Development Expenditures

Costs related to the research, design, and development of products are charged to research and development expenses as incurred. Software development costs are capitalized beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. Generally, Sun’s products are released soon after technological feasibility has been established. As a result, costs subsequent to achieving technological feasibility have not been significant and all software development costs have been expensed as incurred.

Shipping Costs

Sun’s shipping and handling costs for product sales are included in cost of sales for all periods presented.

Advertising Costs

Advertising costs consist of development and placement costs of our advertising campaigns and are charged to expense when incurred. Advertising expense was $47 million, $48 million and $53 million for fiscal 2006, 2005 and 2004, respectively.

Self-Insurance

Sun is insured by third-party insurers for certain potential liabilities, including worker’s compensation, general liability, automobile liability, employer’s liability, errors and omissions liability, employment practices liability, property, cargo and crime and directors and officers liability. We have self insured with regard to certain risks such as California earthquakes and as supplemental coverage for certain potential liabilities including, but not limited to general liability, automobile liability, employer’s liability, employment practices liability, directors and officers liability, workers compensation, errors and omissions liability, property, cargo, crime and employee life insurance. Effective July 1, 2006, we self-insure for all indemnification or defense payments we, as a company, may make to or on behalf of our directors and officers as a result of obligations under applicable agreements, Sun’s by-laws and applicable law. We have self-insured between $2 million and $25 million per occurrence on these lines of coverage. Sun performs an annual actuarial analysis to develop an estimate of amounts to be paid for both claims reported and potential losses on activities that have occurred but have not yet been reported. Loss accruals were $35 million and $33 million at June 30, 2006 and 2005, 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 and nonvested stock awards.

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The following table sets forth the computation of basic and diluted loss per share for each of the past three fiscal years (in millions, except per share amounts):

	Fiscal Years Ended June 30,
	2006			2005			2004
Net loss	$	(864	)	$	(107	)	$	(388	)
Weighted average shares outstanding:
Basic and diluted		3,437			3,368			3,277
Net loss per common share-basic and diluted	$	(0.25	)	$	(0.03	)	$	(0.12	)

Due to our net loss for all periods presented, all of our outstanding options and nonvested stock awards were excluded from the diluted loss per share calculation because their inclusion would have been anti-dilutive. If we had earned a profit during fiscal 2006, 2005 and 2004, we would have added 25 million, 23 million and 30 million equivalent shares to our basic weighted average shares outstanding to compute the diluted weighted average shares outstanding.

Foreign Currency Translation

Sun translates its assets and liabilities of international non-U.S. functional currency subsidiaries into dollars at the rates of exchange in effect at the balance sheet date. Revenue and expenses are translated using rates that approximate those in effect during the period. Translation adjustments are included in stockholders’ equity in the consolidated balance sheet caption “Accumulated other comprehensive income (loss).” Currency transaction gains (losses), net of our hedging activities (see Note 8), derived from monetary assets and liabilities stated in a currency other than the functional currency, are recognized in current operations and were $(13) million, $20 million and $(5) million in fiscal 2006, 2005 and 2004, respectively. The effect of foreign currency rate changes on cash and cash equivalents is not material.

Recent Pronouncements

In October 2004, The American Jobs Creation Act of 2004 (the Jobs Act) was signed into law. The Jobs Act creates a temporary incentive for U.S. multinationals to repatriate accumulated income earned outside the U.S. at a favorable effective tax rate of 5.25%. On April 27, 2006, our Chief Executive Officer and Board of Directors approved our domestic reinvestment plan. As a result, we repatriated $2 billion in unremitted foreign earnings during the fourth quarter of fiscal 2006, the majority of which was eligible to be taxed at a reduced effective tax rate under the Foreign Earnings Repatriation Provision of the American Jobs Creation Act.

In December 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) 123 (revised 2004), “Share-Based Payment” (SFAS 123R). SFAS 123R requires measurement of all employee stock-based compensation awards using a fair-value method and the recording of such expense in the consolidated financial statements. In addition, the adoption of SFAS 123R requires additional accounting related to the income tax effects and disclosure regarding the cash flow effects resulting from share-based payment arrangements. In January 2005, the SEC issued Staff Accounting Bulletin No. 107, which provides supplemental implementation guidance for SFAS 123R. We selected the Black-Scholes option-pricing model as the most appropriate fair-value method for our awards and will recognize compensation cost on a straight-line basis over our awards’ vesting periods. We adopted SFAS 123R in the first quarter of fiscal 2006 and recognized $225 million of expense related to stock based compensation for fiscal year 2006.

On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3 “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards” (FSP 123(R)-3). We adopted the alternative transition method provided in the FASB Staff Position for calculating the tax effects of stock-based compensation pursuant to SFAS 123(R) in the fourth quarter of fiscal 2006. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123(R). The adoption did not have a material impact on our results of operations and financial condition.

In November 2005, the FASB issued FASB Staff Position (FSP) FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (FSP 115-1), which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP 115-1 is required to be applied to reporting periods beginning after December 15, 2005. FSP 115-1 was adopted by Sun in the third quarter of fiscal 2006 and did not have a material impact on our results of operations and financial condition.

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The adoption of the following accounting pronouncements in fiscal 2006 did not have a material impact on our results of operations and financial condition:

• SFAS 151, “Inventory Costs — An Amendment of ARB No. 43, Chapter 4”;

• SFAS 153, “Exchanges of Nonmonetary Assets — An Amendment of APB Opinion No. 29”;

• FASB Statement 143, “Accounting for Asset Retirement Obligations,” specifically FSP 143-1, “Accounting for Electronic Equipment Waste Obligations”; and

• Emerging Issues Task Force (EITF) Issue 05-06, “Determining the Amortization Period for Leasehold Improvements.”

In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections” (SFAS 154), which replaces Accounting Principles Board Opinions (APB) 20 “Accounting Changes” and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements — An Amendment of APB Opinion No. 28.” SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the earliest practicable date, as the required method for reporting a change in accounting principle and restatement with respect to the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 and is required to be adopted by Sun in the first quarter of fiscal 2007.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective in the first quarter of fiscal 2008, with the cumulative effect, if any, of the change in accounting principle recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of adopting FIN 48 on our consolidated financial statements.

3.    Balance Sheet Details

Inventories

At June 30, Inventories consisted of the following (in millions):

	2006		2005
Raw materials	$	68	$	48
Work in process		97		121
Finished goods		375		262
	$	540	$	431

As of June 30, 2006 and 2005, our inventory balances were net of write-downs of approximately $70 million and $38 million, respectively.

Prepaid Expenses and Other Current Assets

At June 30, Prepaid expenses and other current assets consisted of the following (in millions):

	2006		2005
Accounts receivables — other	$	241	$	233
Deferred tax assets		209		255
Refundable income taxes		98		184
Other prepaid expenses and other current assets		209		206
	$	757	$	878

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Property, Plant and Equipment, Net

At June 30, Property, plant, and equipment, net consisted of the following (in millions):

	2006			2005
Machinery and equipment	$	3,075		$	2,574
Land, buildings, and building improvements		1,162			1,492
Leasehold improvements		572			486
Furniture and fixtures		230			256
		5,039			4,808
Less accumulated depreciation and amortization		(3,469	)		(3,039	)
	$	1,570		$	1,769

Depreciation expense was $441 million, $495 million and $589 million for fiscal 2006, 2005 and 2004, respectively.

Assets Held For Sale

We have $242 million of assets held for sale as of June 30, 2006. We committed to the closure of our Newark, California facility as a result of the restructuring plan described in Note 6. We also committed to the closure of our Louisville, Colorado facility as part of our StorageTek integration plan described in Note 4. In the fourth quarter of fiscal 2006 we classified these assets, principally land and buildings, as held for sale and ceased their depreciation in accordance with SFAS 144. Management estimated the fair value of these assets using either available market prices or third-party appraisals and adjusted the carrying value of each facility to its fair value less costs to sell. These adjustments resulted in a $80 million impairment loss for Newark and a $4 million decrease in value for Louisville accounted for as an adjustment to the allocation of the purchase price paid for our acquisition of StorageTek. In July 2006 we sold our Newark facility as described in Note 17.

Other Non-Current Assets, Net

At June 30, Other non-current assets, net consisted of the following (in millions):

	2006		2005
Spare parts, net	$	187	$	162
Long-term deposits and restricted cash		125		30
Marketable equity securities and other equity securities		77		76
Other		286		280
	$	675	$	548

Spare parts are amortized using the straight-line method over their useful lives of between three and ten years. Amortization expense was $93 million, $144 million and $108 million for fiscal 2006, 2005 and 2004, respectively.

For further discussion on interest-rate swap agreements, see Notes 8 and 9.

Accrued Liabilities and Other

At June 30, Accrued liabilities and other consisted of the following (in millions):

	2006		2005
Income taxes payable	$	52	$	120
Restructuring liabilities		219		178
Acquisition-related restructuring liabilities		134		—
Other accrued liabilities		785		716
	$	1,190	$	1,014

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Warranty Reserve

We accrue for our product warranty costs at the time of shipment. Product warranty costs are estimated based upon our historical experience and specific identification of the product’s requirements, and accordingly may fluctuate based on product mix.

The following table sets forth an analysis of our warranty reserve activity (in millions):

	Total
Balance at June 30, 2004	$	252
Charged to costs and expenses		304
Utilized		(332	)
Balance at June 30, 2005		224
Warranty reserve acquired through acquisitions		35
Charged to costs and expenses		355
Utilized		(353	)
Balance at June 30, 2006	$	261

Other Non-Current Obligations

At June 30, Other non-current obligations, consisted of the following (in millions):

	2006		2005
Income tax liabilities, net	$	553	$	341
Restructuring liabilities		241		292
Deferred settlement income from Microsoft		352		353
Other non-current obligations		346		97
	$	1,492	$	1,083

Accumulated Other Comprehensive Income

At June 30, the components of Accumulated other comprehensive income, reflected in the Consolidated Statements of Stockholders’ Equity, net of related taxes, consisted of the following (in millions):

	2006			2005		2004
Unrealized gains (losses) on investments, net	$	9		$	11	$	(17	)
Unrealized gains (losses) on derivative instruments and other, net		(20	)		2		(6	)
Cumulative translation adjustments		191			195		196
	$	180		$	208	$	173

At June 30, the net change in unrealized gains (losses) on investments, net of related taxes, consisted of the following (in millions):

	2006			2005		2004
Net unrealized gains (losses) arising during the period, net of tax (benefit) expense of none, none and $(8) in 2006, 2005 and 2004, respectively	$	(9	)	$	7	$	(52	)
Add (gains) losses:
Included in net loss for the period, net of tax expense of none, none and none in 2006, 2005 and 2004, respectively		7			5		4
Written off due to impairment, net of tax benefit of none, none and none in 2006, 2005 and 2004, respectively		—			16		—
Net change in unrealized gains (losses) on investments	$	(2	)	$	28	$	(48	)

4.    Business Combinations

During the three fiscal years ended June 30, 2006, we completed 11 acquisitions. Pro forma results of operations have not been presented for any of the acquisitions other than StorageTek because the effects of these acquisitions were not material to Sun on

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either an individual or an aggregate annual basis. The results of operations of each purchase acquisition are included in Sun’s consolidated statements of operations from the date of each acquisition.

The amounts allocated to purchased in-process research and development (IPRD) were determined through established valuation techniques in the high-technology industry and were expensed upon acquisition because technological feasibility had not been established and no future alternative uses existed. Research and development costs to bring the products from the acquired companies to technological feasibility are not expected to have a material impact on Sun’s future results of operations or cash flows. Intangible assets subject to amortization are being amortized on a straight-line basis over periods generally not exceeding five years.

The amounts allocated to unearned equity compensation were determined in accordance with the method prescribed in SFAS 123R. Under this method, unearned equity compensation related to equity instruments assumed in acquisitions (generally restricted stock and stock options) is calculated as the pro-rata unearned portion of the fair value of the equity instrument as of the date of acquisition. Subsequent to the acquisition, this amount is recognized as compensation expense as earned, generally classified under either research and development expense or selling, general and administrative expense.

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A summary of Sun’s acquisitions for the fiscal years ended June 30, 2006, 2005 and 2004 is included in the following table (in millions, except share amounts):

Entity Name and Description of Acquisition	Date	Form of Consideration			Goodwill		Developed Technology		Other Intangible Assets		Net Tangible Assets (Liabilities) and Unearned Compensation			IPRD
Fiscal 2006 Acquisitions
Aduva, Inc. Patch management application	03/06	$	12 — 1	Cash paid Fair value of options assumed Cash paid for acquisition costs	$	12	$	3	$	2	$	(4	)		—
		$	13
Storage Technology Corporation Data storage hardware & software	08/05	$	3,987 80 15	Cash paid Fair value of options assumed Cash paid for acquisition costs	$	1,886	$	507	$	606	$	1,034		$	49
		$	4,082
SeeBeyond Technology Corporation Business integration software	08/05	$	362 8 5	Cash paid Fair value of options assumed Cash paid for acquisition costs	$	252	$	34	$	53	$	25		$	11
		$	375
Tarantella, Inc. Software to access and manage information, data and applications	07/05	$	25 — 1	Cash paid Fair value of options assumed Cash paid for acquisition costs	$	19	$	8	$	3	$	(4	)		—
		$	26
Fiscal 2005 Acquisitions
Procom Technology, Inc.(2) Network attached storage intellectual property	06/05	$	50 1 1	Cash paid Fair value of options assumed Cash paid for acquisition costs		—	$	50	$	2		—			—
		$	52
SevenSpace, Inc. Remote system monitoring and management	01/05	$	46 1 1	Cash paid Fair value of options assumed Cash paid for acquisition costs	$	37	$	4	$	5	$	2			—
		$	48
Fiscal 2004 Acquisitions
Kealia, Inc.(1) Next generation server technology	4/04	$	65 27 1	Common stock issued(1) Fair value of options assumed Cash paid for acquisition costs		—	$	16	$	12	$	(4	)	$	69
		$	93
Nauticus Networks, Inc. Technology for a high-performance content-switch, including SSL, security, load-balancing and virtualization	1/04	$	11 — 1	Cash paid Fair value of options assumed Cash paid for acquisition costs	$	4	$	16		—	$	(8	)		—
		$	12
Waveset Technologies, Inc. Identity Management	12/03	$	121 14 1	Cash paid Fair value of options assumed Cash paid for acquisition costs	$	77	$	39	$	3	$	17			—
		$	136
CenterRun, Inc. Provisioning technology for data centers	8/03	$	63 1 1	Cash paid Fair value of options assumed Cash paid for acquisition costs	$	46	$	9	$	4	$	6			—
		$	65
Pixo, Inc. Technology-based server software	7/03	$	21 — 2	Cash paid Fair value of options assumed Cash paid for acquisition costs	$	17	$	4	$	1		—		$	1
		$	23

(1) In addition to the issuance of 11,513,000 shares of common stock, 3,519,000 shares of Sun’s common stock were issued subject to a reacquisition right pending the completion of future employment requirements. Reacquisition rights with respect to 1,173,000 of these shares lapsed during the fourth quarter of fiscal 2006 upon completion of the first employment milestone.

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(2) In accordance with SFAS 141 “Business Combinations,” this transaction was accounted for as a purchase of assets as defined by EITF Issue No. 98-3 “Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business” rather than as a business combination. Accordingly, no goodwill was recorded from this acquisition, as consideration in excess of the fair value of identified assets was allocated pro-rata to the identified intangible assets.

Our fiscal 2006 acquisitions of SeeBeyond and StorageTek are described below.

SeeBeyond

On August 25, 2005, we acquired all of the outstanding shares of SeeBeyond, a publicly held company based in Monrovia, California (NASDAQ: SBYN). Under the terms of the agreement, SeeBeyond stockholders received $4.25 per share in cash for each SeeBeyond share and certain SeeBeyond stock option holders received cash equal to the difference between $4.25 per share and the exercise price of such stock options. In addition, certain other outstanding options to purchase SeeBeyond common stock were converted into options to purchase shares of our stock. SeeBeyond provides business integration software via its Integrated Composite Application Network (ICAN) suite, which enables the real-time flow of information within the enterprise and among customers, suppliers, and partners. This acquisition strengthened our software portfolio and created a complete offering for the development, deployment and management of enterprise applications and Service Oriented Architectures.

We purchased SeeBeyond for approximately $362 million in cash, $8 million in assumed options and approximately $5 million in transaction costs. As of June 30, 2006, the total purchase price of $375 million was allocated as follows (in millions):

Goodwill	$	252
Other intangible assets:
Customer base and other		53
Developed technology		34
Tangible assets acquired and net liabilities assumed		25
In-process research and development		11
Total	$	375

The net liabilities assumed included approximately $11 million of acquisition-related restructuring costs associated with the integration of facilities and activities of SeeBeyond.

StorageTek

On August 31, 2005, we acquired all of the outstanding shares of StorageTek, a publicly held company based in Louisville, Colorado (NYSE: STK). Under the terms of the agreement, StorageTek stockholders received $37 per share in cash for each StorageTek share and certain holders of StorageTek stock options received cash equal to the difference between $37 per share and the exercise price of such options. In addition, certain other outstanding options to purchase StorageTek common stock were converted into options to purchase shares of our stock. StorageTek engages in the design, manufacture, sale and maintenance of data storage hardware and software, as well as the provisioning of support services worldwide. StorageTek helps customers gain control of their storage environments by reducing the time, cost and complexity of their storage infrastructures. We acquired StorageTek in order to offer customers a complete range of products, services and solutions for securely managing mission-critical data assets. The total purchase price of $4,082 million was comprised of (in millions):

Cash paid to acquire the outstanding common stock of StorageTek	$	3,987
Fair value of StorageTek options assumed		80
Acquisition-related transaction costs		15
Total purchase price	$	4,082

The fair value of options assumed was determined using a price of $3.76, which represented the average closing price of our common stock from two trading days before to two trading days after the June 2, 2005 announcement date and was calculated using a Black-Scholes valuation model with the following assumptions: weighted average remaining expected life of 2.7 years, average risk-free interest rate of 3.8%, average expected volatility of 44.8% and no dividend yield.

Acquisition-related transaction costs include investment banking, legal and accounting fees and other third-party costs directly related to the acquisition.

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Purchase Price Allocation

The preliminary allocation of the total purchase price of StorageTek’s net tangible and identifiable intangible assets was based on their estimated fair values as of August 31, 2005. Adjustments to these estimates have been included in the allocation of the purchase price as described below. The excess of the purchase price over the identifiable intangible and net tangible assets was allocated to goodwill. As of June 30, 2006, the total purchase price of $4,082 million has been allocated as follows (in millions):

	August 31, 2005			Allocation adjustments			June 30, 2006
Goodwill	$	1,754		$	132		$	1,886
Other intangible assets		1,122			(9	)		1,113
Tangible assets acquired and liabilities assumed:
Cash and marketable debt securities		1,204			—			1,204
Other current assets		505			18			523
Non-current assets		334			—			334
Accounts payable and accrued liabilities		(487	)		(44	)		(531	)
Acquisition-related restructuring liabilities		(52	)		(120	)		(172	)
Other liabilities		(347	)		23			(324	)
In-process research and development		49			—			49
Total purchase price	$	4,082		$	—		$	4,082

Adjustments made to our preliminary purchase price allocation as of August 31, 2005 primarily consist of additional acquisition-related restructuring liabilities and corresponding fair value impacts as workforce and facilities integration plans were finalized during the allocation period, adjustments to acquired income tax assets and liabilities, and pre-acquisition contingencies for which the fair value was unknown at the date of acquisition.

Other intangible assets

We have estimated the fair value of other intangible assets through the use of an independent third-party valuation firm that used the income approach to value these identifiable intangible assets which are subject to amortization. The following table sets forth the components of these other intangible assets at June 30, 2006 (in millions):

	Fair Value		Accumulated Amortization			Impairment			Net Book Value as of June 30, 2006		Weighted Average Useful Life (in years)
Customer base	$	540	$	(136	)	$	—		$	404	4
Developed technology		507		(107	)		(67	)		333	4
Trademarks		55		(3	)		—			52	16
Other		11		(4	)		—			7	2
Total intangible assets	$	1,113	$	(250	)	$	(67	)	$	796

Customer base represents the expected future benefit to be derived from StorageTek’s existing customer contracts, backlog and underlying customer relationships. Developed technology, which is comprised of products that have reached technological feasibility, includes products in all of StorageTek’s product lines, principally their tape and network products. Trademarks represented trade names and trademarks developed through years of design and development.

As a consequence of product-line rationalization decisions taken as part of our restructuring action in the fourth quarter of Fiscal 2006 and resulting reductions in estimates of forecasted undiscounted cashflows, we concluded that an impairment charge of $67 million was necessary to reduce certain StorageTek acquisition-related intangible asset balances to their estimated fair value.

In-process research and development

Of the total purchase price, approximately $49 million has been allocated to in-process research and development (IPRD) and was expensed in the first quarter of fiscal 2006. Projects that qualify as IPRD represent those that have not yet reached technological feasibility and have no alternative use. Technological feasibility is defined as being equivalent to a beta-phase working prototype in which there is no remaining risk relating to the development.

The value assigned to IPRD was determined by considering the importance of each project to the overall development plan, estimating costs to develop the purchased IPRD into commercially viable products, estimating the resulting net cash flows from

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the projects when completed and discounting the net cash flows to their present value. The revenue estimates used to value the purchased IPRD were based on estimates of the relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by StorageTek and its competitors.

The rates utilized to discount the net cash flows to their present values are based on StorageTek’s weighted-average cost of capital. The weighted-average cost of capital was adjusted to reflect the difficulties and uncertainties in completing each project and thereby achieving technological feasibility, the percentage of completion of each project, anticipated market acceptance and penetration, market growth rates and risks related to the impact of potential changes in future target markets. Based on these factors, discount rates that range from 13% – 15% were deemed appropriate for valuing the IPRD.

The estimates used in valuing IPRD were based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. Accordingly, actual results may differ from the projected results.

Pro forma results

The unaudited financial information in the table below summarizes the combined results of operations of Sun and StorageTek, on a pro forma basis, as though the companies had been combined as of the beginning of each of the periods presented. Sun’s results of operations for the year ended June 30, 2006 included the results of StorageTek since August 31, 2005, the date of acquisition. The unaudited pro forma financial information for the year ended June 30, 2006 combines Sun’s results for this period with the results for StorageTek for the period from July 2, 2005 to August 30, 2005. The unaudited pro forma financial information for the year ended June 30, 2005 combines Sun’s results for this period with StorageTek’s results for the twelve months ended July 1, 2005. The pro forma financial information presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of each of the periods presented (in millions, except for per share amounts):

	Year Ended
	June 30, 2006			June 30, 2005
Revenues	$	13,265		$	13,189
Net loss	$	(915	)	$	(352	)
Net loss per share — basic and diluted	$	(0.27	)	$	(0.10	)

Acquisition-related Restructuring Costs

As a result of our acquisition of StorageTek, we have recorded acquisition-related restructuring costs associated with the costs of integrating operating locations and activities of StorageTek with those of Sun and eliminating duplicative activities. U.S. GAAP (EITF 95-3, “Recognition of Liabilities in Connection with Purchase Business Combinations”) requires that these acquisition-related restructuring costs, which are not associated with the generation of future revenues and have no future economic benefit, be recorded as assumed liabilities in the allocation of the purchase price. As a result, during the year ended June 30, 2006, we recorded approximately $172 million of restructuring costs in connection with the StorageTek acquisition, which are based upon plans committed to by management. To estimate restructuring liabilities, management utilized assumptions of the number of employees that would be involuntarily terminated and of costs associated with the disposition of duplicate or excess acquired facilities. Decreases to the estimates of executing the currently approved acquisition related restructuring plans are recorded as an adjustment to goodwill indefinitely, whereas increases to the estimates are recorded as an adjustment to goodwill during the purchase price allocation period and as operating expenses thereafter. The following table sets forth an analysis of the components of the acquisition-related restructuring liabilities included in the purchase price allocation for StorageTek for the year ended June 30, 2006 (in millions):

	Severance and Benefits			Facilities Related			Termination of Contract		Total
Balance as of June 30, 2005	$	—		$	—		$	—	$	—
Acquisition-related restructuring liabilities		97			48			27		172
Cash paid		(24	)		(3	)		—		(27	)
Balance as of June 30, 2006	$	73		$	45		$	27	$	145

As of June 30, 2006, our estimated sublease income to be generated from sublease contracts not yet negotiated approximated $12 million. The balance of the StorageTek severance accrual at June 30, 2006 is expected to be utilized during the remainder of fiscal 2007 and 2008 due to legal restrictions imposed in certain European countries and is expected to be funded through cash flows from the combined operations.

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5.    Goodwill and Other Intangible Assets

Goodwill

Changes in the carrying amount of goodwill for the years ended June 30, 2006 and 2005, by reportable segment, are as follows (in millions):

	Product Group			Sun Services		Total
Balance as of June 30, 2004	$	326		$	80	$	406
Goodwill acquired during the period		—			37		37
Utilization of acquired deferred tax assets		(2	)		—		(2	)
Balance as of June 30, 2005		324			117		441
Goodwill acquired during the period		997			1,172		2,169
Balance as of June 30, 2006	$	1,321		$	1,289	$	2,610

We performed our annual goodwill impairment analysis in the fourth quarter of each of our past three fiscal years. Based on our estimates of forecasted discounted cash flows as well as our market capitalization, at each of these dates, we concluded that a goodwill impairment charge of $49 million was necessary during fiscal 2004. The fiscal 2004 impairment charge related to the goodwill in our Educational services reporting unit. The lower discounted cash flows attributable to our Educational services reporting unit in fiscal 2004 were primarily due to a decrease in revenue and gross margin, mostly resulting from the end-of-life of new enterprise learning platform licensing and hosting agreements, as well as reduced expectations for other products. Educational services revenues declined in fiscal 2004 by approximately 16% as compared to fiscal 2003. In measuring the amount of goodwill impairment, we estimated fair value of the reporting unit based on our estimates of forecasted discounted cash flows as well as our market capitalization and concluded it was negative. Any allocation of such negative fair value would have resulted in no implied value of the existing goodwill. As a result, we concluded that all of the recorded goodwill in the Educational services reporting unit was impaired and needed to be expensed as a non-cash charge to continuing operations during the fourth quarter of 2004. The resulting impairment charge of $49 million primarily related to goodwill acquired through our acquisitions of ISOPIA, Inc. of $39 million and Ed Learning Systems, Inc. of $7 million.

Reporting units in our Product Group segment accounted for approximately 51% of the carrying value of our goodwill at June 30, 2006.

Other Acquisition-Related Intangible Assets

As a result of identified impairment indicators in the fourth quarter of fiscal 2006, we recorded an impairment charge of $70 million to adjust the intangible cost basis to fair value. No impairment charges were recorded in fiscal 2005 and 2004.

Information regarding our other acquisition-related intangible assets is as follows (in millions):

	Gross Carrying Amount									Accumulated Amortization											Net
	June 30, 2005		Additions		Impairment			June 30, 2006		June 30, 2005			Additions			Impairment		June 30, 2006			June 30, 2006
Developed technology	$	437	$	552	$	(100	)	$	889	$	(339	)	$	(162	)	$	30	$	(471	)	$	418
Customer base		55		595		—			650		(48	)		(156	)		—		(204	)		446
Trademark		6		57		—			63		(6	)		(4	)		—		(10	)		53
Acquired workforce and other		82		12		—			94		(74	)		(8	)		—		(82	)		12
	$	580	$	1,216	$	(100	)	$	1,696	$	(467	)	$	(330	)	$	30	$	(767	)	$	929

	Gross Carrying Amount						Accumulated Amortization									Net
	June 30, 2004		Additions		June 30, 2005		June 30, 2004			Additions			June 30, 2005			June 30, 2005
Developed technology	$	383	$	54	$	437	$	(295	)	$	(44	)	$	(339	)	$	98
Customer base		50		5		55		(45	)		(3	)		(48	)		7
Acquired workforce and other		86		2		88		(52	)		(28	)		(80	)		8
	$	519	$	61	$	580	$	(392	)	$	(75	)	$	(467	)	$	113

Amortization expense of other acquisition-related intangible assets was $330 million, $75 million and $66 million for the fiscal years ended June 30, 2006, 2005 and 2004, respectively. Our acquisition-related intangible assets are primarily amortized over periods ranging from one to five years on a straight-line basis.

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Estimated amortization expense for other acquisition-related intangible assets on our June 30, 2006 balance sheet for the fiscal years ending June 30, is as follows (in millions):

2007	$	311
2008		289
2009		240
2010		50
2011 and thereafter		39
	$	929

As a result of our Phase VI restructuring activities, we exited certain acquired StorageTek product lines and recorded impairment charges of $67 million during the fourth quarter of fiscal 2006. These product line exits were not part of our acquisition integration plan and were conducted to meet our fiscal 2007 operating goals. The impairment charge related to acquired StorageTek developed technology and was recorded in our Product group segment. As a result of the product line exit plans, future cash flows from these acquired technologies were expected to be nil. The full amount of the remaining intangible asset balances for these product lines as of June 30, 2006, was therefore written off as an impairment charge.

During the fourth quarter of fiscal 2006, as a result of operating shortfalls and budget cuts which impacted our ability to realize the expected future benefits of developed technology assets acquired as part of our January 2004 acquisition of Nauticus, we recorded non-cash impairment charges of $3 million in our Product group segment.

Other Non-Acquisition Related Intangible Assets

In October 2004, we reached an agreement with Eastman Kodak Company (Kodak), who filed a patent infringement lawsuit against us in February 2002. We paid Kodak $92 million to settle all claims in the lawsuit, which included a release and a perpetual, non-exclusive, worldwide irrevocable license to certain Kodak patents, including the patents at issue in the lawsuit. Of this amount, $10 million was expensed in fiscal 2004 and $55 million was expensed to cost of sales-products in the first quarter of fiscal 2005. The remaining amount of $27 million represents the estimated future benefit that we will obtain from the licenses granted under the settlement. This intangible asset was recorded in other non-current assets and is being amortized ratably to cost of sales-products over the remaining patent life through fiscal 2010. As of June 30, 2006, this intangible asset had a net book value of $19 million net of accumulated amortization of $8 million. As of June 30, 2005, this intangible asset had a net book value of $23 million net of accumulated amortization of $4 million.

6.    Restructuring Charges and Related Impairment of Long-lived Assets

In accordance with SFAS 112, “Employers’ Accounting for Post Employment Benefits” (SFAS 112) and SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146), we recognized a total of $284 million, $262 million and $344 million in restructuring charges in fiscal 2006, 2005, and 2004, respectively. The determination of when we accrue for severance costs and which standard applies depends on whether the termination benefits are provided under a one-time benefit arrangement as defined by FAS 146 or under an on-going benefit arrangement as described in FAS 112.

We estimated the cost of exiting and terminating our facility leases or acquired leases by referring to the contractual terms of the agreements and by evaluating the current real estate market conditions. In addition, we have estimated sublease income by evaluating the current real estate market conditions or, where applicable, by referring to amounts being negotiated. As of June 30, 2006, our estimated sublease income to be generated from sublease contracts not yet negotiated approximated $38 million. Our ability to generate this amount of sublease income, as well as our ability to terminate lease obligations at the amounts we have estimated, is highly dependent upon the commercial real estate market conditions in certain geographies at the time we perform our evaluations or negotiate the lease termination and sublease arrangements with third parties. The amounts we have accrued represent our best estimate of the obligations we expect to incur and could be subject to adjustment as market conditions change.

Restructuring Plan VI

In May 2006, we implemented a plan to better align our resources with our strategic business objectives by further reducing our workforce by approximately 4,000 to 5,000 employees across certain business functions, operating units and geographic regions as well as implementing other expense reduction measures (Restructuring Plan VI). Through the end of fiscal 2006, we reduced our workforce by approximately 300 and recognized a total expense of $138 million, primarily in workforce reduction charges associated with Restructuring Plan VI.

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Restructuring Plan V

In June 2005, we implemented a workforce reduction and in July 2005, we committed to a facility exit plan (Restructuring Plan V). This plan included reducing our workforce across all levels, business functions, operating units and geographic regions. Through the end of fiscal 2006, we reduced our workforce by approximately 1,400 employees, and recognized cumulative expenses relating to severance and benefit costs of $101 million, associated with Restructuring Plan V. As of June 30, 2006, substantially all employees to be terminated as a result of Restructuring Plan V had been notified. In the fourth quarter of fiscal 2006, we committed to the closure of our Newark, California campus and as a result recognized an impairment loss of approximately $80 million in accordance with FAS 144. With the exception of the Newark campus, which has been accounted for as an asset held for sale under FAS 144, all facilities relating to the amounts accrued under this restructuring plan were exited by June 30, 2006 in accordance with SFAS 146.

Restructuring Plan IV

In March 2004, we implemented a plan to reduce our cost structure and improve operating efficiencies by reducing our workforce, exiting facilities, and implementing productivity improvement initiatives and expense reduction measures (Restructuring Plan IV). This plan included reducing our workforce across all levels, business functions, operating units, and geographic regions. Through the end of fiscal 2006, we reduced our workforce by approximately 4,300 employees under this plan. This plan also included eliminating excess facility capacity in light of revised facility requirements and other actions. Through the end of fiscal 2006, we recognized $567 million in total charges, consisting of $294 million in workforce reduction charges and $273 million in excess facility charges. As of June 30, 2006, all employees to be terminated as a result of Restructuring Plan IV had been notified. During fiscal 2004, the $128 million charge relating to the consolidation of excess facilities included:

• $95 million of estimated future obligations for non-cancelable lease payments (net of estimated sublease income of $35 million) and/or termination fees resulting from exiting excess rental facilities. All facilities relating to the amounts accrued under this restructuring plan were exited by June 30, 2005; and

• $33 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.

Restructuring Plans and Workforce Rebalancing Efforts Prior to Phase IV

Prior to the initiation of our Restructuring Plan IV, we had initiated certain workforce rebalancing efforts during the first six months of fiscal 2004. As a result, we incurred $55 million of separation costs during this period. Approximately $3 million, $14 million and $38 million of these separation costs were included in cost of sales, research and development and selling, general and administrative expenses, respectively. During fiscal 2005 and fiscal 2004, we paid $1 million and $54 million in cash, respectively.

We committed to restructuring plans in fiscal 2003 and 2002 and a facility exit plan in fiscal 2001. These plans included eliminating excess facility capacity in light of revised facility requirements and other actions. All facilities relating to the amounts accrued under these restructuring plans were exited by June 30, 2005.

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The following table sets forth an analysis of the restructuring accrual activity for the fiscal years ended June 30, 2006, 2005 and 2004 (in millions):

	Restructuring Plans																								Total
	VI						V						IV						Prior to IV
	Severance and Benefits			Facilities Related and Other			Severance and Benefits			Facilities Related and Other			Severance and Benefits			Facilities Related			Severance and Benefits			Facilities Related
Balance as of June 30, 2003	$	—		$	—		$	—		$	—		$	—		$	—		$	24		$	351		$	375
Severance and benefits		—			—			—			—			215			—			—			—			215
Accrued lease costs		—			—			—			—			—			95			—			—			95
Property and equipment impairment		—			—			—			—			—			33			—			—			33
Provision adjustments		—			—			—			—			—			—			(3	)		4			1
Total restructuring charges		—			—			—			—			215			128			(3	)		4			344
Cash paid		—			—			—			—			(49	)		(6	)		(21	)		(70	)		(146	)
Non-cash		—			—			—			—			—			(34	)		1			3			(30	)
Balance as of June 30, 2004		—			—			—			—			166			88			1			288			543
Severance and benefits		—			—			44			—			83			—			—			—			127
Accrued lease costs and other		—			—			—			—			—			111			—			—			111
Property and equipment impairment		—			—			—			—			—			16			—			—			16
Provision adjustments		—			—			—			—			(8	)		6			—			10			8
Total restructuring charges		—			—			44			—			75			133			—			10			262
Cash paid		—			—			—			—			(204	)		(47	)		(1	)		(65	)		(317	)
Non-cash		—			—			—			—			—			(17	)		—			(1	)		(18	)
Balance as of June 30, 2005		—			—			44			—			37			157			—			232			470
Severance and benefits		133			—			57			—			4			—			—			—			194
Accrued lease costs		—			—			—			1			—			11			—			—			12
Property and equipment impairment		—			5			—			80			—			—			—			—			85
Provision adjustments		—			—			—			—						1			—			(8	)		(7	)
Total restructuring charges		133			5			57			81			4			12			—			(8	)		284
Cash paid		(1	)		—			(80	)		—			(35	)		(44	)		—			(49	)		(209	)
Non-cash		—			(5	)		—			(80	)		—			—			—			—			(85	)
Balance as of June 30, 2006	$	132		$	—		$	21		$	1		$	6		$	125		$	—		$	175		$	460

The above restructuring charges are based on estimates that are subject to change. Changes to the previous estimates have been reflected as “Provision adjustments” on the above table in the period the changes in estimates were made. Accrued lease costs include accretion adjustments associated with the passage of time.

The remaining cash expenditures relating to workforce reductions are expected to be paid over the next few quarters. Our accrual as of June 30, 2006 for facility-related leases (net of anticipated sublease proceeds) will be paid over their respective lease terms through fiscal 2023. As of June 30, 2006, $219 million of the total $460 million accrual for workforce reductions and facility-related leases was classified as current accrued liabilities and other and the remaining $241 million was classified as other non-current obligations.

We anticipate recording additional charges related to our workforce and facilities reductions over the next several quarters, the timing of which will depend upon the timing of notification of the employees leaving Sun as determined by local employment laws and as we exit facilities. In addition, we anticipate incurring additional charges associated with productivity improvement initiatives and expense reduction measures. The total amount and timing of these charges will depend upon the nature, timing, and extent of these future actions.

See Note 4 for a description of acquisition-related restructuring costs, recorded as restructuring liabilities in the allocation of the purchase price.

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7.    Fair Value of Financial Instruments

Assets

Cash equivalents and accounts receivable are carried at cost as this approximates fair value due to their short term nature. For short-term and long-term marketable debt securities, estimates of fair value are based on market prices.

At June 30, the fair values of Sun’s short-term and long-term marketable debt securities were as follows (in millions):

	2006
	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value			Fair Value of Securities with Unrealized Losses
Corporate notes and bonds	$	389	$	—	$	(1	)	$	388		$	163
Asset and mortgage-backed securities		396		—		(5	)		391			293
U.S. government notes and bonds		501		—		(8	)		493			443
Money market securities		3,023		—		—			3,023			—
Other		7		—		—			7			7
Total marketable securities	$	4,316	$	—	$	(14	)	$	4,302		$	906
Less cash equivalents									(3,023	)
Total marketable debt securities									1,279
Less short-term portion									(496	)
Total long-term marketable debt securities								$	783

	2005
	Adjusted Cost(1)		Gross Unrealized Gains		Gross Unrealized Losses(1)			Fair Value			Fair Value of Securities with Unrealized Losses(1)
Corporate notes and bonds	$	1,185	$	—	$	(6	)	$	1,179		$	749
Asset and mortgage-backed securities		2,301		1		(13	)		2,289			1,435
U.S. government notes and bonds		1,977		1		(9	)		1,969			1,259
Money market securities		1,480		—		—			1,480			2
State and local government debt		21		—		—			21			21
Other		15		—		—			15			10
Total marketable securities	$	6,979	$	2	$	(28	)	$	6,953		$	3,476
Less cash equivalents									(1,480	)
Total marketable debt securities									5,473
Less short-term portion									(1,345	)
Total long-term marketable debt securities								$	4,128

(1) Adjusted cost and unrealized losses include our $15 million impairment loss associated with our intent to liquidate a portion of our June 30, 2005 securities portfolio, due to our acquisition of StorageTek in the first quarter of fiscal 2006.

We only invest in debt securities with a minimum rating of BBB- or above from a nationally recognized credit rating agency. At June 30, 2006, we had investments in debt instruments of four issuers exceeding 2% of the fair market value of our marketable debt securities, including cash equivalents, of $4,302 million. At June 30, 2006, our investment concentration by issuer was as follows (dollars in millions):

Issuer	Fair Value ($)		Fair Value (%)
US Treasury	$	283	7	%
Federal Home Loan Bank		100	2	%
Federal National Mortgage Association (Fannie Mae)		81	2	%
Federal Home Loan Mortgage Corporation (Freddie Mac)		68	2	%
All others(1)		3,770	87	%
	$	4,302	100	%

(1) Investments in all other issuers were, individually, less than $43 million or 1% of the fair market value of our marketable debt securities of $4,302 million.

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Net realized losses before taxes on marketable debt securities totaled $15 million, $25 million and $6 million in fiscal 2006, 2005 and 2004, respectively, and recorded in Interest and other income, net. The cost of securities sold during the year was determined based on the specific identification method. On April 27, 2006, our Chief Executive Officer and Board of Directors approved our domestic reinvestment plan. As a result, we repatriated $2 billion in unremitted foreign earnings during the fourth quarter of fiscal 2006 and realized a loss of $14 million associated with the liquidation of a portion of our marketable debt securities portfolio.

The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of June 30, 2006 (in millions):

	Less Than 12 Months							12 Months or Greater							Total
	Adjusted Cost		Gross Unrealized Losses			Fair Value		Adjusted Cost		Gross Unrealized Losses			Fair Value		Adjusted Cost		Gross Unrealized Losses			Fair Value
Corporate Notes and Bonds	$	99	$	—		$	99	$	66	$	(1	)	$	65	$	165	$	(1	)	$	164
Asset and Mortgage Backed Securities		139		(1	)		138		158		(4	)		154		297		(5	)		292
U.S. Government Notes and Bonds		129		(2	)		127		322		(6	)		316		451		(8	)		443
Other		—		—			—		7		—			7		7		—			7
Total Marketable Securities with Unrealized Losses	$	367	$	(3	)	$	364	$	553	$	(11	)	$	542	$	920	$	(14	)	$	906

Corporate Notes and Bonds

Our unrealized loss on investments in corporate bonds relates to securities purchased prior to 2006. The unrealized losses were caused by interest rate increases. All of the securities are rated investment grade or better by Standard & Poors or Moodys. Because the decline in market value is attributed to changes in interest rates and not credit quality, and because we have the ability to hold those investments until recovery of fair value, which may be at maturity, we do not consider those investments to be other-than-temporarily impaired at June 30, 2006.

Asset Backed and Mortgage Backed Securities

Our unrealized loss on investments in assets backed and mortgage backed securities relates to securities purchased prior to 2006. The unrealized losses were caused by interest rate increases. All of these securities are AAA rated by Standard & Poors or Moodys. Because the decline in market value is attributed to changes in interest rates and not credit quality, and because we have the ability to hold those investments until recovery of fair value, we do not consider those investments to be other-than-temporarily impaired at June 30, 2006.

U.S. Government Notes and Bonds

The unrealized losses on our investments in U.S. Government Notes and Bonds were caused by interest rate increases. These securities are direct obligations of the U.S. Treasury or U.S. Government Agency. Because we have the ability to hold those investments until recovery, which may be at maturity, we do not consider those investments to be other-than-temporarily impaired at June 30, 2006.

At June 30, 2006, the cost and estimated fair values of short-term and long-term marketable debt securities (excluding cash equivalents) by contractual maturity were as follows (in millions):

	Cost		Fair Value
Less than one year	$	500	$	496
Mature in 1-2 years		277		272
Mature in 3-5 years		322		320
Mature after 5 years		194		191
Total	$	1,293	$	1,279

Mortgage-backed assets were allocated based on their contractual maturity.

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Foreign Exchange and Interest Rate Contracts

Foreign currency forward contracts, interest-rate swap agreements and foreign currency option contracts are financial instruments with carrying values that approximate at fair value. The fair value of foreign currency forward contracts is based on the estimated amount at which they could be settled based on market exchange rates. The fair value of the interest-rate swap agreements and the foreign currency option contracts is obtained from dealer quotes and represents the estimated amount we would receive or pay to terminate the agreements. However, analysis of market data is required to develop these estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange.

As of June 30, 2006, the value of Sun foreign currency forward contracts and foreign currency options contracts are as follows (in millions):

	Fair Value 2006 Asset (Liability)			Fair Value 2005 Asset (liability)
Foreign currency forward contracts	$	(23	)	$	9
Foreign currency option contracts		4			11
Total	$	(19	)	$	20

Liabilities

Accounts payables, other accrued expenses and short-term debt are financial liabilities with carrying values that approximates the fair value. For our publicly traded Senior Notes estimates of fair value are based on market prices. For other debt, fair value is estimated based on rates currently available to the company for debt with similar terms and remaining maturities.

At June 30, the value of Sun’s borrowing arrangements was as follows (in millions):

	Maturities	2006			2005
7.50% Senior Notes	2006	$	500		$	500
7.65% Senior Notes	2009		550			550
Other			7			(1	)
Interest rate swap agreements			21			74
Total borrowing arrangements			1,078			1,123
Less: current maturities			(503	)		—
Total carrying value long-term borrowing arrangements		$	575		$	1,123
Total fair value of long-term borrowings arrangements		$	579		$	1,119

8.    Derivative Financial Instruments

We enter into foreign exchange forward and option contracts that are designated and qualify as cash flow hedges under SFAS 133 “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133). Changes in the fair value of the effective portion of these outstanding forward and option contracts are recognized in Other Comprehensive Income (OCI). These amounts are reclassified from OCI and recognized in earnings when either the forecasted transaction occurs or it becomes probable that the forecasted transaction will not occur. Gains or losses resulting from changes in forecast probability were not material during fiscal 2006, 2005 and 2004.

Changes in the ineffective portion of a derivative instrument are recognized in earnings (classified in selling, general and administrative expense) in the current period. Effectiveness for forward cash flow hedge contracts is measured by comparing the fair value of the forward contract to the change in the forward value of the anticipated transaction. The fair market value of the hedged exposure is presumed to be the market value of the hedge instrument when critical terms match. Ineffectiveness during fiscal 2006, 2005 and 2004 was not significant.

We do not use derivative financial instruments for speculative or trading purposes, nor do we hold or issue leveraged derivative financial instruments.

Foreign Exchange Exposure Management.    We have significant international sales and purchase transactions denominated in foreign currencies. As a result, we purchase currency option and forward contracts as cash flow hedges to reduce or eliminate certain foreign currency exposures that can be identified and quantified. These contracts generally expire within 12 months.

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Our hedging contracts are primarily intended to protect against changes in the value of the U.S. dollar. Accordingly, for forecasted transactions, U.S. dollar functional subsidiaries hedge foreign currency revenues and non-U.S. dollar functional subsidiaries selling in foreign currencies hedge U.S. dollar inventory purchases. Gains and losses are reclassified from OCI as an adjustment to revenue or cost of sale in the same period that the underlying revenue and cost of sale is recognized in the Consolidated Statement of Operations. All values reported in OCI at June 30, 2006 are expected to be reclassified to earnings within 12 months.

We also enter into foreign currency forward contracts to hedge against changes in the fair value of monetary assets and liabilities denominated in a non-functional currency. These derivative instruments are not designated as hedging instruments; therefore, changes in the fair value of these contracts are recognized immediately in selling, general and administrative expense as an offset to the changes in the fair value of the monetary assets or liabilities being hedged.

Interest Rate Risk Management.    We are exposed to interest rate risk from both investments and debt. We have hedged against the risk of changes in fair value associated with our fixed rate Senior Notes (See Note 9) by entering into fixed-to-variable interest rate swap agreements, designated as fair value hedges, of which 8 are outstanding, with a total notional amount of $1.1 billion as of June 30, 2006. We assume no ineffectiveness as each interest rate swap meets the short-cut method requirements under SFAS 133 for fair value hedges of debt instruments. As a result, changes in the fair value of the interest rate swaps are offset by changes in the fair value of the debt, both are reported in interest and other income, and no net gain or loss is recognized in earnings.

Accumulated Derivative Gains or Losses.    The following table summarizes activity in OCI, net of related taxes, related to foreign exchange derivatives held by Sun during the fiscal years ended June 30, (in millions):

	2006			2005			2004
Unrealized gain (loss), net, on derivative instruments, at beginning of period	$	11		$	(6	)	$	(20	)
Decrease in fair value of derivatives, net of taxes		(17	)		(7	)		(13	)
Losses (gains) reclassified from OCI:
Revenues		5			18			21
Cost of sales		(6	)		6			6
Unrealized gain (loss), net, on derivative instruments, at end of period	$	(7	)	$	11		$	(6	)

9.    Borrowing Arrangements

At June 30, 2006 and 2005, Sun and its subsidiaries had uncommitted lines of credit aggregating approximately $459 million and $477 million, respectively. No amounts were drawn from these lines of credit as of June 30, 2006 and 2005. 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.

In August 1999, we issued $1.5 billion of unsecured senior debt securities in four tranches (the Senior Notes). The Senior Notes consist of the following notes: $200 million (paid on August 15, 2002 and bore interest at 7%); $250 million (paid on August 15, 2004 and bore interest at 7.35%); $500 million (due on August 15, 2006 and bearing interest at 7.5%); and $550 million (due on August 15, 2009 and bearing interest at 7.65%). Interest on the Senior Notes is payable semi-annually. We may redeem all or any part of any tranche of the Senior Notes at any time at a price equal to 100% of the principal plus accrued and unpaid interest in addition to an amount determined by a quotation agent, representing the present value of the remaining scheduled payments. The Senior Notes are subject to compliance with certain covenants that do not contain financial ratios. We are currently in compliance with these covenants. If we failed to be in compliance with these covenants, the trustee of the Senior Notes 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. As discussed in Note 8, we also entered into various interest-rate swap agreements to modify the interest characteristics of the Senior Notes so that the interest associated with the Senior Notes effectively becomes variable.

In January 2005, our Board of Directors authorized our management to repurchase debt from time to time in partial or full tranches based on available cash and market conditions.

Interest expense on our Senior Notes was $55 million, $34 million and $26 million in fiscal 2006, 2005 and 2004, respectively.

10.    Income Taxes

Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are determined based on the difference between the U.S. GAAP financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

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In the fiscal years ended June 30, income (loss) before income taxes and the provision for (benefit from) income taxes consisted of the following (in millions):

	2006			2005			2004
Income (loss) before income taxes:
United States	$	(1,097	)	$	(526	)	$	448
Foreign		422			342			(11	)
Total income (loss) before income taxes	$	(675	)	$	(184	)	$	437
Provision for (benefit from) income taxes:
Current:
United States federal(1)	$	77		$	(20	)	$	80
State(2)		(5	)		1			(1	)
Foreign(3)		143			147			107
Total current income taxes		215			128			186
Deferred:
United States federal		1			(122	)		284
State		—			—			286
Foreign		(27	)		(83	)		69
Total deferred income taxes		(26	)		(205	)		639
Provision for (benefit from) income taxes	$	189		$	(77	)	$	825

(1) Net of $310 million tax benefit of operating loss carryforwards in fiscal 2004.

(2) Net of $54 million tax benefit of operating loss and tax credit carryforwards in fiscal 2004.

(3) Net of $26 million of tax credit carryforwards in fiscal 2004.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of our deferred tax assets and liabilities, at June 30, were as follows (in millions):

	2006			2005
Deferred tax assets:
Inventory valuation	$	72		$	29
Reserves and other accrued expenses		238			209
Compensation not currently deductible		148			99
Net operating loss carryforwards		792			495
Deferred revenue		283			240
Tax credits carryforward		710			538
Investment impairments		131			195
Restructuring liability		175			156
Acquisition-related intangibles		103			106
Tax credits on unremitted earnings of foreign subsidiaries		625			956
Fixed assets		232			135
Other		84			171
Gross deferred tax assets		3,593			3,329
Valuation allowance		(2,416	)		(2,092	)
Realizable deferred tax assets		1,177			1,237
Deferred tax liabilities:
Net unremitted earnings of foreign subsidiaries		(840	)		(1,043	)
Acquisition-related intangibles		(176	)		(21	)
Other		(71	)		(10	)
Gross deferred tax liabilities		(1,087	)		(1,074	)
Net deferred tax assets	$	90		$	163

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The following table set forth an analysis of our valuation allowance activity (in millions):

	Total
Balance at June 30, 2004	$	1,967
Charged to income tax provision		108
Charged to other accounts		20
Credited to income tax provision		(3	)
Balance at June 30, 2005 (as reported)		2,092
Charged to income tax provision		205
Charged to other accounts		197
Credited to income tax provision		(78	)
Balance at June 30, 2006	$	2,416

The provision for (benefit from) income taxes differs from the amount computed by applying the statutory federal income tax rate to income before income taxes. The sources and tax effects of the difference, for fiscal years ended June 30, were as follows (in millions):

	2006			2005			2004
Expected tax rate at 35%	$	(236	)	$	(64	)	$	153
State income taxes, net of federal tax benefit		3			4			182
Foreign income tax rate differential		(31	)		(2	)		137
Goodwill impairment/amortization		—			—			3
Acquired in-process research and development		21			—			25
Repatriation of unremitted foreign earnings		58			—			—
Tax credits		(29	)		(35	)		(33	)
Utilization of acquired net operating loss carryforwards or credits		—			2			18
Valuation allowance		393			217			339
U.S. and foreign tax settlements		—			(213	)		—
Other		10			14			1
Provision (benefit) for income taxes	$	189		$	(77	)	$	825

On April 27, 2006, our Chief Executive Officer and Board of Directors approved our domestic reinvestment plan. As a result, we repatriated $2 billion in unremitted foreign earnings during the fourth quarter of fiscal 2006, the majority of which was eligible, to be taxed at a reduced effective tax rate under the Foreign Earnings Repatriation Provision of the American Jobs Creation Act. U.S. income taxes have been provided on all undistributed earnings of our foreign subsidiaries. As a result of the aforementioned repatriation, as of June 30, 2006, there are no earnings that are considered to be permanently invested in operations outside of the U.S. However, we may elect to permanently invest in operations outside of the U.S. in the future. During the current year, we changed the calculation for estimating the deferred tax liability on foreign unremitted earnings to more closely reflect the tax consequences that would result from filing our actual tax returns, assuming those earnings were remitted as dividends.

As of June 30, 2006, Sun had aggregate federal net operating loss carryforwards of $1,461 million. If not utilized, these carryforwards will expire in fiscal years 2008 through 2026. The use of the federal net operating loss carryforwards in any one fiscal year is limited due to prior changes in ownership incurred by acquired companies. As of June 30, 2006, Sun had aggregate state net operating loss carryforwards of $1,691 million. If not utilized, these carryforwards will expire in fiscal years 2007 through 2026.

As of June 30, 2006, Sun had aggregate foreign net operating loss carryforwards of $682 million. Foreign net operating loss carryforwards of $25 million, if unused, will expire in fiscal years 2011 through 2020. The remaining foreign operating loss carryforwards of $657 million have an indefinite life.

As of June 30, 2006, Sun had federal and state tax credit carryforwards for income tax purposes of $471 million and $362 million, respectively. If not utilized, the federal credits will expire in fiscal years 2008 through 2026. State tax credit carryforwards of $50 million will expire in fiscal years 2007 through 2021. The remaining state tax credit carryforwards of $312 million have an indefinite life.

The federal and state provisions do not reflect the tax savings resulting from deductions associated with our various stock option plans. These savings were nil, nil and $4 million in fiscal 2006, 2005 and 2004, respectively.

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Net deferred tax assets of approximately $90 million as of June 30, 2006 pertain to certain tax credits and net operating loss carryforwards resulting from the exercise of employee stock options, which have been fully offset by a valuation allowance. When recognized, the reversal of the valuation allowance will be accounted for as a credit to shareholders’ equity rather than as a reduction of the income tax provision.

In addition, net deferred tax assets of approximately $62 million pertained to certain deductible temporary differences and net operating loss carryforwards acquired in certain purchase business combinations. When recognized, the reversal of the valuation allowance will be accounted for as a credit to existing goodwill or other long-term intangibles of the acquired entity rather than as a reduction of the period’s income tax provision. If no goodwill or long-term intangible assets remain, the credit would reduce the income tax provision in the current period.

We believe it is more likely than not that $90 million of deferred tax assets will be realized in the foreseeable future. Realization of our net deferred tax assets is dependent upon our generation of sufficient taxable income in future years in appropriate tax jurisdictions to obtain benefit from the reversal of temporary differences, net operating loss carryforwards, and from tax credit carryforwards. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are reduced.

In evaluating our ability to recover our deferred tax assets we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent fiscal years and our forecast of future taxable income. In determining future taxable income, we are responsible for assumptions utilized including the amount of state, federal and international pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses.

During the third quarter of fiscal 2005, we recorded a tax benefit of $69 million from actions taken in response to the U.S. and the Netherlands tax treaty. These actions resulted in a reduction of the Dutch withholding taxes previously provided on undistributed earnings which were not permanently invested outside of the U.S.

During the fourth quarter of fiscal 2005, we settled the Internal Revenue Service (IRS) income tax audit for the fiscal years 1997 through 2000 and the Dutch income tax audit for the fiscal years 2000 through 2004. As a result, we reduced our income tax reserves resulting in a total benefit of $213 million.

During the third quarter of fiscal 2006, we received a revenue agent report from the Internal Revenue Service relating to an examination of our tax returns filed for fiscal years 2001 and 2002. Pursuant to the report, the Internal Revenue Service has proposed various adjustments resulting in a tax assessment of approximately $27 million. On April 17, 2006, we filed a protest with the Internal Revenue Service to contest several items. Although the ultimate outcome is unknown, we believe that we have adequately reserved for these potential adjustments and the final outcome will not have a material adverse affect on our results of operations.

We are currently under examination by the IRS for tax returns filed in fiscal years 2001 through 2005. Although the ultimate outcome is unknown, we have reserved for potential adjustments that may result from the current examination and we believe that the final outcome will not have a material affect on our results of operations. If events occur which indicate payment of these amounts are unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. In addition, although specific foreign country transfer pricing exposures have not been identified, the risk of potential adjustment exists. If our estimate of the federal, state and foreign income tax liabilities proves to be less than the ultimate assessment, a further charge to expense may result. Any reversals of assumed tax liabilities established by acquired companies will be recorded through a reallocation of the purchase price.

11.    Commitments and Contingencies

Operating Lease Commitments

We lease certain facilities and equipment under non-cancelable operating leases. During fiscal 2006, 2005 and 2004, we elected to exit certain building leases and building projects, but still have obligations on these particular facilities. See Note 6 for further detail.

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At June 30, 2006, the future minimum annual lease payments for all occupied and exited facility leases were approximately (in millions):

	Non-cancelable Operating Leases		Non-cancelable Subleases			Net Payments
Fiscal 2007	$	244	$	(18	)	$	226
Fiscal 2008		181		(15	)		166
Fiscal 2009		155		(11	)		144
Fiscal 2010		134		(10	)		124
Fiscal 2011		107		(9	)		98
Thereafter		368		(39	)		329
	$	1,189	$	(102	)	$	1,087

Rent expense under the non-cancelable operating leases was $155 million, $125 million and $201 million in fiscal 2006, 2005 and 2004, respectively.

Asset Retirement Obligations and Environmental Liabilities

We have asset retirement obligations primarily resulting from certain leased facilities where we have contractual commitments to remove leasehold improvements and return the property to a specified condition when the lease terminates. At June 30, 2006 and 2005, the net present value of these obligations was $35 million and $36 million, respectively, and are primarily classified in other non-current obligations. At June 30, 2006 and 2005, the leasehold assets solely related to our asset retirement obligations approximated $10 million and $11 million, respectively. The amount of amortization of the associated leasehold assets and accretion expense associated with our asset retirement obligations have not been material. To date, the amount of our obligations associated with the Waste Electrical and Electronic Equipment Directive established by the European Union have not been material.

Guarantees, Letters of Credit and Indemnification Obligations

In the normal course of our business, we issue guarantees and letters of credit to numerous third-parties and for various purposes such as lease obligations, performance guarantees and state and local governmental agencies requirements. At June 30, 2006, we had approximately $30 million of outstanding financial letters of credit.

In the normal course of business, we may enter into contractual arrangements under which we may agree to indemnify the third party to such arrangement from any losses incurred relating to the services they perform on behalf of Sun or for losses arising from certain events as defined within the particular contract, which may include, for example, litigation or claims relating to past performance. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have not been material.

Through the normal course of our business, we purchase or place orders for the necessary components of our products from various suppliers and we commit to purchase services where we would incur a penalty if the agreement was canceled. We estimate that our contractual obligations at June 30, 2006 was $155 million primarily and were due within the following twelve months. This amount does not include contractual obligations recorded on the balance sheet as liabilities.

In fiscal 2006 as part of a service-based sales arrangement involving a governmental institution in Mexico, we were required to deposit approximately $41 million with a surety company as collateral guaranteeing our performance under the arrangement. This cash is classified as Other non-current assets, net, in our Consolidated Balance Sheet.

Litigation and Other Contingencies

On April 20, 2004, we were served with a complaint in a case in the United States District Court for the Eastern District of Texas entitled Gobeli Research (Gobeli) v. Sun Microsystems, Inc. and Apple Computer, Inc. (Apple). The complaint alleged that Sun products, including our Solaris^™ Operating System, infringed on a Gobeli patent related to a system and method for controlling interrupt processing. We settled all outstanding claims against us in this case during our third quarter of fiscal 2006 for an amount that was immaterial to our results of operations and financial condition.

In fiscal 2005, the General Services Administration (GSA) began auditing our records under the schedule contracts it had with us to verify our compliance with various contract provisions from October 1997 to February 2005. If the audit determines that we did not comply with such provisions, we may be required to pay the GSA a potential settlement. We have made a preliminary assessment of our exposure for such amounts potentially due and such assessment is reflected in our fiscal 2006 and 2005 consolidated financial statements. We cannot predict with reasonable certainty when the audit and the subsequent negotiation process will be concluded and it may take several quarters for all issues to be resolved.

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12.    Settlement Income

On March 8, 2002, we 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 and other laws. In our complaint and as modified in subsequent filings, we alleged that Microsoft had engaged in illegal conduct, including efforts to acquire, maintain and expand a number of illegal monopolies; illegal tying arrangements; illegal exclusive dealings; copyright infringement; unreasonable restraints of trade; and unfair competition. In February 2003, Microsoft filed four counterclaims against Sun alleging unfair competition and breach of a settlement agreement regarding our Java technology. The presiding judge dismissed two of those counterclaims.

On April 1, 2004, Sun and Microsoft entered into several agreements including an agreement to settle all pending litigation between the two companies. Pursuant to the settlement agreement, Sun agreed to dismiss its litigation against Microsoft with prejudice and agreed to not initiate further steps to participate in the proceedings pending against Microsoft instituted by the Commission of the European Communities, and each party entered into a release of claims with respect to such matters. Microsoft also agreed to pay to Sun the amount of $700 million under this settlement agreement.

Pursuant to a patent covenant and stand-still agreement, the parties agreed not to sue each other for past damages for patent infringement with respect to the other party’s products and technologies (the Covenant Not to Sue for Damages). Each year until 2014, Microsoft has the option of extending the Covenant Not to Sue for Damages to apply to the preceding year in exchange for an annual extension payment, so long as Microsoft has made all previous annual extension payments and so long as Microsoft has not sued Sun or authorized licensees of its commercial products for patent infringement prior to such time. At the end of the ten-year term, if Microsoft has made all such payments and not brought any such suits, then each party will automatically grant to the other party irrevocable, non-exclusive, perpetual licenses under all of its patents and patent applications existing at the end of such period in order to allow such other party to continue to commercialize its products shipping at the end of such period and any related successor products. In addition, the parties agreed, for a period of six months, not to bring any patent infringement suit (including a suit for injunctive relief) against the other party or authorized licensees of its commercial products relating to such other party’s products. Microsoft also agreed to pay to Sun the amount of $900 million under this patent covenant and standstill agreement.

Pursuant to a technical collaboration agreement, each party agreed to provide the other party with access to aspects of its desktop and server-based technology for use in developing interoperable server products. Microsoft also agreed to pay to Sun the amount of $350 million as a prepaid nonrefundable royalty under this technical collaboration agreement.

Based on the agreements with Microsoft described above, we recognized $54 million, $54 million and $1,597 million in settlement income during fiscal 2006, 2005 and 2004, respectively, and deferred $350 million in fiscal 2004 as other non-current obligations until the earlier of usage of the royalties by Microsoft or such time as all our obligations have been met. In fiscal 2004, we also deferred $3 million in connection with our obligation to provide technical support under the terms of the technical collaboration agreement, which is being recognized to income over the 10 year term of the agreement.

13.    Stockholders’ Equity

Stockholders’ Rights Plan

Effective May 31, 2006, our Board of Directors voted to terminate our Stockholders’ Rights Plan, which was originally scheduled to expire on July 25, 2012.

Authorized Preferred Stock

We are authorized to issue up to 10 million shares of preferred stock, with preferences to be determined at the discretion of the Board of the Directors at the time of the issuance. As of June 30, 2006, we have no preferred stock issued and outstanding.

Common Stock Repurchase Programs

From time to time, our Board of Directors approves common stock repurchase programs allowing management to repurchase shares of our common stock in the open market. In February 2001, we announced our intention to acquire up to $1.5 billion of our outstanding common stock under a stock repurchase program authorized by our Board of Directors. Under the February 2001 program, the timing and actual number of shares subject to repurchase are at the discretion of our management and are contingent on a number of factors, including our projected cash flow requirements, our return to sustained profitability and our share price. During fiscal 2006, 2005 and 2004, we did not repurchase common stock under any repurchase programs. All such prior repurchases were made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. As of June 30, 2006, approximately $230 million of the $1.5 billion remains available for repurchase.

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When treasury shares are reissued, any excess proceeds over the average acquisition cost of the shares are recorded as additional paid-in-capital. Any excess of the average acquisition cost of the shares over the proceeds from reissuance is charged to additional paid-in-capital to the extent of previous credits on similar transactions, with any remaining amounts charged to retained earnings.

14.    Stock-Based Compensation and Employee Benefit Plans

Stock-Based Compensation

We have a stock-based compensation program that provides our Board of Directors broad discretion in creating employee equity incentives. This program includes incentive and non-statutory stock options and nonvested stock awards (also known as restricted stock and restricted stock units that are settled in stock). These awards to employees are granted under various plans, the majority of which are stockholder approved. Stock options are generally time-based, vesting 20% on each annual anniversary of the grant date over five years and expire eight years from the grant date. Nonvested stock awards are generally time-based and vest 50% in two tranches within a five year period from the grant date. We also have a Directors’ Stock Option Plan that provides for the automatic grant of stock options to non-employee members of our Board of Directors on the date such person initially becomes a director, and on the date of each annual meeting of stockholders. Additionally, we have an Employee Stock Purchase Plan (ESPP) that allows employees to purchase shares of common stock at 85% of the fair market value at the lower of either the date of enrollment or the date of purchase. Effective May 2006, our ESPP plan was modified to allow employees to purchase shares of common stock at 85% of the fair market value solely at the date of purchase. Shares issued as a result of stock option exercises, nonvested stock awards and our ESPP are generally first issued out of treasury stock. As of June 30, 2006, we had approximately 375 million shares of common stock reserved for future issuance under our stock option plans and ESPP.

On July 1, 2005, we adopted the provisions of SFAS 123R, requiring us to recognize expense related to the fair value of our stock-based compensation awards. We elected to use the modified prospective transition method as permitted by SFAS 123R and therefore have not restated our financial results for prior periods. Under this transition method, stock-based compensation expense for the year ended June 30, 2006 includes compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of July 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. Stock-based compensation expense for all stock-based compensation awards granted subsequent to July 1, 2005 was based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. We recognize compensation expense for stock option awards on a straight-line basis over the requisite service period of the award.

The following table sets forth the total stock-based compensation expense resulting from stock options, nonvested stock awards, ESPP and options assumed as a result of our acquisitions included in our Consolidated Statements of Operations (in millions):

	Fiscal Year Ended June 30, 2006
Cost of sales — products	$	10
Cost of sales — services		29
Research and development		74
Selling, general and administrative		112
Stock-based compensation expense before income taxes		225
Income tax benefit		—
Total stock-based compensation expense after income taxes	$	225

Net cash proceeds from the exercise of stock options were $129 million, $103 million and $102 million for the year ended June 30, 2006, 2005 and 2004, respectively. No income tax benefit was realized from stock option exercises during the year ended June 30, 2006. In accordance with SFAS 123R, we present excess tax benefits from the exercise of stock options, if any, as financing cash flows.

Prior to the adoption of SFAS 123R, we applied SFAS 123, amended by SFAS 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (SFAS 148), which allowed companies to apply the existing accounting rules under APB 25, “Accounting for Stock Issued to Employees”, and related Interpretations. In general, as the exercise price of options granted under these plans was equal to the market price of the underlying common stock on the grant date, no stock-based employee compensation cost was recognized in our net income (loss) for periods prior to the adoption of SFAS 123R. As required by SFAS 148 prior to the adoption of SFAS 123R, we provided pro forma net income (loss) and pro forma net income (loss) per common share disclosures for stock-based awards, as if the fair-value-based method defined in SFAS 123 had been applied.

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The following table illustrates the effect on net income (loss) after tax and net income (loss) per common share as if we had applied the fair value recognition provisions of SFAS 123 to stock-based compensation for the fiscal years ended June 30, 2005 and 2004 as follows (in millions, except per share amounts):

	2005			2004
Pro forma net loss:
Net loss after tax	$	(107	)	$	(388	)
Add: stock-based compensation costs included in reported net loss (net of tax effects of none and none, respectively)		19			16
Deduct: stock-based compensation costs (net of tax effects of none and none, respectively) under SFAS 123		(766	)		(834	)
Pro forma net loss after tax	$	(854	)	$	(1,206	)
Pro forma basic and diluted net loss per common share:
Pro forma shares used in the calculation of pro forma net loss per common share-basic and diluted		3,368			3,277
Pro forma net loss per common share-basic and diluted	$	(0.25	)	$	(0.37	)
Reported net loss per common share-basic and diluted	$	(0.03	)	$	(0.12	)

The fair value of stock-based awards was estimated using the Black-Scholes model with the following weighted-average assumptions for the years ended June 30, 2006, 2005 and 2004, respectively:

	Options									Employee Stock Purchase Plan
	2006			2005			2004			2006			2005			2004
Expected life (in years)		4.8			5.7			6.4			0.5			0.5			0.5
Interest rate		4.41	%		3.68	%		3.42	%		4.0	%		1.74	%		1.28	%
Volatility		52.74	%		64.60	%		67.45	%		35.29	%		41.31	%		56.35	%
Dividend yield		—			—			—			—			—			—
Weighted-average fair value at grant date	$	2.10		$	2.36		$	2.72		$	0.92		$	1.05		$	1.20

Our computation of expected volatility for the year ended June 30, 2006 is based on a combination of historical and market-based implied volatility. Our computation of expected life is based on historical exercise patterns. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.

Prior to the adoption of SFAS 123R, our Board of Directors approved the acceleration of vesting of certain unvested and “out-of-money” stock options with exercise prices equal to or greater than $6.00 per share previously awarded to our employees, including our executive officers and our directors, under our equity compensation plans. The acceleration of vesting was effective for stock options outstanding as of May 30, 2005. Options to purchase approximately 45 million shares of common stock or 18% of our outstanding unvested options were subject to the acceleration. The weighted average exercise price of the options that were accelerated was $14.85. The purpose of the acceleration was to enable us to avoid recognizing compensation expense associated with these options in our Consolidated Statements of Operations upon the adoption of SFAS 123R in July 2005. We also believe that because the options that were accelerated had exercise prices in excess of the current market value of our common stock, the options had limited economic value and were not fully achieving their original objective of incentive compensation and employee retention.

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Stock option activity for the year ended June 30, 2006, is as follows (in millions, except per share and term amounts):

	Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at June 30, 2003	587		$	13.95
Grants and acquisition-related assumed options	111			3.87
Exercises	(41	)		2.52
Forfeitures or expirations	(54	)		14.04
Outstanding at June 30, 2004	603		$	12.85	4.9	$	154
Grants and acquisition-related assumed options	87			3.80
Exercises	(36	)		2.85
Forfeitures or expirations	(97	)		13.61
Outstanding at June 30, 2005	557		$	11.94	4.6	$	38
Grants and acquisition-related assumed options	97			3.40
Exercises	(41	)		3.17
Forfeitures or expirations	(90	)		10.55
Outstanding at June 30, 2006	523		$	11.28	4.3	$	140
Exercisable at June 30, 2006	350		$	14.96	3.4	$	73

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between Sun’s closing stock price on the last trading day of our fiscal year 2006 and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their options on June 30, 2006. This amount changes based on the fair market value of Sun’s stock. Total intrinsic value of options exercised is $57 million for the year ended June 30, 2006. Total fair value of options vested is $251 million for the year ended June 30, 2006.

As of June 30, 2006, $344 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 3 years.

The following table summarizes our restricted stock and restricted stock unit activity for the years ended June 30, 2006 (in millions, except per share amounts):

	Number of Shares		Weighted-Average Grant Date Fair Value
Nonvested stock at June 30, 2003	3		$	38.07
Granted	—			—
Vested	(1	)		37.52
Forfeited	—			—
Nonvested stock at June 30, 2004	2		$	36.93
Granted	1			3.9
Vested	(1	)		40.84
Forfeited	—			—
Nonvested stock at June 30, 2005	2		$	4.80
Granted	46			4.15
Vested	—			—
Forfeited	(2	)		4.09
Nonvested stock at June 30, 2006	46		$	4.16

As of June 30, 2006, we retained purchase rights to 18 million shares of restricted stock issued pursuant to stock purchase agreements and other stock plans at a weighted-average price of approximately $0.01.

As of June 30, 2006, $129 million of total unrecognized compensation costs related to nonvested stock is expected to be recognized over a weighted-average period of four years.

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Defined contribution plans

Sun has a 401(k) plan known as the Sun Microsystems, Inc. Tax Deferred Retirement Savings Plan (Plan). The Plan is available to all regular employees on Sun’s U.S. payroll and provides employees with tax deferred salary deductions and alternative investment options. The Plan does not provide employees with the option to invest in Sun’s common stock. Employees may contribute up to 30% of their salary, subject to certain limitations. Sun matches employees’ contributions to the Plan at a maximum of 4% of eligible compensation up to the annual maximum of $6,800. We expensed $83 million, $74 million and $79 million in the fiscal 2006, 2005 and 2004, respectively, for our contributions to the Plan. Sun’s contributions to the Plan vest 100% upon contribution.

Defined benefit plans

Sun provides certain defined benefit pension plans in countries primarily outside the U.S. We deposit funds for certain of these plans, consistent with the requirements of local law, with insurance companies, third-party trustees, or into government-managed accounts, and accrue for the unfunded portion of the obligation. The assumptions used in calculating the obligation for these plans depend on the local economic environment. The projected benefit obligations were $291 million and $189 million as of June 30, 2006 and 2005, respectively. The related fair value of plan assets were $170 million and $126 million as of June 30, 2006 and 2005, respectively.

Sun’s practice is to fund the various pension plans in amounts at least sufficient to meet the minimum requirements of local laws and regulations. The assets of the various plans are invested in corporate equities, corporate debt securities, government securities and other institutional arrangements. The portfolio of each plan depends on plan design and applicable local laws. Depending on the design of the plan, and local custom and market circumstances, the minimum liabilities of a plan may exceed qualified plan assets. Our contributions for fiscal 2006 and 2005 approximated $20 million and $15 million, respectively. The net amount recognized related to the funded status of the Plans approximated $27 million and $20 million, at June 30, 2006 and 2005, respectively.

15.    Industry Segment, Geographic, and Customer Information

We design, manufacture, market and service network computing infrastructure solutions that consist of Computer Systems (hardware and software), Data Management systems (hardware and software), Support services and Client solutions and Educational services. Our organization is primarily structured in a functional manner. During the periods presented, our current Chief Executive Officer was identified as our Chief Operating Decision Maker (CODM) as defined by SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information” (SFAS 131).

Our CODM managed our company based primarily on broad functional categories of sales, services, manufacturing, product development and engineering and marketing and strategy. Our CODM reviewed consolidated financial information on revenues and gross margins for products and services and also reviewed operating expenses, certain of which had been allocated to our two operating segments. Our Product Group segment comprised our end-to-end networking architecture of computing products including our Computer Systems and Data Management systems product lines. Our Sun Services segment comprised a full range of services to existing and new customers, including Support services and Client solutions and Educational services. StorageTek’s former storage and services segments have been included in our Product Group and Sun Services segments, respectively.

We have a Worldwide Operations (WWOPS) organization and a Global Sales Organization (GSO) that, respectively, manufacture and sell all of our products. The CODM held the GSO accountable for overall products and services revenue and margins on a consolidated level. GSO and WWOPS managed the majority of our accounts receivable and inventory, respectively. In addition, we have a Worldwide Marketing Organization (WMO) that is responsible for developing and executing Sun’s overall corporate, strategic and product marketing and advertising strategies. The CODM looked to this functional organization for advertising, pricing and other marketing strategies for the products and services delivered to market. Operating expenses (primarily sales, marketing and administrative) related to the GSO and the WMO are not allocated to the reportable segments and, accordingly, are included under the Other segment reported below.

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Segment information

The following table presents revenues, interdivision revenues, operating income (loss) and total assets for our segments for the three years ended June 30, 2006. The Other segment consists of certain functional groups that did not meet the requirements for a reportable segment as defined by SFAS 131, such as GSO and WMO and other miscellaneous functions such as Finance, Human Resources, and Legal (in millions):

	Product Group		Services Group		Other			Total
2006
Revenues	$	8,371	$	4,697	$	—		$	13,068
Interdivision revenues		232		361		(593	)		—
Operating income (loss)		1,501		1,765		(4,136	)(1)		(870	)
Total assets		3,408		423		11,251			15,082
2005
Revenues	$	7,126	$	3,944	$	—		$	11,070
Interdivision revenues		646		400		(1,046	)		—
Operating income (loss)		1,172		1,476		(3,025	)(1)		(377	)
Total assets		627		398		13,165			14,190
2004
Revenues	$	7,355	$	3,830	$	—		$	11,185
Interdivision revenues		671		424		(1,095	)		—
Operating income (loss)		1,006		1,127		(3,323	)(1)		(1,190	)
Total assets		779		332		13,694			14,805

(1) Includes restructuring charges and purchased in-process research and development.

Product information

Our product classes comprise revenue from Computer Systems products and Data Management products. Our services revenue consists of sales from two classes of services: (1) Support services which consists of maintenance contracts and (2) Client solutions and Educational services, which consists of technical consulting to help customers plan, implement, and manage distributed network computing environments and developing and delivering integrated learning solutions for enterprises, IT organizations, and individual IT professionals. The following table provides external revenue for similar classes of products and services for the last three fiscal years (in millions):

	2006		2005		2004
Computer Systems products	$	5,997	$	5,826	$	5,854
Data Management products		2,374		1,300		1,501
Total products revenue	$	8,371	$	7,126	$	7,355
Support services	$	3,678	$	3,031	$	2,999
Client solutions and Educational services		1,019		913		831
Total services revenue	$	4,697	$	3,944	$	3,830

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Geographic information

Sun’s significant operations outside the U.S. include manufacturing facilities, design centers, and sales offices in Europe, Middle East, and Africa (EMEA), as well as the Asia Pacific (APAC) and Canada and Latin America (International Americas). Intercompany transfers between operating segments and geographic areas are primarily accounted for at prices that approximate arm’s length transactions. In fiscal 2006, 2005 and 2004, sales between segments are recorded at standard cost. Information regarding geographic areas at June 30, and for each of the years then ended, was as follows (in millions):

	U.S.		International Americas		Americas — Total		EMEA		APAC		Total
2006
Sales to unaffiliated customers	$	5,380	$	815	$	6,195	$	4,703	$	2,170	$	13,068
Long-lived assets (excluding investments and deferred tax assets)		4,993		133		5,126		617		104		5,847
2005
Sales to unaffiliated customers	$	4,392	$	590	$	4,982	$	4,152	$	1,936	$	11,070
Long-lived assets (excluding investments and deferred tax assets)		2,164		46		2,210		401		94		2,705
2004
Sales to unaffiliated customers	$	4,768	$	562	$	5,330	$	3,942	$	1,913	$	11,185
Long-lived assets (excluding investments and deferred tax assets)		2,399		19		2,418		502		101		3,021

Customer information

Sales to General Electric Company (GE) and its subsidiaries in the aggregate accounted for approximately 15%, 16% and 14% of our fiscal 2006, 2005 and 2004 net revenues, respectively. More than 70% of the revenue attributed to GE was generated through GE subsidiaries acting as either a reseller or financier of our products. The vast majority of this revenue is from sales through a single GE subsidiary, comprised 11%, 13% and 11% of net revenues in 2006, 2005 and 2003, respectively. This subsidiary acts as a distributor of our products to resellers who in turn sell those products to end-users. No other customer accounted for more than 10% of revenues. The revenues from GE are generated in the Product Group and Services Group segments. Accounts receivable from GE and its subsidiaries in the aggregate was approximately 12% and 14% of total accounts receivable as of June 30, 2006 and 2005, respectively.

16.    Related Parties

In fiscal 2006, 2005, and 2004 we conducted transactions with one company that was considered a related party. Stephen Bennett, the President and Chief Executive Officer of Intuit Inc. was appointed a member of the Board of Directors of Sun effective June 28, 2004. The amount of net revenues and expenses recognized for Intuit Inc. since Mr. Bennett’s appointment were not material.

At June 30, 2005, Sun had a note receivable including accrued interest totaling $3.9 million, due from Jonathan I. Schwartz, our President and Chief Executive Officer. The note was made in July 2002 prior to the enactment of the Sarbanes-Oxley Act of 2002 and was negotiated at an arms-length basis. The note was due on June 30, 2006, bears interest at 6.75% per annum and is fully collateralized by Sun common stock owned by Mr. Schwartz. Based on fair market value, the number of shares were adjusted every six months as required to fully collaterize the loan. Mr. Schwartz paid the note in full prior to June 30, 2006.

17.    Subsequent Events

In July 2006, we sold our Newark facility to a real estate investment trust for approximately $213 million, net of $1 million in closing costs. In conjunction with the sale we are occupying a portion of the facility pursuant to lease agreements allowing us to exit in a phased approach over the near future. In August 2006, we paid $500 million to settle the current portion of our Senior Notes.

18.    Quarterly Financial Data (unaudited)

Our first three quarters in fiscal 2006 ended on September 25, December 25 and March 26 and in fiscal 2005 ended on September 26, December 26 and March 27. Our fourth quarter ends on June 30.

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The following tables contain selected unaudited Consolidated Statement of Operations data for each quarter of fiscal 2006 and 2005 (in millions, except per share amounts):

	Fiscal 2006 Quarter Ended
	September 25			December 25			March 26			June 30
Net revenues	$	2,726		$	3,337		$	3,177		$	3,828
Gross margin		1,202			1,421			1,367			1,639
Operating loss		(137	)		(186	)		(212	)		(335	)
Net loss		(123	)		(223	)		(217	)		(301	)
Net loss per common share(1):
Basic and diluted	$	(0.04	)	$	(0.07	)	$	(0.06	)	$	(0.09	)
Weighted average shares outstanding:
Basic and diluted		3,407			3,424			3,443			3,475
	Fiscal 2005 Quarter Ended
	September 26			December 26			March 27			June 30
Net revenues	$	2,628		$	2,841		$	2,627		$	2,974
Gross margin		1073			1,198			1,087			1,231
Operating income (loss)		(121	)		1			(142	)		(115	)
Net income (loss)		(133	)		4			(28	)		50
Net income (loss) per common share(1):
Basic	$	(0.04	)	$	0.00		$	(0.01	)	$	0.01
Diluted	$	(0.04	)	$	0.00		$	(0.01	)	$	0.01
Weighted average shares outstanding:
Basic		3,343			3,360			3,376			3,399
Diluted		3,343			3,400			3,376			3,410

(1) Net income (loss) per common share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly per common share information may not equal the annual per common share information.

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Sun Microsystems, Inc.

We have audited the accompanying consolidated balance sheets of Sun Microsystems, Inc. as of June 30, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sun Microsystems, Inc. at June 30, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2006, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, in fiscal year 2006, Sun Microsystems, Inc. changed its method of accounting for stock-based compensation in accordance with guidance provided in Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Sun Microsystems, Inc.’s internal control over financial reporting as of June 30, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 1, 2006 expressed an unqualified opinion thereon.

/s/  Ernst & Young LLP

San Jose, California

September 1, 2006

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Sun Microsystems, Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting in Item 9a, that Sun Microsystems, Inc. maintained effective internal control over financial reporting as of June 30, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Sun Microsystems, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Sun Microsystems, Inc. maintained effective internal control over financial reporting as of June 30, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Sun Microsystems, Inc. maintained, in all material respects, effective internal control over financial reporting as of June 30, 2006, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Sun Microsystems, Inc. as of June 30, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2006 and our report dated September 1, 2006 expressed an unqualified opinion thereon.

/s/  Ernst & Young LLP

San Jose, California

September 1, 2006

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ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A.    CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Management, with the participation of the Chief Executive Officer and Chief Financial Officer, has performed an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). This evaluation included consideration of the controls, processes and procedures that are designed to ensure that information required to be disclosed by us in the reports we file under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including or Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2006, our disclosure controls and procedures were effective.

Remediation of Prior Year Material Weakness

During fiscal 2006, we took steps toward remediating the identified material weakness related to the review of accounting for income tax reserves discussed in detail in our 2005 Form 10-K for the year ended June 30, 2005, including engaging external tax advisors to assist in the review of our income tax calculations, implementing preventive controls with respect to the recording of tax reserves, and accelerating the timing of certain tax review activities during the financial statement close process. Additionally, management performed an assessment of our tax organization and recruited the necessary personnel to improve our internal control and communication processes and the overall level of expertise within the group. During the fourth quarter of fiscal 2006, our management implemented certain preventive controls with respect to the recording of tax reserves, including obtaining approval by the Corporate Controller’s Group prior to recording significant adjustments to such reserves. We believe these actions had strengthened our internal control over financial reporting and addressed the material weakness identified above.

The planned remediation steps set forth above were designed and initiated following the identification of the material weakness and deployed as soon as practicable throughout fiscal year 2006, during which, time management continued to evaluate the operating effectiveness of our internal controls. All the steps identified in the above remediation plan have been implemented as of June 30, 2006.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control system may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

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Based on the results of our evaluation, management assessed the effectiveness of our internal control over financial reporting as of June 30, 2006, utilizing the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on the results of this assessment, management (including our chief executive officer and our chief financial officer) has concluded that, as of that date, our internal control over financial reporting was effective.

The attestation report concerning management’s assessment of the effectiveness of our internal control over financial reporting as of June 30, 2006, issued by Ernst & Young, LLP, Independent Registered Public Accounting Firm, appears on page 90 of our Form 10-K.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the fourth quarter of fiscal 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting other than the remediation steps described above.

ITEM 9B.    OTHER INFORMATION

None

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PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding our directors is incorporated herein by reference to the information contained under the caption “Proposal 1 — Election of Directors” in our 2006 Proxy Statement for the 2006 Annual Meeting of Stockholders. Information regarding current executive officers found under the caption “Executive Officers of the Registrant” in Part I hereof is incorporated by reference into this Item 10. Information regarding Section 16 reporting compliance is incorporated herein by reference to information contained under the caption “Executive Compensation — Section 16(a) beneficial ownership reporting compliance” in our 2006 Proxy Statement. The identity of our Audit Committee members and information regarding the “audit committee financial expert” on our Audit Committee, as such term is defined in SEC regulations, is incorporated herein by reference to information contained under the caption “Proposal 1 — Election of Directors — About the Board and its committees” in our 2006 Proxy Statement. Finally, the information contained under the caption “Corporate Governance — Standards of Business Conduct” in our 2006 Proxy Statement is incorporated herein by reference.

ITEM 11.    EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference from the information contained under the captions “Proposal 1 — Election of Directors — Director Compensation,” and “Executive Compensation” in our 2006 Proxy Statement.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated by reference from the information contained under the caption “Security Ownership of Certain Beneficial Owners and Management” in our 2006 Proxy Statement.

Equity Compensation Plan Information

The following table presents a summary of outstanding stock options and securities available for future grant under our stockholder approved and non-stockholder-approved equity compensation plans as of June 30, 2006 (in millions, except per share amounts).

Plan Category	Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights	Weighted Average Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans
Equity compensation plans approved by security holders (excluding ESPP)	486	$	11.60	251
Equity compensation plans not approved by security holders (excluding ESPP)	65	$	4.03	29
Total (excluding ESPP)	551	$	10.70	280
Equity compensation plans approved by security holders (ESPP only)	N/A		N/A	95
Equity compensation plans not approved by security holders (ESPP only)	N/A		N/A	N/A
Total (ESPP only)	N/A		N/A	95
All plans	551	$	10.70	375

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference from the information contained under the captions “Proposal 1 — Election of Directors — Compensation committee interlocks and insider participation,” “Executive Compensation —Summary Compensation Table,” “— Executive officer severance and change-in-control arrangements,” “— Deferred compensation arrangements” and “— Certain transactions with officers and members of the Board” in our 2006 Proxy Statement.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated herein by reference to the information contained under the caption “Audit and Non-Audit Fees” in our 2006 Proxy Statement.

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PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this report:

1. Financial Statements: See Index to Consolidated Financial Statements under Item 8 on Page 49 of this report.

2. Financial Statement Schedules have been omitted since they are either not required, not applicable, or the information is otherwise included.

3. Exhibits:

Exhibit Number	Description
3.1	Registrant’s Restated Certificate of Incorporation, dated June 29, 2006.
3.2(1)	Bylaws of the Registrant, as amended May 24, 2006.
4.1(2)	Indenture, dated August 1, 1999 (the “Indenture”) between Registrant and The Bank of New York, as Trustee.
4.2(2)	Form of Subordinated Indenture.
4.3(2)	Officers’ Certificate Pursuant to Section 301 of the Indenture, without exhibits, establishing the terms of Registrant’s Senior Notes.
4.4(2)	Form of Senior Note.
10.1*	Registrant’s 1990 Long-Term Equity Incentive Plan, as amended on January 25, 2006 (the “1990 Plan”).
10.2(3)*	Representative form of stock option grant agreement under the 1990 Plan.
10.3(4)*	Representative form of restricted stock grant agreement under the 1990 Plan.
10.4*	Representative form of restricted stock unit grant agreement under the 1990 Plan.
10.5*	Representative form of performance restricted stock unit agreement under the 1990 Plan.
10.6(5)*	Registrant’s 1988 Directors’ Stock Option Plan, as amended on August 11, 1999 (the “Directors’ Plan”).
10.7(4)*	Representative form of stock option grant agreement under the Directors’ Plan.
10.8(6)*	Registrant’s Equity Compensation Acquisition Plan, as amended on July 25, 2002 (the “ECAP”).
10.9(4)*	Representative form of stock option grant agreement under the ECAP.
10.10(7)*	Registrant’s Non-Qualified Deferred Compensation Plan, as amended June 30, 2002.
10.11*	Registrant’s Section 162(m) Executive Officer Performance-Based Bonus Plan effective July 1, 2006.
10.12*	U.S. Vice President Severance Plan and Summary Plan Description, effective as of May 1, 2006.
10.13*	U.S. Vice President Involuntary Separation Plan and Summary Plan Description, effective as of May 1, 2006.
10.14*	Form of Change of Control Agreement executed by each executive officer, other than the Chief Executive Officer of Registrant.
10.15*	Form of Change of Control Agreement executed by the Chairman of the Board and Chief Executive Officer of Registrant.
10.16(6)*	Form of Indemnification Agreement executed by each Board member and executive officer of Registrant.
10.17*	Chief Executive Officer Bonus Terms for FY07 under the Section 162(m) Executive Officer Performance-Based Bonus Plan.
10.18*	ELT Staff Executive Officer Bonus Terms for FY07 under the Section 162(m) Executive Officer Performance-Based Bonus Plan.
10.19*	Compensation Terms for Scott McNealy
10.20*	Compensation Terms for Jonathan Schwartz
21.1	Subsidiaries of Registrant
23.1	Consent of Independent Registered Public Accounting Firm
31.1	Rule 13a-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a) Certification of Chief Financial Officer
32.1	Section 1350 Certificate of Chief Executive Officer
32.2	Section 1350 Certificate of Chief Financial Officer

 * Indicates a management contract or compensatory plan or arrangement.

(1) Incorporated by reference to Registrant’s Current Report on Form 8-K filed May 31, 2006.

(2) Incorporated by reference to Registrant’s Current Report on Form 8-K filed August 6, 1999.

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(3) Incorporated by reference to Registrant’s Current Report on on Form 8-K filed on June 28, 2005.

(4) Incorporated by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2005.

(5) Incorporated by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 1999.

(6) Incorporated by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2002.

(7) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2002.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

September 8, 2006	SUN MICROSYSTEMS, INC. Registrant
	By:	/s/    MICHAEL E. LEHMAN
		(Michael E. Lehman) Chief Financial Officer and Executive Vice President, Corporate Resources

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/    SCOTT G. McNEALY         (Scott G. McNealy)	Chairman of the Board of Directors	September 8, 2006
/s/    JONATHAN I. SCHWARTZ         (Jonathan I. Schwartz)	Chief Executive Officer, President and Director (Principal Executive Officer)	September 8, 2006
/s/    MICHAEL E. LEHMAN         (Michael E. Lehman)	Chief Financial Officer and Executive Vice President, Corporate Resources (Principal Financial Officer)	September 8, 2006
/s/    BARRY J. PLAGA         (Barry J. Plaga)	Vice President and Corporate Controller (Principal Accounting Officer)	September 8, 2006
/s/    JAMES L. BARKSDALE         (James L. Barksdale)	Director	September 8, 2006
/s/    STEPHEN M. BENNETT         (Stephen M. Bennett)	Director	September 8, 2006
/s/    L. JOHN DOERR         (L. John Doerr)	Director	September 8, 2006
/s/    ROBERT J. FINOCCHIO, Jr.         (Robert J. Finocchio, Jr)	Director	September 8, 2006
/s/    ROBERT J. FISHER         (Robert J. Fisher)	Director	September 8, 2006
/s/    PATRICIA E. MITCHELL         (Patricia E. Mitchell)	Director	September 8, 2006
/s/    M. KENNETH OSHMAN         (M. Kenneth Oshman)	Director	September 8, 2006
/s/    NAOMI O. SELIGMAN         (Naomi O. Seligman)	Director	September 8, 2006

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INDEX TO EXHIBITS

Exhibit Number	Description
3.1	Registrant’s Restated Certificate of Incorporation, dated June 29, 2006.
3.2(1)	Bylaws of the Registrant, as amended May 24, 2006.
4.1(2)	Indenture, dated August 1, 1999 (the “Indenture”) between Registrant and The Bank of New York, as Trustee.
4.2(2)	Form of Subordinated Indenture.
4.3(2)	Officers’ Certificate Pursuant to Section 301 of the Indenture, without exhibits, establishing the terms of Registrant’s Senior Notes.
4.4(2)	Form of Senior Note.
10.1*	Registrant’s 1990 Long-Term Equity Incentive Plan, as amended on January 25, 2006 (the “1990 Plan”).
10.2(3)*	Representative form of stock option grant agreement under the 1990 Plan.
10.3(4)*	Representative form of restricted stock grant agreement under the 1990 Plan.
10.4*	Representative form of restricted stock unit grant agreement under the 1990 Plan.
10.5*	Representative form of performance restricted stock unit agreement under the 1990 Plan.
10.6(5)*	Registrant’s 1988 Directors’ Stock Option Plan, as amended on August 11, 1999 (the “Directors’ Plan”).
10.7(4)*	Representative form of stock option grant agreement under the Directors’ Plan.
10.8(6)*	Registrant’s Equity Compensation Acquisition Plan, as amended on July 25, 2002 (the “ECAP”).
10.9(4)*	Representative form of stock option grant agreement under the ECAP.
10.10(7)*	Registrant’s Non-Qualified Deferred Compensation Plan, as amended June 30, 2002.
10.11*	Registrant’s Section 162(m) Executive Officer Performance-Based Bonus Plan effective July 1, 2006.
10.12*	U.S. Vice President Severance Plan and Summary Plan Description, effective as of May 1, 2006.
10.13*	U.S. Vice President Involuntary Separation Plan and Summary Plan Description, effective as of May 1, 2006.
10.14*	Form of Change of Control Agreement executed by each executive officer, other than the Chief Executive Officer of Registrant.
10.15*	Form of Change of Control Agreement executed by the Chairman of the Board and Chief Executive Officer of Registrant.
10.16(6)*	Form of Indemnification Agreement executed by each Board member and executive officer of Registrant.
10.17*	Chief Executive Officer Bonus Terms for FY07 under the Section 162(m) Executive Officer Performance-Based Bonus Plan.
10.18*	ELT Staff Executive Officer Bonus Terms for FY07 under the Section 162(m) Executive Officer and Executive Officers Performance-Based Bonus Plan.
10.19*	Compensation Terms for Scott McNealy
10.20*	Compensation Terms for Jonathan Schwartz
21.1	Subsidiaries of Registrant
23.1	Consent of Independent Registered Public Accounting Firm
31.1	Rule 13a-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a) Certification of Chief Financial Officer
32.1	Section 1350 Certificate of Chief Executive Officer
32.2	Section 1350 Certificate of Chief Financial Officer

 * Indicates a management contract or compensatory plan or arrangement.

(1) Incorporated by reference to Registrant’s Current Report on Form 8-K filed May 31, 2006.

(2) Incorporated by reference to Registrant’s Current Report on Form 8-K filed August 6, 1999.

(3) Incorporated by reference to Registrant’s Current Report on on Form 8-K filed on June 28, 2005.

(4) Incorporated by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2005.

(5) Incorporated by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 1999.

(6) Incorporated by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2002.

(7) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2002.

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EX-3.1

Exhibit 3.1

RESTATED CERTIFICATE OF INCORPORATION

OF

SUN MICROSYSTEMS, INC.

The undersigned hereby certifies that:

A. The present name of the corporation (hereinafter called the “Corporation”) is Sun Microsystems, Inc., which is the name under which the corporation was originally incorporated; and the date of filing the original certificate of incorporation with the Secretary of State of the State of Delaware is September 17, 1986.

B. The provisions of the certificate of incorporation of the Corporation as heretofore amended and/or supplemented, are hereby restated and integrated into the single instrument which is hereinafter set forth, and which is entitled Restated Certificate of Incorporation of Sun Microsystems, Inc., without further amendment and without any discrepancy between the provisions of the certificate of incorporation as heretofore amended and supplemented and the provisions of the said single instrument hereinafter set forth.

C. The Board of Directors of the Corporation has duly adopted this Restated Certificate of Incorporation pursuant to the provisions of Section 245 of the General Corporation Law of the State of Delaware in the form set forth as follows:

1. The name of the corporation is Sun Microsystems, Inc. (the “Corporation”).

2. The registered office of the Corporation with the State of Delaware is 2711 Centerville Road, Suite 400, City of Wilmington 19808, County of New Castle. The registered agent of the Corporation within the State of Delaware is Corporation Service Company, the business office of which is identical with the registered office of the Corporation.

3. The nature of the business or purposes to be conducted or promoted by the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Law of Delaware.

4. (a) The Corporation is authorized to issue two classes of shares designated “Common Stock” and “Preferred Stock”. The total number of shares which the Corporation shall have authority to issue is Seven Billion Two Hundred Ten Million (7,210,000,000), of which Seven Billion Two Hundred Million (7,200,000,000) shall be Common Stock with a par value of $0.00067 per share and Ten Million (10,000,000) shall be Preferred Stock with a par value of $0.001 per share.

(b) The shares of Preferred Stock may be issued from time to time in one or more series. The Board of Directors is authorized, subject to limitations prescribed by law and the provisions of this Article 4, to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof.

The authority of the Board with respect to each series shall include, but not be limited to, determination of the following:

(i) The number of shares constituting that series and the distinctive designation of that series;

(ii) The dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series;

(iii) Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights;

(iv) Whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine;

(v) Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the dates or date upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates;

(vi) Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund;

(vii) The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the corporation, and the relative rights of priority, if any, of payment of shares of that series;

(viii) Any other relative or participating rights, preferences and limitations of that series.

5. The Corporation is to have perpetual existence.

6. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the Bylaws of the Corporation.

7. The number of directors which will constitute the whole Board of Directors of the Corporation shall be as specified in the Bylaws of the Corporation.

8. At all elections of directors of the Corporation, each holder of stock or of any class or classes or of a series or series thereof shall be entitled to as many votes as shall equal the number of votes which (except for this provision as to cumulative voting) he would be entitled to cast for the election of directors with respect to his shares multiplied by the number of directors to be elected, and he may cast all of such votes for a single candidate or may distribute them among the number to be elected, or for any two or more of them as he may see fit.

9. Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation.

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10. To the fullest extent permitted by the Delaware General Corporation Law as the same exists or as may hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Neither any amendment nor repeal of this Article 10, nor the adoption of any provision of this Certification of Incorporation inconsistent with this Article 10, shall eliminate or reduce the effect of this Article 10, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision.

11. The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. This Certificate of Incorporation may not be amended to eliminate Section 8 hereof or to divide the directors of the Corporation who are elected by the holders of Common Stock and any Preferred Stock entitled to vote generally with the holders of Common Stock in elections of directors, into two or three classes without the approval of holders of seventy-five percent (75%) of the outstanding shares of the Corporation entitled to vote thereon.

12. Elections for directors need not be by ballot unless a stockholder demands election by ballot at the meeting and before the voting begins or unless the Bylaws so require.

Signed on this 29^th day of June, 2006.

By:	/S/ CRAIG D. NORRIS
Name:	Craig D. Norris
Title:	Assistant Secretary

3

EX-10.1

Exhibit 10.1

SUN MICROSYSTEMS, INC.

1990 LONG-TERM EQUITY INCENTIVE PLAN

AMENDED EFFECTIVE JANUARY 1, 2005

AMENDED FURTHER AS OF JANUARY 25, 2006

1. Purpose of the Plan. The purpose of the Sun Microsystems, Inc. 1990 Long-Term Equity Incentive Plan is to enable Sun Microsystems, Inc. to provide an incentive to eligible employees, consultants and Officers whose present and potential contributions are important to the continued success of the Company, to afford them an opportunity to acquire a proprietary interest in the Company, and to enable the Company to enlist and retain in its employ the best available talent for the successful conduct of its business. It is intended that this purpose will be effected through the granting of (a) stock options, (b) stock purchase rights, (c) restricted stock units, (d) stock appreciation rights, and (e) long-term performance awards.

2. Definitions. As used herein, the following definitions shall apply:

(a) “Board” means the Board of Directors of the Company.

(b) “Code” means the Internal Revenue Code of 1986, as amended.

(c) “Committee” means the Committee or Committees referred to in Section 5 of the Plan. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board.

(d) “Common Stock” means the Common Stock, $0.00067 par value (as adjusted from time to time), of the Company.

(e) “Company” means Sun Microsystems, Inc., a corporation organized under the laws of the state of Delaware, or any successor corporation.

(f) “Disability” means a disability, whether temporary or permanent, partial or total, as determined by the Committee.

(g) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(h) “Fair Market Value” means, as of any date, the value of Common Stock determined as follows:

(i) the last reported sale price of the Common Stock of the Company on the NASDAQ National Market System or, if no such reported sale takes place on any such day, the average of the closing bid and asked prices, or

(ii) if such Common Stock shall then be listed on a national securities exchange, the last reported sale price or, if no such reported sale takes place on any such day, the average of the closing bid and asked prices on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or

(iii) if such Common Stock shall not be quoted on such National Market System nor listed or admitted to trading on a national securities exchange, then the average of the closing bid and asked prices, as reported by The Wall Street Journal for the over-the-counter market, or

(iv) if none of the foregoing is applicable, then the Fair Market Value of a share of Common Stock shall be determined by the Board in its discretion.

(i) “Incentive Stock Option” means an Option intended to be and designated as an “Incentive Stock Option” within the meaning of Section 422 of the Code.

(j) “Long-Term Performance Award” means an award under Section 11 below. A Long-Term Performance Award shall permit the recipient to receive a cash or stock bonus (as determined by the Committee) upon satisfaction of such performance factors as are set out in the recipient’s individual grant. Long-Term Performance Awards will be based upon the achievement of Company, Subsidiary and/or individual performance factors or upon such other criteria as the Committee may deem appropriate.

(k) “Nonstatutory Stock Option” means any Option that is not an Incentive Stock Option.

(l) “Officer” means an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

(m) “Option” means any option to purchase shares of Common Stock granted pursuant to Section 7 below.

(n) “Plan” means this 1990 Long-Term Equity Incentive Plan, as hereinafter amended from time to time.

(o) “Restricted Stock” means shares of Common Stock acquired pursuant to a grant of Stock Purchase Rights under Section 9 below.

(p) “Restricted Stock Unit” means an award made pursuant to Section 10 below. A Restricted Stock Unit entitles the recipient to receive shares of Common Stock after meeting specified vesting criteria.

(q) “Right” means and includes Stock Appreciation Rights and Stock Purchase Rights granted pursuant to the Plan.

2

(r) “Special Reserve” means a number of shares reserved and available for issuance under the terms of the Plan equal to 3% of the total shares reserved under the Plan as determined by and set forth under Section 4 below as such section may be amended from time to time in accordance with the terms of this Plan.

(s) “Stock Appreciation Right” means an award made pursuant to Section 8 below, which right permits the recipient to receive an amount of Common Stock or cash equal in value to the difference between the Fair Market Value of Common Stock on the date of grant of the Option and the Fair Market Value of Common Stock on the date of exercise of the Stock Appreciation Right.

(t) “Stock Purchase Right” means the right to purchase Common Stock pursuant to a restricted stock purchase agreement entered into between the Company and the purchaser under Section 9 below.

(u) “Subsidiary” means a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or by a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or by a Subsidiary.

3. Eligible Participants. Any Officer, consultant, or other employee of the Company or of a Subsidiary whom the Committee deems to have the potential to contribute to the future success of the Company shall be eligible to receive awards under the Plan; provided, however, that any Options intended to qualify as Incentive Stock Options shall be granted only to employees of the Company or its Subsidiaries.

4. Stock Subject to the Plan. Subject to Sections 12 and 13, the total number of shares of Common Stock reserved and available for distribution pursuant to the Plan shall be 1,287,475,000 shares. The shares may be authorized, but unissued, or reacquired Common Stock. Subject to Sections 12 and 13 below, if any shares of Common Stock that have been optioned under an Option cease to be subject to such Option (other than through exercise of the Option), or if any Right, Option, Restricted Stock Unit or Long-Term Performance Award granted hereunder is forfeited or any such award otherwise terminates prior to the issuance to the participant of Common Stock, the shares (if any) that were reserved for issuance pursuant to such Right, Option, Restricted Stock Unit or Long-Term Performance Award shall again be available for distribution in connection with future awards or Option grants under the Plan; provided, however, that shares of Common Stock that have actually been issued under the Plan, whether upon exercise of an Option or Right or in satisfaction of a Restricted Stock Unit or Long-Term Performance Award, shall not in any event be returned to the Plan and shall not become available for future distribution under the Plan.

5. Administration.

(a) Procedure.

(i) Multiple Administrative Bodies. The Plan may be administered by different Committees with respect to different groups of service providers.

(ii) Section 162(m). To the extent that a Committee determines it to be desirable to

3

qualify awards granted hereunder as “performance-based compensation” within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee consisting solely of two or more “outside directors” within the meaning of Section 162(m) of the Code.

(iii) Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3 promulgated under the Exchange Act (“Rule 16b-3”), the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3.

(iv) Other Administration. Other than as provided above, the Plan shall be administered by (A) the Board, or (B) a Committee, which committee shall be constituted to satisfy applicable securities laws, Delaware corporate law and the Code.

(b) Authority. A Committee, if there be one, shall have full power to implement and carry out the Plan, subject to the general purposes, terms, and conditions of the Plan and to the direction of the Board (including the specific duties delegated by the Board to such Committee), which power shall include, but not be limited to, the following:

(i) to select the Officers, consultants and other employees of the Company and/or its Subsidiaries to whom Options, Rights, Restricted Stock Units and/or Long-Term Performance Awards may from time to time be granted hereunder;

(ii) to determine whether and to what extent Options, Rights, Restricted Stock Units and/or Long-Term Performance Awards, or any combination thereof, are granted hereunder;

(iii) to determine the number of shares of Common Stock to be covered by each such award granted hereunder;

(iv) to approve forms of agreement for use under the Plan;

(v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, the share price and any restriction or limitation, or any vesting acceleration or waiver of forfeiture restrictions regarding any Option or other award and/or the shares of Common Stock relating thereto, based in each case on such factors as the Committee shall determine, in its sole discretion);

(vi) to determine whether and under what circumstances an Option may be settled in cash or Restricted Stock under Section 7(j) instead of Common Stock;

(vii) to determine the form of payment that will be acceptable consideration for exercise of an Option or Right or the purchase of Common Stock in satisfaction of a Restricted Stock Unit granted under the Plan;

4

(viii) to determine, to the extent permitted by Section 409A of the Code, whether and under what circumstances Common Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of the participant (including providing for and determining the amount (if any) of any deemed earnings on any deferred amount during any deferral period);

(ix) to reduce, to the extent permitted by Section 409A of the Code, the exercise price of any Option or Right or the purchase price of any Common Stock issued in satisfaction of a Restricted Stock Unit;

(x) to determine the terms and restrictions applicable to Stock Purchase Rights and the Restricted Stock purchased by exercising such Rights;

(xi) to determine the terms and restrictions applicable to Restricted Stock Units and the Common Stock issued in satisfaction of Restricted Stock Units; and

(xii) to allow participants to satisfy withholding tax obligations by electing to have the Company withhold from the shares of Common Stock to be issued upon exercise or satisfaction of an award that number of shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by a participant to have shares withheld for this purpose shall be made in such form and under such conditions as the Committee may deem necessary or advisable and shall be subject to the consent or disapproval of the Committee.

(c) Rules. The Committee shall have the authority to construe and interpret the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, and to make all other determinations necessary or advisable for the administration of the Plan.

6. Duration of the Plan. The Plan shall remain in effect until terminated by the Board under the terms of the Plan, provided that in no event may Incentive Stock Options be granted under the Plan later than October 15, 2010.

7. Stock Options. The Committee, in its discretion, may grant Options to eligible participants and shall determine whether such Options shall be Incentive Stock Options or Nonstatutory Stock Options. Each Option shall be evidenced by a written Option agreement which shall expressly identify the Option as an Incentive Stock Option or as a Nonstatutory Stock Option, and be in such form and contain such provisions as the Committee shall from time to time deem appropriate. Without limiting the foregoing, the Committee may, at any time, or from time to time, authorize the Company, with the consent of the respective recipients, to issue new Options including Options in exchange for the surrender and cancellation of any or all outstanding Options or Rights. Option agreements shall contain the following terms and conditions:

(a) Exercise Price; Number of Shares. The exercise price of the Option, which shall be approved

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by the Committee, must be equal to or greater than the Fair Market Value of the Common Stock at the time the Option is granted. The Option agreement shall specify the exercise price and the number of shares of Common Stock to which it pertains.

(b) Waiting Period; Exercise Dates; Term. At the time an Option is granted, the Committee will determine the terms and conditions to be satisfied before shares may be purchased, including the dates on which shares subject to the Option may first be purchased. The Committee may specify that an Option may not be exercised until the completion of the waiting period specified at the time of grant. (Any such period is referred to herein as the “waiting period.”) At the time an Option is granted, the Committee shall fix the period within which such Option may be exercised, which shall not be less than the waiting period, if any, nor, in the case of an Incentive Stock Option, more than 10 years from the date of grant.

(c) Form of Payment. The consideration to be paid for the shares of Common Stock to be issued upon exercise of an Option, including the method of payment, shall be determined by the Committee (and, in the case of an Incentive Stock Option, shall be determined at the time of grant) and may consist entirely of (i) cash, (ii) certified or cashier’s check, (iii) promissory note (provided that Officers may not exercise an Option using a promissory note), (iv) other shares of Common Stock (including, in the discretion of the Committee, Restricted Stock) which (A) either have been owned by the option holder for more than six months on the date of surrender or were not acquired, directly or indirectly, from the Company, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the shares as to which said Option shall be exercised, (v) delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan proceeds required to pay the exercise price, (vi) delivery of an irrevocable subscription agreement for the shares which obligates the option holder to take and pay for the shares not more than 11 months after the date of delivery of the subscription agreement or (vii) any combination of the foregoing methods of payment.

(d) Effect of Termination of Employment, Retirement or Death of Employee Participants. In the event that an option holder during his or her lifetime ceases to be an employee of the Company or of any Subsidiary for any reason, including retirement, any Option, including any unexercised portion thereof, which was otherwise exercisable on the date of termination of employment, shall expire within such time period as is determined by the Committee; provided, however, that in the case of an Incentive Stock Option the Option shall expire unless exercised within a period of 3 months from the date on which the option holder ceased to be an employee, but in no event after the expiration of the term of such Option as set forth in the Option agreement. If in any case the Committee shall determine that an employee shall have been discharged for Just Cause (as defined below) such employee shall not thereafter have any rights under the Plan or any Option that shall have been granted to him or her under the Plan. For purposes of this Section, “Just Cause” means the termination of employment of an employee shall have taken place as a result of (i) willful breach or neglect of duty; (ii) failure or refusal to work or to comply with the Company’s rules, policies, and practices; (iii) dishonesty; (iv) insubordination; (v) being under the influence of drugs (except to the extent medically prescribed) or alcohol while on duty or on Company premises; (vi) conduct endangering, or likely to endanger, the health or safety of another employee; or (vii) conviction of a felony. In the event of the death of an employee option holder, that portion of the Option which had become exercisable on the date of death

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shall be exercisable by his or her personal representatives, heirs, or legatees within six months or such time period as is determined by the Committee but in no event after the expiration of the term of such Option as set forth in the Option agreement. In the event of the death of an option holder within one month after termination of employment or service, that portion of the Option which had become exercisable on the date of termination shall be exercisable by his or her personal representatives, heirs, or legatees within six months or such time period as is determined by the Committee but in no event after the expiration of the term of such Option as set forth in the Option agreement. In the event that an option holder ceases to be an employee of the Company or of any Subsidiary for any reason, including death or retirement, prior to the lapse of the waiting period, if any, his or her Option shall terminate and be null and void to the extent unvested.

(e) Leave of Absence. The employment relationship shall not be considered interrupted in the case of: (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Committee, provided that such leave is for a period of not more than 3 months (or not more than 30 days for unpaid leave), unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to formal policy adopted from time to time by the Company and issued and promulgated to employees in writing; or (iv) a transfer between locations of the Company or between the Company, its Subsidiaries or its successor. In the case of any employee on an approved leave of absence, the Committee may make such provisions respecting suspension of vesting of the Option while on leave from the employ of the Company or a Subsidiary as it may deem appropriate, except that in no event shall an Option be exercised after the expiration of the term set forth in the Option agreement.

(f) Acceleration of Exercisability or Waiting Period. The Committee may accelerate the earliest date on which outstanding Options (or any installments thereof) are exercisable.

(g) Special Incentive Stock Option Provisions. In addition to the foregoing, Options granted under the Plan which are intended to be Incentive Stock Options under Section 422 of the Code shall be subject to the following terms and conditions:

(i) Dollar Limitation. To the extent that the aggregate Fair Market Value of the shares of Common Stock with respect to which Options designated as Incentive Stock Options become exercisable for the first time by any individual during any calendar year (under all plans of the Company) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of the preceding sentence, (i) Options shall be taken into account in the order in which they were granted and (ii) the Fair Market Value of the shares shall be determined as of the time the Option with respect to such shares is granted.

(ii) 10% Stockholder. If any person to whom an Incentive Stock Option is to be granted pursuant to the provisions of the Plan is, on the date of grant, the owner of Common Stock (as determined under Section 424(d) of the Code) possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any Subsidiary, then the following special provisions shall be applicable to the Incentive Stock Option granted to such individual:

(A) The exercise price per share of the Common Stock subject to such Incentive Stock Option shall not be less than 110% of the Fair Market Value of the Common Stock on the date of grant; and

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(B) The Option shall not have a term in excess of five years from the date of grant.

Except as modified by the preceding provisions of this Section 7(g) and except as otherwise required by Section 422 of the Code, all of the provisions of the Plan shall be applicable to the Incentive Stock Options granted hereunder.

(h) Other Provisions. Each Option granted under the Plan may contain such other terms, provisions, and conditions not inconsistent with the Plan as may be determined by the Committee.

(i) Options to Consultants. Options granted to consultants shall not be subject to Sections 7(b) and 7(d) of the Plan, but shall have such terms and conditions pertaining to the waiting period (if any), exercise date, and effect of termination of the consulting relationship as the Committee shall determine in each case.

(j) Buyout Provisions. The Committee may at any time offer to buy out, for a payment in cash or Common Stock (including Restricted Stock), an Option previously granted, based on such terms and conditions as the Committee shall establish and communicate to the option holder at the time that such offer is made. Any such offer made to an Officer shall comply with the applicable provisions of Rule 16b-3. This provision is intended only to clarify the powers of the Committee and shall not in any way be deemed to create any rights on the part of option holders to receive buyout offers or payments.

(k) Limitations on Grants to Employees. Notwithstanding anything to the contrary herein, the following limitations shall apply to grants of Options:

(i) No eligible participant shall be granted, in any fiscal year of the Company, Options to purchase more than 4,800,000 shares.

(ii) In connection with his or her initial employment, an eligible participant may be granted Options to purchase up to an additional 6,400,000 shares which shall not count against the limit set forth in subsection (i) above.

(iii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company’s capitalization as described in Section 12.

(iv) If an Option is cancelled (other than in connection with a transaction described in Section 13), the cancelled Option will be counted against the limit set forth in this paragraph (k). For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option.

8. Stock Appreciation Rights. Stock Appreciation Rights may be granted only in connection with an Option, either concurrently with the grant of the Option or at any time thereafter during the term of the Option. The following provisions apply to such Stock Appreciation Rights.

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(a) Exercise of Right. The Stock Appreciation Right shall entitle the option holder to exercise the Right by surrendering to the Company unexercised a portion of the underlying Option as to which Option holder has a right to exercise. The Option holder shall receive in exchange from the Company an amount in cash or Common Stock equal in value to the excess of (x) the Fair Market Value on the date of exercise of the Right of the Common Stock covered by the surrendered portion of the underlying Option over (y) the exercise price of the Common Stock covered by the surrendered portion of the underlying Option, as determined in accordance with Section 7(a) above. Notwithstanding the foregoing, the Committee may place limits on the amount that may be paid upon exercise of a Stock Appreciation Right; provided, however, that such limit shall not restrict the exercisability of the underlying Option.

(b) Option Cancelled. When a Stock Appreciation Right is exercised, the underlying Option, to the extent surrendered, shall no longer be exercisable.

(c) Exercisability Requirement. A Stock Appreciation Right shall be exercisable only when and to the extent that the underlying Option is exercisable and shall expire no later than the date on which the underlying Option expires.

(d) In-the-Money Requirement. A Stock Appreciation Right may only be exercised at a time when the Fair Market Value of the Common Stock covered by the underlying Option exceeds the exercise price of the Common Stock covered by the underlying Option.

(e) Incentive Stock Option Requirements. In the event that a Stock Appreciation Right is granted that relates to an Incentive Stock Option, such Right shall contain such additional or different terms as may be necessary under applicable regulations to preserve treatment of the Incentive Stock Option as such under Section 422 of the Code.

(f) Form of Payment. The Company’s obligation arising upon the exercise of a Stock Appreciation Right shall be paid currently and may be paid in Common Stock or in cash, or in any combination of Common Stock and cash, as the Committee in its sole discretion may determine. Shares of Common Stock issued upon the exercise of a Stock Appreciation Right shall be valued at the Fair Market Value of the Common Stock as of the date of exercise.

9. Stock Purchase Rights.

(a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Committee determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing of the terms, conditions and restrictions related to the offer, including the number of shares of Common Stock that such person shall be entitled to purchase, the price to be paid, which price in the case of individuals subject to Section 16 of the Exchange Act shall not be more than $0.00067 per share (the par value of the Company’s Common Stock, as adjusted from time to time, and the

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minimum price permitted by the Delaware General Corporation Law), and the time within which such person must accept such offer, which shall in no event exceed 60 days from the date the Stock Purchase Right was granted. The offer shall be accepted by execution of a Restricted Stock purchase agreement in the form determined by the Committee. Shares purchased pursuant to the grant of a Stock Purchase Right shall be referred to herein as “Restricted Stock.”

(b) Repurchase Option. The Restricted Stock purchase agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser’s employment with the Company for any reason (including death or Disability). The purchase price for shares repurchased pursuant to the Restricted Stock purchase agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse as to not more than 50% of such shares at a date not earlier than 2-1/2 years from the date of grant of the Restricted Stock and as to the remaining shares at a date not earlier than 5 years from the date of grant of the Restricted Stock. The Committee shall exercise its repurchase option in accordance with the above. Notwithstanding the foregoing, with respect to Restricted Stock granted out of and subject to the restrictions of the Special Reserve, the Committee may in its discretion exercise its repurchase option and such repurchase option shall lapse as to such shares at such a rate as the Committee may, in its discretion, determine.

(c) Other Provisions. The Restricted Stock purchase agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Committee in its sole discretion. In addition, the provisions of Restricted Stock purchase agreements need not be the same with respect to each purchaser.

10. Restricted Stock Units.

(a) Awards. Restricted Stock Units may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Committee determines that it will offer Restricted Stock Units under the Plan, it shall advise the offeree in writing of the terms, conditions and restrictions related to the offer, including the number of shares of Common Stock issuable in satisfaction of such Restricted Stock Units, the price to be paid, which price in the case of individuals subject to Section 16 of the Exchange Act shall not be more than $0.00067 per share (the par value of the Company’s Common Stock, as adjusted from time to time, and the minimum price permitted by the Delaware General Corporation Law), and the time within which such person must accept such offer, which shall in no event exceed 60 days from the date the Restricted Stock Unit was granted. The offer shall be accepted by execution of a Restricted Stock Unit agreement in the form determined by the Committee.

(b) Vesting. The Restricted Stock Unit agreement shall provide for vesting that shall cease upon the voluntary or involuntary termination of the purchaser’s employment with the Company for any reason (including death or Disability). Restricted Stock Units shall vest as to not more than 50% of such shares at a date not earlier than 2-1/2 years from the date of grant of the Restricted Stock Unit and as to the remaining shares at a date not earlier than 5 years from the date of grant of the Restricted Stock Unit. Notwithstanding the foregoing, Restricted Stock Units granted out of and subject to the restrictions of the Special Reserve shall vest at such a rate as the Committee may, in its discretion, determine.

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(c) Other Provisions. The Restricted Stock Unit agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Committee in its sole discretion. In addition, the provisions of Restricted Stock Unit agreements need not be the same with respect to each purchaser.

11. Long-Term Performance Awards.

(a) Awards. Long-Term Performance Awards are cash or stock bonus awards that may be granted either alone, in addition to or in tandem with other awards granted under the Plan and/or awards made outside of the Plan. Long-Term Performance Awards shall not require payment by the recipient of any consideration for the Long-Term Performance Award or for the shares of Common Stock covered by such award. The Committee shall determine the nature, length and starting date of any performance period (the “Performance Period”) for each Long-Term Performance Award and shall determine the performance and/or employment factors to be used in the determination of the value of Long-Term Performance Awards and the extent to which such Long-Term Performance Awards have been earned. Shares issued pursuant to a Long-Term Performance Award may be made subject to various conditions, including vesting or forfeiture provisions. Long-Term Performance Awards may vary from participant to participant and between groups of participants and shall be based upon the achievement of Company, Subsidiary and/or individual performance factors or upon such other criteria as the Committee may deem appropriate. Performance Periods may overlap and participants may participate simultaneously with respect to Long-Term Performance Awards that are subject to different Performance Periods and different performance factors and criteria. Long-Term Performance Awards shall be confirmed by, and be subject to the terms of, a written Long-Term Performance Award agreement.

(b) Value of Awards. At the beginning of each Performance Period, the Committee may determine for each Long-Term Performance Award subject to such Performance Period the range of dollar values and/or numbers of shares of Common Stock to be issued to the participant at the end of the Performance Period if and to the extent that the relevant measures of performance for such Long-Term Performance Award are met. Such dollar values or numbers of shares of Common Stock may be fixed or may vary in accordance with such performance or other criteria as may be determined by the Committee.

(c) Adjustment of Awards. Notwithstanding the provisions of Section 20 hereof, the Committee may, after the grant of Long-Term Performance Awards, adjust the performance factors applicable to such Long-Term Performance Awards to take into account changes in the law or in accounting or tax rules and to make such adjustments as the Committee deems necessary or appropriate to reflect the inclusion or exclusion of the impact of extraordinary or unusual items, events or circumstances in order to avoid windfalls or hardships.

(d) Termination. Unless otherwise provided in the applicable Long-Term Performance Award agreement, if a participant terminates his or her employment or his or her consultancy during a Performance Period because of death or Disability, the Committee may in its discretion provide for an

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earlier payment in settlement of such award, which payment may be in such amount and under such terms and conditions as the Committee deems appropriate. Unless otherwise provided in the applicable Long-Term Performance Award agreement, if a participant terminates employment or his or her consultancy during a Performance Period for any reason other than death or Disability, then such a participant shall not be entitled to any payment with respect to the Long-Term Performance Award subject to such Performance Period, unless the Committee shall otherwise determine in its discretion.

(e) Form of Payment. The earned portion of a Long-Term Performance Award may be paid currently or on a deferred basis consistent with Section 409A of the Code (with such interest or earnings equivalent as may be determined by the Committee). Payment shall be made in the form of cash or whole shares of Common Stock, including Restricted Stock, or a combination thereof, either in a lump sum payment or in installments, all as the Committee shall determine at the time of grant.

(f) Reservation of Shares. In the event that the Committee grants a Long-Term Performance Award that is payable in cash or Common Stock, the Committee may (but need not) reserve an appropriate number of shares of Common Stock under the Plan at the time of grant of the Long-Term Performance Award. If and to the extent that the full amount reserved is not actually paid in Common Stock, the shares of Common Stock representing the portion of the reserve for that Long-Term Performance Award that is not actually issued in satisfaction of such Long-Term Performance Award shall again become available for award under the Plan. If shares of Common Stock are not reserved by the Committee at the time of grant, then (i) no shares shall be deducted from the number of shares available for grant under the Plan at that time and (ii) at the time of payment of the Long-Term Performance Award, only the number of shares actually issued to the participant shall be so deducted. If there are not a sufficient number of shares available under the Plan for issuance to a participant at the time of payment of a Long-Term Performance Award, any shortfall shall be paid by the Company in cash.

12. Recapitalization. In the event that dividends are payable in Common Stock or in the event there are splits, subdivisions, or combinations of shares of Common Stock, the number of shares available under the Plan shall be increased or decreased proportionately, as the case may be, and the number of shares of Common Stock deliverable in connection with any Option, Right, Restricted Stock Unit or Long-Term Performance Award theretofore granted shall be increased or decreased proportionately, as the case may be, without change in the aggregate purchase price (where applicable).

13. Reorganization. In case the Company is merged or consolidated with another corporation and the Company is not the surviving corporation, or in case the property or stock of the Company is acquired by another corporation, or in case of separation, reorganization, or liquidation of the Company, the Committee, or the board of directors of any corporation assuming the obligations of the Company hereunder, shall, as to outstanding Options, Rights, Restricted Stock Units or Long-Term Performance Awards either (a) make appropriate provision for the protection of any such outstanding Options, Rights, Restricted Stock Units or Long-Term Performance Awards by the assumption or substitution on an equitable basis of appropriate stock of the Company or of the merged, consolidated, or otherwise reorganized corporation which will be issuable in respect to the shares of Common Stock, provided that in the case of Options, such assumption or substitution comply with Section 424(a) of the Code, or (b) upon written notice to the participant, provide that the Option or Right must be exercised within 30 days of the date of such notice or it will be terminated. In any such case, the Committee may, in its discretion, advance the lapse of vesting periods, waiting periods, and exercise dates.

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14. Employment or Consulting Relationship. Nothing in the Plan or any award made hereunder shall interfere with or limit in any way the right of the Company or of any Subsidiary to terminate any recipient’s employment or consulting relationship at any time, with or without cause, nor confer upon any recipient any right to continue in the employ or service of the Company or any Subsidiary.

15. General Restriction. Each award shall be subject to the requirement that, if, at any time, the Committee shall determine, in its discretion, that the listing, quotation, registration, or qualification of the shares subject to such award upon any securities exchange or quotation system or under any state or federal law, or the consent or approval of any government regulatory body, is necessary or desirable as a condition of, or in connection with, such award or the issue or purchase of shares thereunder, such award may not be exercised in whole or in part unless such listing, quotation, registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to the Committee.

16. Rights as a Stockholder. The holder of an Option, Right, Restricted Stock Unit or Long-Term Performance Award shall have no rights as a stockholder with respect to any shares covered by such Option, Right, Restricted Stock Unit or Long-Term Performance Award until the date of exercise. Once an Option, Right, Restricted Stock Unit or Long-Term Performance Award is exercised by the holder thereof, the participant shall have the rights equivalent to those of a stockholder, and shall be a stockholder when his or her holding is entered upon the records of the duly authorized transfer agent of the Company. Except as otherwise expressly provided in the Plan, no adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued.

17. Nonassignability of Awards. No awards made hereunder, including Options, Rights, Restricted Stock Units and Long-Term Performance Awards, shall be assignable or transferable by the recipient other than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder, and in no event shall such awards be assigned or transferred in a manner that is inconsistent with the specific Plan provisions relating thereto. The designation of a beneficiary by a participant does not constitute a transfer. During the life of the recipient, an Option, Right, Restricted Stock Unit or Long-Term Performance Award shall be exercisable only by him or her or by a transferee permitted by this Section 17.

18. Withholding Taxes. Whenever, under the Plan, shares are to be issued in satisfaction of Options, Rights, Restricted Stock Units or Long-Term Performance Awards granted hereunder, the Company shall have the right to require the recipient to remit to the Company an amount sufficient to satisfy federal, state, and local withholding tax requirements prior to the delivery of any certificate or certificates for such shares. Whenever, under the Plan, payments are to be made to participants in cash, such payments shall be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements.

19. Nonexclusivity of the Plan. Neither the adoption or amendment of the Plan by the Board, the

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submission of the Plan or any amendments thereto to the stockholders of the Company for approval, nor any provision of the Plan shall be construed as creating any limitations on the power of the Board or the Committee to adopt and implement such additional compensation arrangements as it may deem desirable, including, without limitation, the awarding of cash or the granting of stock options, stock appreciation rights, stock purchase rights, restricted stock units or long-term performance awards outside of the Plan, and such arrangements may be either generally applicable to a class of employees or consultants or applicable only in specified cases.

20. Amendment, Suspension, or Termination of the Plan. The Board may at any time amend, alter, suspend, or terminate the Plan, but no amendment, alteration, suspension, or termination shall be made which would impair the rights of any grantee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with Rule 16b-3 under the Exchange Act or under Section 422 of the Code (or any other applicable law), the Company shall obtain stockholder approval of any Plan amendment in such a manner and to such a degree as is required by such applicable law.

21. Effective Date of the Plan. The Plan shall become effective upon approval of the Board and shall be subject to stockholder approval within 11 months of adoption by the Board. Options, Rights, Restricted Stock Units and Long-Term Performance Awards may be granted and exercised under the Plan only after there has been compliance with all applicable federal and state securities laws.

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EX-10.4

Exhibit 10.4

SUN MICROSYSTEMS, INC.

RESTRICTED STOCK UNIT AGREEMENT

NOTICE OF GRANT

Sun Microsystems, Inc. (“Sun”) is pleased to inform you that you, [                    ], have been granted the number of restricted stock units (“Restricted Stock Units”) indicated below under Sun’s 1990 Long-Term Equity Incentive Plan (the “Plan”) and the terms of this Restricted Stock Unit agreement (including the Notice of Grant and Appendices A and B, all of which are the “Agreement”). Subject to the provisions of the Agreement and the Plan, the principal features of this grant are as follows:

Grant Date:	[Date]
Total Number of Restricted Stock Units:	[To come]
Scheduled Vesting:	50% of total Restricted Stock Units vest 2.5 years after Grant Date; remaining 50% vest 5 years after Grant Date*
Purchase Price per Share:	$.00067 payable in services rendered by you (no cash payment required)
Acceptance Deadline:	You must accept this grant of Restricted Stock Units prior to the Acceptance Deadline, which is sixty (60) days from the Grant Date.

* Except as otherwise provided in the Agreement or by the terms of the Plan, you will not vest in the Restricted Stock Units unless you remain employed by Sun or one of its Subsidiaries through the applicable vesting date.

Your acceptance of this grant either by signature below or by electronic acceptance indicates your understanding that this grant is subject to all of the terms described in this Agreement, including Appendices A and B, and the Plan. Important additional information on vesting and forfeiture of the Restricted Stock Units covered by this grant is contained in paragraphs 4 through 5 and paragraph 7 of Appendix A. PLEASE BE SURE TO READ ALL OF APPENDIX A, WHICH CONTAINS THE SPECIFIC TERMS OF THIS GRANT.

THIS AGREEMENT MUST BE ACCEPTED BY YOU BY THE ACCEPTANCE DEADLINE, OR THIS GRANT OF RESTRICTED STOCK UNITS WILL AUTOMATICALLY BE CANCELED.

SUN MICROSYSTEMS, INC.		GRANTEE
By:	/s/ Michael A. Dillon
Title:	Senior VP, General Counsel and Secretary	[Name]

APPENDIX A

TERMS OF RESTRICTED STOCK UNITS

1. Grant. Sun hereby grants to you under the Plan at the per share price of $.00067 (the “Purchase Price”), the number of Restricted Stock Units indicated in the Notice of Grant, subject to all of the terms in this Agreement and the Plan. The Purchase Price equals the par value of a share of Sun Common Stock (a “Share”).

2. Payment of Purchase Price. When Shares are issued to you in payment for the Restricted Stock Units, the Purchase Price will be deemed paid through services rendered by you (not in cash), and will be subject to the appropriate tax withholdings.

3. Sun’s Obligation to Pay. Unless and until the Restricted Stock Units have vested in the manner set forth in paragraphs 4 or 5, you will have no right to payment of the Restricted Stock Units. Until any vested Restricted Stock Units actually are paid, the Restricted Stock Units will be an unsecured obligation of Sun. Any vested Restricted Stock Units will be paid in Shares. Only whole Shares will be issued.

4. Vesting Schedule.

(a) General. Except as otherwise provided in this paragraph 4 and paragraph 5 of this Agreement, and subject to paragraph 7, the Restricted Stock Units are scheduled to vest in accordance with the vesting schedule shown in the Notice of Grant. Restricted Stock Units scheduled to vest on any date actually will vest only if you continue to be employed by Sun or one of its Subsidiaries through the applicable vesting date, except to the extent otherwise provided in this Agreement, by Sun in a written agreement between you and an authorized officer of Sun or in accordance with the then-applicable written policies of Sun. In all instances in which Restricted Stock Units continue to vest after you cease to be employed by Sun or one of its Subsidiaries, the payment of such accelerated Restricted Stock Units nevertheless will be made at the same time or times such Restricted Stock Units would have been paid had they vested in accordance with the vesting schedule shown in the Notice of Grant.

(b) Leave of Absence. Notwithstanding the above, vesting of the Restricted Stock Units will be suspended if you take an authorized unpaid leave of absence (including a leave of absence for military, educational, disability or personal purposes, but except as may be required by law) of more than thirty (30) days or an authorized paid leave of absence of more than ninety (90) days. The vesting schedule shown in the Notice of Grant will be delayed for the number of days that the authorized unpaid leave of absence or authorized paid leave of absence extends beyond the periods set forth above. The suspension of vesting will commence on the thirty-first (31^st) day of an authorized unpaid leave of absence of more than thirty (30) days or, in the case of an authorized paid leave of absence of more than ninety (90) days, on the ninety-first (91^st) day of the leave and the suspension will end on the earlier of: (i) the last business day preceding the date on which your leave of absence terminates; or (ii) a date twelve (12) months after the beginning of the leave of

absence. These vesting suspension provisions will be applied in compliance with local law. Sun policies on leave of absence may vary outside the United States, in accordance with local law. The preceding two sentences will apply only to those employees who are not subject to United States taxes.

(c) Disability. Notwithstanding the above, if your employment with Sun (or the employing Subsidiary) terminates as a result of your Disability, during the twelve (12) months following your termination, you will continue to vest as to the number of Restricted Stock Units that would have vested if you had remained an employee of Sun (or the employing Subsidiary) during that period. For purposes of this Agreement, “Disability” means your total and permanent disability as defined in Section 22(e)(3) of the Code.

(d) Death. Notwithstanding the above, if your employment with Sun (or the employing Subsidiary) terminates as a result of your death, the Restricted Stock Units granted under this Agreement will continue to vest during the twelve (12) months following your death as to the number of Restricted Stock Units that would have vested had you remained an employee of Sun (or the employing Subsidiary) during that period.

5. Committee Discretion. The Committee, in its discretion, may accelerate the vesting of some or all of the Restricted Stock Units at any time, subject to the terms of the Plan. If so accelerated, the Restricted Stock Units will be considered as having vested as of the date specified by the Committee. If the Committee, in its discretion, accelerates the vesting of any Restricted Stock Units, the payment of the accelerated Restricted Stock Units nevertheless will be made at the same time or times as if the Restricted Stock Units had vested in accordance with the vesting schedule shown on the Notice of Grant (whether or not you remain employed by Sun or one of its Subsidiaries).

6. Payment after Vesting. Any Restricted Stock Units that vest while you remain employed by Sun or one of its Subsidiaries in accordance with paragraph 4 will be paid to you (or in the event of your death, to your estate) in Shares as soon as administratively practicable following the date of vesting, subject to paragraph 9. Any Restricted Stock Units that continue to vest after you cease to be employed by Sun or one of its Subsidiaries as provided in paragraph 4 or that vest in accordance with paragraph 5 will be paid to you (or in the event of your death, to your estate) in Shares in accordance with the provision of such paragraphs, subject to paragraph 9. For each Restricted Stock Unit that vests, you will receive one Share.

7. Forfeiture. Except as expressly provided herein, any Restricted Stock Units that have not vested at the time you cease to be employed by Sun or one of its Subsidiaries will be forfeited and automatically transferred to and reacquired by Sun at no cost to Sun.

8. Death. Any distribution or delivery to be made to you under this Agreement will, if you are then deceased, be made to the administrator or executor of your estate. The administrator or executor must furnish Sun with (a) written notice of his or her status as transferee, and (b) evidence satisfactory to Sun to establish the validity of the transfer and compliance with any applicable laws or regulations.

9. Withholding of Taxes. Regardless of any action Sun or the company that employs you (the “Employer”) takes with respect to any or all income tax, social insurance, payroll

tax, payment on account or other tax-related withholding (“Tax-Related Items”), you acknowledge that the ultimate liability for all Tax-Related Items legally due by you is and remains your responsibility and that Sun and/or the Employer (1) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the grant of Restricted Stock Units, including the grant, vesting and lapse of repurchase rights, the subsequent sale of Shares and/or the receipt of any dividends; and (2) do not commit to structure the terms of the grant or any aspect of the grant of Restricted Stock Units to reduce or eliminate your liability for Tax-Related Items. When the Shares are issued as payment for vested Restricted Stock Units, you will recognize immediate U.S. taxable income if you are a U.S. taxpayer. If you are a non-U.S. taxpayer, you will be subject to applicable taxes in your jurisdiction. Sun or the Employer is required to withhold from you an amount that is sufficient to pay the minimum federal, state and local income, employment and any other applicable taxes required to be withheld by Sun or the Employer with respect to the Shares. Sun or the Employer may, in its discretion, meet this withholding requirement in any one or more of the three following ways:

(a) by withholding or selling a portion of the Shares that otherwise would be paid out for your vested Restricted Stock Units.

(b) by withholding the amount necessary to pay the applicable taxes from your paycheck, with no withholding of Shares.

(c) by requiring you to make alternate arrangements to meet the withholding obligation.

(d) or such other method as Sun or the Committee may elect in compliance with local law.

No payment of Shares will be made to you (or your estate) for Restricted Stock Units unless and until satisfactory arrangements (as determined by Sun) have been made by you to fulfill Sun’s (or the Employer’s) obligation to withhold or collect any income and other taxes with respect to the Restricted Stock Units. By accepting this grant, you expressly consent to the withholding of Shares and to any additional (or alternative) cash withholding as provided for in this paragraph 9. All income and other taxes related to the Restricted Stock Unit award and any Shares delivered in payment thereof are your sole responsibility.

10. Rights as Stockholder. Neither you nor any person claiming under or through you will have any of the rights or privileges of a stockholder of Sun in respect of any Shares deliverable hereunder unless and until certificates representing the Shares (which may be in book entry form) have been issued, recorded on the records of Sun or its transfer agents or registrars, and delivered to you (including through electronic delivery to a brokerage account). Notwithstanding any other part of this Agreement, any quarterly or other regular, periodic dividends or distributions (as determined by Sun) will not affect unvested Restricted Stock Units, and no dividends or other distributions will be paid on unvested Restricted Stock Units. Notwithstanding any other part of this Agreement, any quarterly or other regular, periodic dividends or distributions (as determined by Sun) paid on Shares will accrue with respect to Restricted Stock Units that are vested but

unpaid pursuant to paragraph 4 or 5, and will be paid out at the same time or time(s) as the underlying Shares on which such dividends or other distributions have accrued. After the issuance, recordation and delivery of any shares, you will have all the rights of a stockholder of Sun with respect to voting the Shares and receiving dividends and distributions on the Shares.

11. Nature of Grant. In accepting the offer to acquire Shares, you acknowledge that: (a) the Plan is established voluntarily by Sun, it is discretionary in nature and it may be modified, amended, suspended or terminated by Sun at any time, unless otherwise provided in the Plan and this Agreement; (b) the grant of Restricted Stock Units is voluntary and occasional and does not create any contractual or other right to receive future grants of restricted stock units, or benefits in lieu of such grants even if restricted stock units have been granted repeatedly in the past; (c) all decisions with respect to future Restricted Stock Unit grants, if any, will be at the sole discretion of Sun; (d) you are voluntarily participating in the Plan; (e) the grant of Restricted Stock Units is an extraordinary item that does not constitute compensation of any kind for services of any kind rendered to Sun or the Employer, and which is outside the scope of your employment contract, if any; (f) the Restricted Stock Units are not part of normal or expected compensation or salary for any purposes, including, but not limited to, calculating any severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments; (g) the future value of the Shares is unknown and cannot be predicted with certainty; (h) in consideration of the grant of Restricted Stock Units, no claim or entitlement to compensation or damages will arise from the termination of vesting or diminution in value of the Shares resulting from termination of your active employment by Sun or the Employer (for any reason whatsoever and whether or not in breach of contract or local labor laws) and you irrevocably release Sun and the Employer from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing this Agreement, you will be deemed irrevocably to have waived your entitlement to pursue such claim; and (i) notwithstanding any terms or conditions of the Plan to the contrary, in the event of involuntary termination of your active employment (whether or not in breach of contract or local labor laws), your right to continued vesting, if any, will terminate effective as of the date that you are no longer actively employed and will not be extended by any notice period mandated under local law (e.g., active employment would not include a period of “garden leave” or similar period pursuant to local law), except as expressly provided herein, and that Sun will have the exclusive discretion to determine when you are no longer actively employed for purposes of administering your grant of Restricted Stock Units.

12. Address for Notices. Any notice to be given to Sun under the terms of this Agreement must be addressed to Sun, in care of its Secretary, at 4150 Network Circle, Santa Clara, CA 95054, or at such other address as Sun may hereafter designate in writing.

13. Grant is Not Transferable. Except to the limited extent provided in paragraph 8 above, this grant (and the associated rights and privileges) cannot be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and will not be subject to sale under execution, attachment or similar process. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of this grant, or of any associated right or privilege, or upon any attempted sale under any execution, attachment or similar process, this grant and the associated rights and privileges will immediately become null and void.

14. Restrictions on Sale of Securities. The Shares issued as payment for vested Restricted Stock Units will be registered under the U.S. federal securities laws and will be freely tradable upon receipt. However, your subsequent sale of the Shares will be subject to any market blackout-period that may be imposed by Sun and must comply with Sun’s insider trading policies, and any other applicable securities or other laws.

15. Delay in Payment. Notwithstanding any other part of this Agreement, any Restricted Stock Unit otherwise payable to you pursuant to this Agreement will not be paid during the six-month period following your termination of employment unless Sun determines, in its good faith judgment, that the payment would not cause you to incur an additional tax under Section 409A of the Code and any temporary or final Treasury Regulations and Internal Revenue Service guidance thereunder (“Section 409A”). If the payment of any amounts are delayed as a result of the previous sentence, any Restricted Stock Unit otherwise payable to you during the six (6) months following your termination will accrue during such six-month period and will become payable in Shares on the date six (6) months and one (1) day following the date of your termination.

16. Binding Agreement. Subject to the limitation on the transferability of this grant contained herein, this Agreement will be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto.

17. Conditions for Issuance of Certificates for Stock. Any Shares deliverable to you may be either previously authorized but unissued Shares or issued Shares which have been reacquired by Sun. Sun will not be required to issue any certificate or certificates for Shares hereunder prior to fulfillment of all the following conditions: (a) the admission of the Shares to listing on all stock exchanges on which the stock is listed; and (b) the completion of any registration or other qualification of the Shares under any U.S. state or federal law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body, which the Committee shall, in its absolute discretion, deem necessary or advisable; and (c) the obtaining of any approval or other clearance from any U.S. state or federal governmental agency or any other governmental regulatory body, which the Committee shall, in its absolute discretion, determine to be necessary or advisable; and (d) the lapse of a reasonable period of time following the date of vesting or other scheduled payout of the Restricted Stock Units as the Committee may establish from time to time for reasons of administrative convenience.

18. Plan Governs. This Agreement is subject to all terms and provisions of the Plan. In the event of a conflict between this Agreement and the Plan, the Plan will govern. Capitalized terms used and not defined in this Agreement will have the meaning set forth in the Plan.

19. Committee Authority. The Committee will have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any rules (including, but not limited to, the determination of whether or not any Restricted Stock Units have vested). All actions taken and all interpretations and determinations made by the

Committee will be final and binding upon you, Sun and all other persons. The Committee will not be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Agreement.

20. Data Privacy. By accepting this Restricted Stock Unit award or any Shares in payment thereof, you explicitly and unambiguously consent to the collection, use and transfer, in electronic or other form, of your personal data as described in this document by and among, as applicable, the Employer, Sun and its Subsidiaries and affiliates for the exclusive purpose of implementing, administering and managing your participation in the Plan. For the purpose of implementing, administering and managing the Plan, you understand that Sun and the Employer hold certain personal information about you, including, but not limited to, your name, home address and telephone number, date of birth, Tax ID or other identification number, salary, nationality, job title, any Shares or directorships held in Sun, details of all Restricted Stock Units or any entitlement to Shares awarded, canceled, exercised, vested, unvested or outstanding in your favor, for the purpose of implementing, administering and managing the Plan (“Data”). You understand that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in your country or elsewhere. Sun, as a global company, may transfer your personal data to countries which may not provide an adequate level of protection. Sun, however, is committed to providing a suitable and consistent level of protection for your personal data regardless of the country in which it resides. You understand that you may request information regarding Sun’s stock plan administration by contacting Global Stock Plan Services. You authorize the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing your participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom you deposit any Shares issued at vesting or other scheduled payout. You understand that Data will be held as long as is necessary to implement, administer and manage the Plan. You understand that you may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing Global Stock Plan Services. You understand, however, that refusing or withdrawing your consent may affect your ability to participate in the Plan. For more information on the consequences of your refusal to consent or withdrawal of consent, you understand that you may contact Global Stock Plan Services.

21. Country-Specific Terms. Appendix B of this Agreement contains additional terms that apply to employees in certain countries. You should review Appendix B to determine any additional terms that will apply to your grant of Restricted Stock Units.

22. Captions. Captions used in this Agreement are for convenience only and are not to serve as a basis for interpretation or construction of this Agreement.

23. Agreement Severable. In the event that any provision in this Agreement is held invalid or unenforceable, the provision will be severable from, and the invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Agreement.

24. Entire Agreement. This Agreement constitutes the entire understanding of the parties on the subjects covered. You expressly warrant that you are not executing this Agreement in reliance on any promises, representations, or inducements other than those contained in the Agreement.

25. Modifications to the Agreement. Modifications to this Agreement or the Plan can be made only in an express written contract executed by a duly authorized officer of Sun. Notwithstanding anything to the contrary in the Plan or this Agreement, Sun reserves the right to revise this Agreement as it deems necessary or advisable, in its sole discretion and without your consent, to comply with Section 409A or to otherwise avoid imposition of any additional tax or income recognition under Section 409A prior to the actual payment of Shares pursuant to this award of Restricted Stock Units.

26. Amendment, Suspension or Termination of the Plan. By accepting this award, you expressly warrant that you have received a right to purchase stock under the Plan, and has received, read and understood a description of the Plan. You understand that the Plan is discretionary in nature and may be modified, suspended or terminated by Sun at any time.

27. Electronic Delivery. Sun may, in its sole discretion, decide to deliver any documents related to the grant of Restricted Stock Units and participation in the Plan or future restricted stock units that may be granted under the Plan by electronic means or to request your consent to participate in the Plan by electronic means. You hereby consent to receive such documents by electronic delivery and, if requested, to agree to participate in the Plan through an on-line or electronic system established and maintained by Sun or another third party designated by Sun.

28. No Effect on Employment or Service. YOU FURTHER ACKNOWLEDGE THAT NOTHING IN THIS AGREEMENT CONSTITUTES A CONTRACT OF EMPLOYEMENT AND THAT YOU AND SUN, INCLUDING ITS SUBSIDIARIES AND AFFILIATES, EACH RESERVES THE RIGHT TO TERMINATE THE EMPLOYMENT RELATIONSHIP AT ANY TIME AND FOR ANY REASON, WITH OR WITHOUT CAUSE AND WITH OR WITHOUT NOTICE, WHEREVER ALLOWED BY LOCAL LAWS.

29. Notice of Governing Law. This grant of Restricted Stock Units is governed by, and will be construed in accordance with, the laws of the State of Delaware without regard to principles of conflict of laws. For purposes of litigating any dispute that arises directly or indirectly from the relationship of the parties evidenced by this grant or the Agreement, the parties agree to submit to and consent to the exclusive jurisdiction of the State of California and agree that such litigation will be conducted only in the courts of Santa Clara County, California, or the federal courts for the United States for the Northern District of California, and no other courts, where this grant is made and/or to be performed.

30. Solicitation of Employees. You agree that both while employed by Sun (including its subsidiaries and affiliates) and for twelve (12) months immediately following the termination of employment with Sun, you shall not either directly or indirectly solicit, induce, recruit or encourage any of Sun’s employees to leave their employment either for yourself or for any other person or entity.

APPENDIX B

SUN MICROSYSTEMS, INC.

RESTRICTED STOCK UNIT AGREEMENT

Special Provisions for Restricted Stock Units in Countries Outside the U.S.

This Exhibit includes special terms applicable to grantees in the countries below. These terms are in addition to those set forth in the Agreement. Capitalized terms used but not defined herein will have the same meanings assigned to them in the Plan and the Agreement.

Please note that the information below may relate to your exchange control obligations. Compliance with such obligations is your responsibility and neither Sun nor the Employer accepts any responsibility for such compliance. Also, exchange control regulations are subject to change. As a result, you should consult with your advisor before sending/receiving funds to the U.S. or before selling Shares.

Argentina

The offering of the award of Restricted Stock Units and Shares issued at vesting are offered in a private transaction. This offer is not subject to the supervision of Argentine governmental authorities.

The Restricted Stock Units and Shares are being awarded by Sun on behalf of your local employer. The Restricted Stock Units do not accrue on a monthly basis and will not be granted on a regular or monthly basis.

Canada

Consent to Receive Information in English for Employees in Quebec.

The parties acknowledge that it is their express wish that the Agreement, as well as all documents, notices and legal proceeds entered into, given or instituted pursuant hereto or relating directly or indirectly hereto, be drawn up in English.

Les parties reconnaissent avoir exigé la rédaction en anglais de cette convenzion, ainsi que de tous documents exécutés, avis donnés et procédures judiciaries intentées, directement ou indirectement, relativement à ou suite à la présents convenzion.

China

Please be advised of the following exchange control regulations that will apply when you sell Shares.

A PRC national is permitted to open foreign exchange accounts in China and to receive foreign exchange remitted from abroad or foreign exchange held in China. There is no limit on the amount of foreign exchange that can be received and maintained in the foreign exchange accounts. However, difficulties may arise with the withdrawal and conversion of foreign currency from Chinese bank accounts. For amounts between US$10,000 and US$50,000, you must produce documentation to the bank evidencing the source of the funds. If the amount exceeds US$50,000, local approval is required to withdraw and convert the currency.

Colombia

You may be required to register any foreign investments you hold abroad, including Shares of Sun, with the Bank of the Republic if the value of such foreign investments exceeds the applicable threshold.

Pursuant to Article 128 of the Colombian Labor Code, the Plan and related benefits do not constitute a component of “salary” for any legal purpose.

Denmark

If you make or receive overseas payments in excess of DKK250,000, you will be required to file a report with the Danish National Bank. This report is required for statistical purposes only. In addition, if you establish an account holding cash or shares abroad, you must report the account to the Danish National Bank.

If the Danish Stock Option Act applies to your grant of Restricted Stock Units, your Restricted Stock Units will not be subject to Sun’s repurchase option upon involuntary termination of employment that is not in breach of contract.

France

You may hold Shares acquired under the Plan outside France provided you declare all foreign accounts, whether open, current, or closed, in your income tax return. Furthermore, you must declare to the customs and excise authorities any cash or securities you import or export without the use of a financial institution when the value of the cash or securities is equal to or exceeds €7,600.

Restricted Stock Units are being granted under a French tax-qualified plan.

Germany

Cross-border payments in excess of €12,500 must be reported monthly. If you use a German bank to effect a cross-border payment in excess of €12,500 in connection with the sale or securities or the payment of dividends related to certain securities, the bank will make the report. In this case, you will not have to report the transaction. In addition, you must report any receivables or payables or debts in foreign currency exceeding an amount of approximately €5,000,000 on a monthly basis. Finally, you must report on an annual basis, Shares holding exceeding 10% of the total voting capital of Sun.

Hong Kong

The contents of the Agreement have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you have any doubt about any of the contents of the Agreement, you should obtain independent professional advice.

India

Proceeds from the sale of Shares must be repatriated to India. You should obtain a foreign inward remittance certificate from the bank for your records to document compliance with this requirement and submit a copy of the foreign inward remittance certificate to your employer.

By accepting this Restricted Stock Unit award, you acknowledge that you understand and agree that: (i) your decision to accept the award is voluntary; and (ii) an award granted under the Plan does not constitute a customary right or privilege.

Ireland

Restricted Stock Units and Shares issued at vesting are offered in a private transaction and not as a public offering. Only newly issued Shares will be used for the payment of Restricted Stock Units to directors of Sun.

Directors and shadow directors of an Irish subsidiary are subject to certain notification requirements under the Companies Act. Directors and shadow directors must notify the Irish subsidiary in writing of their

interest in Sun and the number and class of Shares or rights to which the interest relates within five days of receipt or knowledge of receipt of the Restricted Stock Units. Directors and shadow directors also must notify the Irish subsidiary within five days of payment of their Restricted Stock Units or of selling Shares acquired under the Plan. This disclosure requirement also applies to any rights or Shares acquired by director’s spouse or children (under the age of 18).

Korea

When the Shares acquired under the Plan are sold, if the proceeds exceed US$100,000, such proceeds must be repatriated to Korea within six months.

Luxembourg

You are obligated to report any outward and inward remittance of funds to the Banque Central de Luxembourg and/or the Service Central de La Statisque et des Etudes Economiques (the “STATEC”). If a Luxembourg financial institution is involved in the transaction, it will generally fulfill the reporting obligation on your behalf. If the transaction does not involve a Luxembourg financial institution, you will have to report the transaction (regardless of the amount remitted or received) yourself to the STATEC on a specific form. The report has to be filed within 15 working days following the month during which the transaction occurred.

Netherlands

The Restricted Stock Unit award is being made to you as an incentive for you to remain employed with your current Employer and is not remuneration for services rendered.

Russia

If Restricted Stock Units are granted to employees in Russia, the Restricted Stock Units will be paid to you in cash at vesting. You will receive the cash equivalent of the fair market value of the Shares at vesting. You will not be entitled to receive any Shares pursuant to the grant of Restricted Stock Units.

When you receive cash at vesting, you may be required to repatriate the funds to Russia through an “F” type account opened at an authorized bank in Russia. After you remit the sale proceeds back to Russia, you may transfer the funds to a foreign bank account subject to the following limitations: (1) the foreign account may be opened only for individuals; (2) the foreign account may not be used for business activities; (3) you must give notice to the Russian tax authorities about the opening/closing of each foreign account within one month after the account opening/closing; and (4) you must notify the account balances on your foreign accounts as of the beginning of each calendar year to the Russian tax authorities. There may be additional restrictions if you send/receive more than US$150,000 into/out of Russia within a calendar year.

Singapore

The offer is being made on a private basis and is, therefore, exempt from registration in Singapore.

Directors of a Singapore subsidiary are subject to certain notification requirements under the Singapore Companies Act Directors must notify the Singapore subsidiary in writing of an interest (e.g., Shares) in Sun or any related companies within two days of its acquisition or disposal. In addition, directors must notify the Singapore subsidiary of any interest held in Sun or any related company within two days of becoming a director.

Thailand

Any proceeds received from the sale of Shares must be repatriated into Thailand, and they must be converted to Thai Baht within seven days of receipt. In the event that the amount of the proceeds from the sale of Shares is US$20,000 or more (or its equivalent amount at market rate). You also are required to complete and submit a Foreign Exchange Transaction Form to the authorized agent to report the inward remittance of the proceeds to Thailand.

United Kingdom

Restricted Stock Units may only be settled in Shares.

You must also agree to certain National Insurance Contribution (NIC) passthrough provisions in order to accept your grant.

Venezuela

This offering is personal, private, exclusive and non-transferable and is made to you because you meet the eligibility requirements set forth in the Plan.

You agree that any modification of the Plan or its termination will not constitute a change or impairment of the terms and conditions of your employment.

EX-10.5

Exhibit 10.5

SUN MICROSYSTEMS, INC.

PERFORMANCE RESTRICTED STOCK UNIT AGREEMENT

NOTICE OF GRANT

Sun Microsystems, Inc. (“Sun”) is pleased to inform you that you, [                                ], have been granted the number of Performance Restricted Stock Units (“Performance Restricted Stock Units”) indicated below under Sun’s 1990 Long-Term Equity Incentive Plan (the “Plan”) and the terms of this Performance Restricted Stock Unit agreement (including the Notice of Grant and Appendices A and B, all of which are the “Agreement”). Subject to the provisions of the Agreement and the Plan, the principal features of this grant are as follows:

Grant Date:	[Date]
Total Number of Performance Restricted Stock Units:	[To come]
Scheduled Vesting:	25% of total Performance Restricted Stock Units vest one year after the Grant Date, subject to Sun achieving the Performance Target for Fiscal Year [            ]. If the Performance Target is achieved, 25% of the total Performance Restricted Stock Units vest on the second, third and fourth anniversaries of the Grant Date. If the Performance Target is not achieved, all Restricted Stock Units shall be canceled.
Purchase Price per Share:	$[0.01 or 0.00067] payable in services rendered by you (no cash payment required)
Acceptance Deadline:	You must accept this grant of Performance Restricted Stock Units prior to the Acceptance Deadline, which is sixty (60) days from the Grant Date.

* Except as otherwise provided in the Agreement or by the terms of the Plan, you will not vest in the Performance Restricted Stock Units unless you remain employed by Sun or one of its Subsidiaries through the applicable vesting date.

Your acceptance of this grant either by signature below or by electronic acceptance indicates your understanding that this grant is subject to all of the terms described in this Agreement, including Appendices A and B, and the Plan. Important additional information on vesting and forfeiture of the Performance Restricted Stock Units covered by this grant is contained in paragraphs 4 through 5 and paragraph 7 of Appendix A. PLEASE BE SURE TO READ ALL OF APPENDIX A, WHICH CONTAINS THE SPECIFIC TERMS OF THIS GRANT.

THIS AGREEMENT MUST BE ACCEPTED BY YOU BY THE ACCEPTANCE DEADLINE, OR THIS GRANT OF PERFORMANCE RESTRICTED STOCK UNITS WILL AUTOMATICALLY BE CANCELED.

SUN MICROSYSTEMS, INC.		GRANTEE
By:	/s/ Michael A. Dillon
Title:	Executive VP, General Counsel and Secretary	[Name]

APPENDIX A

TERMS OF PERFORMANCE RESTRICTED STOCK UNITS

1. Grant. Sun hereby grants to you under the Plan at the per share price of $0.01 or 0.00067 (the “Purchase Price”), the number of Performance Restricted Stock Units indicated in the Notice of Grant, subject to all of the terms in this Agreement and the Plan.

2. Payment of Purchase Price. When Shares are issued to you in payment for the Performance Restricted Stock Units, the Purchase Price will be deemed paid through services rendered by you (not in cash), and will be subject to the appropriate tax withholdings.

3. Sun’s Obligation to Pay. Unless and until the Performance Restricted Stock Units have vested in the manner set forth in paragraphs 4 or 5, you will have no right to payment of the Performance Restricted Stock Units. Until any vested Performance Restricted Stock Units actually are paid, the Performance Restricted Stock Units will be an unsecured obligation of Sun. Any vested Performance Restricted Stock Units will be paid in Shares. Only whole Shares will be issued.

4. Vesting Schedule.

(a) General. Except as otherwise provided in this paragraph 4 and paragraph 5 of this Agreement, and subject to paragraph 7, the Performance Restricted Stock Units are scheduled to vest in accordance with the vesting schedule shown in the Notice of Grant. Performance Restricted Stock Units scheduled to vest on any date actually will vest only if you continue to be employed by Sun or one of its Subsidiaries through the applicable vesting date, except to the extent otherwise provided in this Agreement, by Sun in a written agreement between you and an authorized officer of Sun or in accordance with the then-applicable written policies of Sun. In all instances in which Performance Restricted Stock Units continue to vest after you cease to be employed by Sun or one of its Subsidiaries, the payment of such accelerated Performance Restricted Stock Units nevertheless will be made at the same time or times such Performance Restricted Stock Units would have been paid had they vested in accordance with the vesting schedule shown in the Notice of Grant.

(b) Leave of Absence. Notwithstanding the above, vesting of the Performance Restricted Stock Units will be suspended if you take an authorized unpaid leave of absence (including a leave of absence for military, educational, disability or personal purposes, but except as may be required by law) of more than thirty (30) days or an authorized paid leave of absence of more than ninety (90) days. The vesting schedule shown in the Notice of Grant will be delayed for the number of days that the authorized unpaid leave of absence or authorized paid leave of absence extends beyond the periods set forth above. The suspension of vesting will commence on the thirty-first (31^st) day of an authorized unpaid leave of absence of more than thirty (30) days or, in the case of an authorized paid leave of absence of more than ninety (90) days, on the ninety-first (91^st) day of the leave and the suspension will end on the earlier of: (i) the last

business day preceding the date on which your leave of absence terminates; or (ii) a date twelve (12) months after the beginning of the leave of absence. These vesting suspension provisions will be applied in compliance with local law. Sun policies on leave of absence may vary outside the United States, in accordance with local law. The preceding two sentences will apply only to those employees who are not subject to United States taxes.

(c) Disability. Notwithstanding the above, if your employment with Sun (or the employing Subsidiary) terminates as a result of your Disability, during the twelve (12) months following your termination, you will continue to vest as to the number of Performance Restricted Stock Units that would have vested if you had remained an employee of Sun (or the employing Subsidiary) during that period. For purposes of this Agreement, “Disability” means your total and permanent disability as defined in Section 22(e)(3) of the Code.

(d) Death. Notwithstanding the above, if your employment with Sun (or the employing Subsidiary) terminates as a result of your death, the Performance Restricted Stock Units granted under this Agreement will continue to vest during the twelve (12) months following your death as to the number of Performance Restricted Stock Units that would have vested had you remained an employee of Sun (or the employing Subsidiary) during that period.

(e) Performance Target. The “Performance Target” shall be achieved if [describe performance targets]. The determination of whether or not the Performance Target is achieved shall be made by the Leadership Development and Compensation Committee of the Board of Directors in its sole discretion as soon as practicable after the end of the fiscal year, and no Shares will be issued until such determination is made.

5. Committee Discretion. The Committee, in its discretion, may accelerate the vesting of some or all of the Performance Restricted Stock Units at any time, subject to the terms of the Plan. If so accelerated, the Performance Restricted Stock Units will be considered as having vested as of the date specified by the Committee. If the Committee, in its discretion, accelerates the vesting of any Performance Restricted Stock Units, the payment of the accelerated Performance Restricted Stock Units nevertheless will be made at the same time or times as if the Performance Restricted Stock Units had vested in accordance with the vesting schedule shown on the Notice of Grant (whether or not you remain employed by Sun or one of its Subsidiaries).

6. Payment after Vesting. Any Performance Restricted Stock Units that vest while you remain employed by Sun or one of its Subsidiaries in accordance with paragraph 4 will be paid to you (or in the event of your death, to your estate) in Shares as soon as administratively practicable following the date of vesting, subject to paragraph 9. Any Performance Restricted Stock Units that continue to vest after you cease to be employed by Sun or one of its Subsidiaries as provided in paragraph 4 or that vest in accordance with paragraph 5 will be paid to you (or in the event of your death, to your estate) in Shares in accordance with the provision of such paragraphs, subject to paragraph 9. For each Performance Restricted Stock Unit that vests, you will receive one Share.

7. Forfeiture. Except as expressly provided herein, any Performance Restricted Stock Units that have not vested at the time you cease to be employed by Sun or one of its Subsidiaries will be forfeited and automatically transferred to and reacquired by Sun at no cost to Sun.

8. Death. Any distribution or delivery to be made to you under this Agreement will, if you are then deceased, be made to the administrator or executor of your estate. The administrator or executor must furnish Sun with (a) written notice of his or her status as transferee, and (b) evidence satisfactory to Sun to establish the validity of the transfer and compliance with any applicable laws or regulations.

9. Withholding of Taxes. Regardless of any action Sun or the company that employs you (the “Employer”) takes with respect to any or all income tax, social insurance, payroll tax, payment on account or other tax-related withholding (“Tax-Related Items”), you acknowledge that the ultimate liability for all Tax-Related Items legally due by you is and remains your responsibility and that Sun and/or the Employer (1) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the grant of Performance Restricted Stock Units, including the grant, vesting and lapse of repurchase rights, the subsequent sale of Shares and/or the receipt of any dividends; and (2) do not commit to structure the terms of the grant or any aspect of the grant of Performance Restricted Stock Units to reduce or eliminate your liability for Tax-Related Items. When the Shares are issued as payment for vested Performance Restricted Stock Units, you will recognize immediate U.S. taxable income if you are a U.S. taxpayer. If you are a non-U.S. taxpayer, you will be subject to applicable taxes in your jurisdiction. Sun or the Employer is required to withhold from you an amount that is sufficient to pay the minimum federal, state and local income, employment and any other applicable taxes required to be withheld by Sun or the Employer with respect to the Shares. Sun or the Employer may, in its discretion, meet this withholding requirement in any one or more of the three following ways:

(a) by withholding or selling a portion of the Shares that otherwise would be paid out for your vested Performance Restricted Stock Units.

(b) by withholding the amount necessary to pay the applicable taxes from your paycheck, with no withholding of Shares.

(c) by requiring you to make alternate arrangements to meet the withholding obligation.

(d) or such other method as Sun or the Committee may elect in compliance with local law.

No payment of Shares will be made to you (or your estate) for Performance Restricted Stock Units unless and until satisfactory arrangements (as determined by Sun) have been made by you to fulfill Sun’s (or the Employer’s) obligation to withhold or collect any income and other taxes with respect to the Performance Restricted Stock Units. By accepting this grant, you expressly consent to the withholding of Shares and to any additional (or alternative) cash withholding as provided for in this paragraph 9. All income and other taxes related to the Performance Restricted Stock Unit award and any Shares delivered in payment thereof are your sole responsibility.

10. Rights as Stockholder. Neither you nor any person claiming under or through you will have any of the rights or privileges of a stockholder of Sun in respect of any Shares deliverable hereunder unless and until certificates representing the Shares (which may be in book entry form) have been issued, recorded on the records of Sun or its transfer agents or registrars, and delivered to you (including through electronic delivery to a brokerage account). Notwithstanding any other part of this Agreement, any quarterly or other regular, periodic dividends or distributions (as determined by Sun) will not affect unvested Performance Restricted Stock Units, and no dividends or other distributions will be paid on unvested Performance Restricted Stock Units. Notwithstanding any other part of this Agreement, any quarterly or other regular, periodic dividends or distributions (as determined by Sun) paid on Shares will accrue with respect to Performance Restricted Stock Units that are vested but unpaid pursuant to paragraph 4 or 5, and will be paid out at the same time or time(s) as the underlying Shares on which such dividends or other distributions have accrued. After the issuance, recordation and delivery of any shares, you will have all the rights of a stockholder of Sun with respect to voting the Shares and receiving dividends and distributions on the Shares.

11. Nature of Grant. In accepting the offer to acquire Shares, you acknowledge that: (a) the Plan is established voluntarily by Sun, it is discretionary in nature and it may be modified, amended, suspended or terminated by Sun at any time, unless otherwise provided in the Plan and this Agreement; (b) the grant of Performance Restricted Stock Units is voluntary and occasional and does not create any contractual or other right to receive future grants of Performance Restricted Stock Units, or benefits in lieu of such grants even if Performance Restricted Stock Units have been granted repeatedly in the past; (c) all decisions with respect to future Performance Restricted Stock Unit grants, if any, will be at the sole discretion of Sun; (d) you are voluntarily participating in the Plan; (e) the grant of Performance Restricted Stock Units is an extraordinary item that does not constitute compensation of any kind for services of any kind rendered to Sun or the Employer, and which is outside the scope of your employment contract, if any; (f) the Performance Restricted Stock Units are not part of normal or expected compensation or salary for any purposes, including, but not limited to, calculating any severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments; (g) the future value of the Shares is unknown and cannot be predicted with certainty; (h) in consideration of the grant of Performance Restricted Stock Units, no claim or entitlement to compensation or damages will arise from the termination of vesting or diminution in value of the Shares resulting from termination of your active employment by Sun or the Employer (for any reason whatsoever and whether or not in breach of contract or local labor laws) and you irrevocably release Sun and the Employer from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing this Agreement, you will be deemed irrevocably to have waived your entitlement to pursue such claim; and (i) notwithstanding any terms or conditions of the Plan to the contrary, in the event of involuntary termination of your active employment (whether or not in breach of contract or local labor laws), your right to continued vesting, if any, will terminate effective as of

the date that you are no longer actively employed and will not be extended by any notice period mandated under local law (e.g., active employment would not include a period of “garden leave” or similar period pursuant to local law), except as expressly provided herein, and that Sun will have the exclusive discretion to determine when you are no longer actively employed for purposes of administering your grant of Performance Restricted Stock Units.

12. Address for Notices. Any notice to be given to Sun under the terms of this Agreement must be addressed to Sun, in care of its Secretary, at 4150 Network Circle, Santa Clara, CA 95054, or at such other address as Sun may hereafter designate in writing.

13. Grant is Not Transferable. Except to the limited extent provided in paragraph 8 above, this grant (and the associated rights and privileges) cannot be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and will not be subject to sale under execution, attachment or similar process. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of this grant, or of any associated right or privilege, or upon any attempted sale under any execution, attachment or similar process, this grant and the associated rights and privileges will immediately become null and void.

14. Restrictions on Sale of Securities. The Shares issued as payment for vested Performance Restricted Stock Units will be registered under the U.S. federal securities laws and will be freely tradable upon receipt. However, your subsequent sale of the Shares will be subject to any market blackout-period that may be imposed by Sun and must comply with Sun’s insider trading policies, and any other applicable securities or other laws.

15. Delay in Payment. Notwithstanding any other part of this Agreement, any Performance Restricted Stock Unit otherwise payable to you pursuant to this Agreement will not be paid during the six-month period following your termination of employment unless Sun determines, in its good faith judgment, that the payment would not cause you to incur an additional tax under Section 409A of the Code and any temporary or final Treasury Regulations and Internal Revenue Service guidance thereunder (“Section 409A”). If the payment of any amounts are delayed as a result of the previous sentence, any Performance Restricted Stock Unit otherwise payable to you during the six (6) months following your termination will accrue during such six-month period and will become payable in Shares on the date six (6) months and one (1) day following the date of your termination.

16. Binding Agreement. Subject to the limitation on the transferability of this grant contained herein, this Agreement will be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto.

17. Conditions for Issuance of Certificates for Stock. Any Shares deliverable to you may be either previously authorized but unissued Shares or issued Shares which have been reacquired by Sun. Sun will not be required to issue any certificate or certificates for Shares hereunder prior to fulfillment of all the following conditions: (a) the admission of the Shares to listing on all stock exchanges on which the stock is listed; and (b) the completion of any registration or other qualification of the Shares under any U.S. state or federal law or under the rulings or regulations of the Securities and Exchange

Commission or any other governmental regulatory body, which the Committee shall, in its absolute discretion, deem necessary or advisable; and (c) the obtaining of any approval or other clearance from any U.S. state or federal governmental agency or any other governmental regulatory body, which the Committee shall, in its absolute discretion, determine to be necessary or advisable; and (d) the lapse of a reasonable period of time following the date of vesting or other scheduled payout of the Performance Restricted Stock Units as the Committee may establish from time to time for reasons of administrative convenience.

18. Plan Governs. This Agreement is subject to all terms and provisions of the Plan. In the event of a conflict between this Agreement and the Plan, the Plan will govern. Capitalized terms used and not defined in this Agreement will have the meaning set forth in the Plan.

19. Committee Authority. The Committee will have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any rules (including, but not limited to, the determination of whether or not any Performance Restricted Stock Units have vested). All actions taken and all interpretations and determinations made by the Committee will be final and binding upon you, Sun and all other persons. The Committee will not be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Agreement.

20. Data Privacy. By accepting this Performance Restricted Stock Unit award or any Shares in payment thereof, you explicitly and unambiguously consent to the collection, use and transfer, in electronic or other form, of your personal data as described in this document by and among, as applicable, the Employer, Sun and its Subsidiaries and affiliates for the exclusive purpose of implementing, administering and managing your participation in the Plan. For the purpose of implementing, administering and managing the Plan, you understand that Sun and the Employer hold certain personal information about you, including, but not limited to, your name, home address and telephone number, date of birth, Tax ID or other identification number, salary, nationality, job title, any Shares or directorships held in Sun, details of all Performance Restricted Stock Units or any entitlement to Shares awarded, canceled, exercised, vested, unvested or outstanding in your favor, for the purpose of implementing, administering and managing the Plan (“Data”). You understand that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in your country or elsewhere. Sun, as a global company, may transfer your personal data to countries which may not provide an adequate level of protection. Sun, however, is committed to providing a suitable and consistent level of protection for your personal data regardless of the country in which it resides. You understand that you may request information regarding Sun’s stock plan administration by contacting Global Stock Plan Services. You authorize the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing your participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom you deposit any Shares issued at vesting or other scheduled payout. You understand that Data will be held as long as is necessary to implement, administer and manage the Plan. You understand that you may, at any time, view Data, request additional information about the storage and

processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing Global Stock Plan Services. You understand, however, that refusing or withdrawing your consent may affect your ability to participate in the Plan. For more information on the consequences of your refusal to consent or withdrawal of consent, you understand that you may contact Global Stock Plan Services.

21. Country-Specific Terms. Appendix B of this Agreement contains additional terms that apply to employees in certain countries. You should review Appendix B to determine any additional terms that will apply to your grant of Performance Restricted Stock Units.

22. Captions. Captions used in this Agreement are for convenience only and are not to serve as a basis for interpretation or construction of this Agreement.

23. Agreement Severable. In the event that any provision in this Agreement is held invalid or unenforceable, the provision will be severable from, and the invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Agreement.

24. Entire Agreement. This Agreement constitutes the entire understanding of the parties on the subjects covered. You expressly warrant that you are not executing this Agreement in reliance on any promises, representations, or inducements other than those contained in the Agreement.

25. Modifications to the Agreement. Modifications to this Agreement or the Plan can be made only in an express written contract executed by a duly authorized officer of Sun. Notwithstanding anything to the contrary in the Plan or this Agreement, Sun reserves the right to revise this Agreement as it deems necessary or advisable, in its sole discretion and without your consent, to comply with Section 409A or to otherwise avoid imposition of any additional tax or income recognition under Section 409A prior to the actual payment of Shares pursuant to this award of Performance Restricted Stock Units.

26. Amendment, Suspension or Termination of the Plan. By accepting this award, you expressly warrant that you have received a right to purchase stock under the Plan, and has received, read and understood a description of the Plan. You understand that the Plan is discretionary in nature and may be modified, suspended or terminated by Sun at any time.

27. Electronic Delivery. Sun may, in its sole discretion, decide to deliver any documents related to the grant of Performance Restricted Stock Units and participation in the Plan or future Performance Restricted Stock Units that may be granted under the Plan by electronic means or to request your consent to participate in the Plan by electronic means. You hereby consent to receive such documents by electronic delivery and, if requested, to agree to participate in the Plan through an on-line or electronic system established and maintained by Sun or another third party designated by Sun.

28. No Effect on Employment or Service. YOU FURTHER ACKNOWLEDGE THAT NOTHING IN THIS AGREEMENT CONSTITUTES A CONTRACT OF EMPLOYEMENT AND THAT YOU AND SUN, INCLUDING ITS SUBSIDIARIES AND AFFILIATES, EACH

RESERVES THE RIGHT TO TERMINATE THE EMPLOYMENT RELATIONSHIP AT ANY TIME AND FOR ANY REASON, WITH OR WITHOUT CAUSE AND WITH OR WITHOUT NOTICE, WHEREVER ALLOWED BY LOCAL LAWS.

29. Notice of Governing Law. This grant of Performance Restricted Stock Units is governed by, and will be construed in accordance with, the laws of the State of Delaware without regard to principles of conflict of laws. For purposes of litigating any dispute that arises directly or indirectly from the relationship of the parties evidenced by this grant or the Agreement, the parties agree to submit to and consent to the exclusive jurisdiction of the State of California and agree that such litigation will be conducted only in the courts of Santa Clara County, California, or the federal courts for the United States for the Northern District of California, and no other courts, where this grant is made and/or to be performed.

30. Solicitation of Employees. You agree that both while employed by Sun (including its subsidiaries and affiliates) and for twelve (12) months immediately following the termination of employment with Sun, you shall not either directly or indirectly solicit, induce, recruit or encourage any of Sun’s employees to leave their employment either for yourself or for any other person or entity.

o O o

APPENDIX B

SUN MICROSYSTEMS, INC.

Performance Restricted Stock Unit AGREEMENT

Special Provisions for Performance Restricted Stock Units in Countries Outside the U.S.

This Exhibit includes special terms applicable to grantees in the countries below. These terms are in addition to those set forth in the Agreement. Capitalized terms used but not defined herein will have the same meanings assigned to them in the Plan and the Agreement.

Please note that the information below may relate to your exchange control obligations. Compliance with such obligations is your responsibility and neither Sun nor the Employer accepts any responsibility for such compliance. Also, exchange control regulations are subject to change. As a result, you should consult with your advisor before sending/receiving funds to the U.S. or before selling Shares.

Argentina

The offering of the award of Performance Restricted Stock Units and Shares issued at vesting are offered in a private transaction. This offer is not subject to the supervision of Argentine governmental authorities.

The Performance Restricted Stock Units and Shares are being awarded by Sun on behalf of your local employer. The Performance Restricted Stock Units do not accrue on a monthly basis and will not be granted on a regular or monthly basis.

Canada

Consent to Receive Information in English for Employees in Quebec.

The parties acknowledge that it is their express wish that the Agreement, as well as all documents, notices and legal proceeds entered into, given or instituted pursuant hereto or relating directly or indirectly hereto, be drawn up in English.

Les parties reconnaissent avoir exigé la rédaction en anglais de cette convenzion, ainsi que de tous documents exécutés, avis donnés et procédures judiciaries intentées, directement ou indirectement, relativement à ou suite à la présents convenzion.

China

Please be advised of the following exchange control regulations that will apply when you sell Shares.

A PRC national is permitted to open foreign exchange accounts in China and to receive foreign exchange remitted from abroad or foreign exchange held in China. There is no limit on the amount of foreign exchange that can be received and maintained in the foreign exchange accounts. However, difficulties may arise with the withdrawal and conversion of foreign currency from Chinese bank accounts. For amounts between US$10,000 and US$50,000, you must produce documentation to the bank evidencing the source of the funds. If the amount exceeds US$50,000, local approval is required to withdraw and convert the currency.

Colombia

You may be required to register any foreign investments you hold abroad, including Shares of Sun, with the Bank of the Republic if the value of such foreign investments exceeds the applicable threshold.

Pursuant to Article 128 of the Colombian Labor Code, the Plan and related benefits do not constitute a component of “salary” for any legal purpose.

Denmark

If you make or receive overseas payments in excess of DKK250,000, you will be required to file a report with the Danish National Bank. This report is required for statistical purposes only. In addition, if you establish an account holding cash or shares abroad, you must report the account to the Danish National Bank.

If the Danish Stock Option Act applies to your grant of Performance Restricted Stock Units, your Performance Restricted Stock Units will not be subject to Sun’s repurchase option upon involuntary termination of employment that is not in breach of contract.

France

You may hold Shares acquired under the Plan outside France provided you declare all foreign accounts, whether open, current, or closed, in your income tax return. Furthermore, you must declare to the customs and excise authorities any cash or securities you import or export without the use of a financial institution when the value of the cash or securities is equal to or exceeds €7,600.

Performance Restricted Stock Units are being granted under a French tax-qualified plan.

Germany

Cross-border payments in excess of €12,500 must be reported monthly. If you use a German bank to effect a cross-border payment in excess of €12,500 in connection with the sale or securities or the payment of dividends related to certain securities, the bank will make the report. In this case, you will not have to report the transaction. In addition, you must report any receivables or payables or debts in foreign currency exceeding an amount of approximately €5,000,000 on a monthly basis. Finally, you must report on an annual basis, Shares holding exceeding 10% of the total voting capital of Sun.

Hong Kong

The contents of the Agreement have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you have any doubt about any of the contents of the Agreement, you should obtain independent professional advice.

India

Proceeds from the sale of Shares must be repatriated to India. You should obtain a foreign inward remittance certificate from the bank for your records to document compliance with this requirement and submit a copy of the foreign inward remittance certificate to your employer.

By accepting this Performance Restricted Stock Unit award, you acknowledge that you understand and agree that: (i) your decision to accept the award is voluntary; and (ii) an award granted under the Plan does not constitute a customary right or privilege.

Ireland

Performance Restricted Stock Units and Shares issued at vesting are offered in a private transaction and not as a public offering. Only newly issued Shares will be used for the payment of Performance Restricted Stock Units to directors of Sun.

Directors and shadow directors of an Irish subsidiary are subject to certain notification requirements under the Companies Act. Directors and shadow directors must notify the Irish subsidiary in writing of their interest in Sun and the number and class of Shares or rights to which the interest relates within five days of receipt or knowledge of receipt of the Performance Restricted Stock Units. Directors and shadow directors also must notify the Irish subsidiary within five days of payment of their Performance Restricted Stock Units or of selling Shares acquired under the Plan. This disclosure requirement also applies to any rights or Shares acquired by director’s spouse or children (under the age of 18).

Korea

When the Shares acquired under the Plan are sold, if the proceeds exceed US$100,000, such proceeds must be repatriated to Korea within six months.

Luxembourg

You are obligated to report any outward and inward remittance of funds to the Banque Central de Luxembourg and/or the Service Central de La Statisque et des Etudes Economiques (the “STATEC”). If a Luxembourg financial institution is involved in the transaction, it will generally fulfill the reporting obligation on your behalf. If the transaction does not involve a Luxembourg financial institution, you will have to report the transaction (regardless of the amount remitted or received) yourself to the STATEC on a specific form. The report has to be filed within 15 working days following the month during which the transaction occurred.

Netherlands

The Performance Restricted Stock Unit award is being made to you as an incentive for you to remain employed with your current Employer and is not remuneration for services rendered.

Russia

If Performance Restricted Stock Units are granted to employees in Russia, the Performance Restricted Stock Units will be paid to you in cash at vesting. You will receive the cash equivalent of the fair market value of the Shares at vesting. You will not be entitled to receive any Shares pursuant to the grant of Performance Restricted Stock Units.

When you receive cash at vesting, you may be required to repatriate the funds to Russia through an “F” type account opened at an authorized bank in Russia. After you remit the sale proceeds back to Russia, you may transfer the funds to a foreign bank account subject to the following limitations: (1) the foreign account may be opened only for individuals; (2) the foreign account may not be used for business activities; (3) you must give notice to the Russian tax authorities about the opening/closing of each foreign account within one month after the account opening/closing; and (4) you must notify the account balances on your foreign accounts as of the beginning of each calendar year to the Russian tax authorities. There may be additional restrictions if you send/receive more than US$150,000 into/out of Russia within a calendar year.

Singapore

The offer is being made on a private basis and is, therefore, exempt from registration in Singapore.

Directors of a Singapore subsidiary are subject to certain notification requirements under the Singapore Companies Act Directors must notify the Singapore subsidiary in writing of an interest (e.g., Shares) in Sun or any related companies within two days of its acquisition or disposal. In addition, directors must notify the Singapore subsidiary of any interest held in Sun or any related company within two days of becoming a director.

Thailand

Any proceeds received from the sale of Shares must be repatriated into Thailand, and they must be converted to Thai Baht within seven days of receipt. In the event that the amount of the proceeds from the sale of Shares is US$20,000 or more (or its equivalent amount at market rate). You also are required to complete and submit a Foreign Exchange Transaction Form to the authorized agent to report the inward remittance of the proceeds to Thailand.

United Kingdom

Performance Restricted Stock Units may only be settled in Shares.

You must also agree to certain National Insurance Contribution (NIC) passthrough provisions in order to accept your grant.

Venezuela

This offering is personal, private, exclusive and non-transferable and is made to you because you meet the eligibility requirements set forth in the Plan.

You agree that any modification of the Plan or its termination will not constitute a change or impairment of the terms and conditions of your employment.

EX-10.11

Exhibit 10.11

SUN MICROSYSTEMS, INC.

SECTION 162(M) EXECUTIVE OFFICER

PERFORMANCE-BASED BONUS PLAN

SECTION 1

BACKGROUND, PURPOSE AND DURATION

1.1 Effective Date.

Sun Microsystems, Inc., having established the Plan effective as of August 9, 1995 and amended and restated the Plan effective as of July 1, 2001, hereby amends and restates the Plan, effective as of July 1, 2006, subject to ratification by an affirmative vote of the holders of a majority of the Shares that are present in person or by proxy and entitled to vote at the 2006 Annual Meeting of Stockholders of the Company.

1.2 Purpose of the Plan.

The Plan is intended to increase shareholder value and the success of the Company by motivating key executives (1) to perform to the best of their abilities, and (2) to achieve the Company’s objectives. The Plan’s goals are to be achieved by providing such executives with incentive awards based on the achievement of goals relating to the performance of the Company. The Plan is intended to permit the grant of awards that qualify as performance-based compensation under section 162(m) of the Code.

SECTION 2

DEFINITIONS

The following words and phrases shall have the following meanings unless a different meaning is plainly required by the context:

2.1 “1934 Act”

means the Securities Exchange Act of 1934, as amended. Reference to a specific section of the 1934 Act or regulation thereunder shall include such section or regulation, any valid regulation promulgated under such section, and any comparable provision of any future legislation or regulation amending, supplementing or superseding such section or regulation.

2.2 “Actual Award”

means as to any Performance Period, the actual award (if any) payable to a Participant for the Performance Period. Each Actual Award is determined by the Payout Formula for the Performance Period, subject to the Committee’s authority under Section 3.7 to eliminate or reduce the award otherwise determined by the Payout Formula.

2.3 “Affiliate”

means any corporation or other entity (including, but not limited to, partnerships and joint ventures) controlled by the Company.

2.4 “Board”

means the Board of Directors of the Company.

2.5 “Code”

means the Internal Revenue Code of 1986, as amended. Reference to a specific section of the Code or regulation thereunder shall include such section or regulation, any valid regulation promulgated thereunder, and any comparable provision of any future legislation or regulation amending, supplementing or superseding such section or regulation.

2.6 “Committee”

means the committee appointed by the Board (pursuant to Section 5.1) to administer the Plan.

2.7 “Company”

means Sun Microsystems, Inc., a Delaware corporation, or any successor thereto.

2.8 “Disability”

means a permanent and total disability determined in accordance with uniform and nondiscriminatory standards adopted by the Committee from time to time.

2.9 “Employee”

means any employee of the Company or of an Affiliate, whether such employee is so employed at the time the Plan is adopted or becomes so employed subsequent to the adoption of the Plan.

2.10 “Participant”

means as to any Performance Period, an Employee who has been selected by the Committee for participation in the Plan for that Performance Period.

2.11 “Payout Formula”

means as to any Performance Period, the formula or payout matrix established by the Committee pursuant to Section 3.5 in order to determine the Actual Awards (if any) to be paid to Participants. The formula or matrix may differ from Participant to Participant.

2.12 “Performance Period”

means the period of time established by the Committee in its sole discretion.

2.13 “Performance Goals”

means the goal(s) (or combined goal(s)) determined by the Committee (in its discretion) to be applicable to a Participant for a Target Award for a Performance Period. As determined by the Committee, the Performance Goals for any Target Award applicable to a Participant may provide for a targeted level or levels of achievement using one or more of the following measures: (a) earnings (or loss) per share, (b) individual objectives that are measurable and consistent with Section 162(m) of the Code, (c) net income (or loss) before or after taxes and before or after allocation or corporate overhead and bonus, (d) cash flow, operating cash flow, or cash flow or operating cash flow per share (before or after dividends), (e) operating income, (or loss) before or after taxes (f) return on assets or net assets, (g) return on equity, (h) return on sales or net sales, (i) revenue, revenue growth or product revenue growth, (j) total shareholder return, (k) earnings or loss per share; (l) attainment of strategic and operational initiatives, (m) appreciation in and/or maintenance of the price of the Shares or any other publicly traded securities of the Company, (n) market shares, (o) gross profits, (p) earnings (or losses), including earnings or losses before taxes, earnings or losses before interest and taxes, earnings or losses before interest, taxes and depreciation or earnings or losses before interest, taxes depreciation and amortization, (q) economic value-added models (or equivalent metrics), (r) comparisons with various stock market indices, (s) reduction in costs, (t) return on capital, including return on total capital or return on invested capital, (u) cash flow return on investment, (v) improvement in or attainment of expense levels or working capital levels, (w) operating margin or gross margin, (x) year-end cash, (y) cash margin, (z) debt reduction, (aa) stockholders’ equity, (bb) market share; (cc) research progress, including the development or programs, and (dd) recruiting and maintaining personnel. Such performance goals also may be based solely by reference to the Company’s performance or the performance of an Affiliate, division, business segment or business unit of the Company, or based upon the relative performance of other companies or upon comparisons of any of the indicators of performance relative to other companies.

2.14 “Plan”

means the Sun Microsystems, Inc. Section 162(m) Executive Officer Performance-Based Bonus Plan, as set forth in this instrument and as hereafter amended from time to time.

2.15 “Retirement”

means, with respect to any Participant, a Termination of Service after attaining at least (a) age 65, (b) age 60 and 5 years of service with the Company or an Affiliate, or (c) age 55 and 10 years of service with the Company or an Affiliate.

2.16 “Shares”

means shares of the Company’s common stock.

2.17 “Target Award”

means the target award payable under the Plan to a Participant for the Performance Period as determined by the Committee in accordance with Section 3.4.

2.18 “Termination of Service”

means a cessation of the employee-employer relationship between a Participant and the Company or an Affiliate for any reason, including, but not by way of limitation, a termination by resignation, discharge, death, Disability, Retirement, or the disaffiliation of an Affiliate, but excluding any such termination where there is a simultaneous reemployment by the Company or an Affiliate.

SECTION 3

SELECTION OF PARTICIPANTS AND DETERMINATION OF AWARDS

3.1 Selection of Participants.

The Committee, in its sole discretion, shall select the Employees who are executive officers of the Company (within the meaning of Rule 3b-7 under the 1934 Act) and who shall be Participants for any Performance Period. Participation in the Plan is in the sole discretion of the Committee, and on a Performance Period by Performance Period basis. Accordingly, an Employee who is a Participant for a given Performance Period in no way is guaranteed or assured of being selected for participation in any subsequent Performance Period.

3.2 Determination of Performance Period.

The Committee, in its sole discretion, shall establish in writing whether the Performance period shall be the Company’s fiscal year or such other period of time.

3.3 Determination of Performance Goals.

The Committee, in its sole discretion, shall establish the Performance Goals for each Participant for the Performance Period. Such Performance Goals shall be set forth in writing. The Performance Goals may differ from Participant to Participant and from award to award. The Committee shall also determine and set forth in writing whether any significant elements shall be included in or excluded from the calculation of any Performance Goal with respect to any Participants, including (a) restructurings, discontinued operations, extraordinary items, and other unusual or non-recurring charges, (b) an event either not directly related to the operations of the Company or not within the reasonable control of the Company’s management, or (c) the cumulative effects of tax or accounting changes in accordance with U.S. generally accepted accounting principles.

3.4 Determination of Target Awards.

The Committee, in its sole discretions, shall establish a Target Award for each Participant. Each Participant’s Target Award shall be determined by the Committee in its sole discretion, and each Target Award shall be set forth in writing. The Target Award may be denominated by reference to a number of Shares or an amount of cash.

3.5 Determination of Payout Formula or Formulae.

The Committee, in its sole discretion, shall establish a Payout Formula or Formulae for purposes of determining the Actual Award (if any) payable to each Participant. Each Payout Formula shall (a) be in writing, (b) be based on a comparison of actual performance to the Performance Goals, (c) provide for the payment of a Participant’s Target Award if the Performance Goals for the Performance Period are achieved, and (d) provide for an Actual Award greater than or less than the Participant’s Target Award, depending upon the extent to which actual performance exceeds or falls below the Performance Goals. Notwithstanding the preceding, in no event shall a Participant’s Actual Award for any Performance Period exceed $10,000,000 or 1,500,000 Shares for each 12 months in a Performance Period (proportionately adjusted for periods of less than 12 months).

3.6 Date for Determinations.

The Committee shall make all determinations under Sections 3.1 through 3.5 on or before the earlier of (i) 90 days after the commencement of each Performance Period or (ii) the expiration of 25% of the Performance Period.

3.7 Determination of Actual Awards.

After the end of each Performance Period, the Committee shall certify in writing the extent to which the Performance Goals applicable to each Participant for the Performance Period were achieved or exceeded. The Actual Award for each Participant shall be determined by applying the Payout Formula to the level of actual performance that has been certified by the Committee. Notwithstanding any contrary provision of the Plan, the Committee, in its sole discretion, may (a) eliminate or reduce the Actual Award payable to any Participant below that which otherwise would be payable under the Payout Formula, and (b) determine what Actual Award, if any, will be paid in the event of a Termination of Service prior to the end of the Performance Period.

SECTION 4

PAYMENT OF AWARDS

4.1 Right to Receive Payment.

Each Actual Award that may become payable under the Plan shall be paid solely from the general assets of the Company. Nothing in this Plan shall be construed to create a trust or to establish or other than as an unsecured general creditor with respect to any payment to which he or she may be entitled.

4.2 Timing of Payment.

Payment of each Actual Award shall be made as soon as practicable after the end of the Performance Period during which the Award was earned and the certification of the Committee provided for in Section 3.7.

4.3 Form of Payment.

Each Actual Award shall be paid in cash (or its equivalent) or Shares in a single lump sum, except as otherwise determined by the Committee. To the extent an Actual Award is paid in whole or in part in Shares, such Shares shall be granted under the Company’s 1990 Long-Term Equity Incentive Plan or such other shareholder approved plan of the Company providing for payment of Shares. If (i) a Target Award denominated in cash is paid in Shares or (ii) a Target Award denominated in Shares is paid in cash, the amount of cash or Shares shall be determined based on the closing per share selling price for Shares as quoted on the NASDAQ Stock Market on the date payment of the Actual Award would otherwise have been made.

4.4 Payment in the Event of Death.

If a Participant dies prior to the payment of an Actual Award earned by him or her prior to death for a prior Performance Period, the Award shall be paid to his or her estate, except as provided in Section 6.6.

SECTION 5

ADMINISTRATION

5.1 Committee is the Administrator.

The Plan shall be administered by the Committee. The Committee shall consist of not less than two (2) members of the Board. The members of the Committee shall be appointed from time to time by, and serve at the pleasure of, the Board. Each member of the Committee shall qualify as an “outside director” under section 162(m) of the Code. If it is later determined that one or more members of the Committee do not so qualify, actions taken by the Committee prior to such determination shall be valid despite such failure to qualify.

5.2 Committee Authority.

It shall be the duty of the Committee to administer the Plan in accordance with the Plan’s provisions. The Committee shall have all powers and discretion necessary or appropriate to administer the Plan and to control its operation, including, but not limited to, the power to (a) determine which Employees who are executive officers shall be granted awards, (b) prescribe the terms and conditions of awards, (c) interpret the Plan and the awards, (d) adopt such procedures and sub plans as are necessary or appropriate to permit participation in the Plan by Employees who are foreign nationals or employed outside of the United States, (e) adopt rules for the administration, interpretation and application of the Plan as are consistent therewith, and (f) interpret, amend or revoke any such rules.

5.3 Decisions Binding.

All determinations and decisions made by the Committee, the Board, and any delegate of the Committee pursuant to the provisions of the Plan shall be final, conclusive, and binding on all persons, and shall be given the maximum deference permitted by law.

5.4 Delegation by the Committee.

The Committee, in its sole discretion and on such terms and conditions as it may provide, may delegate all or part of its authority and powers under the Plan to one or more directors and/or officers of the Company; provided, however, that the Committee may delegate its authority and powers only to the extent consistent with applicable laws (including the provisions of Section 162(m) of the Code) and the rules and regulations of the principal securities market on which the Company’s securities are listed or qualified for trading.

SECTION 6

GENERAL PROVISIONS

6.1 Tax Withholding.

The Company shall withhold all applicable taxes from any Actual Award, including any federal, state and local taxes (including, but not limited to, the Participant’s FICA and SDI obligations).

6.2 No Effect on Employment.

Nothing in the Plan shall interfere with or limit in any way the right of the Company to terminate any Participant’s employment at any time, with or without cause. For purposes of the Plan, transfer of employment of a Participant between the Company and any one of its Affiliates (or between Affiliates) shall not be deemed a Termination of Service. Employment with the Company and its Affiliates is on an at-will basis only. The Company expressly reserves the right, which may be exercised at any time and without regard to when during a Performance Period such exercise occurs, to terminate any individual’s employment with or without cause, and to treat him or her without regard to the effect which such treatment might have upon him or her as a Participant.

6.3 Participation.

No Employee shall have the right to be selected to receive an award under this Plan, or, having been so selected, to be selected to receive a future award.

6.4 Indemnification.

Each person who is or shall have been a member of the Committee, or of the Board, shall be indemnified and held harmless by the Company against and from (a) any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan or any award, and (b) from any and all amounts paid by him or her in settlement thereof, with the Company’s approval, or paid by him or her in satisfaction of any judgment in any such claim, action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company’s Certificate of Incorporation or Bylaws, by contract, as a matter of law, or otherwise, or under any power that the Company may have to indemnify them or hold them harmless.

6.5 Successors.

All obligations of the Company under the Plan, with respect to awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business or assets of the Company.

6.6 Beneficiary Designations.

If permitted by the Committee, a Participant under the Plan may name a beneficiary or beneficiaries to whom an Actual Award which the Participant has earned shall be paid in the event of the Participant’s death. Each such designation shall revoke all prior designations by the Participant and shall be effective only if given in a form and manner acceptable to the Committee. In the absence of any such designation, any such Actual Award remaining unpaid at the Participant’s death shall be paid to the Participant’s estate.

6.7 Nontransferability of Awards.

No award granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will, by the laws of descent and distribution, or to the limited extent provided in Section 6.6. All rights with respect to an award granted to a Participant shall be available during his or her lifetime only to the Participant.

6.8 Deferrals.

The Committee, in its sole discretion, may permit a Participant to defer receipt of the payment of cash or Shares that would otherwise be delivered to a Participant under the Plan. Any such deferral elections shall be made under a plan or arrangement consistent with the requirements of section 409A of the Code.

SECTION 7

AMENDMENT, TERMINATION AND DURATION

7.1 Amendment, Suspension or Termination.

The Board, in its sole discretion, may amend or terminate the Plan, or any part thereof, at any time and for any reason. The amendment, suspension or termination of the Plan shall not, without the consent of the Participant, alter or impair any rights or obligations under any Target Award theretofore granted to such Participant. No award may be granted during any period of suspension or after termination of the Plan.

7.2 Duration of the Plan.

The Plan shall commence on the date specified herein, and subject to Section 7.1 (regarding the Board’s right to amend or terminate the Plan), shall remain in effect thereafter.

SECTION 8

LEGAL CONSTRUCTION

8.1 Gender and Number.

Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural.

8.2 Severability.

In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.

8.3 Requirements of Law.

The granting of awards under the Plan shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.

8.4 Governing Law.

The Plan and all awards shall be construed in accordance with and governed by the laws of the State of California, but without regard to its conflict of law provision.

8.5 Captions.

Captions are provided herein for convenience only, and shall not serve as a basis for interpretation or construction of the Plan.

EXECUTION

IN WITNESS WHEREOF, Sun Microsystems, Inc., by its duly authorized officer, has executed the Plan on the date indicated below.

	SUN MICROSYSTEMS, INC.
Date:                                                      , 2006	By:
		Michael A. Dillon
		Executive Vice President,
		General Counsel and Secretary
		Sun Microsystems, Inc.

EX-10.12

Exhibit 10.12

SUN MICROSYSTEMS, INC.

U.S. VICE PRESIDENT SEVERANCE PLAN

AND

SUMMARY PLAN DESCRIPTION

Purpose of Plan

The Sun Microsystems, Inc. U.S. Vice President Severance Plan (the “Plan”) provides Notification Pay and Severance Benefits if your employment terminates because of a Retirement or Mutual Agreement (defined below). However, this Plan does not provide benefits if you voluntarily terminate employment prior to qualifying for Retirement or if you are involuntarily terminated with or without Cause. You must sign, and not revoke, a Release and Waiver Agreement in order to receive Severance Benefits.

This Plan was originally adopted effective July 1, 2005. It was restated effective November 1, 2005. It is now restated again effective May 1, 2006. In this document “Sun” means Sun Microsystems, Inc., its subsidiaries and its successor or successors. The Plan is intended to comply with Section 409A of the Internal Revenue Code and from its original effective date, the Plan has been operated in accordance with a good faith, reasonable interpretation of Section 409A of the Internal Revenue Code.

This document constitutes both the official plan document and the required summary plan description under ERISA.

Highlights

Under this Plan, you are eligible to receive two types of benefits: Notification Pay and Severance Benefits.

“Notification Pay” consists of either a period of time you remain on Sun’s payroll or a lump sum payment. You need not sign a Release and Waiver Agreement in order to receive Notification Pay.

“Severance Benefits” consist of a lump sum Severance Payment and payment of COBRA Premiums (if eligible). You will not receive Severance Benefits if you do not sign a Release and Waiver Agreement, or if you sign a Release and Waiver Agreement but revoke it within the seven (7) calendar day revocation period.

The amount of Severance Benefits available to you depends on whether you are a member of Sun’s Executive Leadership Team (“ELT”) or a Vice President who is not a member of the ELT.

Eligibility

You are an Eligible Employee under the Plan if you are:

• A regular full-time or part-time Sun employee on the U.S. Payroll;

• Not on the payroll of, or considered an employee of, any Sun subsidiary outside the U.S.;

• Employed at the Vice President level or above; and

• Not a Contingent Worker or Partner Worker (includes independent contractor, consultant or vendor) as defined in Sun’s Headcount Policy.

If Sun has not classified you as an employee on the date your service with Sun is terminated and, for that reason, has not withheld employment taxes with respect to you, and you are later determined retroactively to have been a common-law employee of Sun, whether by Sun, a governmental agency or a court, you will nevertheless be ineligible to receive Plan benefits.

Notwithstanding any other provision of the Plan to the contrary, if you were a Storage Technology Corporation (“StorageTek”) employee who received severance benefits as a result of the acquisition of StorageTek by Sun, you will not be eligible for some or all of the benefits under the Plan for a period of time, as set forth in your offer letter from Sun dated on or around August 5-10, 2005.

Conditions For Receiving Plan Benefits

You will receive Plan benefits if you are an Eligible Employee and meet all of the following conditions:

• You inform Sun of your intent to retire and receive a formal written notice that states the date your employment will terminate and that your termination is because of Retirement or Mutual Agreement (“Termination Letter”);

• You abide by any written terms and requirements that Sun may establish as a condition to your receiving Plan benefits; and

• For Severance Benefits only, you sign the Release and Waiver Agreement within a reasonable period of time (as determined by Sun in its sole discretion) after your employment termination date and do not revoke the Release and Waiver Agreement within the seven (7) calendar day revocation period.

“Retirement” for purposes of this Plan means your voluntary resignation from Sun at or after attaining age 55 and with a number of full years of service with Sun that when added to your age (in full years), the sum equals or exceeds 65. Notwithstanding the foregoing sentence, you must have a minimum of five (5) full years of service in order to qualify for Retirement. Your resignation will not be considered Retirement if you work in the same or similar profession during the six-month period following your termination of employment. You will be considered to have retired if you perform services for a nonprofit organization following your termination of employment. Sun shall make the determination of whether you have retired in its sole discretion.

“Mutual Agreement” for purposes of this Plan means that both you and Sun agree that your employment should terminate.

Conditions Under Which You Will Not Receive Plan Benefits

Even if you are an Eligible Employee, you will not receive Plan benefits if any of the following apply:

• You are involuntarily terminated with or without Cause. “Cause” means (i) misconduct as described in Sun’s Misconduct Policy (HR503) or (ii) documented unsatisfactory job performance. Sun shall make this determination in its sole discretion.

• You voluntarily terminate employment (including as a result of disability) other than due to Retirement or Mutual Agreement even if you claim “constructive termination,” prior to your termination date as set forth in your Termination Letter.

• You decline a written offer of a “Comparable Job” at Sun for which, in Sun’s judgment, you are reasonably qualified. A “Comparable Job” is a job within 50 miles of your current job location at the same or higher salary/job grade as the current job and with at least the same total target cash compensation opportunity. A Comparable Job need not involve the same duties and responsibilities as your current job.

• You accept another regular job at Sun before your employment at Sun terminates (i.e., a job other than a Temporary Job Assignment, defined below).

• You are on an unpaid personal non-FMLA, non-Military Leave of Absence on the date of the Termination Letter.

• You begin working for another employer (whether regular or temporary) before your employment at Sun terminates. You are required to immediately notify Sun in writing if you begin another job prior to your termination date.

• Your job is re-leveled for any reason, for example, to reflect your current job duties and responsibilities or to reflect any changes in your job duties and responsibilities.

• For Severance Benefits only, you do not timely sign a Release and Waiver Agreement or you timely sign a Release and Waiver Agreement but you revoke it within the seven calendar day revocation period.

Temporary Job Assignments

For purposes of this Plan, a “Temporary Job Assignment” is a job as a Sun employee that is not expected to last more than two years at the time it is offered to you and which is offered to you after you receive a Termination Letter but prior to your employment termination. If you accept a job which, at the time it is offered to you, is expected to last more than two years, you will be treated as a regular Sun employee and will not receive Plan benefits in connection with the Retirement or Mutual Agreement that occurred immediately prior to your acceptance of your new job at Sun.

While you are on a Temporary Job Assignment you will not receive Plan benefits. However, at the end of the Temporary Job Assignment, provided you meet the conditions of the Plan, you will receive Plan benefits in accordance with the terms of the Plan in effect as of the date of the Termination Letter.

If you accept a Temporary Job Assignment and it has not ended after two years, you will be treated as if you are in a regular position and will not be eligible for Plan benefits unless you terminate employment as a result of Retirement or Mutual Agreement. In other words, you will not receive Plan benefits in connection with Retirement or Mutual Agreement that occurred immediately prior to your acceptance of your new job at Sun.

Notification Pay

You need not sign a Release and Waiver Agreement in order to be eligible for Notification Pay.

If you are an Eligible Employee and you receive a written Termination Letter that your employment will terminate, you will receive the following Notification Pay:

• Notification Pay. You will remain employed for sixteen (16) weeks following the date of your Termination Letter. During this sixteen (16) week period, you will receive your regularly bi-weekly Pay (defined below under Severance Benefits) and your Sun Flex benefits will continue, but you are not required to work during this time.

Note: If you are a Key Employee (defined below under Severance Benefits), your Notification Pay will be paid in one lump sum payment on the second Friday (or as soon as administratively practical thereafter) that is six (6) months following the date of your Separation from Service (defined below under Severance Benefits).

Severance Benefits

When you receive a Termination Letter, you may choose to sign a Release and Waiver Agreement in order to also receive Severance Benefits. You will have at least 45 calendar days after your employment termination date to sign the Agreement. If you do not sign and return to Sun a Release and Waiver Agreement within a reasonable period of time (as determined by Sun in its sole discretion) after your employment termination date or you subsequently revoke the Agreement during the seven (7) calendar day revocation period, you will not be eligible to receive the Severance Payment and the payment of COBRA Premiums described below. You may not sign the Release and Waiver Agreement prior to your employment termination date.

You will receive the following benefits on the second Friday after Sun receives your signed Release and Waiver Agreement and the revocation period has ended (or as soon as administratively practical thereafter):

• Severance Payment. This is a lump sum payment equal to four (4) weeks Pay (defined below) for each Year of Service (defined below), up to a maximum

determined by your Position (defined below) plus sixteen (16) or thirty-two (32) weeks Pay determined by your Position.

Note: If you are a Key Employee (defined below), your Severance Payment will be paid on the second Friday (or as soon as administratively practical thereafter) that is six (6) months following the date of your Separation from Service (defined below).

• COBRA Premiums. Your existing coverage under Sun’s group health plan (and, if applicable, the existing group health coverage for your eligible dependents) will end on the date on which your employment terminates. You and your eligible dependents may then be eligible to elect temporary continuation coverage under Sun’s group health plan in accordance with the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”). If you are eligible for a Severance Payment and elect COBRA continuation coverage, Sun will pay your COBRA Premiums (defined below) for a period equal to the number of weeks of Pay you will receive as a Severance Payment (not to exceed the maximum period of COBRA coverage). However, in no event may payment of COBRA Premiums continue beyond December 31 of the second calendar year following the calendar year in which you have a Separation from Service. After such period of Sun-paid coverage, you (and, if applicable, your eligible dependents) may continue COBRA coverage at your own expense in accordance with COBRA. No provision of the Plan will affect the continuation coverage rules under COBRA. Therefore, the period during which you must elect to continue Sun’s group health plan coverage under COBRA, the length of time during which COBRA coverage will be made available to you, and all your other rights and obligations under COBRA will be applied in the same manner that such rules would apply in the absence of the Plan.

“Key Employee” means, in general, one of Sun’s top fifty (50) officers based on compensation. The determination of which Eligible Employees are Key Employees will be made by Sun in its sole discretion in accordance with Sections 416(i) and 409A of the Internal Revenue Code and the regulations promulgated thereunder. If you are determined to be a Key Employee on any December 31, then you will be considered a Key Employee for purposes of the Plan during the period beginning on the first April 1 following such December 31 and ending on the next March 31.

“Separation from Service” means, in general, the date you work less than twenty percent (20%) of your average work schedule during the preceding three (3) full calendar years (or if you were employed by Sun for less than three (3) years, such lesser period). The determination of when your Separation from Service occurs will be made by Sun in its sole discretion in accordance with Section 409A of the Internal Revenue Code and the regulations promulgated thereunder.

“Year of Service” for purposes of this Plan means a full or partial year of service with Sun prior to your employment termination date. If you are a rehired employee, prior service at Sun will be counted as Year of Service provided that the prior service period

exceeded the period when you were not employed by Sun. Years of Service includes up to seven (7) (ten (10) for former employees of Procom Technology, Inc.) years of service credit for service with a predecessor employer that was acquire by Sun; however, the service credit limit will not apply to former employees of Storage Technology Corporation and SeeBeyond Technology Corporation. A partial year of service will be treated as a full year of service.

“COBRA Premiums” for purposes of this Plan are the COBRA premiums that you would have to pay to continue for a certain period of time, the medical, dental, and/or vision coverage you had immediately prior to terminating employment.

“Pay” for purposes of this Plan (other than for sales-related incentive based positions) means your base pay as of the date of the Termination Letter, which does not include car allowance, draws, spifs, bonuses or any non-base compensation. “Pay” for sales-related incentive based positions is based on the On-Target Earnings rate (OTE) effective on the date of the Termination Letter.

“Position” for purposes of this Plan means your position as either a member of the ELT or a Vice President who is not a member of the ELT on the date of the Termination Letter as recorded in Sun’s HR Database.

Example of Calculation of Severance Payment

Assume you are a Vice President with eight years of service. The calculation of your Severance Payment is as follows:

16 weeks Pay based on the Pay you would have received had you worked for those 16 weeks, plus 20 weeks Pay*, for a total of 36 weeks of Pay.

*4 weeks Pay per Year of Service x 8 years = 32 weeks but the maximum allowed payment based on Years of Service is 20 weeks Pay. The 16 weeks of Pay is not included in calculating the maximum payment based on Years of Service.

Stock Options

If your employment terminates because of Retirement and you are eligible to receive benefits under the Plan, your stock options that would have vested during the 15 months following your employment termination date will become immediately vested on your employment termination date. Except as provided in the previous sentence, all other terms and conditions of your option agreements remain the same.

Sales-Related Incentive Based Positions

If you are in a sales-related incentive based position, commission earnings end effective the date of your Termination Letter. Base pay will be used to determine the payment of unused, accrued vacation in your final paycheck.

Obligation to Repay Sun

If you are reemployed by Sun (in any capacity) before the end of the number of weeks used to determine your Severance Benefits, you must repay to Sun the portion of your Severance Payment for the period that you have been reemployed.

For example, if you are a Vice President with eight years of service, you would have received 36 weeks of Pay. If you were then reemployed by Sun 4 weeks following your employment termination date, you would be required to repay to Sun an amount calculated as follows:

36 weeks of Severance Payment paid minus 4 weeks of actual unemployment equals 32 weeks of Severance Payment to be repaid to Sun.

Reduction of Other Benefits

Any Notification Pay received under this Plan will reduce the amount of any short term and long term disability benefits you are entitled to receive under the Sun Microsystems, Inc. Comprehensive Welfare Plan.

Taxes and Other Deductions

Sun will withhold all appropriate federal, state, local, income and employment taxes from your Plan benefit payments. Contributions to Sun’s 401(k) plan and employee stock purchase plan will not be deducted from your Severance Payment or any Notification Pay paid after your employment termination date.

Bonus Programs

The Plan does not change the terms of any bonus program for which you may have been eligible at the time of your termination with Sun.

Accordingly, if you are eligible for a bonus payment under a program operated on a quarterly or fiscal year basis (such as SMI Bonus) and terminate employment prior to the last day of a quarter or fiscal year, you will not be eligible to receive the bonus for the quarter or fiscal year in which you terminate employment, except to the extent the bonus program provides otherwise. Unless the bonus program provides otherwise, bonus program payments will not be prorated for a partial quarter’s or year’s participation.

Disability Prior to Employment Termination

If you become disabled after receiving a Termination Letter but before you terminate employment, your employment termination date will not change. You should contact SunDial to discuss the employment disability benefits for which you may be eligible.

Death Prior to Employment Termination

If you die after receiving a Termination Letter but before you sign the Release and Waiver Agreement, neither you nor your estate will be entitled to any further Plan benefits.

SUN MICROSYSTEMS, INC.

U.S. VICE PRESIDENT SEVERANCE PLAN

SUMMARY OF PLAN BENEFITS

To receive the Severance Payment and Payment of COBRA Premiums,

the Release and Waiver Agreement must be signed and not revoked.

See Important Notes at the end of Summary.

SALARY/JOB GRADE	NOTIFICATION PAY	SEVERANCE PAYMENT	PAYMENT OF COBRA PREMIUMS
Vice President	16 weeks of Pay	16 weeks Pay plus 4 weeks Pay per Year of Service up to 20 weeks	16 weeks of COBRA premiums plus 4 weeks of COBRA premiums per Year of Service up to 20 weeks
Executive Leadership Team	16 weeks of Pay	32 weeks Pay plus 4 weeks Pay per Year of Service up to 32 weeks	32 weeks of COBRA premiums plus 4 weeks of COBRA premiums per Year of Service up to 32 weeks

IMPORTANT NOTES TO SUMMARY OF PLAN BENEFITS

NOTIFICATION PAY	SEVERANCE PAYMENT	PAYMENT OF COBRA PREMIUMS
1. A Signed Release and Waiver Agreement is not required. 2. Calculated as number of days Pay (base pay or OTE, as applicable). “Pay” has the same meaning as used for Severance Payment. 3. If you are a Key Employee, your Notification Pay will be paid in one lump sum payment on the second Friday (or as soon as administratively practical thereafter) that is six (6) months following the date of your Separation from Service.	1. Lump sum Severance Payment paid after Sun receives signed Release and Waiver Agreement and period for revoking Agreement has ended. 2. “Pay” (other than for sales-related incentive based positions) means base pay and does not include any non-base compensation. 3. “Pay” for sales-related incentive based positions is based on on-target earnings (OTE) effective on the date of the Termination Letter. 4. “Years of Service” for calculating benefits means each full or partial year of service with Sun prior to your employment termination date. 5. The 16 weeks/32 weeks additional payment is not included for purpose of calculating the maximum payment based on Years of Service. 6. If you are a Key Employee, your Severance Payment will be paid on the second Friday (or as soon as administratively practical thereafter) that is six (6) months following the date of your Separation from Service.	1. If you elect COBRA coverage, your COBRA premiums will be paid after Sun receives signed Release and Waiver Agreement and period for revoking Agreement has ended. 2. “Years of Service” for calculating benefits means each full or partial year of service with Sun prior to your employment termination date. 3. The 16 weeks/32 weeks additional period for payment of COBRA premiums is not included for purpose of calculating the maximum period for payment of COBRA premiums based on Years of Service.

Plan Operation, Administration and General Provisions

Other Benefit Plans/Agreements

Your rights and participation in any other Sun benefit plan at termination of employment are governed solely by the terms of those other plans. Amounts you receive under the Plan will be reduced by any other type of severance (or similar) payment you receive under any plan or agreement (including any change of control agreement), if any (including any payments pursuant to a Sun foreign subsidiary’s or an acquired company’s plan or agreement) or as required by law.

Amendment and Termination

Sun reserves the right to modify, suspend or terminate the Plan at any time and for any reason. Any action amending or terminating the Plan shall be in writing and shall be approved by the Leadership and Development Compensation Committee of the Board of Directors of Sun.

Unfunded Plan

All Plan benefits are paid from Sun’s general funds, and each participant is an unsecured general creditor of Sun. Nothing contained in the Plan creates a trust fund of any kind for your benefit or creates any fiduciary relationship between you and Sun with respect to any of Sun’s assets. Sun is under no obligation to fund the benefits provided under the Plan prior to payment.

Plan Benefits Cannot Be Assigned

The rights of any person to any benefit under the Plan may not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including bankruptcy, garnishment, attachment or other creditor’s process. Any act in violation of this rule shall be void.

No Employment Rights

Nothing in the Plan may be deemed to give any individual a right to remain employed by Sun or affect Sun’s right to terminate an individual’s employment at any time, with or without cause.

Legal Construction

The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and, to the extent not preempted by ERISA, California law. If any provision of the Plan is held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions of the Plan shall continue to be fully effective.

Plan Administrator

Sun is the “Plan Administrator” of the Plan as that term is used in ERISA. Sun has full discretionary authority to administer and interpret the Plan, including the exclusive right

to adopt rules and procedures to implement the Plan, to interpret in its sole discretion, provisions of the Plan, to decide any questions in connection with the administration of the Plan, or relating to any claim for Plan benefits, including, whether an individual is eligible for Plan benefits and the amount of Plan benefits. Sun may delegate its responsibilities to other persons, which includes delegation of discretion. Subject to the claims and appeal procedures, the decisions of Sun and its delegatees relating to the Plan are final and binding on all persons.

Claims and Appeal Procedures

If you disagree with Sun’s determination of the amount of your benefits or with any other decision Sun may have made regarding your interest in the Plan, you may file a claim with Sun. You must send your claim in writing to: Director, Executive Compensation – U.S. Vice President Severance Plan, Sun Microsystems, Inc., 4230 Network Circle, M/S USCA23-106, Santa Clara, CA 95054. You should file the claim as soon as possible, but no later than one (1) year after the determination /decision.

In the event that your claim for benefits is denied in whole or in part, Sun must provide you written or electronic notification of the denial of the claim, and of your right to appeal the denial. The notice of denial will be set forth in a manner designed to be understood by you, and will include (i) the specific reason or reasons for the denial, (ii) reference to the specific Plan provisions upon which the denial is based, (iii) a description of any information or material that Sun needs to complete the review and an explanation of why such information or material is necessary, and (iv) an explanation of the Plan’s appeal procedures and the time limits applicable to such procedures, including a statement of your right to bring a civil action under Section 502(a) of ERISA following a denial on appeal. This notice will be given to you within 90 calendar days after Sun receives the claim, unless special circumstances require an extension of time – in which case Sun has up to an additional 90 calendar days for processing the claim. If an extension of time for processing is required, notice of the extension will be furnished to you before the end of the initial 90-day period. This notice of extension will describe the special circumstances necessitating the additional time and the date by which Sun expects to render its decision on the claim.

If your claim for benefits is denied, in whole or in part, you (or your authorized representative) may appeal the denial by submitting a written appeal to the Appeal Committee within 60 calendar days after you receive the denial. If you fail to appeal a denial within the 60-day period, Sun’s determination will be final and binding. If you appeal to the Appeal Committee, you (or your authorized representative) may submit comments, documents, records and other information relating to your claim for benefits. You may request (free of charge) reasonable access to, and copies of, all documents, records, and other information relevant to your claim.

The Appeal Committee will make a decision on each appeal no later than 60 calendar days following receipt of the appeal. If special circumstances require an extension of time for processing the appeal, the Appeal Committee will make a decision on the appeal no later than 120 calendar days following receipt of the appeal. If an extension for

review is required, notice of the extension will be furnished to you before the extension begins. The extension notice will indicate the special circumstances requiring an extension and the date by which the Appeal Committee expects to render a decision. The Appeal Committee will give written or electronic notice of its decision to you after its decision is made. In the event that the Appeal Committee confirms the denial of the claim for benefits in whole or in part, the notice will outline, in a manner calculated to be understood by you, (i) the specific reason or reasons for the decision, (ii) reference to the specific Plan provisions upon which the decision is based, (iii) a statement that you may request (free of charge) reasonable access to, and copies of, all documents, records, and all other information relevant to your claim, and (iv) a statement of your right to bring an action under Section 502(a) of ERISA.

No legal action for benefits under the Plan may be brought until you (i) have submitted a written claim for benefits in accordance with the procedures described above, have been notified by Sun that the claim is denied, have filed a written appeal in accordance with the appeal procedures described above, and have been notified that the Appeal Committee has denied the appeal, or (ii) Sun or the Appeal Committee fail to follow these procedures. No legal action may be commenced or maintained against the Plan, Sun or the Appeal Committee more than two (2) years after the Appeal Committee denies your appeal or Sun or the Appeal Committee fail to follow these procedures.

If you wish to take legal action after exhausting the appeal procedures, you may serve process on Sun at the address indicated in the section below entitled “Plan Information.”

Plan Information

Plan Governed by ERISA

The Plan is an employee welfare benefit plan subject to ERISA. The Plan is subject to most of the provisions of Title I of ERISA. However, it is not subject to Title IV of ERISA, which includes the plan termination insurance provisions.

Address of Sun

The principal executive office of Sun Microsystems, Inc. is 4150 Network Circle, Santa Clara, California 95054. Its telephone number is (650) 960-1300.

Identification Numbers

Sun’s Employer Identification Number (EIN) is 94-2805249. The Plan Number assigned to the Plan is 540.

Type of Plan

The Plan is a welfare benefit plan providing special severance benefits to eligible employees. All benefits under the Plan are paid directly by Sun to participants.

Plan Year

The Plan’s year ends on December 31.

Service of Process

The Plan’s agent for service of legal process is:

General Counsel

Legal Department

Sun Microsystems, Inc.

4120 Network Circle, MS USCA 12-202

Santa Clara, CA 95054

Statement of ERISA Rights and Protections

As a participant in the Sun Microsystems, Inc. U.S. Vice President Severance Plan, you are entitled to certain rights and protections under ERISA. ERISA provides that all plan participants are entitled to:

Receive Information About your Plan and Benefits

Examine, without charge, at the plan administrator’s office - and at other specified locations - all documents governing the Plan and a copy of the latest annual report (Form 5500 Series) filed by the Plan with the U.S. Department of Labor and available at the Public Disclosure Room of the Employee Benefits Security Administration.

Obtain, upon written request to the plan administrator, copies of documents governing the operation of the plan, copies of the latest annual report (Form 5500 Series) and updated summary plan description (there may be a reasonable charge for the copies).

Prudent Actions by Plan Fiduciaries

In addition to creating rights for plan participants, ERISA imposes obligations on those responsible for the operation of the Plan. The people who operate the Plan, called “fiduciaries” of the Plan, have a duty to do so prudently and in the interest of you and other plan participants and beneficiaries. No one, including Sun or any other individual, may fire you or otherwise discriminate against you in any way to prevent you from obtaining a benefit or exercising your rights under ERISA.

Enforce Your Rights

If your claim for a benefit is denied or ignored, in whole or in part, you have a right to know why this was done, to obtain copies of documents relating to the decision without charge, and to appeal any denial, all within certain time schedules.

Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request a copy of plan documents or the latest annual report from the plan administrator and do not receive them within 30 days, you may file suit in a Federal court. In such a case, the court may require the plan administrator to provide the materials and pay you up to $110 a day until you receive them, unless the materials were not sent because of reasons beyond the administrator’s control. If your claim for benefits is denied or ignored, in whole or in part, and you have been through the Plan’s appeal procedures, you may sue in a state or Federal court. If it should happen that plan fiduciaries misuse the Plan’s money, or if you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file suit

in a Federal court. The court will decide who should pay court costs and legal fees. If you are successful, the court may order the person you sued to pay these legal costs and fees. If you lose, the court may order you to pay these costs and fees (for example, if it finds your claim is frivolous).

Assistance With Your Questions

If you have questions about the Plan, you should contact the plan administrator. If you have questions about this statement or your rights under ERISA, or if you need assistance in obtaining documents from the plan administrator, you should contact the nearest office of the Employee Benefits Security Administration, U.S. Department of Labor, listed in your telephone directory or the Division of Technical Assistance and Inquiries, Employee Benefits Security Administration, U.S. Department of Labor, 200 Constitution Ave. N.W., Washington, D.C., 20210. You may also obtain certain publications about your rights and responsibilities under ERISA by calling the publications hotline of the Employee Benefits Security Administration.

Execution

To record the amendment and restatement of the Plan effective May 1, 2006 as set forth herein, Sun Microsystems, Inc. has caused its authorized representative to sign this document the              day of May, 2006.

Sun Microsystems, Inc.
By:
Printed Name: William N. MacGowan
Title:	Executive Vice President People and Places and Chief Human Resources Officer

EX-10.13

Exhibit 10.13

SUN MICROSYSTEMS, INC.

U.S. VICE PRESIDENT INVOLUNTARY SEPARATION PLAN

AND

SUMMARY PLAN DESCRIPTION

Purpose of Plan

The Sun Microsystems, Inc. U.S. Vice President Involuntary Separation Plan (the “Plan”) provides Notification Benefits and Severance Benefits if your employment terminates because of a Workforce Reduction or Involuntary Termination (defined below). However, this Plan does not provide benefits if you voluntarily terminate employment or if you are terminated for Cause. You must sign, and not revoke, a Release and Waiver Agreement in order to receive Severance Benefits.

The Plan is intended to satisfy, where applicable, the obligations of Sun under the Federal Worker Adjustment and Retraining Notification (“WARN”) Act. The Plan is also intended to constitute a separation pay arrangement that does not provide for a deferral of compensation for purposes of Section 409A of the Internal Revenue Code.

This Plan is adopted effective May 1, 2006. In this document “Sun” means Sun Microsystems, Inc., its subsidiaries and its successor or successors.

This document constitutes both the official plan document and the required summary plan description under ERISA.

Highlights

Under this Plan, you are eligible to receive two types of benefits: Notification Benefits and Severance Benefits.

“Notification Benefits” consist of Notification Pay and Employment Transition Services. You need not sign a Release and Waiver Agreement in order to receive Notification Benefits.

“Severance Benefits” consist of a lump sum Severance Payment and payment of COBRA Premiums (if eligible). You will not receive Severance Benefits if you do not sign a Release and Waiver Agreement, or if you sign a Release and Waiver Agreement but revoke it within the seven (7) calendar day revocation period.

The amount of Severance Benefits available to you depends on whether you are a member of Sun’s Executive Leadership Team (“ELT”) or a Vice President who is not a member of the ELT.

Eligibility

You are an Eligible Employee under the Plan if you are:

• A regular full-time or part-time Sun employee on the U.S. Payroll;

• Not on the payroll of, or considered an employee of, any Sun subsidiary outside the U.S.;

• Employed at the Vice President level or above; and

• Not a Contingent Worker or Partner Worker (includes independent contractor, consultant or vendor) as defined in Sun’s Headcount Policy.

If Sun has not classified you as an employee on the date your service with Sun is terminated and, for that reason, has not withheld employment taxes with respect to you, and you are later determined retroactively to have been a common-law employee of Sun, whether by Sun, a governmental agency or a court, you will nevertheless be ineligible to receive Plan benefits.

Notwithstanding any other provision of the Plan to the contrary, if you were a Storage Technology Corporation (“StorageTek”) employee who received severance benefits as a result of the acquisition of StorageTek by Sun, you will not be eligible for some or all of the benefits under the Plan for a period of time, as set forth in your offer letter from Sun dated on or around August 5-10, 2005.

Conditions For Receiving Plan Benefits

You will receive Plan benefits if you are an Eligible Employee and meet all of the following conditions:

• You receive a formal written notice that states the date your employment will terminate and that your termination is because of a Workforce Reduction or Involuntary Termination (“Termination Letter”);

• You abide by any written terms and requirements that Sun may establish as a condition to your receiving Plan benefits; and

• For Severance Benefits only, you sign the Release and Waiver Agreement within a reasonable period of time (as determined by Sun in its sole discretion) after your employment termination date and do not revoke the Release and Waiver Agreement within the seven (7) calendar day revocation period.

“Workforce Reduction” for purposes of this Plan means your employment is terminated because of the elimination or coordinated reduction of jobs within your group, division, department or branch due to a corporate transaction or reorganization, technology change, funding reduction, reduced workload or similar occurrence (including an outsourcing arrangement). A Workforce Reduction also includes a Material Job Change. A Material Job Change means your job is re-leveled downward and Sun has determined, in its sole discretion, that the re-leveling constitutes a Material Job Change as described in the Global Compensation Treatment for Job Level Downgrades Policy (HR310).

“Involuntary Termination” for purposes of this Plan means termination of your employment by Sun for any reason except for Cause.

Conditions Under Which You Will Not Receive Plan Benefits

Even if you are an Eligible Employee, you will not receive Plan benefits if any of the following apply:

• You are terminated for Cause. “Cause” means (i) misconduct as described in Sun’s Misconduct Policy (HR503) or (ii) documented unsatisfactory job performance. Sun shall make this determination in its sole discretion.

• You voluntarily terminate employment (including as a result of disability) even if you claim “constructive termination,” prior to your termination date as set forth in your Termination Letter.

• You decline a written offer of a “Comparable Job” at Sun for which, in Sun’s judgment, you are reasonably qualified. A “Comparable Job” is a job within 50 miles of your current job location at the same or higher salary/job grade as the current job and with at least the same total target cash compensation opportunity. A Comparable Job need not involve the same duties and responsibilities as your current job.

• You accept another regular job at Sun before your employment at Sun terminates.

• You are on an unpaid personal non-FMLA, non-Military Leave of Absence on the date of the Termination Letter.

• You begin working for another employer (whether regular or temporary) before your employment at Sun terminates. You are required to immediately notify Sun in writing if you begin another job prior to your termination date.

• Your job is re-leveled for any reason, for example, to reflect your current job duties and responsibilities or to reflect any changes in your job duties and responsibilities. A job re-leveling is not a Workforce Reduction unless Sun determines, in its sole discretion, that you have experienced a Material Job Change as defined above.

• For Severance Benefits only, you do not timely sign a Release and Waiver Agreement or you timely sign a Release and Waiver Agreement but you revoke it within the seven calendar day revocation period.

Outsourcing Situations

Additional eligibility requirements apply if your job is eliminated due to outsourcing. Outsourcing is the transfer of work, a function, a group or an organization at Sun to a vendor. The vendor (the “Outsourcing Service Provider”) may seek to hire Sun employees who were previously performing that function or who were members of the group being outsourced.

If your position is outsourced, you will be able to receive Plan benefits, but only if all the following apply:

• You are an Eligible Employee (described above).

• You do not receive an offer of a Comparable Outsource Job, which is Regular Employment. A “Comparable Outsource Job” is a job at the Outsourcing Service Provider for which you are qualified, providing the same level of base pay or higher as your Sun job, and which is not anticipated, pursuant to the outsourcing agreement between Sun and the Outsourcing Service Provider, to require you to relocate to a job location more than 50 miles away from your Sun job location within the first 12 months of your employment with the Outsourcing Service Provider. For purposes of the Plan, if you participate in the iWork program, Sun job location means your home if you are a home assigned employee or the location of your mailstop if you are a flexible employee. If you work from home or a flexible office based on any arrangement outside of the iWork program, your Sun mailstop is your job location. For purposes of the Plan, “Regular Employment” is employment with the Outsourcing Service Provider that is on the same terms and conditions as those provided to their other employees and that is anticipated to be ongoing for an indefinite period. If you are currently working part-time for Sun and you are offered a full-time job by the Outsourcing Service Provider or you are offered a job by the Outsourcing Service Provider that is outside the outsourcing agreement between the Outsourcing Service Provider and Sun (i.e., your job would not support Sun), you will not be considered to have received an offer of a Comparable Outsource Job, which is Regular Employment.

• You fulfill all the regular duties of your Sun job from the date of the outsourcing notice until your last day of work (which may be prior to your termination date) as set forth in the Termination Letter. For purposes of the Plan, outsourcing notice is a written notice of termination due to outsourcing, which does not contain the date your employment will terminate.

• You meet all the Conditions For Receiving Plan Benefits (described above).

You will be ineligible to receive Plan benefits if:

• You receive an offer of a Comparable Outsource Job, which is Regular Employment,

• You accept an offer of a Comparable Outsource Job, which is Short-Term Employment (for purposes of the Plan, Short-Term Employment is employment with the Outsourcing Service Provider that is anticipated, at the time of the job offer, to last less than 12 months), with the Outsourcing Service Provider and the outsourcing agreement between the Outsourcing Service Provider and Sun provides that severance benefits equivalent to the severance benefits under this Plan will be paid by the Outsourcing Service Provider, or

• You meet any of the Conditions Under Which You Will Not Receive Plan Benefits (described above).

Notification Benefits

You need not sign a Release and Waiver Agreement in order to be eligible for Notification Benefits.

If you are an Eligible Employee and you receive a written Termination Letter that your employment will terminate, you will receive the following Notification Benefits:

• Notification Pay. You will remain employed for sixteen (16) weeks following the date of your Termination Letter. During this sixteen (16) week period, you will receive your regularly bi-weekly Pay (defined below under Severance Benefits) and your Sun Flex benefits will continue, but you are not required to work during this time.

• Employment Transition Services (career service assistance) for six (6) months. Employment Transition Services become available to you on the date of your Termination Letter and must be started no later than your employment termination date in order to receive the full benefit.

Severance Benefits

When you receive a Termination Letter, you may choose to sign a Release and Waiver Agreement in order to also receive Severance Benefits. You will have at least 45 calendar days after your employment termination date to sign the Agreement. If you do not sign and return to Sun a Release and Waiver Agreement within a reasonable period of time (as determined by Sun in its sole discretion) after your employment termination date or you subsequently revoke the Agreement during the seven (7) calendar day revocation period, you will not be eligible to receive the Severance Payment and the payment of COBRA Premiums described below. You may not sign the Release and Waiver Agreement prior to your employment termination date.

You will receive the following benefits on the second Friday after Sun receives your signed Release and Waiver Agreement and the revocation period has ended (or as soon as administratively practical thereafter):

• Severance Payment. This is a lump sum payment equal to four (4) weeks Pay (defined below) for each Year of Service (defined below), up to a maximum determined by your Position (defined below) plus sixteen (16) or thirty-two (32) weeks Pay determined by your Position, and

• COBRA Premiums. Your existing coverage under Sun’s group health plan (and, if applicable, the existing group health coverage for your eligible dependents) will end on the date on which your employment terminates. You and your eligible dependents may then be eligible to elect temporary continuation coverage under Sun’s group health plan in accordance with the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”). If you are eligible for a Severance Payment and elect COBRA continuation coverage, Sun will pay your COBRA Premiums (defined below) for a period equal to the number of weeks of

Pay you will receive as a Severance Payment (not to exceed the maximum period of COBRA coverage). After such period of Sun-paid coverage, you (and, if applicable, your eligible dependents) may continue COBRA coverage at your own expense in accordance with COBRA. No provision of the Plan will affect the continuation coverage rules under COBRA. Therefore, the period during which you must elect to continue Sun’s group health plan coverage under COBRA, the length of time during which COBRA coverage will be made available to you, and all your other rights and obligations under COBRA will be applied in the same manner that such rules would apply in the absence of the Plan.

In order that Plan benefits will not constitute a deferral of compensation under Section 409A of the Internal Revenue Code, Notification Pay and the Severance Payment will be paid no later than the later of (i) March 15 following the calendar year in which such payments are no longer subject to a substantial risk of forfeiture or (ii) September 15 following Sun’s fiscal year in which such payments are no longer subject to a substantial risk of forfeiture. Such payments will be considered to be no longer subject to a substantial risk of forfeiture on the date of your Termination Letter (i.e., the date you first have a legally binding right to the Plan benefits). Furthermore, in no event may Employment Transition Services and payment of COBRA Premiums continue beyond December 31 of the second calendar year following the calendar year in which you separate from service. You are deemed to have separated from service on the date you work less than twenty percent (20%) of your average work schedule during the preceding three (3) full calendar years (or, if you were employed by Sun for less than three (3) years, such lesser period). The determination of when you have separated from service will be made by Sun in its sole discretion in accordance with Section 409A of the Internal Revenue Code and the regulations promulgated thereunder.

“Year of Service” for purposes of this Plan means a full or partial year of service with Sun prior to your employment termination date. If you are a rehired employee, prior service at Sun will be counted as Year of Service provided that the prior service period exceeded the period when you were not employed by Sun. Years of Service includes up to seven (7) (ten (10) for former employees of Procom Technology, Inc.) years of service credit for service with a predecessor employer that was acquire by Sun; however, the service credit limit will not apply to former employees of Storage Technology Corporation and SeeBeyond Technology Corporation. A partial year of service will be treated as a full year of service.

“COBRA Premiums” for purposes of this Plan are the COBRA premiums that you would have to pay to continue for a certain period of time, the medical, dental, and/or vision coverage you had immediately prior to terminating employment.

“Pay” for purposes of this Plan (other than for sales-related incentive based positions) means your base pay as of the date of the Termination Letter, which does not include car allowance, draws, spifs, bonuses or any non-base compensation. “Pay” for sales-related incentive based positions is based on the On-Target Earnings rate (OTE) effective on the date of the Termination Letter.

“Position” for purposes of this Plan means your position as either a member of the ELT or a Vice President who is not a member of the ELT on the date of the Termination Letter as recorded in Sun’s HR Database.

Example of Calculation of Severance Payment

Assume you are a Vice President with eight years of service. The calculation of your Severance Payment is as follows:

16 weeks Pay based on the Pay you would have received had you worked for those 16 weeks, plus 20 weeks Pay*, for a total of 36 weeks of Pay.

*4 weeks Pay per Year of Service x 8 years = 32 weeks but the maximum allowed payment based on Years of Service is 20 weeks Pay. The 16 weeks of Pay is not included in calculating the maximum payment based on Years of Service.

Sales-Related Incentive Based Positions

If you are in a sales-related incentive based position, commission earnings end effective the date of your Termination Letter. Base pay will be used to determine the payment of unused, accrued vacation in your final paycheck.

Obligation to Repay Sun

If you are reemployed by Sun (in any capacity) before the end of the number of weeks used to determine your Severance Benefits, you must repay to Sun the portion of your Severance Payment for the period that you have been reemployed.

For example, if you are a Vice President with eight years of service, you would have received 36 weeks of Pay. If you were then reemployed by Sun 4 weeks following your employment termination date, you would be required to repay to Sun an amount calculated as follows:

36 weeks of Severance Payment paid minus 4 weeks of actual unemployment equals 32 weeks of Severance Payment to be repaid to Sun.

Reduction of Other Benefits

Any Notification Pay received under this Plan will reduce the amount of any short term and long term disability benefits you are entitled to receive under the Sun Microsystems, Inc. Comprehensive Welfare Plan.

Taxes and Other Deductions

Sun will withhold all appropriate federal, state, local, income and employment taxes from your Plan benefit payments. Contributions to Sun’s 401(k) plan and employee stock purchase plan will not be deducted from your Severance Payment or any Notification Pay paid after your employment termination date.

Bonus Programs

The Plan does not change the terms of any bonus program for which you may have been eligible at the time of your termination with Sun.

Accordingly, if you are eligible for a bonus payment under a program operated on a quarterly or fiscal year basis (such as SMI Bonus) and terminate employment prior to the last day of a quarter or fiscal year, you will not be eligible to receive the bonus for the quarter or fiscal year in which you terminate employment, except to the extent the bonus program provides otherwise. Unless the bonus program provides otherwise, bonus program payments will not be prorated for a partial quarter’s or year’s participation.

Disability Prior to Employment Termination

If you become disabled after receiving a Termination Letter but before you terminate employment, your employment termination date will not change. You should contact SunDial to discuss the employment disability benefits for which you may be eligible.

Death Prior to Employment Termination

If you die after receiving a Termination Letter but before you sign the Release and Waiver Agreement, neither you nor your estate will be entitled to any further Plan benefits.

Leaves of Absence

If you are on a full-time Medical, FMLA, State Family Care Leave or Military Leave and your job is part of a Workforce Reduction, you may, in Sun’s sole discretion, be given your Termination Letter either during your leave or at the end of your leave. If you receive the Termination Letter at the end of your leave of absence, you will receive the Plan benefits for which you are eligible and your employment will be terminated sixteen (16) weeks after your leave of absence ends. If you receive the Termination Letter while on leave, you may choose to (i) end your leave early and terminate your employment after sixteen (16) weeks (you will receive the Plan benefits for which you are eligible) or (ii) continue your leave (at the end of your leave, you will receive the Plan benefits for which you are eligible and your employment will be terminated sixteen (16) weeks after your leave of absence ends). In no event will your employment termination date extend beyond 24 months after your Medical Leave began. If you are on an intermittent Medical, FMLA or State Family Care Leave, the provisions of this section will not apply to you and your employment will be terminated on the employment termination date indicated on the Termination Letter.

Employees on leaves of absence who are eligible to receive Plan benefits at the end of their leave, will be covered by the terms of the Plan in effect as of the date their positions were designated by Sun to be part of a Workforce Reduction.

SUN MICROSYSTEMS, INC.

U.S. VICE PRESIDENT INVOLUNTARY SEPARATION PLAN

SUMMARY OF PLAN BENEFITS

To receive the Severance Payment and Payment of COBRA Premiums,

the Release and Waiver Agreement must be signed and not revoked.

See Important Notes at the end of Summary.

SALARY/JOB GRADE	NOTIFICATION PAY	EMPLOYMENT TRANSITION SERVICES	SEVERANCE PAYMENT	PAYMENT OF COBRA PREMIUMS
Vice President	16 weeks of Pay	6 months career service assistance	16 weeks Pay plus 4 weeks Pay per Year of Service up to 20 weeks	16 weeks of COBRA premiums plus 4 weeks of COBRA premiums per Year of Service up to 20 weeks
Executive Leadership Team	16 weeks of Pay	6 months career service assistance	32 weeks Pay plus 4 weeks Pay per Year of Service up to 32 weeks	32 weeks of COBRA premiums plus 4 weeks of COBRA premiums per Year of Service up to 32 weeks

IMPORTANT NOTES TO SUMMARY OF PLAN BENEFITS

NOTIFICATION PAY	EMPLOYMENT TRANSITION SERVICES	SEVERANCE PAYMENT	PAYMENT OF COBRA PREMIUMS
1. A Signed Release and Waiver Agreement is not required. 2. Calculated as number of days Pay (base pay or OTE, as applicable). “Pay” has the same meaning as used for Severance Payment.	1. Career service assistance will be provided by an agency designated by Sun. 2. Employment Transition Services become available to you on the date of the Termination Letter and must be started no later than your employment termination date in order to receive the full benefit. 3. A signed Release and Waiver Agreement is not required. 4. Instructions on initiating Employment Transition Services is provided with the Termination Letter.	1. Lump sum Severance Payment paid after Sun receives signed Release and Waiver Agreement and period for revoking Agreement has ended. 2. “Pay” (other than for sales- related incentive based positions) means base pay and does not include any non-base compensation. 3. “Pay” for sales-related incentive based positions is based on on-target earnings (OTE) effective on the date of the Termination Letter. 4. “Years of Service” for calculating benefits means each full or partial year of service with Sun prior to your employment termination date. 5. The 16 weeks/32 weeks additional payment is not included for purpose of calculating the maximum payment based on Years of Service.	1. If you elect COBRA coverage, your COBRA premiums will be paid after Sun receives signed Release and Waiver Agreement and period for revoking Agreement has ended. 2. “Years of Service” for calculating benefits means each full or partial year of service with Sun prior to your employment termination date. 3. The 16 weeks/32 weeks additional period for payment of COBRA premiums is not included for purpose of calculating the maximum period for payment of COBRA premiums based on Years of Service.

Plan Operation, Administration and General Provisions

Other Benefit Plans/Agreements

Your rights and participation in any other Sun benefit plan at termination of employment are governed solely by the terms of those other plans. Amounts you receive under the Plan will be reduced by any pay in lieu of notice you receive under the Worker Adjustment and Retraining Notice Act (“WARN”), if any, and by any other type of severance (or similar) payment you receive under any plan or agreement (including any change of control agreement), if any (including any payments pursuant to a Sun foreign subsidiary’s or an acquired company’s plan or agreement) or as required by law.

Amendment and Termination

Sun reserves the right to modify, suspend or terminate the Plan at any time and for any reason. Any action amending or terminating the Plan shall be in writing and shall be approved by the Leadership and Development Compensation Committee of the Board of Directors of Sun.

Unfunded Plan

All Plan benefits are paid from Sun’s general funds, and each participant is an unsecured general creditor of Sun. Nothing contained in the Plan creates a trust fund of any kind for your benefit or creates any fiduciary relationship between you and Sun with respect to any of Sun’s assets. Sun is under no obligation to fund the benefits provided under the Plan prior to payment.

Plan Benefits Cannot Be Assigned

The rights of any person to any benefit under the Plan may not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including bankruptcy, garnishment, attachment or other creditor’s process. Any act in violation of this rule shall be void.

No Employment Rights

Nothing in the Plan may be deemed to give any individual a right to remain employed by Sun or affect Sun’s right to terminate an individual’s employment at any time, with or without cause.

Legal Construction

The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and, to the extent not preempted by ERISA, California law. If any provision of the Plan is held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions of the Plan shall continue to be fully effective.

Plan Administrator

Sun is the “Plan Administrator” of the Plan as that term is used in ERISA. Sun has full discretionary authority to administer and interpret the Plan, including the exclusive right to adopt rules and procedures to implement the Plan, to interpret in its sole discretion, provisions of the Plan, to decide any questions in connection with the administration of the Plan, or relating to any claim for Plan benefits, including, whether an individual is eligible for Plan benefits and the amount of Plan benefits. Sun may delegate its responsibilities to other persons, which includes delegation of discretion. Subject to the claims and appeal procedures, the decisions of Sun and its delegatees relating to the Plan are final and binding on all persons.

Claims and Appeal Procedures

If you disagree with Sun’s determination of the amount of your benefits or with any other decision Sun may have made regarding your interest in the Plan, you may file a claim with Sun. You must send your claim in writing to: Director, Executive Compensation – U.S. Vice President Involuntary Separation Plan, Sun Microsystems, Inc., 4230 Network Circle, M/S USCA23-106, Santa Clara, CA 95054. You should file the claim as soon as possible, but no later than one (1) year after the determination /decision.

In the event that your claim for benefits is denied in whole or in part, Sun must provide you written or electronic notification of the denial of the claim, and of your right to appeal the denial. The notice of denial will be set forth in a manner designed to be understood by you, and will include (i) the specific reason or reasons for the denial, (ii) reference to the specific Plan provisions upon which the denial is based, (iii) a description of any information or material that Sun needs to complete the review and an explanation of why such information or material is necessary, and (iv) an explanation of the Plan’s appeal procedures and the time limits applicable to such procedures, including a statement of your right to bring a civil action under Section 502(a) of ERISA following a denial on appeal. This notice will be given to you within 90 calendar days after Sun receives the claim, unless special circumstances require an extension of time – in which case Sun has up to an additional 90 calendar days for processing the claim. If an extension of time for processing is required, notice of the extension will be furnished to you before the end of the initial 90-day period. This notice of extension will describe the special circumstances necessitating the additional time and the date by which Sun expects to render its decision on the claim.

If your claim for benefits is denied, in whole or in part, you (or your authorized representative) may appeal the denial by submitting a written appeal to the Appeal Committee within 60 calendar days after you receive the denial. If you fail to appeal a

denial within the 60-day period, Sun’s determination will be final and binding. If you appeal to the Appeal Committee, you (or your authorized representative) may submit comments, documents, records and other information relating to your claim for benefits. You may request (free of charge) reasonable access to, and copies of, all documents, records, and other information relevant to your claim.

The Appeal Committee will make a decision on each appeal no later than 60 calendar days following receipt of the appeal. If special circumstances require an extension of time for processing the appeal, the Appeal Committee will make a decision on the appeal no later than 120 calendar days following receipt of the appeal. If an extension for review is required, notice of the extension will be furnished to you before the extension begins. The extension notice will indicate the special circumstances requiring an extension and the date by which the Appeal Committee expects to render a decision. The Appeal Committee will give written or electronic notice of its decision to you after its decision is made. In the event that the Appeal Committee confirms the denial of the claim for benefits in whole or in part, the notice will outline, in a manner calculated to be understood by you, (i) the specific reason or reasons for the decision, (ii) reference to the specific Plan provisions upon which the decision is based, (iii) a statement that you may request (free of charge) reasonable access to, and copies of, all documents, records, and all other information relevant to your claim, and (iv) a statement of your right to bring an action under Section 502(a) of ERISA.

No legal action for benefits under the Plan may be brought until you (i) have submitted a written claim for benefits in accordance with the procedures described above, have been notified by Sun that the claim is denied, have filed a written appeal in accordance with the appeal procedures described above, and have been notified that the Appeal Committee has denied the appeal, or (ii) Sun or the Appeal Committee fail to follow these procedures. No legal action may be commenced or maintained against the Plan, Sun or the Appeal Committee more than two (2) years after the Appeal Committee denies your appeal or Sun or the Appeal Committee fail to follow these procedures.

If you wish to take legal action after exhausting the appeal procedures, you may serve process on Sun at the address indicated in the section below entitled “Plan Information.”

Plan Information

Plan Governed by ERISA

The Plan is an employee welfare benefit plan subject to ERISA. The Plan is subject to most of the provisions of Title I of ERISA. However, it is not subject to Title IV of ERISA, which includes the plan termination insurance provisions.

Address of Sun

The principal executive office of Sun Microsystems, Inc. is 4150 Network Circle, Santa Clara, California 95054. Its telephone number is (650) 960-1300.

Identification Numbers

Sun’s Employer Identification Number (EIN) is 94-2805249. The Plan Number assigned to the Plan is 541.

Type of Plan

The Plan is a welfare benefit plan providing special severance benefits to eligible employees. All benefits under the Plan are paid directly by Sun to participants.

Plan Year

The Plan’s year ends on December 31.

Service of Process

The Plan’s agent for service of legal process is:

General Counsel

Legal Department

Sun Microsystems, Inc.

4120 Network Circle, MS USCA 12-202

Santa Clara, CA 95054

Statement of ERISA Rights and Protections

As a participant in the Sun Microsystems, Inc. U.S. Vice President Involuntary Separation Plan, you are entitled to certain rights and protections under ERISA. ERISA provides that all plan participants are entitled to:

Receive Information About your Plan and Benefits

Examine, without charge, at the plan administrator’s office - and at other specified locations - all documents governing the Plan and a copy of the latest annual report (Form 5500 Series) filed by the Plan with the U.S. Department of Labor and available at the Public Disclosure Room of the Employee Benefits Security Administration.

Obtain, upon written request to the plan administrator, copies of documents governing the operation of the plan, copies of the latest annual report (Form 5500 Series) and updated summary plan description (there may be a reasonable charge for the copies).

Prudent Actions by Plan Fiduciaries

In addition to creating rights for plan participants, ERISA imposes obligations on those responsible for the operation of the Plan. The people who operate the Plan, called “fiduciaries” of the Plan, have a duty to do so prudently and in the interest of you and other plan participants and beneficiaries. No one, including Sun or any other individual, may fire you or otherwise discriminate against you in any way to prevent you from obtaining a benefit or exercising your rights under ERISA.

Enforce Your Rights

If your claim for a benefit is denied or ignored, in whole or in part, you have a right to know why this was done, to obtain copies of documents relating to the decision without charge, and to appeal any denial, all within certain time schedules.

Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request a copy of plan documents or the latest annual report from the plan administrator and do not receive them within 30 days, you may file suit in a Federal court. In such a case, the court may require the plan administrator to provide the materials and pay you up to $110 a day until you receive them, unless the materials were not sent because of reasons beyond the administrator’s control. If your claim for benefits is denied or ignored, in whole or in part, and you have been through the Plan’s appeal procedures, you may sue in a state or Federal court. If it should happen that plan fiduciaries misuse the Plan’s money, or if you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file suit in a Federal court. The court will decide who should pay court costs and legal fees. If you are successful, the court may order the person you sued to pay these legal costs and fees. If you lose, the court may order you to pay these costs and fees (for example, if it finds your claim is frivolous).

Assistance With Your Questions

If you have questions about the Plan, you should contact the plan administrator. If you have questions about this statement or your rights under ERISA, or if you need assistance in obtaining documents from the plan administrator, you should contact the nearest office of the Employee Benefits Security Administration, U.S. Department of Labor, listed in your telephone directory or the Division of Technical Assistance and Inquiries, Employee Benefits Security Administration, U.S. Department of Labor, 200 Constitution Ave. N.W., Washington, D.C., 20210. You may also obtain certain publications about your rights and responsibilities under ERISA by calling the publications hotline of the Employee Benefits Security Administration.

Execution

To record the adoption of the Plan effective May 1, 2006 as set forth herein, Sun Microsystems, Inc. has caused its authorized representative to sign this document the              day of May, 2006.

Sun Microsystems, Inc.
By:
Printed Name: William N. MacGowan
Title:	Executive Vice President People and Places and Chief Human Resources Officer

EX-10.14

Exhibit 10.14

July 27, 2006

[name]

4150 Network Circle

Santa Clara, CA 95054

Dear [name]:

Sun Microsystems, Inc. (the “Company”), considers it essential to the best interests of its stockholders to attract top executives and to foster the continuous employment of key management personnel. In this connection, the Board of Directors of the Company (the “Board”) recognizes that the possibility of a change of control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders.

The Board has determined that appropriate steps should be taken to ensure the continuity of management and to foster objectivity in the face of potentially disturbing circumstances arising from the possibility of a change of control of the Company, although no such change is now contemplated. In order to induce you to remain in the employ of the Company and in consideration of your further services to the Company, the Company agrees that effective as of July 27, 2006, you shall receive the severance benefits set forth in this letter agreement (“Agreement”) in the event your employment with the Company terminates subsequent to a Change of Control of the Company (as defined in Section 2(d) hereof) under the circumstances described below. This Agreement supersedes and replaces prior Agreements and/or policies related to severance benefits payable to you following a Change of Control of the Company.

1. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until the earlier of (i) your Separation from Service with the Company other than within twelve (12) months of a Change of Control; (ii) such time as you no longer are a Corporate Executive Officer of the Company (and thereby no longer a member of the ‘Executive Leadership Team’) other than within twelve (12) months of a Change of Control; (iii) once the Company has satisfied all of its obligations under this Agreement; or (iv) the execution of a written agreement between the Company and you terminating this Agreement.

2. Definitions. As used in this Agreement:

(a) “Annual Compensation” means the total of

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(i) one year of base salary, at the highest base salary rate that you were paid by the Company in the 12-month period prior to the date of your Separation from Service (the “Look-Back Period”);

(ii) 100% of the greatest On Target annual bonus target for which you were eligible within the Look-Back Period, and

(iii) 100% of the greatest On Target Commission for which you were eligible within the Look-Back Period.

(b) “Beneficial Owner” has the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

(c) “Cause” means (i) any act of personal dishonesty taken by you in connection with your responsibilities as an employee and intended to result in substantial personal enrichment to you, (ii) a willful act by you which constitutes Gross Misconduct and which is injurious to the Company; or (iii) your conviction of a felony which the Board reasonably believes had or will have a material detrimental effect on the Company’s reputation or business.

(d) “Change of Control” of the Company means and includes, consistent with Section 409A of the Code, each and all of the following occurrences:

(i) The stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent company) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity, or its parent company, outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company’s assets.

(ii) The acquisition by any Person as Beneficial Owner, directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then outstanding voting securities.

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July 27, 2006

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(iii) A change in the composition of the Board of Directors of the Company as a result of which fewer than a majority of the directors are “Incumbent Directors.” “Incumbent Directors” shall mean directors who either (A) are directors of the Company as of the date hereof or (B) are elected, or nominated for election, to the Board of Directors with the affirmative votes (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for election as a director without objection to such nomination) of at least three-quarters of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors of the Company).

Any other provision of this Section notwithstanding, the term Change in Control shall not include either of the following events undertaken at the election of the Company:

(x) Any transaction, the sole purpose of which is to change the state of the Company’s incorporation;

(y) A transaction, the result of which is to sell all or substantially all of the assets of the Company to another corporation (the “surviving corporation”); provided that the surviving corporation is owned directly or indirectly by the stockholders of the Company immediately following such transaction in substantially the same proportions as their ownership of the Company’s Common Stock immediately preceding such transaction; and provided, further, that the surviving corporation expressly assumes this Agreement.

(e) “Code” means the Internal Revenue Code of 1986, as amended.

(f) “Company” means Sun Microsystems, Inc., a Delaware corporation, and any successor as provided in Section 8 hereof.

(g) “Determination Date” means each December 31.

(h) “Disability” means that, at the time your employment is terminated, you have been unable to perform the duties of your position for a period of 180 consecutive days as the result of your incapacity due to physical or mental illness.

(i) “Good Reason” means the occurrence of one of the following without your express written consent (i) a significant reduction of your duties, position or responsibilities, or your removal from such position and responsibilities, unless

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you are offered a comparable position (i.e., a position of equal or greater organizational level, duties, authority, compensation, title and status); (ii) a reduction by the Company in your base compensation (base salary and target bonus) as in effect immediately prior to such reduction; (iii) a material reduction by the Company in the kind or level of employee benefits to which you are entitled immediately prior to such reduction with the result that your overall benefits package is significantly reduced; (iv) you are requested to relocate (except for office relocations that would not increase your one way commute by more than 50 miles); or (v) the failure of the Company to obtain the assumption of this Agreement pursuant to Section 8.

(j) “Gross Misconduct” means (i) theft or damage of Company property; (ii) use, possession, sale or distribution of illegal drugs; (iii) being under the influence of alcohol or drugs (except to the extent medically prescribed) while on duty or on Company premises; (iv) involvement in activities representing conflicts of interests; (v) improper disclosure of confidential information; (vi) conduct endangering, or likely to endanger, the health or safety of another employee, or (vii) falsifying or misrepresenting information on Company records.

(k) Key Employee” means an employee who, on a Determination Date, is (i) an officer of the Company having annual compensation greater than the compensation limit in Section 416(i)(1)(A)(i) of the Code, provided that no more than fifty officers of the Company shall be determined to be Key Employees as of any Determination Date; (ii) a five percent owner of the Company; or (iii) a one percent owner of the Company having annual compensation from the Company of more than $150,000.

(l) If an employee is determined to be a Key Employee on a Determination Date, then such employee shall be considered a Key Employee for purposes of this Agreement in accordance with Code Section 409A and regulations promulgated thereunder.

(m) “Person” has the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof, including a group as defined in Section 13(d) of the Exchange Act but excluding the Company and any subsidiary and any employee benefit plan sponsored or maintained by the Company or any subsidiary (including any trustee of such plan acting as Trustee).

[name]

July 27, 2006

Page 5

(n) “Separation from Service” means termination of employment with the Company. You shall not be deemed to have Separated from Service if you continue to provide services to the Company in a capacity other than as an employee and if you are providing services at an annual rate that is fifty percent or more of the services you rendered, on average, during the immediately preceding three full calendar years of employment with the Company (or if employed by the Company less than three years, such lesser period) and the annual remuneration for your services is fifty percent or more of the annual remuneration earned during the final three full calendar years of employment (of if less, such lesser period); provided, however, that a Separation from Service will be deemed to have occurred if your service with the Company is reduced to an annual rate that is less than twenty percent of the services you rendered, on average, during the immediately preceding three full calendar years of employment with the Company (or if employed by the Company less than three years, such lesser period) or the annual remuneration for your services is less than twenty percent of the annual remuneration earned during the three full calendar years of employment with the Company (or if less, such lesser period.

(o) “Severance Payment” means the payment of severance compensation as provided in Section 3 of this Agreement.

3. Compensation Upon Separation from Service Following a Change of Control. If you Separate from Service on account of (i) an involuntary termination without Cause or (ii) a voluntary termination for Good Reason, within twelve (12) months after a Change in Control, then subject to your signing and not revoking a separation agreement and release of claims in a form reasonably satisfactory to the Company as well as Sections 4 and 5 below:

(a) You will be entitled to a Severance Payment in an amount computed as follows:

(i) A lump sum payment, paid in accordance with subsection (c) below, equal to two and one-half (2 ¹/2) times Annual Compensation; plus

(ii) The same percentage of Company-paid health and group-term life insurance benefits as were provided to you and your family under plans of the Company as of the Change of Control for a total of twenty-four (24) months, provided that all payments be made prior to December 31 of the second year following the year in which you Separate from Service. Notwithstanding the foregoing, the Company may, at its option, satisfy any requirement that the Company provide coverage under any plan by instead providing coverage under a separate plan or plans providing coverage that is no less favorable.

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July 27, 2006

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(b) The Company agrees that in addition to the payments and benefits provided under Section 3(a), all outstanding stock options, restricted stock, restricted stock units, performance units, performance shares, stock appreciation rights, and long-term incentive cash programs (“Long-Term Incentives”) previously granted to you under any Company stock option or long-term incentive plan (including any options or other Long-Term Incentives assumed by the Company in connection with its acquisition of another entity, all Long-Term Incentives issued in substitution or assumption of such Long-Term Incentives as a result of a Change in Control), whether vested or unvested, shall immediately have their vesting accelerated upon such Separation from Service, and all such outstanding Long-Term Incentives (whether incentive stock options (as defined under Section 422 of the Code) or nonstatutory stock options (i.e., options that are not incentive stock options), or other forms of Long-Term Incentives) shall be exercisable for a period of three (3) months after your Separation from Service, and all restricted stock, restricted stock units, performance units, performance shares and long-term incentive cash programs shall be paid automatically in accordance with subsection (c) below.

(c) All payments made to you under subsections (a) and (b) shall be made within ten (10) calendar days of your Separation from Service unless on the date that you Separate from Service you are a Key Employee, in which case all payments made to you under subsections (a) and (b) shall be made in the seventh month following your Separation from Service; provided, however, that no payment shall be made to a Key Employee prior to the six-month anniversary of the date the Key Employee’s Separation from Service; provided further, however, that no Severance Payment shall be made to you until the separation agreement and release of claims referenced above becomes effective.

(d) Notwithstanding anything contained in subsections (a) and (b) above, the Company shall have no obligation to make any payment or offer any benefits to you under this Section 3 if you Separate from Service prior to a Change in Control or if you Separate from Service within twelve (12) months after a Change in Control for Cause, death, Disability, retirement or voluntary resignation other than for Good Reason or if you Separate from Service for any reason after twelve (12) months following a Change in Control.

4. Parachute Payments. In the event that any payment or benefit received or to be received by you in connection with your Separation from Service with the Company (collectively,

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July 27, 2006

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the “Severance Parachute Payments”) would (i) constitute a parachute payment within the meaning of Section 280G of the Code or any similar or successor provision to 280G and (ii) but for this Section 4, be subject to the excise tax imposed by Section 4999 of the Code or any similar or successor provision to Section 4999 (the “Excise Tax”), then such Payments shall be reduced to the largest amount which would result in no portion of the Severance Parachute Payments being subject to the Excise Tax. In the event any reduction of benefits is required pursuant to this Agreement, you shall be allowed to choose which benefits hereunder are reduced (e.g., reduction first from the Severance Payment, then from the vesting acceleration). Any determination as to whether a reduction is required under this Agreement and as to the amount of such reduction shall be made in writing by the independent public accountants appointed for this purpose by the Company (the “Accountants”) prior to, or immediately following, the Change of Control, whose determinations shall be conclusive and binding upon you and the Company for all purposes. If the Internal Revenue Service (the “IRS”) determines that the Severance Parachute Payments are subject to the Excise Tax, then the Company or any related corporation, as their exclusive remedy, shall seek to enforce the provisions of Section 5 hereof. Such enforcement of Section 5 below shall be the only remedy, under any and all applicable state and federal laws or otherwise, for your failure to reduce the Severance Parachute Payments so that no portion thereof is subject to the Excise Tax. The Company or related corporation shall reduce the Severance Parachute Payments in accordance with Section 4 only upon written notice by the Accountants indicating the amount of such reduction, if any. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Agreement.

5. Remedy. If, notwithstanding the reduction described in Section 4 hereof, the IRS determines that you are liable for the Excise Tax as a result of the receipt of a Severance Parachute Payment, then you shall, subject to the provisions of this Agreement, be obligated to pay to the Company (the “Repayment Obligation”) an amount of money equal to the Repayment Amount (defined below). The “Repayment Amount” with respect to the Severance Parachute Payments shall be the smallest such amount, if any, as shall be required to be paid to the Company so that your net proceeds with respect to any Payment s(after taking into account the payment of the Excise Tax imposed on such Payments) shall be maximized. Notwithstanding the foregoing, the Repayment Amount with respect to the Severance Parachute Payments shall be zero if a Repayment Amount of more than zero would not eliminate the Excise Tax imposed on such Severance Parachute Payment. If the Excise Tax is not eliminated through the performance of the Repayment Obligation, you shall pay the Excise Tax. The Repayment Obligation shall be performed within thirty (30) days of either (i) your entering into a binding agreement with the IRS as to the amount of your Excise Tax liability or (ii) a final determination by the IRS or a decision by a court of competent jurisdiction requiring you to pay the Excise Tax with respect to the Severance Parachute Payments from which no appeal is available or is timely taken.

[name]

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6. No Mitigation. You shall not be required to mitigate the amount of any payment provided for in Section 3 hereof by seeking other employment or otherwise, nor shall the amount of such payment be reduced by reason of compensation or other income you receive for services rendered after your Separation from Service from the Company.

7. Exclusive Remedy. In the event of your Separation from Service on account of an involuntary termination without Cause or a voluntary termination for Good Reason within twelve (12) months following a Change of Control, the provisions of Section 3 are intended to be and are exclusive and in lieu of any other rights or remedies to which you or the Company may otherwise be entitled (including any contrary provisions in any employment agreement you may have with the Company), whether at law, tort or contract, in equity, or under this Agreement. You shall not be entitled to any severance benefits, compensation or other payments or rights upon your Separation from Service on account of an involuntary termination (including any benefits under the SMI U.S. Vice President Involuntary Severance Plan or the U.S. Vice President Severance Plan) without Cause or a voluntary termination for Good Reason within twelve (12) months following a Change of Control other than those benefits expressly set forth in Section 3.

8. Company’s Successors. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, to expressly assume and agree to perform the obligations under this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. As used in this Section 8, Company includes any successor to its business or assets as aforesaid which executes and delivers this Agreement or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law.

9. Notice. Notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or five (5) days after deposit with postal authorities transmitted by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first or last page of this Agreement, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.

10. Amendment or Waiver. No provisions of this Agreement may be amended, modified, waived or discharged unless you and the Company agree to such amendment, modification, waiver or discharge in writing. No amendment, modification, waiver or discharge of this Agreement shall result in the accelerated payment of any Severance Payment provided for in Section 3. No waiver by either party at any time of the breach of, or lack of compliance with, any conditions or provisions of this Agreement shall be deemed a waiver of the provisions or conditions hereof.

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11. Sole Agreement. This Agreement represents the entire agreement between you and the Company with respect to the matters set forth herein and supersedes and replaces any prior agreements in their entirety. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter of this Agreement will be made by either party which are not set forth expressly herein. No future agreement between you and the Company may supercede this Agreement, unless it is in writing and specifically make reference to this Section 11.

12. Employee’s Successors. This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amounts are still payable to you hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee, or other designee or, if there be no such designees, to your estate.

13. Funding. This Agreement shall be unfunded. Any payment made under the Agreement shall be made from the Company’s general assets.

14. Waiver. No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time.

15. Headings. All captions and section headings used in this Agreement are for convenient reference only and do not form a part of this Agreement.

16. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect.

17. Withholding. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes.

18. Applicable Law. This Agreement shall be interpreted and enforced in accordance with the laws of the State of California (with the exception of its conflict of laws provisions). This Agreement is intended to comply with Section 409A of the Code and the regulations promulgated thereunder.

19. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument.

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If the foregoing conforms to your understanding, please indicate your agreement to the terms hereof by signing where indicated below and returning one copy of this Agreement to the undersigned.

IN WITNESS WHEREOF, this Agreement is executed effective as of the date set forth above.

Sincerely,

SUN MICROSYSTEMS, INC.

Michael A. Dillon

Executive Vice President, General Counsel and Secretary

ACCEPTED AND AGREED TO AS OF

THE DATE FIRST SET FORTH ABOVE:

[name]

EX-10.15

Exhibit 10.15

July 27, 2006

[name]

4150 Network Circle

Santa Clara, CA 95054

Dear [name]:

Sun Microsystems, Inc. (the “Company”), considers it essential to the best interests of its stockholders to attract top executives and to foster the continuous employment of key management personnel. In this connection, the Board of Directors of the Company (the “Board”) recognizes that the possibility of a change of control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders.

The Board has determined that appropriate steps should be taken to ensure the continuity of management and to foster objectivity in the face of potentially disturbing circumstances arising from the possibility of a change of control of the Company, although no such change is now contemplated. In order to induce you to remain in the employ of the Company and in consideration of your further services to the Company, the Company agrees that effective as of July 27, 2006, you shall receive the severance benefits set forth in this letter agreement (“Agreement”) in the event your employment with the Company terminates subsequent to a Change of Control of the Company (as defined in Section 2(d) hereof) under the circumstances described below. This Agreement supersedes and replaces prior Agreements and/or policies related to severance benefits payable to you following a Change of Control of the Company.

1. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until the earlier of (i) your Separation from Service with the Company other than within twelve (12) months of a Change of Control; (ii) such time as you no longer are a Corporate Executive Officer of the Company (and thereby no longer a member of the ‘Executive Leadership Team’) other than within twelve (12) months of a Change of Control; (iii) once the Company has satisfied all of its obligations under this Agreement; or (iv) the execution of a written agreement between the Company and you terminating this Agreement.

2. Definitions. As used in this Agreement:

(a) “Annual Compensation” means the total of

1

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(i) one year of base salary, at the highest base salary rate that you were paid by the Company in the 12-month period prior to the date of your Separation from Service (the “Look-Back Period”);

(ii) 100% of the greatest On Target annual bonus target for which you were eligible within the Look-Back Period, and

(iii) 100% of the greatest On Target Commission for which you were eligible within the Look-Back Period.

(b) “Beneficial Owner” has the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

(c) “Cause” means (i) any act of personal dishonesty taken by you in connection with your responsibilities as an employee and intended to result in substantial personal enrichment to you, (ii) a willful act by you which constitutes Gross Misconduct and which is injurious to the Company; or (iii) your conviction of a felony which the Board reasonably believes had or will have a material detrimental effect on the Company’s reputation or business.

(d) “Change of Control” of the Company means and includes, consistent with Section 409A of the Code, each and all of the following occurrences:

(i) The stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent company) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity, or its parent company, outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company’s assets.

(ii) The acquisition by any Person as Beneficial Owner, directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then outstanding voting securities.

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(iii) A change in the composition of the Board of Directors of the Company as a result of which fewer than a majority of the directors are “Incumbent Directors.” “Incumbent Directors” shall mean directors who either (A) are directors of the Company as of the date hereof or (B) are elected, or nominated for election, to the Board of Directors with the affirmative votes (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for election as a director without objection to such nomination) of at least three-quarters of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors of the Company).

Any other provision of this Section notwithstanding, the term Change in Control shall not include either of the following events undertaken at the election of the Company:

(x) Any transaction, the sole purpose of which is to change the state of the Company’s incorporation;

(y) A transaction, the result of which is to sell all or substantially all of the assets of the Company to another corporation (the “surviving corporation”); provided that the surviving corporation is owned directly or indirectly by the stockholders of the Company immediately following such transaction in substantially the same proportions as their ownership of the Company’s Common Stock immediately preceding such transaction; and provided, further, that the surviving corporation expressly assumes this Agreement.

(e) “Code” means the Internal Revenue Code of 1986, as amended.

(f) “Company” means Sun Microsystems, Inc., a Delaware corporation, and any successor as provided in Section 8 hereof.

(g) “Determination Date” means each December 31.

(h) “Disability” means that, at the time your employment is terminated, you have been unable to perform the duties of your position for a period of 180 consecutive days as the result of your incapacity due to physical or mental illness.

(i) “Good Reason” means the occurrence of one of the following without your express written consent (i) a significant reduction of your duties, position or responsibilities, or your removal from such position and responsibilities, unless

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you are offered a comparable position (i.e., a position of equal or greater organizational level, duties, authority, compensation, title and status); (ii) a reduction by the Company in your base compensation (base salary and target bonus) as in effect immediately prior to such reduction; (iii) a material reduction by the Company in the kind or level of employee benefits to which you are entitled immediately prior to such reduction with the result that your overall benefits package is significantly reduced; (iv) you are requested to relocate (except for office relocations that would not increase your one way commute by more than 50 miles); or (v) the failure of the Company to obtain the assumption of this Agreement pursuant to Section 8.

(j) “Gross Misconduct” means (i) theft or damage of Company property; (ii) use, possession, sale or distribution of illegal drugs; (iii) being under the influence of alcohol or drugs (except to the extent medically prescribed) while on duty or on Company premises; (iv) involvement in activities representing conflicts of interests; (v) improper disclosure of confidential information; (vi) conduct endangering, or likely to endanger, the health or safety of another employee, or (vii) falsifying or misrepresenting information on Company records.

(k) “Key Employee” means an employee who, on a Determination Date, is (i) an officer of the Company having annual compensation greater than the compensation limit in Section 416(i)(1)(A)(i) of the Code, provided that no more than fifty officers of the Company shall be determined to be Key Employees as of any Determination Date; (ii) a five percent owner of the Company; or (iii) a one percent owner of the Company having annual compensation from the Company of more than $150,000.

(l) If an employee is determined to be a Key Employee on a Determination Date, then such employee shall be considered a Key Employee for purposes of this Agreement in accordance with Code Section 409A and regulations promulgated thereunder.

(m) “Person” has the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof, including a group as defined in Section 13(d) of the Exchange Act but excluding the Company and any subsidiary and any employee benefit plan sponsored or maintained by the Company or any subsidiary (including any trustee of such plan acting as Trustee).

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(n) “Separation from Service” means termination of employment with the Company. You shall not be deemed to have Separated from Service if you continue to provide services to the Company in a capacity other than as an employee and if you are providing services at an annual rate that is fifty percent or more of the services you rendered, on average, during the immediately preceding three full calendar years of employment with the Company (or if employed by the Company less than three years, such lesser period) and the annual remuneration for your services is fifty percent or more of the annual remuneration earned during the final three full calendar years of employment (of if less, such lesser period); provided, however, that a Separation from Service will be deemed to have occurred if your service with the Company is reduced to an annual rate that is less than twenty percent of the services you rendered, on average, during the immediately preceding three full calendar years of employment with the Company (or if employed by the Company less than three years, such lesser period) or the annual remuneration for your services is less than twenty percent of the annual remuneration earned during the three full calendar years of employment with the Company (or if less, such lesser period.

(o) “Severance Payment” means the payment of severance compensation as provided in Section 3 of this Agreement.

3. Compensation Upon Separation from Service Following a Change of Control. If you Separate from Service on account of (i) an involuntary termination without Cause or (ii) a voluntary termination for Good Reason, within twelve (12) months after a Change in Control, then subject to your signing and not revoking a separation agreement and release of claims in a form reasonably satisfactory to the Company as well as Sections 4 and 5 below:

(a) You will be entitled to a Severance Payment in an amount computed as follows:

(i) A lump sum payment, paid in accordance with subsection (c) below, equal to three (3) times Annual Compensation; plus

(ii) The same percentage of Company-paid health and group-term life insurance benefits as were provided to you and your family under plans of the Company as of the Change of Control for a total of twenty-four (24) months, provided that all payments be made prior to December 31 of the second year following the year in which you Separate from Service. Notwithstanding the foregoing, the Company may, at its option, satisfy any requirement that the Company provide coverage under any plan by instead providing coverage under a separate plan or plans providing coverage that is no less favorable.

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(b) The Company agrees that in addition to the payments and benefits provided under Section 3(a), all outstanding stock options, restricted stock, restricted stock units, performance units, performance shares, stock appreciation rights, and long-term incentive cash programs (“Long-Term Incentives”) previously granted to you under any Company stock option or long-term incentive plan (including any options or other Long-Term Incentives assumed by the Company in connection with its acquisition of another entity, all Long-Term Incentives issued in substitution or assumption of such Long-Term Incentives as a result of a Change in Control), whether vested or unvested, shall immediately have their vesting accelerated upon such Separation from Service, and all such outstanding Long-Term Incentives (whether incentive stock options (as defined under Section 422 of the Code) or nonstatutory stock options (i.e., options that are not incentive stock options), or other forms of Long-Term Incentives) shall be exercisable for a period of three (3) months after your Separation from Service, and all restricted stock, restricted stock units, performance units, performance shares and long-term incentive cash programs shall be paid automatically in accordance with subsection (c) below.

(c) All payments made to you under subsections (a) and (b) shall be made within ten (10) calendar days of your Separation from Service unless on the date that you Separate from Service you are a Key Employee, in which case all payments made to you under subsections (a) and (b) shall be made in the seventh month following your Separation from Service; provided, however, that no payment shall be made to a Key Employee prior to the six-month anniversary of the date the Key Employee’s Separation from Service; provided further, however, that no Severance Payment shall be made to you until the separation agreement and release of claims referenced above becomes effective.

(d) Notwithstanding anything contained in subsections (a) and (b) above, the Company shall have no obligation to make any payment or offer any benefits to you under this Section 3 if you Separate from Service prior to a Change in Control or if you Separate from Service within twelve (12) months after a Change in Control for Cause, death, Disability, retirement or voluntary resignation other than for Good Reason or if you Separate from Service for any reason after twelve (12) months following a Change in Control.

4. Parachute Payments. In the event that any payment or benefit received or to be received by you in connection with your Separation from Service with the Company (collectively,

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the “Severance Parachute Payments”) would (i) constitute a parachute payment within the meaning of Section 280G of the Code or any similar or successor provision to 280G and (ii) but for this Section 4, be subject to the excise tax imposed by Section 4999 of the Code or any similar or successor provision to Section 4999 (the “Excise Tax”), then such Payments shall be reduced to the largest amount which would result in no portion of the Severance Parachute Payments being subject to the Excise Tax. In the event any reduction of benefits is required pursuant to this Agreement, you shall be allowed to choose which benefits hereunder are reduced (e.g., reduction first from the Severance Payment, then from the vesting acceleration). Any determination as to whether a reduction is required under this Agreement and as to the amount of such reduction shall be made in writing by the independent public accountants appointed for this purpose by the Company (the “Accountants”) prior to, or immediately following, the Change of Control, whose determinations shall be conclusive and binding upon you and the Company for all purposes. If the Internal Revenue Service (the “IRS”) determines that the Severance Parachute Payments are subject to the Excise Tax, then the Company or any related corporation, as their exclusive remedy, shall seek to enforce the provisions of Section 5 hereof. Such enforcement of Section 5 below shall be the only remedy, under any and all applicable state and federal laws or otherwise, for your failure to reduce the Severance Parachute Payments so that no portion thereof is subject to the Excise Tax. The Company or related corporation shall reduce the Severance Parachute Payments in accordance with Section 4 only upon written notice by the Accountants indicating the amount of such reduction, if any. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Agreement.

5. Remedy. If, notwithstanding the reduction described in Section 4 hereof, the IRS determines that you are liable for the Excise Tax as a result of the receipt of a Severance Parachute Payment, then you shall, subject to the provisions of this Agreement, be obligated to pay to the Company (the “Repayment Obligation”) an amount of money equal to the Repayment Amount (defined below). The “Repayment Amount” with respect to the Severance Parachute Payments shall be the smallest such amount, if any, as shall be required to be paid to the Company so that your net proceeds with respect to any Payments (after taking into account the payment of the Excise Tax imposed on such Payments) shall be maximized. Notwithstanding the foregoing, the Repayment Amount with respect to the Severance Parachute Payments shall be zero if a Repayment Amount of more than zero would not eliminate the Excise Tax imposed on such Severance Parachute Payment. If the Excise Tax is not eliminated through the performance of the Repayment Obligation, you shall pay the Excise Tax. The Repayment Obligation shall be performed within thirty (30) days of either (i) your entering into a binding agreement with the IRS as to the amount of your Excise Tax liability or (ii) a final determination by the IRS or a decision by a court of competent jurisdiction requiring you to pay the Excise Tax with respect to the Severance Parachute Payments from which no appeal is available or is timely taken.

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6. No Mitigation. You shall not be required to mitigate the amount of any payment provided for in Section 3 hereof by seeking other employment or otherwise, nor shall the amount of such payment be reduced by reason of compensation or other income you receive for services rendered after your Separation from Service from the Company.

7. Exclusive Remedy. In the event of your Separation from Service on account of an involuntary termination without Cause or a voluntary termination for Good Reason within twelve (12) months following a Change of Control, the provisions of Section 3 are intended to be and are exclusive and in lieu of any other rights or remedies to which you or the Company may otherwise be entitled (including any contrary provisions in any employment agreement you may have with the Company), whether at law, tort or contract, in equity, or under this Agreement. You shall not be entitled to any severance benefits, compensation or other payments or rights upon your Separation from Service on account of an involuntary termination (including any benefits under the SMI U.S. Vice President Involuntary Severance Plan or the U.S. Vice President Severance Plan) without Cause or a voluntary termination for Good Reason within twelve (12) months following a Change of Control other than those benefits expressly set forth in Section 3.

8. Company’s Successors. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, to expressly assume and agree to perform the obligations under this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. As used in this Section 8, Company includes any successor to its business or assets as aforesaid which executes and delivers this Agreement or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law.

9. Notice. Notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or five (5) days after deposit with postal authorities transmitted by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first or last page of this Agreement, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.

10. Amendment or Waiver. No provisions of this Agreement may be amended, modified, waived or discharged unless you and the Company agree to such amendment, modification, waiver or discharge in writing. No amendment, modification, waiver or discharge of this Agreement shall result in the accelerated payment of any Severance Payment provided for in Section 3. No waiver by either party at any time of the breach of, or lack of compliance with, any conditions or provisions of this Agreement shall be deemed a waiver of the provisions or conditions hereof.

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11. Sole Agreement. This Agreement represents the entire agreement between you and the Company with respect to the matters set forth herein and supersedes and replaces any prior agreements in their entirety. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter of this Agreement will be made by either party which are not set forth expressly herein. No future agreement between you and the Company may supersede this Agreement, unless it is in writing and specifically make reference to this Section 11.

12. Employee’s Successors. This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amounts are still payable to you hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee, or other designee or, if there be no such designees, to your estate.

13. Funding. This Agreement shall be unfunded. Any payment made under the Agreement shall be made from the Company’s general assets.

14. Waiver. No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time.

15. Headings. All captions and section headings used in this Agreement are for convenient reference only and do not form a part of this Agreement.

16. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect.

17. Withholding. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes.

18. Applicable Law. This Agreement shall be interpreted and enforced in accordance with the laws of the State of California (with the exception of its conflict of laws provisions). This Agreement is intended to comply with Section 409A of the Code and the regulations promulgated thereunder.

19. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument.

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If the foregoing conforms to your understanding, please indicate your agreement to the terms hereof by signing where indicated below and returning one copy of this Agreement to the undersigned.

IN WITNESS WHEREOF, this Agreement is executed effective as of the date set forth above.

Sincerely,

SUN MICROSYSTEMS, INC.

Michael A. Dillon

Executive Vice President, General Counsel and Secretary

ACCEPTED AND AGREED TO AS OF

THE DATE FIRST SET FORTH ABOVE:

[name]

EX-10.17

Exhibit 10.17

Chief Executive Officer Bonus Terms for FY07 Under the

Section 162(m) Executive Officer Performance-Based Bonus Plan

Plan Objective

Sun’s Chief Executive Officer Bonus Terms for FY07 under its Section 162(m) Executive Officer Performance-Based Bonus Plan (the “Plan”) are designed to compensate the Chief Executive Officer (“CEO”) for contributions to Sun during the fiscal year. The Plan provides for quarterly cash compensation based on performance against the Plan measures.

Plan Year/Performance Periods

The Plan year is the Company’s fiscal year 2007. The performance periods are each of the Company’s four fiscal quarters during that fiscal year.

Eligibility

These terms apply to the person serving as Sun’s CEO as of July 1, 2006. In order to receive a bonus payment with respect to any fiscal quarter, the participant must be serving as Sun’s CEO as of the last day of that fiscal quarter, except as provided below.

A participant who retires, becomes disabled, or dies during any fiscal quarter may receive a prorated bonus for the period of time during the fiscal quarter that the participant provided services to Sun. A participant who leaves Sun prior to the end of a fiscal quarter for any other reason, including but not limited to a reduction in force, voluntary resignation, or termination by Sun, will be ineligible for a bonus payment with respect to that fiscal quarter and any subsequent fiscal quarter during fiscal year 2007.

Bonus Target

The participant’s bonus target under the Plan is 200% of the participant’s Eligible Wages for fiscal year 2007, as determined below (the “Bonus Target”). The Bonus Target is divided between the four fiscal quarters of fiscal year 2006 as follows (each, a “Quarterly Bonus Target”):

Fiscal Quarter	Percentage		Quarterly Bonus Target
FY07 Q1	15	%	30	%
FY07 Q2	25	%	50	%
FY07 Q3	25	%	50	%
FY07 Q4	35	%	70	%

For example, for FY07 Q1, the Quarterly Bonus Target would be 200% multiplied by 15%, or 30% of Eligible Wages for that quarter.

Payouts under the Plan are capped at 270% of the Bonus Target for fiscal year 2007. (Plan funding is capped at 200% of the target funding amount; in addition, for the Q4 payment, individual performance can adjust the funded Q4 payment from 0% to 200%.)

Company Performance Measures

The Plan is based on Company performance against the following measures (the “Company Performance Measures”):

1. Q1 FY07-quarterly Operating Income (weighted 50%) and quarterly Revenue (weighted 50%);

2. Q2 FY07-quarterly Operating Income (weighted 50%) and quarterly Revenue (weighted 50%);

Page 1 of 4

Chief Executive Officer Bonus Terms for FY07 Under the

Section 162(m) Executive Officer Performance-Based Bonus Plan

3. Q3 FY07-quarterly Operating Income (weighted 50%) and quarterly Revenue (weighted 50%);

4. Q4 FY07-quarterly Operating Income (weighted 50%) and quarterly Revenue (weighted 50%);

Additional funding maybe be allocated to the Q4 bonus payments if:

1. Q4 financial performance on Revenue and Operating Income are at least at target, and,

2. Corporate annual goals for Solaris adoption/conversion are met.

Company Performance Measure Definitions

Operating Income: For purposes of calculating the bonus accrual under the Plan, “Operating Income” is defined as Operating Income, calculated on a GAAP basis, adjusted to exclude the impact of the following:

• Restructuring charges

• In process R & D charges

• Intangible impairment charges

• Stock Compensation Expense

• FY07 Bonus Accrual

• Equity Based Compensation Expense

In addition, any significant one-time event in excess of $20 million (income or expense) may be included or excluded at the discretion of the Leadership Development and Compensation Committee of the Board of Directors (the “LDCC”) . Significant changes to operations may result in changes to the Plan at LDCC discretion.

Revenue: For purposes of calculating the bonus accrual under the Plan, “Revenue” is defined as net revenue as reported in the Company’s consolidated operations analysis.

Bonus Plan Funding Percentage

The Company uses a schedule (the “Quarterly Bonus Funding Schedule”), which provides percentages based upon the Company’s actual performance against the Company’s goal(s) with respect to the Company Performance Measures for each quarter. The Bonus Plan Funding Percentage is determined for each fiscal quarter as follows:

1. Q1-Q4 FY07: Funding based on actual performance against goals with respect to quarterly Operating Income and quarterly Revenue, weighted equally;

2. Evaluating and funding each performance measure independently;

3. Additionally, with respect to Q4 FY07, there maybe additional bonus funding based on the Corporate Solaris Goal, providing up to an additional 6% of the bonus pool if the Q4 Revenue goal, Q4 Operating Income and Corporate Solaris adoption/conversion annual goals are met.

Individual Performance

Q4 FY07 bonus calculation will include a percentage multiplier based upon the Participant’s annual performance (the “Individual Performance Percentage”.) The participant can receive 0-200% of their bonus target based on achievement of documented individual objectives.

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Chief Executive Officer Bonus Terms for FY07 Under the

Section 162(m) Executive Officer Performance-Based Bonus Plan

Eligible Wages

Eligible Wages with respect to any fiscal quarter in fiscal year 2007 (“Eligible Wages”) shall be determined based upon the participant’s annual base salary on the last day of such fiscal quarter (October 1, 2006 for FY07 Q1, December 31, 2006 for FY07 Q2, April 1, 2007 for FY07 Q3, and June 30, 2007 for FY07 Q4).

For example, for FY07 Q2, assuming the participant’s annual base salary on December 31, 2006 was $1,000,000, the participant’s Eligible Wages would be $1,000,000.

Eligible Wages exclude relocation allowances, expense reimbursements, tuition reimbursement, car/transportation allowances, expatriate allowances, long-term disability payments, or other commissions and bonuses paid during each quarter of FY07.

Bonus Calculation

Q1 - Q3 FY07

The Participant’s quarterly bonus payment for Q1- Q3 FY07 will be calculated as follows:

    Quarterly Bonus Target Percentage

x Bonus Plan Funding Percentage

x Eligible Wages

= Actual Quarterly Bonus Payment

Example: In Q2, FY07, if the Company achieves 100% of Operating Income goal and 100% of Revenue goal, the actual quarterly bonus payment will be calculated as follows:

Quarterly Bonus Target Percentage			50	%
Bonus Plan Funding Percentage	X		100	%
Eligible Wages	X	$	1,000,000
Actual Quarterly Bonus Payment for Q2 FY07		$	500,000

Q4 FY07

The Participant’s quarterly bonus payment for Q4 FY07 will be calculated as follows:

    Quarterly Bonus Target Percentage

x Bonus Plan Funding Percentage (Financial Measures and Corporate Solaris Goal, if applicable)

x Individual Performance Percentage

x Eligible Wages

= Actual Quarterly Bonus Payment

Example: In Q4 FY07, if the Company achieves 100% of its quarterly Operating Income goal and 100% of its Revenue goal, and 100% of the Corporate Solaris goal, actual quarterly bonus payment with an Individual Performance Percentage of 125% will be calculated as follows:

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Chief Executive Officer Bonus Terms for FY07 Under the

Section 162(m) Executive Officer Performance-Based Bonus Plan

Step One – Determine Bonus Plan Funding Percentage:

Company Actual Performance for Q4 FY07	Percentage from Schedule		Relative Weighting
Quarterly Operating Income – 100%	100	%	50	%
Quarterly Revenue – 100%	100	%	50	%
Solaris Goal	100	%	6	%
Bonus Plan Funding Percentage			106	%

Step Two – Determine actual quarterly bonus payment:

Quarterly Bonus Target Percentage			70	%
Bonus Plan Funding Percentage	X		106	%
Individual Performance Percentage	X		125	%
Eligible Wages	X	$	1,000,000
Actual Quarterly Bonus Payment for Q4 FY07		$	927,500

Bonus Payment

In the U.S., bonus awards are taxable income, and will generally be paid within 2 and half months after the close of each fiscal quarter. Bonuses are paid in accordance with local payroll schedules in countries outside the U.S and subject to local and regional tax provisions.

Communication of Results

With respect to any particular fiscal quarter during fiscal year 2007, results will be communicated as soon as possible after the Company’s quarterly financial results are publicly announced.

General Provisions and Plan Governance

This Plan is in all respects subject to the terms, definitions and provisions of Sun’s Section 162(m) Executive Officer Performance-Based Bonus Plan, which is incorporated herein by reference.

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EX-10.18

Exhibit 10.18

Executive Officer Bonus Terms for FY07 Under the

Section 162(m) Executive Officer Performance-Based Bonus Plan

Plan Objective

Sun’s Executive Officer Bonus Terms for FY07 under its Section 162(m) Executive Officer Performance-Based Bonus Plan (the “Plan”) are designed to compensate Executive Officers, other than the Chief Executive Officer, for contributions to Sun during the fiscal year. The Plan provides for quarterly cash compensation based on performance against the Plan measures.

Plan Year/Performance Periods

The Plan year is the Company’s fiscal year 2007. The performance periods are each of the Company’s four fiscal quarters during that fiscal year.

Eligibility

These terms apply to persons serving as Executive Officers, other than the Chief Executive Officer, as of July 1, 2006. In order to receive a bonus payment with respect to any fiscal quarter, the participant must be serving as an Executive Officer as of the last day of that fiscal quarter, except as provided below.

A participant who retires, becomes disabled, or dies during any fiscal quarter may receive a prorated bonus for the period of time during the fiscal quarter that the participant provided services to Sun. A participant who leaves Sun prior to the end of a fiscal quarter for any other reason, including but not limited to a reduction in force, voluntary resignation, or termination by Sun, will be ineligible for a bonus payment with respect to that fiscal quarter and any subsequent fiscal quarter during fiscal year 2007.

Bonus Target

The annual bonus targets under the Plan for Executive Officers, other than the Chief Executive Officer, range from 45% to 100% (as approved for each individual based on their role) of the participant’s Eligible Wages for fiscal year 2007, as determined below (the “Bonus Targets”). The Bonus Targets are divided between the four fiscal quarters of fiscal year 2007 as follows (each, a “Quarterly Bonus Target”):

Fiscal Quarter	Percentage		Quarterly Bonus Target
FY07 Q1	15	%	6.75% to 15	%
FY07 Q2	25	%	11.25% to 25	%
FY07 Q3	25	%	11.25% to 25	%
FY07 Q4	35	%	15.75% to 35	%

For example, for FY07 Q1, for an individual with an annual Bonus Target of 45%, the target would be multiplied by 15%, resulting in a bonus target of 6.75% of Eligible Wages for that quarter.

Plan funding is capped at 200% of the target funding amount; in addition, for the Q4 payment, individual performance can adjust the funded Q4 payment from 0% to 200%.

Company Performance Measures

The Plan is based on Company performance against the following measures (the “Company Performance Measures”):

1. Q1 FY07-quarterly Operating Income (weighted 50%) and quarterly Revenue (weighted 50%);

2. Q2 FY07-quarterly Operating Income (weighted 50%) and quarterly Revenue (weighted 50%);

Page 1 of 4

Executive Officer Bonus Terms for FY07 Under the

Section 162(m) Executive Officer Performance-Based Bonus Plan

3. Q3 FY07-quarterly Operating Income (weighted 50%) and quarterly Revenue (weighted 50%);

4. Q4 FY07-quarterly Operating Income (weighted 50%) and quarterly Revenue (weighted 50%);

Additional funding maybe be allocated to the Q4 bonus payments if:

1. Q4 financial performance on Revenue and Operating Income are at least at target, and,

2. Corporate annual goals for Solaris adoption/conversion are met.

Company Performance Measure Definitions

Operating Income: For purposes of calculating the bonus accrual under the Plan, “Operating Income” is defined as Operating Income, calculated on a GAAP basis, adjusted to exclude the impact of the following:

• Restructuring charges

• In process R & D charges

• Intangible impairment charges

• Stock Compensation Expense

• FY07 Bonus Accrual

• Equity Based Compensation Expense

In addition, any significant one-time event in excess of $20 million (income or expense) may be included or excluded at the discretion of the Leadership Development and Compensation Committee of the Board of Directors (the “LDCC”) . Significant changes to operations may result in changes to the Plan at LDCC discretion.

Revenue: For purposes of calculating the bonus accrual under the Plan, “Revenue” is defined as net revenue as reported in the Company’s consolidated operations analysis.

Bonus Plan Funding Percentage

The Company uses a schedule (the “Quarterly Bonus Funding Schedule”), which provides percentages based upon the Company’s actual performance against the Company’s goal(s) with respect to the Company Performance Measures for each quarter. The Bonus Plan Funding Percentage is determined for each fiscal quarter as follows:

1. Q1-Q4 FY07: Funding based on actual performance against goals with respect to quarterly Operating Income and quarterly Revenue, weighted equally;

2. Evaluating and funding each performance measure independently;

3. Additionally, with respect to Q4 FY07, there maybe additional bonus funding based on the Corporate Solaris Goal, providing up to an additional 6% of the bonus pool if the Q4 Revenue goal, Q4 Operating Income and Corporate Solaris adoption/conversion annual goals are met.

Individual Performance

Q4 FY07 bonus calculation will include a percentage multiplier based upon the Participant’s annual performance (the “Individual Performance Percentage”.) The participant can receive 0-200% of their bonus target based on achievement of documented individual objectives.

Page 2 of 4

Executive Officer Bonus Terms for FY07 Under the

Section 162(m) Executive Officer Performance-Based Bonus Plan

Eligible Wages

Eligible Wages with respect to any fiscal quarter in fiscal year 2007 (“Eligible Wages”) shall be determined based upon the participant’s annual base salary on the last day of such fiscal quarter (October 1, 2006 for FY07 Q1, December 31, 2006 for FY07 Q2, April 1, 2007 for FY07 Q3, and June 30, 2007 for FY07 Q4).

For example, for FY07 Q2, assuming the participant’s annual base salary on December 31, 2006 was $200,000, the participant’s Eligible Wages would be $200,000.

Eligible Wages exclude relocation allowances, expense reimbursements, tuition reimbursement, car/transportation allowances, expatriate allowances, long-term disability payments, or other commissions and bonuses paid during each quarter of FY07.

Bonus Calculation

Q1 - Q3 FY07

The Participant’s quarterly bonus payment for Q1- Q3 FY07 will be calculated as follows:

    Quarterly Bonus Target Percentage

x Bonus Plan Funding Percentage

x Eligible Wages

= Actual Quarterly Bonus Payment

Example: In Q2, FY07, if the Company achieves 100% of Operating Income goal and 100% of Revenue goal, the actual quarterly bonus payment will be calculated as follows: (assumes a 45% annual bonus target)

Quarterly Bonus Target Percentage			11.25	%
Bonus Plan Funding Percentage	X		100	%
Eligible Wages	X	$	200,000
Actual Quarterly Bonus Payment for Q2 FY07		$	22,500

Q4 FY07

The Participant’s quarterly bonus payment for Q4 FY07 will be calculated as follows:

    Quarterly Bonus Target Percentage

x Bonus Plan Funding Percentage (Financial Measures and Corporate Solaris Goal, if applicable)

x Individual Performance Percentage

x Eligible Wages

= Actual Quarterly Bonus Payment

Example: In Q4 FY07, if the Company achieves 100% of its quarterly Operating Income goal and 100% of its Revenue goal, and 100% of the Corporate Solaris goal, actual quarterly bonus payment with an Individual Performance Percentage of 125% will be calculated as follows:

Page 3 of 4

Executive Officer Bonus Terms for FY07 Under the

Section 162(m) Executive Officer Performance-Based Bonus Plan

Step One – Determine Bonus Plan Funding Percentage:

Company Actual Performance for Q4 FY07	Percentage from Schedule		Relative Weighting
Quarterly Operating Income – 100%	100	%	50	%
Quarterly Revenue – 100%	100	%	50	%
Solaris Goal	100	%	6	%
Bonus Plan Funding Percentage			106	%

Step Two – Determine actual quarterly bonus payment:

Quarterly Bonus Target Percentage			15.75	%
Bonus Plan Funding Percentage	X		106	%
Individual Performance Percentage	X		125	%
Eligible Wages	X	$	200,000
Actual Quarterly Bonus Payment for Q4 FY07		$	41,737

Bonus Payment

In the U.S., bonus awards are taxable income, and will generally be paid within 2 and half months after the close of each fiscal quarter. Bonuses are paid in accordance with local payroll schedules in countries outside the U.S and subject to local and regional tax provisions.

Communication of Results

With respect to any particular fiscal quarter during fiscal year 2007, results will be communicated as soon as possible after the Company’s quarterly financial results are publicly announced.

General Provisions and Plan Governance

This Plan is in all respects subject to the terms, definitions and provisions of Sun’s Section 162(m) Executive Officer Performance-Based Bonus Plan, which is incorporated herein by reference.

Page 4 of 4

EX-10.19

Exhibit 10.19

Compensation Terms for Scott McNealy

Mr. McNealy will continue to receive his current annual base salary and shall continue to be subject to his current bonus terms under the Bonus Plan through the remainder of fiscal year 2006. Effective on the first day of Sun’s fiscal 2007, July 1, 2006, Mr. McNealy will receive an annual base salary of $1,000,000 and his annual bonus target under the Bonus Plan will be 150% of his annual base salary.

Mr. McNealy will also be granted, effective April 27, 2006, the following equity-based compensation under the 1990 Plan:

• an option to purchase 2,100,000 shares of Sun Common Stock at an exercise price equal to the per-share fair market value on the date of grant, which shall vest at a rate of 20% per year over five years; and

• 350,000 restricted stock units, which shall vest pursuant to certain performance criteria.

Mr. McNealy will continue to participate in Sun’s employee benefit programs, including the VP Severance Plan. Mr. McNealy will also continue to be a party to Sun’s standard forms of Chief Executive Officer Change of Control Agreement and Indemnification Agreement.

Mr. McNealy shall continue to be eligible for the Amended FY04 Officer Bonus Plan for the Chief Executive Officer. Under this plan, Mr. McNealy will receive a bonus of $625,000 for fiscal 2004 if Sun achieves three consecutive quarters of operating profitability and year over year revenue growth on or by the end of fiscal 2007.

Finally, Sun will continue to provide Mr. McNealy with private jet access for business use.

EX-10.20

Exhibit 10.20

Compensation Terms for Jonathan Schwartz

Mr. Schwartz will receive an annual base salary of $1,000,000 and his annual bonus target under Sun’s 162(m) Executive Officer Performance-Based Bonus Plan (the “Bonus Plan”) will be 200% of his annual base salary. Mr. Schwartz will also be granted, effective April 27, 2006, the following equity-based compensation under Sun’s 1990 Long-Term Equity Incentive Plan (the “1990 Plan”):

• an option to purchase 2,000,000 shares of Sun Common Stock at an exercise price equal to the per-share fair market value on the date of grant, which shall vest at a rate of 20% per year over five years;

• 800,000 restricted stock units, all of which shall vest pursuant to certain performance criteria; and

• 1,500,000 restricted stock units, which shall vest on the one-year anniversary of the date of grant.

Mr. Schwartz will continue to participate in Sun’s employee benefit programs, including Sun’s Amended and Restated U.S. Vice President Severance Plan (the “VP Severance Plan”).

Mr. Schwartz will also enter into Sun’s standard form of Chief Executive Officer Change of Control Agreement, pursuant to which Mr. Schwartz will be eligible to receive three times his annual compensation in the event of a change of control, and shall continue to be a party to Sun’s standard form of Indemnification Agreement.

Sun will cover reasonable expenses for personal security for Mr. Schwartz. The expense of such personal security will be imputed as income to Mr. Schwartz, for which Sun will provide a tax gross-up. Finally, Sun will provide Mr. Schwartz with private jet access for business and reasonable personal use. The expense of any personal private jet use will be imputed as income to Mr. Schwartz and he will be personally responsible for the associated taxes.

EX-21.1

Exhibit 21.1

Sun Microsystems, Inc. Subsidiaries

	Jurisdiction of Incorporation or Formation
3055855 Nova Scotia Company	Canada
514713 N.B. Inc.	Canada
Beduin Nova Scotia Company	Canada
Belle Gate Investment B.V.	Netherlands
Clustra Systems Inc.	Delaware
Clustra Systems Limited	United Kingdom
Cobalt Networks B.V.	Netherlands
Cobalt Networks GmbH	Germany
Cobalt Networks Inc.	Delaware
Cobalt Networks (UK) Limited	United Kingdom
Forte Software Canada, Ltd.	Canada
Forte Software (UK) Limited	United Kingdom
InfraSearch, Inc.	Delaware
i-Planet, Inc.	California
ISOPIA Company	Canada
ISOPIA Corp.	New York
ISOPIA Limited	United Kingdom
JCP Computer Services Limited	United Kingdom
Lighthouse Design Ltd.	Maryland
Lighthouse Design R&D Corporation	California
netIX System Consulting GmbH	Germany
Niwot Acquisition Corp.	Delaware
Nuclio Corporation	Illinois
Pixo, Inc.	Delaware
Pixo UK Limited	United Kingdom
SeeBeyond Technology Corporation	Delaware
SevenSpace, Inc.	Delaware
SevenSpace Subsidiary I, Inc.	Delaware
SevenSpace Subsidiary II, Inc.	Delaware
Solaris Assurance, Inc.	Bermuda
Solaris Indemnity, Ltd.	Bermuda
Storage Technology (Bermuda) Ltd.	Bermuda
Storage Technology Corporation	Delaware
Storage Technology European Operations, S.A.S.	France
Storage Technology GmbH	Germany
Storage Technology Holding GmbH	Germany
Storage Technology Sweden AB	Sweden
StorageTek (Bermuda) Finance Limited	Bermuda
StorageTek (China) Services Company Limited	China
StorageTek (India) Private Ltd.	India
StorageTek International Corporation	Delaware
StorageTek International Services Corporation	Delaware
StorageTek SBG Europe S.A.S.	France

	Jurisdiction of Incorporation or Formation
StorageTek South Asia Pte. Ltd.	Singapore
Sun Microsystems AO	Russia
Sun Microsystems AS	Norway
Sun Microsystems Australia Pty. Ltd.	Australia
Sun Microsystems (Barbados), Ltd.	Barbados
Sun Microsystems Belgium N.V./S.A.	Belgium
Sun Microsystems (Bilgisayar Sistemleri) L.S.	Turkey
Sun Microsystems Capital Investments Plc	Gibraltar
Sun Microsystems (China) Co., Ltd.	People’s Republic of China
Sun Microsystems China Ltd.	Hong Kong
Sun Microsystems Consulting Limited	People’s Republic of China
Sun Microsystems Czech s.r.o.	Czech Republic
Sun Microsystems Denmark A/S	Denmark
Sun Microsystems de Argentina S.A.	Argentina
Sun Microsystems de Chile, S.A.	Chile
Sun Microsystems de Colombia, S.A.	Colombia
Sun Microsystems de Mexico, S.A. de C.V.	Mexico
Sun Microsystems de Venezuela, S.A.	Venezuela
Sun Microsystems Distributions International, Inc.	California
Sun Microsystems do Brasil Industria e Comericio Ltda.	Brazil
Sun Microsystems (Egypt) LLC	Egypt
Sun Microsystems Europe Properties B.V.	Netherlands
Sun Microsystems Exchange, Inc.	Delaware
Sun Microsystems Federal, Inc.	California
Sun Microsystems Finance K.K.	Japan
Sun Microsystems France S.A.	France
Sun Microsystems Ges.m.b.H	Austria
Sun Microsystems Global Financial Services, LLC	Delaware
Sun Microsystems (Hellas) S.A.	Greece
Sun Microsystems Holdings Limited	United Kingdom
Sun Microsystems Hungary Computing Limited Liability Company	Hungary
Sun Microsystems Iberica, S.A.	Spain
Sun Microsystems India Private Limited	India
Sun Microsystems Intercontinental Operations	California
Sun Microsystems International B.V.	Netherlands
Sun Microsystems International Holding B.V.	Netherlands
Sun Microsystems International, Inc.	California
Sun Microsystems Ireland Limited	Ireland
Sun Microsystems Israel Ltd.	Israel
Sun Microsystems Italia S.p.A.	Italy
Sun Microsystems K.K.	Japan
Sun Microsystems Korea, Ltd.	South Korea
Sun Microsystems Limited	United Kingdom
Sun Microsystems LLC	California
Sun Microsystems Luxembourg SARL	Luxembourg
Sun Microsystems Malaysia Sdn. Bhd.	Malaysia
Sun Microsystems Management Services Corporation	California

	Jurisdiction of Incorporation or Formation
Sun Microsystems (Middle East) B.V.	Netherlands
Sun Microsystems Nederland B.V.	Netherlands
Sun Microsystems (NZ) Limited	New Zealand
Sun Microsystems of California, Inc.	California
Sun Microsystems of California Limited	Hong Kong
Sun Microsystems of Canada Inc.	Canada
Sun Microsystems Oy	Finland
Sun Microsystems Poland Sp.z.o.o	Poland
Sun Microsystems (Portugal) Tecnicas de Informatica, Sociedade Unipessoal, Limitada	Portugal
Sun Microsystems Products, Ltd.	People’s Republic of China
Sun Microsystems Properties, Inc.	California
Sun Microsystems Pte. Ltd.	Singapore
Sun Microsystems Risk Management, Inc.	California
Sun Microsystems (Schweiz) A.G.	Switzerland
Sun Microsystems Scotland B.V.	Netherlands
Sun Microsystems Scotland Limited	Scotland
Sun Microsystems Scotland LP	Scotland
Sun Microsystems Slovakia, s.r.o	Slovak Republic
Sun Microsystems (South Africa) (Pty) Limited	Republic of South Africa
Sun Microsystems Superannuation Nominees Pty. Ltd.	Australia
Sun Microsystems SPB LLC	Russian Federation
Sun Microsystems Taiwan Limited	Taiwan
Sun Microsystems Technology Ltd.	Bermuda
Sun Microsystems Technology Pty. Ltd.	Australia
Sun Microsystems (Thailand) Limited	Thailand
Sun Microsystems (U.A.E.) Ltd.	Cayman Islands
Tarantella, Inc.	California
Tarantella International, Inc.	California
The Santacruz Operation de Mexico, S. de R.L. De C.V.	Mexico
The Sun Microsystems Foundation, Inc.	California
Trustbase Limited	United Kingdom
Waveset Technologies, Inc.	Delaware
Waveset Technologies UK Limited	United Kingdom

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-18602, 33-25860, 33-33344, 33-38220, 33-51129, 33-56577, 333-09867, 333-34543, 333-34651, 333-38163, 333-40677, 333-40675, 333-59503, 333-62987, 333-65531, 333-67183, 333-72413, 333-86267, 333-89391, 333-90907, 333-35796, 333-45540, 333-48080, 333-49788, 333-52314, 333-56358, 333-59466, 333-61120, 333-62034, 333-68140, 333-73218, 333-98097, 333-100189, 333-101332, 333-101323, 333-108639, 333-109303, 333-111968, 333-114550, 333-122586, 333-127063, 333-128324, 333-128325 and 333-131507; and Form S-3 No. 333-81101) of Sun Microsystems, Inc. of our reports dated September 1, 2006, with respect to the consolidated financial statements of Sun Microsystems, Inc., Sun Microsystems, Inc. management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Sun Microsystems, Inc., included in this Annual Report (Form 10-K) for the year ended June 30, 2006.

/S/    ERNST & YOUNG LLP

San Jose, California

September 1, 2006

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Jonathan I. Schwartz, certify that:

1. I have reviewed this annual report on Form 10-K of Sun Microsystems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 8, 2006

/s/  JONATHAN I. SCHWARTZ

Jonathan I. Schwartz

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Michael E. Lehman, certify that:

1. I have reviewed this annual report on Form 10-K of Sun Microsystems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 8, 2006

/s/  MICHAEL E. LEHMAN

Michael E. Lehman

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Jonathan I. Schwartz, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Sun Microsystems, Inc. on Form 10-K for the period ended June 30, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Sun Microsystems, Inc.

Date: September 8, 2006	By:	/s/  JONATHAN I. SCHWARTZ
		Name: Jonathan I. Schwartz Title:   Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael E. Lehman, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Sun Microsystems, Inc. on Form 10-K for the period ended June 30, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Sun Microsystems, Inc.

Date: September 8, 2006	By:	/s/  MICHAEL E. LEHMAN
		Name: Michael E. Lehman Title:   Chief Financial Officer