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S U N MI C R O SYST E M S, INC.
19 9 8 A N N UA L R E P O RT

An expanded, dynamic version of Sun’s Annual Report is available on the Internet at www.sun.com/annualreport

Table of Contents
FINANCIAL HIGHLIGHTS 2
VISION 3
LETTER FROM THE CHAIRMAN 4
OPPORTUNITY 5
SUCCESS 11
THE LAST TEN YEARS 14
FINANCIAL REVIEW 16
ABOUT YOUR INVESTMENT 45
CORPORATE INFORMATION/SUN WORLDWIDE 47
1

Financial Highlights
9,791 1,130 1.93
4,690
.50
277
94 98 94 98 94 98
NET REVENUES OPERATING INCOME NET INCOME PER COMMON
1
(in millions of dollars) (in millions of dollars) SHARE—DILUTED
(in dollars)
1998 1997 CHANGE
Net revenues (thousands) $ 9,790,840 $ 8,598,346 14%
Net income (thousands) $ 762,862 $ 762,420 0%
1
Net income per common share—diluted $ 1.93 $ 1.96 –2%
Return on average stockholders’ equity (12 month average) 24% 31% –23%
2
Return on average capital 24% 30% –21%
Estimated number of stockholders 341,000 289,000 18%
Total employees at year end 26,343 21,553 22%
Shares used in the calculation of net income per common share—diluted 394,274,000 388,967,000 1%
Outstanding shares 376,304,000 370,485,000 2%
Book value per outstanding share $ 9.34 $ 7.40 26%
1
FOR 1998, THE AMOUNT INCLUDES 37 CENTS OF ACQUISITION-RELATED CHARGES. FOR 1997, THE AMOUNT INCLUDES A GAIN ON THE SALE OF AN EQUITY INVESTMENT, PARTIALLY OFFSET BY AN
ACQUISITION-RELATED CHARGE. THE NET IMPACT OF THESE ITEMS INCREASED NET INCOME PER COMMON SHARE BY 7 CENTS IN 1997.
2
CAPITAL COMBINES STOCKHOLDERS’ EQUITY AND INTEREST-BEARING LONG-TERM OBLIGATIONS TO PROVIDE A MEASURE OF HOW EFFECTIVELY SUN EMPLOYS EXTERNALLY PROVIDED FUNDS.
30
2

Sun in Brief
VISION Networked Customers,
Networked Consumers Networked Enterprise
Suppliers, Partners
In an industry synonymous with change, Sun has had one constant vision. It’s at the
heart of every technology, system, software, and service we offer today—and the
focus of everything we invest in for tomorrow. It’s the one thing that never changes:
The Network Is The Computer.™ Through open interfaces, industry standards, and
platform-independent Java™ technologies, we’re working to provide seamless connec-
tivity to anyone, anywhere, anytime, on virtually anything.
3

Translations of this letter—in Japanese, German,
Letter from the Chairman
Spanish, Chinese, Korean, and French—are available
on the Internet at www.sun.com/ceoletter
To our stockholders:
It’s gratifying to see what the right vision and the right focus an airport computing kiosk, a hotel set-top box, or a client’s
can do for a company. For Sun, and for our stockholders, fiscal workstation—anywhere you happen to be. So we won’t
1998 was yet another outstanding year—a year in which we need to carry our computers with us—the network will
set records not only for revenues, but also for operating be everywhere we go. That’s pretty heady stuff. And it’s
income, net income, and net cash from operating activities. closer than you might think. Already it’s opening a world
of O P P O R T U N I T Y for Sun™ technologies, products,
As noted in last year’s letter, we owe much of our success to and services.
services.
our adherence to a powerful vision. A vision of computers,
programs, and people working together across any boundary. You may not see the Sun brand on personal organizers
For 16 years now, we’ve based our solutions on open (non- or set-top boxes or Web phones— at least in the near
phones—at
proprietary) interfaces and industry standards—an approach future—but I like to think of it this way: Others make the
that encourages innovation throughout the industry and devices. We make them possible by selling them network-
gives customers greater flexibility and choice. We believe, as enabling components.
we always have, that proprietary architectures promoted by
some of our competitors have no place in the network age. One way we do that is with our widely adopted Java
Our customers seem to agree—they’ve made Sun one technologies. Right now, the momentum and energy
of the world’s top providers of network computing solutions. behind the Java platform is astonishing. It has become a
standard for the smart-card industry and for leading Web
phone manufacturers. It’s also being widely deployed in
home banking, retail point-of-sale applications, and major
The network now stretches from the data center all the way to
segments of the telecommunications industry.
smart cards, palmtop computers, Web phones—and probably
some devices that don’t have names yet. Imagine a world
Just this year, Sun signed Java technology licensing agree-
where all your devices—computers, cars, televisions, kitchen
ments with Sony, Motorola, TCI, Ericsson, Samsung,Alcatel,
ments with Sony, Motorola, Ericsson, Samsung, Alcatel,
appliances—speak to each other over a network that goes
Nortel, OpenTV, BEA Systems, Siemens-Nixdorf, and Scientific
wherever you do. Imagine being able to access your personal
desktop from any computer—just by swiping a smart card at
4

OPPORTUNITY
Networked Networked Networked Customers,
Consumers Enterprise Suppliers, Partners
The network is an expanding universe of information and an
expanding market for Sun’s products and services.
OPEN HERE FOR A DETAILED LOOK AT SUN’S EXPANDING OPPORTUNITIES

T H E N E T W O R K E XT E N D S TO A L L O F U S.
The diagram below represents the reach of network computing today—Sun products and enabling technologies working seamlessly with products from other companies through open standards.
THE NET THE NET THE NET THE NET
SECURITY SECURITY
SOLUTION SOLUTION
Networked Networked Networked Customers,
Enhanced Personal Personal
E-mail Web Servers
Handheld PDAs
Consumers Enterprise Suppliers, Partners
Function ATMs Computers Computers
No matter where they Thanks to Internet stan-
Organizations in virtually Application
In-Store Kiosks Databases Mainframes Servers
Cellular Phones are or what time it is, dards, platform-independent
every industry use the Servers
people want instant Java technologies, and
network to share informa-
access to information, to advanced network security
tion across departments
Network Network Network
their financial resources, products, whole organiza-
and widespread offices, Storage E-mail
Web Phones
Computers Computers Computers
to communication services. tions are able to interact
through a combination of
And they’re getting it— over the network, reducing
systems, software, and
through an ever-expanding cycle times.
networking products.
Personal Application Network Routers Databases E-commerce
Smart Cards
Computers Servers
variety of access devices.
Web Servers
Workstations
Sun’s opportunities span the network—from systems to software to comprehensive services.
Consumer and Microprocessors
Systems and Storage Enterprise Services Enterprise Software Java Products Embedded Technologies
Sun offers an integrated portfolio Highly reliable, scalable, and easy to It’s the platform that started a revolu- By promoting industry standards, open Powering networked systems from
Our network-ready Ultra™ workstations
use, the Solaris™ operating environment tion: The Write Once, Run Anywhere™
of services to help customers plan, interfaces, and platform-independent routers to supercomputers, Sun’s highly
and Sun Enterprise™ servers comprise
scalable UltraSPARC™ microprocessors
design, implement, and manage provides a solid foundation for building software environment that provides a Java technologies, Sun enables a
the broadest, most scalable line of
innovative, mission-critical network an integrated enterprise supporting comprehensive, robust solution to the wide range of systems to talk to each accelerate multimedia and networking
binary-compatible systems anywhere.
computing solutions. Our professional vast data warehouses and thousands challenges of programming for the other—from smart cards to cellular applications with their innovative
Sun StorEdge™ network storage systems
architecture and VIS™ instruction set.
services experts work closely with of users. Sun Internet Mail Server Internet and other complex networks. phones to touch-screen kiosks. To build
are the building blocks to construct
customers to align their information provides e-mail that works on a global It has become one of the fastest this new generation of network-ready
intelligent storage networks. And our
systems with their business goals. scale. Sun also offers developer tools, growing software technologies in information appliances, manufacturers
JavaStation™ systems are at the
enterprise management software, and history—and the basis of many new are turning to Sun for innovative
forefront of the thin-client movement.
network security solutions. systems, services, and solutions solutions.
from Sun.
6 7

As for the opportunities most ofus this past year, I’d say
we certainly made the before them. In all our major
Atlanta—and announced a major partnership with IBM on
™ we certainly made the most of them. In all our govern-
markets—telecommunications, financial services, major
JavaOS for Business.
ment, manufacturing, education—we signed contracts that
markets—telecommunications, financial services, govern-
Many ofnew new devices these companies create connect
All the the devices these companies create connect to ment, manufacturing, the strength of our tested-and-proven
were won primarily on education—we signed contracts that
to servers and network storage—which happen to be two
servers and network storage—which happen to be two of network computing solutions.
were won primarily on the strength of our tested-and-proven
of our strengths.
our strengths. network computing solutions.
For instance, we earned the right to supply the U.S. Postal
In other words, our core competencies are the very tech- For instance, Sunearned the right to supply the U.S. Postal
Service with we Enterprise servers, the Solaris operating
nologies, products, and services that keep this extended Service with Sun Enterprise servers, the Solaris operating
environment, Java technology, and professional services—a
network running. That’s why so much of our effort this environment, Java technology, and over five years.
contract worth up to $500 million professional services—a
year has been directed toward what we call the WebTone— contract worth up to $500 million over five years.
computing that’s as powerful as a supercomputer, yet as The Toronto Stock Exchange, Canada’s premier capital
reliable (and as easy to use) as a telephone. The Toronto trades Exchange, Canada’s billion a day, chose
market with Stock of approximately $2 premier exchange,
representing and network storage systems to support vol-
Sun servers more than 80 percent of the daily traded its
ume TOREX trading system. a day in trades, chose Sun
It’s what our customers (and their customers) want. For new or approximately $2 billion
servers and network storage systemsthe support its new
AT&T Business Markets Division chose to Sun platform to
their corporate intranets, and for the extranets that link
them with their suppliers, partners, and customers. It’s TOREX trading be the world’s largest data warehouse with
build what may system.
more than 60 terabytes of customer information.
why they’re choosing our highly reliable, industrial-
why they’re choosing our highly reliable, industrial-
strength products. AT&T Business Markets Division chose the Sun platform to
strength products.
Ford Motor Company’s Vehicle Operations selected Sun as
help them build what may be the world’s largest data ware-
its workstation partner to help implement Ford’s computer-
Many companies are currently re-architecting and recen- house with more than 60 terabytes of customer information.
Many companies are currently re-architecting and recen-
aided design, manufacturing, and engineering vision.
tralizing their information systems, easing administrative
tralizing their information systems, easing administrative
burdens, lowering costs, and offering a whole new level of Ford Motor Company’s Vehicle Operations selected Sun as
burdens, lowering costs, and offering a whole new level of
network services. As server consolidation and recentraliza- its workstation partner to helpmarketshare gains as well,
We made some remarkable implement Ford’s computer-
network services. As server consolidation and recentraliza-
aided in arenas where we hadn’t engineering vision.force.
even design, manufacturing, and previously been a
tion efforts move into full swing, we’ve seen sales of our
tion efforts move into full swing, we’ve seen sales of our
Take workgroup servers, for instance, where we’re now
systems for enterprise resource planning increase signifi-
systems for enterprise resource planning increase signifi-
We 1 in the UNIX® market, up marketshare gainshigh-end,
No. made some remarkable from No. 3. Or the as well,
cantly—and our partnerships with ERP vendors such as
cantly—and our partnerships with ERP vendors such as
Baan, Oracle, PeopleSoft, and SAP grow even stronger. even in arenas simply not a presence last yearbeen areforce.
where we were where we hadn’t previously and a now
Baan, Oracle, PeopleSoft, and SAP grow even stronger.
Take3workgroup servers, for instance, where we’re now
No. in the UNIX market, on the strength of our award-
winning Sun Enterprise 10000 system. In the midrange,
You can see why we’re so excited about where the network No. 1 in the UNIX® market, up from No. 3. Or the high-end,
You can see why we’re so excited about where the network
*
whereNo. wereUNIX, No. 3aoverall. Put it year, we are now
we’re we 1 in simply not presence last all together and
is going. Because as it expands into virtually every aspect
is going. Because as it expands into virtually every aspect
of our lives, Sun’s opportunities expand right along with it. No. 3 in the UNIXleading supplier of UNIX servers. award-
Sun is the world’s market, on the strength of our
of our lives, Sun’s opportunities expand right along with it.
winning Sun Enterprise 10000 system. We’re also No. 1
in UNIX midrange servers. Put it all together and Sun is
*
As for the opportunities before us this past year, I’d say a world leader in UNIX servers.
8

Our refreshed the midrange servers stronger than ever.
We product line is now broader and in our Sun Enterprise
In data storage, where we once sold subsystems only for
data storage, where we once sold subsystems only
for our own computers, we now sell devicesthat work in
our own computers, we now sell devices that work line, boosting performance by up to 43 percent and adding
We refreshed the midrange serversfound only in systems
high-availability features normally in our Sun Enterprise
mixed-platform environments. (Thanks to our acquisition
environments—thanks
line, boosting times more. And up to 43 percent and adding
costing many performance by we extended our workgroup
of Encore, completed this year. *What’sresult, we rose to
completed this year. ) As a more,
high-availability features normally found only in systems
No. 1 in UNIX storage and No. 5 overall.* server family with two new models—the Sun Enterprise
costing many times more. And we extended ourto the work-
250 and 450—that bring enterprise capabilities workgroup
That’s not to discount our traditional markets: We’re still
server at an affordable price. models—the Sun Enterprise
group family with two new
That’s not to discount our traditional markets: We’re still
the No. 1 UNIX workstation vendor by a wide margin, and
250 and 450—that bring enterprise capabilities to the work-
the No. 1 UNIX workstation vendor by a wide margin, and
we remain No. 1 in 10 of the top 17 technical markets
group atintroduced new Netra™ systems—the Netra t 1120
We also an affordable price.
we remain No. 1 in 10 of the top 17 technical markets
where these systems are used.*
where these systems are used. server, which meets stringent telecommunications standards,
We also introduced new Netra™ systems—the Netra t 1120
and the Netra Proxy Cache server, which enables Internet
Our Solaris environment is stronger than ever—and has
server, which meets deliver faster access to frequently visited
service providers to stringent telecommunications standards,
Our Solaris environment is stronger than ever—and grow-
grown at double the rate of the UNIX market in general.
and the Netra Proxy Cache server, which enables Internet
Many of the leading Internet UNIX market in general. Ten
ing at double the rate of the service providers use Solaris Web sites.
service providers to deliver faster access to frequently visited
of 12 leading Internet service providers use Solaris soft-
software, and it is fast becoming the platform of choice for
ERP asand it is fast becoming the platform of choice for
ware, well. Webwe literally redefined storage this year. Our full line of
And sites.
ERP as well. Sun StorEdge systems delivers mainframe-class reliability,
And we literally redefined storage this year. Our full line of
At the same time, we’ve altered our organization some-
Sun StorEdge systems delivers mainframe-class reliability,
outstanding expandability, and cross-platform information
what to map to these market opportunities. With the
outstanding expandability, andcompete in every corner of
sharing. Which enables us to cross-platform information
formation of a new we’ve altered our organization some-
At the same time, executive committee, including Chief
sharing.billion market. us to compete in every corner of
this $28 Which enables
Operating Officer these market opportunities. WithMike
what to map to Ed Zander, Chief Financial Officer the
this $28 billion market.
Lehman, and a newStrategy Officer Bill Raduchel, weChief
formation of Chief executive committee, including took
a hard lookOfficer Ed Zander, Chief Financial Officer Mike
Operating at streamlining our operations. By eliminating Extending our leadership in the workstation market, we
Extending our leadership in the workstation market, we
overlap, we have been able to sharpen our focus on strategic
Lehman, and Chief Strategy Officer Bill Raduchel, we took a introduced a series of new Ultra systems that deliver UNIX
introduced a series of new Ultra systems that deliver UNIX
opportunities in networkour operations, eliminating overlap
hard look at streamlining storage as well as consumer and performance at PC prices. They even provide PC compatibility.
performance at PC prices. They even provide PC compatibility.
embedded products. groups to go after key markets such
and then creating new
as network storage and consumer and embedded products. This year saw a great deal of industry consolidation around
We have continued to expand our professional services this our Solaris operating environment. Fujitsu, Toshiba, Amdahl,
Solaris operating environment. Toshiba, Fujitsu, and
year, significantly increasing our head count for consulting,
We have continued to expand our professional services this Siemens-Nixdorf joined NCR NCR in licensinghighly scalable
and Siemens-Nixdorf joined in licensing our our highly scal-
integration, and management services. And we continue
year, significantly increasing our head count for consulting, able environment—which promises to expand the
environment—which should help to expand the Solaris
to offer our customers mission-critical support, 24 hours a
integration, and management services. And we continue market and attract even more software developers to the
day, seven days a week. All of which we view as vital to our
platform. We also signed a cross-licensing agreement with
also signed an agreement with Intel to port
to offer our customers mission-critical support, 24 hours a
success and that of our customers.
the Solaris environment to Intel Architecture processors
day, seven days a week. All of which we view as vital to our Intel and opened a joint porting and tuning center. We will
and have opened optimize our Solaris environment with
work together to a porting and tuning center. We will
success and that of our customers.
work together toMerced processor, andenvironment with
Intel’s upcoming optimize our Solaris provide technical
*Market references noted above reflect findings from the 1997 IDC World-
wide product line Reports: broader and stronger than ever.
Our Market Share is now Entry Server (shipments); High-End Server Intel’s upcoming Merced processor, and provide technical
assistance to independent software vendors and original
(revenue); Midrange Server (shipments); Workstation Census (shipments
assistance to independent software vendors and original
equipment manufacturers.
and revenue); the 1998 IDC Worldwide Disk Subsystems Report (revenue);
and based on a compilation of data about Sun and its competitors derived
equipment manufacturers.
from the sources previously listed.
9

With mergers and consolidations producing formidable
We also unveiled our third-generation UltraSPARC micro-
competitors—and as those competitors see the value in our
processor, a highly scalable design that should make it
network computing vision—we’ll have to work harder than
possible to build systems with more than a thousand proces-
ever to differentiate ourselves and demonstrate the unique
sors. The new design is slated to deliver three times the
value of our solutions. To that end, we are aggressively pur-
performance of our current processors while maintaining
suing our branding and demand-creation strategies.
complete compatibility with our entire product family.
But our biggest challenge is simply this: Keep delivering the
highest quality products and services we can. To help bring
This pace of innovation doesn’t come cheaply: Maintaining
that about, we are on course to complete the reengineer-
leadership means digging deep and investing in the technolo-
ing of our major business processes during fiscal 1999. Once
gies that sustain your company. We invested over $1 billion
installed and operating as designed, this highly flexible
in research and development last year and employ some of
new infrastructure is expected to shorten our quote-to-
the world’s leading experts in advanced technologies such
collect and procure-to-pay cycle times.
as microprocessor design, system design, operating system
software, networking, and, of course, the Java platform.
We are certainly aware of the ongoing situation in the
markets of Japan and Southeast Asia, and we will continue
One of the most significant innovations this year was our
to monitor this over the coming months to balance appro-
Jini ™ software technology. Aimed at simplifying network
priate investment levels with returns. But we have always
computing, this new technology offers the potential to
considered Asia a strategic market for Sun, and continue
make any intelligent electronic device an instantly con-
to do so.
nected node on the network.
At this point I’d like to take the opportunity to thank our
We acquired NetDynamics, Inc., an early adopter of Java
more than 26,000 employees worldwide. Investing in bright,
technology. We believe NetDynamics’ strengths—application
competent, dedicated people always pays off. They are the
server software, application integration, and development
reason for Sun’s phenomenal SUCCESS this year.
tools—are the linchpins for a new application platform.
We plan to augment these technologies to produce next-
Finally, we base the compensation of our executives and
generation products and solutions.
managers—as well as the profit- sharing plan for U.S.
employees—on a rigorous metric of meaningful revenue
Most importantly, we invested in our own intellectual prop-
growth, earnings, quality, and customer loyalty. We will
™
erties—specifically, SPARC, Solaris, and Java technologies.
continue to align these factors with stockholder value.
We own these intellectual properties, yes, but we have
Once again, thank you for your support.
always made the interfaces readily available, and continue
to do so. It’s the best way to drive the pace of innovation.
Having the right vision and the right strategy can only take
a company so far. Then you simply have to get the job done.
At Sun, we have a team in place that is 100 percent focused Scott G. McNealy
on the challenges ahead. Chairman of the Board, President,
and Chief Executive Officer
scottg.mcnealy@corp.sun.com
10

SUCCESS
Consumer
Systems Enterprise
Enterprise
Java Products and Embedded Microprocessors
Services
and Storage Software Technologies
Our innovative products and constant customer focus have
made Sun a premier provider of network computing solutions.
OPEN HERE FOR A DETAILED LOOK AT SUN’S RECENT SUCCESSES

MAKING CUSTOMERS SUCCESSFUL HAS MADE SUN SUCCESSFUL.
Sun’s network computing customers
Tokyo U.S. Kaiser Parametric
Mitsubishi Eli Lilly Department University Foundation Technology The SABRE
Convergys International and Company of Energy of Utah FNAC AT&T Amazon.com Spirit Energy 76 Health Plan, Inc. Motorola Corporation Group
Telecommunications Financial Services Manufacturing Government Education Retail Internet Service Provider E-Commerce Energy Health Care Consumer Products Software Development Transportation
For telecom carriers, Tokyo Mitsubishi Eli Lilly and Company, Under a four-year With 15 colleges and FNAC, one of France’s When AT&T launched With more than Spirit Energy 76, Kaiser Foundation In Sun’s largest Java PTC is the world’s fifth The SABRE Group is
the ability to efficiently International, key a leading research- research and develop- 27,000 students, the leading retailers of its IP services for 3 million titles, the U.S. Lower 48 Health Plan, Inc.— technology licensing largest independent a global leader in
generate bills and investment banking based pharmaceutical ment contract within University of Utah is records, books, videos, business customers Amazon.com may be Exploration & Produc- the largest health deal to date, Motorola software company and the travel and trans-
support customers is subsidiary of the Bank company, has chosen the PathForward the largest university and computers, has and consumers, the the world’s biggest tion Business Unit of maintenance organi- has licensed Sun’s full the leading supplier of portation industry,
nearly as important of Tokyo-Mitsubishi Sun servers and Program, Sun will in the state. To upgrade chosen Sun systems to company sought a book and music store. Unocal, a multinational zation in the U.S., family of Java technolo- software tools within offering strategic
as providing service. Limited, depends on storage systems to run work with the U.S. its computer systems, run its purchasing platform that would Now the online retailer energy company, serving 9.4 million gies, giving Motorola the mechanical com- solutions to more than
That’s why Convergys timely, accurate infor- its worldwide SAP Department of Energy prepare for the year and accounting applica- provide customers has turned to Sun recently purchased a members—purchased the ability to use those puter-aided design, 450 clients in over
(formerly CBIS), one mation. TMI increased operations, including on its Accelerated 2000, and ensure tions. The company with dependable servers, software, and range of Sun hardware 64 Sun servers to build technologies in its manufacturing, and 70 countries around
of the world’s leading the performance and corporate, financial, Strategic Computing ample capacity for selected the powerful service. It chose Sun’s storage systems to to support network, its nationwide Web product line, which engineering (CAD/ the world. This year,
providers of out- reliability of its data sales, distribution, Initiative. The contract growth, the university Sun Enterprise 10000 Solaris operating help serve its growing database, financial, server infrastructure. includes semicon- CAM/CAE) industry. In The SABRE Group
sourced billing and warehouse by consoli- human resources, and is worth an estimated chose Sun servers server and Sun StorEdge environment. Today, customer base. For and geological appli- The Sun servers will ductors, smart cards, a multimillion-dollar agreed to recommend
customer care services, dating 64 individual enterprise resource $11 million to Sun. The and storage systems A5000 disk array with AT&T’s presence on the its data warehouse cations. Priced at support both internal wireless devices, silicon deal, PTC purchased Sun’s JavaStation net-
relies on Sun Enterprise CPUs on a single planning applications. goal of the initiative to support PeopleSoft 2 terabytes of storage. Internet continues to and decision-support approximately $2.5 intranet functions and systems, automotive more than 400 Sun work computer as the
10000 servers for Sun Enterprise 10000 Sun’s record of service is to develop systems applications and an Sun will also provide a grow, both in number system, Amazon.com million, the systems external Internet components, and Ultra workstations. platform of choice for
processing millions system. This enables and support on SAP running up to 100 Oracle database. The mission-critical support of users and in services selected the Sun include two Sun Enter- projects such as a computers. As part The company will use QIK-ACCESS, its product
of phone bills every decision makers to implementations trillion operations per university found that package, a customized offered. The scalability Enterprise 10000 prise 10000 servers and member services Web of the agreement, the systems in the line of user-friendly
month—accurately access a wide range of was a key factor in second in order to the Sun Enterprise training program, of the Sun platform server with the robust four Sun StorEdge site. Kaiser selected Motorola will work development and interfaces for reserva-
and on time. risk-management data the decision. meet the requirements 10000 server met its and consulting services has proven itself, and Solaris operating A5000 storage systems. Sun based on its with Sun to bring its demonstration of its tions, airline check-in,
instantly, rather than of the Comprehensive price, performance, to define and imple- AT&T’s relationship environment, plus Sun Unocal uses Sun work- Internet experience. embedded and commu- popular Pro/ENGINEER and cargo manage-
waiting for overnight Test Ban Treaty. and other objectives. ment the production with Sun is expanding. StorEdge intelligent stations and servers in nications expertise to family of software tools. ment tools.
processing. environment. storage systems. other capacities as well. the Java environment.
Sun’s network computing products
Servers Workstations Storage Enterprise Services Enterprise Software Java Products Consumer and Microprocessors
Embedded Technologies
Sun is a market leader in UNIX Sun is the No. 1 UNIX Last year Sun rose to No. 1 With the world’s largest UNIX Many of the leading Internet More than 170 companies Sun’s SPARC processors are
servers: No. 1 in entry-level workstation vendor by a wide in UNIX storage, and with the service organization, supporting service providers use our have licensed Java technology Our Java technology has become now being produced at a rate
systems, No. 1 in midrange margin. No. 1 in 10 of 17 acquisition of Encore, we are more than one million systems, Solaris environment, and it is from Sun; more than 400 appli- a standard for the smart-card of one million units per year.
systems, and No. 3 in high-end technical markets (including well positioned for oppor- we deliver mission-critical the leading platform for top cations have received 100% industry and for leading Web The UltraSPARC-III processor
Pure Java™ certification; and the
data center systems—a EDA, MCAD, and medical tunities in the $28 billion open support—24 hours a day, seven ERP vendors such as Oracle, phone manufacturers. It is also will debut at 600 MHz and
category we entered just last imaging), we shipped a record storage market. Since 1995, days a week—along with com- PeopleSoft, and SAP. More Java Developer Connection has being widely deployed in home aims to increase Sun’s
SM
year with our award-winning number of units in the last we have shipped 11 petabytes prehensive enterprise services. than 12,000 applications run more than 548,000 members. banking, retail point-of-sale industry-leading scalability
Sun Enterprise 10000 server. quarter of fiscal 1998. of storage. on the Solaris platform. applications, and more. in UNIX systems.
12 13

THE LAST TEN YEARS
Sun’s revenues have grown an average of 26% annually
over the past decade as demand for our open network
computing products and services has increased. With
over 45% of our revenues generated outside the United
States in fiscal 1998, our portfolio of revenues by geog-
raphy is well balanced.
Net income has grown an average of 32.8% annually
over the past ten years, demonstrating the strength and
consistency of Sun’s business model.
While our vision and strategy have remained constant,
Rest of world
our market opportunities have expanded as companies Europe 1,732
U.S.
around the world recognize the benefits of open network
computing—resulting in more and more ERP implemen- 2,709
tations, ISP expansion, server consolidation programs,
and widespread Internet/intranet deployment.
5,350
We have invested carefully—in research and develop-
ment as well as demand creation—to capture our share
98
89
of these new opportunities.
REVENUES BY GEOGRAPHY
(in millions of dollars)
Sun is a global company with over
Sun’s excellence in financial and asset management 45% of its revenues generated outside
the United States. Despite the ongoing
continues to yield outstanding results in almost every macroeconomic difficulties in Japan
and Southeast Asia, Sun continued to
conventional measure of profitability and productivity. experience strong revenue growth in
the United States, Europe, and Latin
Our balance sheet is superb, and we are strongly capital- America, demonstrating the value of
a balanced geographical portfolio.
ized, positioning Sun well for future growth.
14

9,791 1,130
1,014
234
1,765
88
98 98
98
89 89
89
NET REVENUES R &D INVESTMENT OPERATING INCOME
(in millions of dollars) (in millions of dollars) (in millions of dollars)
Net revenues grew nearly $1.2 billion During fiscal 1998, Sun invested approximately 10% Operating income as a percent of
in fiscal 1998, an increase of 13.9% from of its revenues in research and development, primarily revenues for fiscal 1998 was a robust
$8.6 billion in the previous year. in the areas of system design, SPARC microprocessors, 11.5%. Over the past decade, Sun’s
Solaris software, and Java technologies. Sun’s invest- operating income has increased 32.1%
ments in R&D have led to increasingly innovative on an average annual basis.
products and technologies that promise to change the
way customers think about network computing.
1,527
1,298
1.93
0.19
54
–97
98 98 98
89 89 89
NET INCOME PER COMMON CASH PORTFOLIO CASH FROM OPERATING ACTIVITIES
(in millions of dollars) (in millions of dollars)
SHARE—DILUTED
Excellent financial management resulted In fiscal 1998, Sun achieved record net cash
(in dollars)
in a strong balance sheet. Sun’s cash from operating activities of $1,527 million
Earnings per share for fiscal 1998 totaled $1.93,
portfolio, which includes cash, cash due to strong customer acceptance of Sun’s
which included acquisition-related charges.
equivalents, and short-term investments, server, storage, and workstation products.
Over the past ten years, Sun has grown earnings
totaled nearly $1.3 billion at the end
per share an average of 28.6%.
of fiscal 1998.
24.0
22.0
12.0
0.0
98 98
89 89
LONG-TERM DEBT-TO-EQUITY RATIO RETURN ON EQUITY
(percentage) (percentage)
Sun had no long-term debt at the end of In fiscal 1998, Sun’s return on equity was
fiscal 1998, resulting in a 0.0% long-term 24%, slightly lower than fiscal 1997, but
debt-to-equity ratio. an exceptional performance given the
macroeconomic difficulties throughout
Japan and Southeast Asia.
15

Financial Review
HISTORICAL FINANCIAL REVIEW OF SUN MICROSYSTEMS, INC. 18
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 20
CONSOLIDATED STATEMENTS OF INCOME 26
CONSOLIDATED BALANCE SHEETS 27
CONSOLIDATED STATEMENTS OF CASH FLOWS 28
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 44
16

FINANCIAL REVIEW
OPEN HERE FOR A LONG-TERM VIEW OF SUN’S GROWTH

Historical Financial Review of Sun Microsystems, Inc.
Summary Consolidated Statements of Income Years Ended June 30,
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
(In millions, except per share amounts)
Dollars % Dollars % Dollars % Dollars % Dollars % Dollars % Dollars % Dollars % Dollars % Dollars %
Net revenues $9,791 100.0 $8,598 100.0 $7,095 100.0 $5,902 100.0 $4,690 100.0 $4,309 100.0 $3,589 100.0 $3,221 100.0 $2,466 100.0 $1,765 100.0
Costs and expenses:
Cost of sales 4,693 47.9 4,320 50.2 3,921 55.3 3,336 56.5 2,753 58.7 2,518 58.4 1,963 54.7 1,758 54.6 1,399 56.7 1,010 57.2
Research and development 1,014 10.4 826 9.6 653 9.2 563 9.5 500 10.7 445 10.3 382 10.6 356 11.1 302 12.2 234 13.3
Selling, general and administrative 2,777 28.4 2,402 27.9 1,788 25.2 1,503 25.5 1,160 24.7 1,105 25.7 983 27.4 812 25.2 588 23.9 433 24.5
Purchased in-process research
and development 177 1.8 23 0.3 58 0.8 — — — — — — — — — — — — — —
Total costs and expenses 8,661 88.5 7,571 88.0 6,420 90.5 5,402 91.5 4,413 94.1 4,068 94.4 3,328 92.7 2,926 90.9 2,289 92.8 1,677 95.0
Operating income 1,130 11.5 1,027 12.0 675 9.5 500 8.5 277 5.9 241 5.6 261 7.3 295 9.1 177 7.2 88 5.0
Gain on sale of equity investment — — 62 0.7 — — — — — — — — — — — — — — — —
Interest income (expense), net 46 0.5 32 0.4 34 0.5 23 0.4 6 0.1 (2) — (6) (0.2) (11) (0.3) (23) (0.9) (10) (0.6)
Litigation settlement — — — — — — — — — — (15) (0.4) — — — — — — — —
Income before income taxes 1,176 12.0 1,121 13.1 709 10.0 523 8.9 283 6.0 224 5.2 255 7.1 284 8.8 154 6.3 78 4.4
Provision for income taxes 413 4.2 359 4.2 232 3.3 167 2.8 87 1.8 67 1.6 82 2.3 94 2.9 43 1.8 17 1.0
Net income $ 763 7.8 $ 762 8.9 $ 477 6.7 $ 356 6.1 $ 196 4.2 $ 157 3.6 $ 173 4.8 $ 190 5.9 $ 111 4.5 $ 61 3.4
Net income per common share—diluted $ 1.93 $ 1.96 $ 1.21 $ 0.91 $ 0.50 $ 0.37 $ 0.42 $ 0.45 $ 0.30 $ 0.19
Shares used in the calculation of net
income per common share—diluted 394 389 393 394 388 430 431 439 395 348
Operating and Capitalization Data Years Ended June 30,
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
Total assets (millions) $ 5,771 $ 4,697 $ 3,801 $ 3,545 $ 2,898 $ 2,768 $ 2,672 $ 2,326 $ 1,779 $ 1,269
Long-term debt and other obligations (millions) $ 75 $ 106 $ 60 $ 91 $ 122 $ 178 $ 348 $ 401 $ 359 $ 145
Current ratio 2.0 2.0 2.0 2.2 2.0 2.4 2.6 2.5 2.6 1.9
Long-term debt-to-equity ratio — 0.015 0.018 0.039 0.075 0.11 0.23 0.33 0.39 0.22
Return on average equity 24% 31% 22% 19% 12% 10% 13% 18% 14% 12%
Return on average capital 24% 30% 23% 18% 12% 9% 10% 13% 11% 9%
Return on average assets 15% 18% 13% 11% 7% 6% 7% 9% 7% 6%
Effective income tax rate 35.1% 32% 33% 32% 33% 30% 32% 33% 28% 22%
Average shares and equivalents (thousands) 394,274 388,967 393,380 393,700 387,056 420,500 406,560 412,268 377,476 340,664
Book value per outstanding share $ 9.34 $ 7.40 $ 6.05 $ 5.39 $ 4.34 $ 4.03 $ 3.72 $ 3.15 $ 2.51 $ 1.97
18 19

Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table sets forth items from Sun’s Consolidated Statements of Income as a percentage of net revenues:
1998 1997 1996
Net revenues:
Products 87.9 90.1 90.2
Services 12.1 9.9 9.8
Total net revenues 100.0% 100.0% 100.0%
Cost of sales:
Products 40.5 44.0 48.9
Services 7.4 6.2 6.4
Total cost of sales 47.9 50.2 55.3
Gross margin 52.1 49.8 44.7
Research and development 10.4 9.6 9.2
Selling, general and administrative 28.4 27.9 25.2
Purchased in-process research and development 1.8 0.3 0.8
Operating income 11.5 12.0 9.5
Gain on sale of investment — 0.7 —
Interest income, net 0.5 0.4 0.5
Income before income taxes 12.0 13.1 10.0
Provision for income taxes 4.2 4.2 3.3
Net income 7.8% 8.9% 6.7%
This Annual Report, including the following sections, contains demand throughout thein fiscal 1997. More than 50% of the
$1,355 million, or 21%, fiscal year for workgroup, enterprise,
forward-looking statements within the meaning of the and departmental servers and high-end desktop systemsfrom
increase in products revenues in fiscal 1998 resulted and
Private Securities Litigation Reform Act of 1995, particularly to a lesser demand throughout the fiscalmemory and related
increased extent from high-end storage, year for workgroup,
statements regarding market opportunities, market share products. The increase in products revenues in fiscal 1997
enterprise, and departmental servers and high-end desktop
growth, competitive growth, new product introductions, over fiscal 1996 was primarilyfrom high-endto increased ship-
systems and to a lesser extent attributable storage, memory
success of research and development, research and devel- ments of richly configured servers, and products revenues in
and related products. The increase in higher revenues from
opment expenses, customer acceptance of new products, memory, storage options, andwas primarily attributable to
fiscal 1997 over fiscal 1996 accessories.
gross margin and selling, general and administrative expenses.
margin and selling, and general and administrative Sun’s services net revenues increased $336servers, and40%, to
increased shipments of richly configured million, or higher
expenses. These forward-looking statements involve risks and
These forward-looking statements involve risks and uncer- $1,188 million memory, 1998, compared and accessories. of
revenues from in fiscal storage options, with an increase
uncertainties, and the cautionary statements setforth below,
tainties, and the cautionary statements set forth $149 million, or 21%, in fiscal 1997. The increase in services
Sun’s services net revenues increased $336 million, or 40%, to
specifically those contained in “Future Operating Results,”
specifically those contained in “Future Operating revenues is primarily the result of a larger installed product
$1,188 million in fiscal 1998, compared with an increase of
identify important factors that could cause actual results to base due to increased in fiscal 1997.sales increase in services
$149 million, or 21%, product unit The as described above,
differ materially from those predicted in any such forward-
such forward- as well as is primarily the result of a larger installed product
revenues increased revenues associated with Sun professional
looking statements. Such factors include, but are not limited services. Theincreased in services revenue as described above,
base due to increase product unit sales from fiscal 1996 to
to, adverse changes in general economic conditions, including fiscal 1997 is primarily the result of products Sun professional
as well as increased revenues associated with revenue growth.
adverse changes in the specific markets for the Company’s
In fiscal 1998 increase in1997, domestic net revenues grew by
services. The and fiscal services revenue from fiscal 1996 to
products, adverse business conditions, decreased or or lack
products, adverse business conditions, decreased lack of
16% and 25%, respectively, whileof products revenue growth.
fiscal 1997 is primarily the result international net revenues
of growth in computing industry, adverseadverse changes in
growth in the the computing industry, changes in customer
(including United States1997, domestic 12%revenues grew by
In fiscal 1998 and fiscal exports) grew net and 17%, respec-
customer order patterns, increased competition, lack of
order patterns, increased competition, lack of acceptance
tively. Revenues from international operationsnet revenues
16% and 25%, respectively, while international represented
acceptance of new products, pricing pressures, lack technolog-
new products, pricing pressures, lack of success in of success
(including United States exports) grew 12% and 17%, respec-
48%, 49%, and 50% of total revenues in fiscal 1998, 1997, and
in technological advancements, riskswith foreign operations
ical advancements, risks associated associated with foreign
1996, respectively.
tively. Revenues from international operations represented
operations, and other factors, including those listed below.
(including the downturn of economic trends and unfavorable
European net revenuestotal revenues in fiscal 1998, 1997,1997,
48%, 49%, and 50% of increased 20% in fiscal 1998 and and
currency movements in the Asia Pacific marketplace), risks asso-
Results of Operationsefforts to comply with Year 2000 1996, respectively.
ciated with the Company’s primarily due to continued market acceptance of Sun’s
NET REVENUES other factors, including those listed below.
requirements, and network computing products and services in most major
European net revenues increased 20% in fiscal 1998 and 1997,
Sun’s products net revenues increased $856 million, or 11%, European markets.continued market acceptance of Sun’s
primarily due to
Results of Operations
to $8,603 million in fiscal 1998, compared with an increase of Japan net computing products and services in compared to
network revenues decreased 5% for fiscal 1998, most major
NET REVENUES
$1,356 million, or 21%, in fiscal 1997. More than 50% of the European markets. fiscal 1997. The Company attributes the
a decrease of 3% in
increase in net revenues in fiscal 1998 resultedmillion, or 11%,
Sun’s products net revenues increased $856 from increased decrease in revenues from 3% 5% fiscal 1997 to 5% in fiscal
Japan net revenues decreased in for fiscal 1998, compared
to $8,603 million in fiscal 1998, compared with an increase of to a decrease of 3% in fiscal 1997. The Company attributes
20

the decrease in revenues to current macroeconomic trends The increase in products gross margin in fiscal 1998 resulted
1998 to current macroeconomic trends affecting the Japanese The increase in gross margin in fiscal 1998 resulted primarily
affecting the Japanese market, including currency movements primarily from sales of more richly configured, higher margin
against the U.S. dollar. The Company does not expect dollar,
market, including currency movements against the U.S. these servers and more richly configured, a lesser extent, from
from sales ofdesktop systems, and to higher margin servers
trends thechange materially in the nearchange materially in
which to Company does not expect to term. The foregoing decreased componentand to a lesser extent, from decreased
and desktop systems, costs. The increase in products gross
the near term. The foregoing is a forward-looking statement margin in fiscal 1997 over fiscalin product primarily due to
component costs. The increase 1996 was gross margin in
is a forward-looking statement that is subject to risks and
that is subject to risks and uncertainties, and actual results increased shipments of richly configured due to product mix
fiscal 1997 over fiscal 1996 was primarily servers and higher
uncertainties, and actual results may differ materially from
those set forth in such statement as forth in such number of
may differ materially from those set a result of a statement and products revenue growth.
revenues from memory, storage options, and accessories.
factors. In particular, the economic trends if Japan signifi-
as a result of a numberifof factors. In particular, in the economic Services gross margin was 39.3% for fiscal 1998, compared
Services gross margin was 39.3% for fiscal 1998, compared
cantly worsen in significantly decline over an extendeddecline
trends in Japan a quarter or worsen in a quarter or period with 37.7% and 35.5% for fiscal 1997 and 1996, respectively.
with 37.7% and 35.5% for fiscal 1997 and 1996, respectively.
of time,extended period of time, the Company’s results from
over an the Company’s results from operations and cash
These increases reflect the increase in services revenues year
These increases reflect the increase in service revenues year
flows would be cash flowsaffected. adversely affected.
operations and adversely would be over year as the result of a larger installed base and increased
over year as the result of a larger installed base and increased
Net revenues in Rest of World increased by 9% in fiscal 1998, investment by the Company in its services business.
Net revenues in Rest of World increased by 9% in fiscal 1998, investment by the Company in its services business.
compared with 33% in fiscal 1997, primarily due to expanding
compared with 33% in fiscal 1997, primarily due to expanding The factors described above resulted in a favorable impact
The factors described above resulted in a favorable impact
markets in China, Australia, and Latin America. This slowing in
markets in China, Australia, and Latin America. This slowing in on gross margin. The Company continuously evaluates the
on gross margin. The Company continuously evaluates the
the growth rate in fiscal 1998 is attributable to a downturn in
the growth rate in fiscal 1998 is attributable to a downturn in competitiveness of its product offerings. These evaluations
competitiveness of its product offerings. These evaluations
economic trends and unfavorable currency movements in the
economic trends and unfavorable currency movements in the could result in repricing actions in the near term. Sun’s future
could result in repricing actions in the near term. Sun’s future
Asia Pacific marketplace.
Asia Pacific marketplace. operating results would be adversely affected if such repricing
operating results would be adversely affected if such repricing
actions were to occur and the Company was unable to miti-
A portion of the Company’s operations consists of manufac- actions were to occur and the Company was unable to miti-
A portion of the Company’s operations consists of manufac-
gate the resulting margin pressure by maintaining a favorable
gate the resulting margin pressure by maintaining a favorable
turing and sales activities in foreign jurisdictions. As a result,
turing and sales activities in foreign jurisdictions. As a result,
the Company’s results could be significantly adversely
the Company’s results could be significantly adversely mix of systems, software, service, and other products; and by
mix of systems, software, service, and other products, and by
affected by factors such as changes in foreign currency achieving component cost reductions, operating efficiencies,
affected by factors such as changes in foreign currency achieving component cost reductions, operating efficiencies,
exchange rates or real economic conditions in the foreign and increasing volumes.
exchange rates or real economic conditions in the foreign and increasing volumes.
markets in which the Company distributes its products. The
markets in which the Company distributes its products. The RESEARCH AND DEVELOPMENT
RESEARCH AND DEVELOPMENT
Company is primarily exposed to changes in exchange rates
Company is primarily exposed to changes in exchange rates Research and development (R&D) expenses increased $188
Research and development (R&D) expenses increased $188
on the Japanese yen, British pound sterling, French franc,
on the Japanese yen, British pound sterling, French franc,
million, or 22.7%, in fiscal 1998 to $1,014 million, compared
million, or 22.7%, in fiscal 1998 to $1,014 million, compared
and German mark. When the U.S. dollar strengthens against
and German mark. When the U.S. dollar strengthens against with an increase of $173 million, or 26.5%, in fiscal 1997. As a
with an increase of $173 million, or 26.5%, in fiscal 1997. As a
these currencies, the U.S. dollar value of non-U.S. dollar-
these currencies, the U.S. dollar value of non-U.S. dollar- percentage of net revenues, R&D expenses were 10.4%, 9.6%,
percentage of net revenues, R&D expenses were 10.4%, 9.6%,
based sales decreases. When the U.S. dollar weakens against
based sales decreases. When the U.S. dollar weakens against and 9.2% in fiscal 1998, 1997, and 1996, respectively. The
and 9.2% in fiscal 1998, 1997, and 1996, respectively. The
these currencies, the U.S. dollar value of non-U.S. dollar-based
these currencies, the U.S. dollar value of non-U.S. dollar-based
increase in R&D spending, both in dollars and as a percentage
increase in R&D spending, both in dollars and as a percentage
sales increases. Correspondingly, the U.S. dollar value of
sales increases. Correspondingly, the U.S. dollar value of of revenues, was a result of the Company’s continued signifi-
of revenues, was a result of the Company’s continued signifi-
non-U.S. dollar-based costs increases when the U.S. dollar
non-U.S. dollar-based costs increases when the U.S. dollar
cant investment related to the development of hardware and
cant investment related to the development of hardware and
weakens and decreases when the U.S. dollar strengthens. Over-
weakens and decreases when the U.S. dollar strengthens. Over-
software products that utilize the Java architecture, and new
software products that utilize the Java architecture, and new
all the Company is a net receiver of currencies other than
all the Company is a net receiver of currencies other than server and storage products. The remaining increase in dollar
server and storage products. The remaining increase in dollar
the U.S. dollar and, as such, benefits from a weaker dollar,
the U.S. dollar and, as such, benefits from a weaker dollar,
amount of such expenses is primarily attributable to
amount of such expenses is primarily attributable to
and is adversely affected by a stronger dollar relative to major
and is adversely affected by a stronger dollar relative to major
continued development of UltraSPARC systems, further
continued development of UltraSPARC systems, further
currencies worldwide. Accordingly, changes in exchange rates,
currencies worldwide. Accordingly, changes in exchange rates,
development of products obtained through acquisitions, and
development of products obtained through acquisitions, and
and in particular a strengthening of the U.S. dollar, may
and in particular a strengthening of the U.S. dollar, may
increased compensation due primarily to higher levels of
increased compensation due primarily to higher levels of
adversely affect the Company’s consolidated sales and gross
adversely affect the Company’s consolidated sales and gross staffing. The increase as a percentage of net revenues reflects
staffing. The increase as a percentage of net revenues reflects
margins as expressed in U.S. dollars.
margins as expressed in U.S. dollars. the Company’s belief that to maintain its competitive position
the Company’s belief that to maintain its competitive position
To mitigate the short-term effect of changes in currency in a market characterized by rapid rates of technological
To mitigate the short-term effect of changes in currency in a market characterized by rapid rates of technological
exchange rates on the Company’s non-U.S. dollar-based sales, advancement for systems and software products, as well as
exchange rates on the Company’s non-U.S. dollar-based sales, advancement for systems and software products, as well as
product procurement, and operating expenses, the Company
microprocessor technologies; the Company must continue to
microprocessor technologies, the Company must continue to
product procurement, and operating expenses, the Company
regularly hedges its net non-U.S. dollar-based exposures by
regularly hedges its net non-U.S. dollar-based exposures by
invest significant resources in new systems, software, and
invest significant resources in new systems, software, and
entering into foreign exchange forward and option contracts
entering into foreign exchange forward and option contracts microprocessor development, as well as in enhancements to
microprocessor development, as well as in enhancements to
to hedge transactions.transactions. Currently, hedges of trans-
to hedge anticipated Currently, hedges of transactions do not existing products. The Company expects R&D expenses to
existing products. The Company expects R&D expenses to
actionsbeyond three months. Given the short-term nature of the
extend do not extend beyond three months. Given the short- increase in dollar amount in fiscal 1999 while remaining in
increase in dollar amount in fiscal 1999 while remaining in
term natureforeign Company’s forward exchange forward and
Company’s of the exchange foreign and option contracts, the range of 10% of revenue.
the range of 10% of revenue.
exchange contracts, the Company’sassociated withassociated
the Company’s exposure to risk exposure to risk currency
SELLING, GENERAL AND ADMINISTRATIVE
with currency market these instruments is not material. See
market movement on movement on the instruments is not SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative (SG&A) expenses increased
“Other Financial Instruments”Instruments” in Note 1 of the
material. See “Other Financial in Note 1 of the “Notes to Selling, general and administrative (SG&A) expenses increased
$375 million, or 15.6%, in fiscal 1998 to $2,777 million compared
“Notes to Consolidated Financial Statements” for more details. $375 million, or 15.6%, in fiscal 1998 to $2,777 million compared
Consolidated Financial Statements” for more details.
with an increase of $615 million, or 34.4%, in fiscal 1997. As
with an increase of $615 million, or 34.4%, in fiscal 1997. As
GROSS MARGIN
GROSS MARGIN a percentage of net revenues, these expenses were 28.4%,
a percentage of net revenues, these expenses were 28.4%,
Productsgross margin was 53.8% for fiscal 1998, compared
Product gross margin was 53.8% for fiscal 1998, compared 27.9%, and 25.2% in fiscal 1998, 1997, and 1996, respectively.
27.9%, and 25.2% in fiscal 1998, 1997, and 1996, respectively.
with 51.1% and 45.7% for fiscal 1997 and 1996, respectively. The increase as a percentage of net revenues in fiscal 1998
with 51.1% and 45.7% for fiscal 1997 and 1996, respectively. The increase as a percentage of net revenues in fiscal 1998
21

Management’s Discussion and Analysis of Financial Condition and Results of Operations
reflects, in part, the Company’s ongoing efforts to expand its and investments as compared to the corresponding period
demand in part, the Company’s service and support organiza-
reflects, creation programs and ongoing efforts to expand its in fiscal 1996. fiscal 1996, was primarily the result of lower
compared with
tions. The dollar programs and service and support organiza-
demand creation increase also reflects investments aimed interest earnings due to a smaller average portfolio of cash
The principal/notional amount to the Company’s cashperiod
and investments as compared of the corresponding equiv-
tions. The dollar increase also reflects investments aimed
at improving Sun’s own business processes. The increase in alents and short-term investments at June 30, 1998 were
at improving Sun’s own business processes. In addition, the in fiscal 1996.
dollar amount of SG&A expenses in fiscal 1997 was primarily $783.8 million. These investments, which generally mature in
attributable to increased marketing costs related drive its
Company expects to continue to hire personnel to to new
fiscal 1999, bear interest at an averageCompany’s cash equiv-
The principal/notional amount of the rate of 5.2% and have
product introductions and other promotional support organi-
demand-creation programs and service and programs, and alents and short-term investments at June 30, 1998 were
a fair market value of $783.9 million.
zations. The increase in dollar amount of SG&A expenses in
an increase in compensation resulting primarily from higher $783.8 million. These investments, which generally mature in
levels of marketing and attributable to increased 1999, the
fiscal 1997 was primarily sales head count. In fiscalmarketing INCOME TAXES
fiscal 1999, bear interest at an average rate of 5.2% and have
Company expects SG&A expenses to increaseand other promo-
costs related to new product introductions in dollar amount,
The effective value of $783.9 million. was 33% before a $25.2
a fair market tax rate for fiscal 1998
as the Company and an increase in compensation resulting
tional programs,continues to invest in efforts to achieve addi-
million tax charge resulting from a nonrecurring write-off of
INCOME TAXES
tional operating higher levels of marketing and sales head
primarily from efficiencies through the continual review and
in-process research and development associated with the
improvement of business processes. expects SG&A Company
count. In fiscal 1999, the CompanyIn addition, the expenses
acquisitions of Diba, Inc.; Integrity Arts, 33% before a $25.5
The effective tax rate for fiscal 1998 was Inc.; and Red Cape
expects to continue to hire personnel Companyits demand-
to increase in dollar amount, as the to drive continues
Software, Inc. The effective tax ratenonrecurring write-off of
million tax charge resulting from a for fiscal 1997 was 32%.
creation programs and achieveand supportoperating efficien-
to invest in efforts to service additional organizations.
The effective tax rate for development associated with $5.7
in-process research and fiscal 1996 was 32% before a the
cies through the continual review and improvement of
million tax charge resulting from a nonrecurring Red Cape
acquisitions of Diba, Inc.; Integrity Arts, Inc.; and write-off
PURCHASED IN-PROCESS RESEARCH
business processes.
of in-process research and tax rate for associated with the
Software, Inc. The effectivedevelopment fiscal 1997 was 32%.
AND DEVELOPMENT The effective tax rate for Design, Ltd. was 32% before a $5.7
acquisition of Lighthouse fiscal 1996
PURCHASED IN-PROCESS RESEARCH
Purchased in-process research and development of $176.4 million tax charge resulting from a nonrecurring write-off
AND DEVELOPMENT The Companyresearch and development associatedto remain
of in-process currently expects its effective tax rate with the
million, $23 million, and $57.9 million in fiscal 1998, 1997,
and 1996, respectively,research and development of $176.3
Purchased in-process represents the write-off of technology
acquisitionfiscal 1999. This rate excludes the impact of poten-
at 33% for of Lighthouse Design, Ltd.
associated million, Company’s acquisitions of Diba, Inc.;
million, $23with the and $57.9 million in fiscal 1998, 1997, tial mergers and acquisitions, the tax effect of which will be
accounted forcurrently expects its effective tax rate to remain at
The Company in the interim quarter in which the transaction
and 1996, respectively, represents the write-off of technology
Integrity Arts, Inc.; Chorus Systems, S.A.; Red Cape Software,
takesfor fiscal 1999. The estimate is basedcurrent tax law and
33% place. The expected rate is based on on current tax law
Inc.; and the storage Company’s acquisitions of Diba, Inc.;
associated with the products business of Encore Computer
and current estimate of earnings, and is subject to change.
Corporation inInc.; Chorus Systems, S.A.; Red Cape Software,
Integrity Arts, fiscal 1998; Long View Technologies, LLC in current estimate of earnings, and is subject to change.
fiscal 1997; and Integrated Micro Products plc, and Computer
Inc.; and the storage products business of EncoreLighthouse
FUTURE OPERATING RESULTS
FUTURE OPERATING RESULTS
Design, Ltd. in fiscal 1996. See alsoView Technologies, LLC in
Corporation in fiscal 1998, Long “Acquisitions” in Footnote
The markets for Sun’s products and services are intensely com-
The markets for Sun’s products and services are intensely com-
2 of the “Notes Integrated MicroFinancial Statements.”
fiscal 1997 and to Consolidated Products plc, and Lighthouse
petitive and subject to continuous, rapid technological
petitive and subject to continuous, rapid technological
Design, Ltd. in fiscal 1996. See “Acquisitions” in Note 2 of
change, short product life cycles, and frequent product per-
GAIN ON SALE OF EQUITY INVESTMENT change, short product life cycles, and frequent product per-
the “Notes to Consolidated Financial Statements” for addi-
formance improvements and price reductions. Due to the
formance improvements and price reductions. Due to the
In fiscal 1997, the gain on sale of equity investment of
tional information.
breadth of the Company’s product lines and the scalability
breadth of the Company’s product lines and the scalability
$62 million represents net proceeds from the sale of the
GAIN ON SALE OF EQUITY INVESTMENT of its products and network computing model, Sun competes
of its products and network computing model, Sun competes
Company’s equity investment in Iona Technologies, plc.
in many segments of the network computing market across
In fiscal 1997, the gain on sale of equity investment of in many segments of the network computing market across
INTEREST INCOME (EXPENSE), NET a broad spectrum of customers. The Company expects the
$62 million represents net proceeds from the sale of the a broad spectrum of customers. The Company expects the
markets for its products and technologies, as well as its com-
The Company’s interest income and expense are most
Company’s equity investment in Iona Technologies, plc. markets for its products and technologies, as well as its com-
petitors within such markets, will continue to change as the
sensitive to changes in the general level of U.S. interest rates. petitors within such markets, will continue to change as the
INTEREST INCOME (EXPENSE), NET rightsizing trend shifts customer buying patterns to network-
In this regard, changes in the U.S. interest rates affect the rightsizing trend shifts customer buying patterns to network-
interest earned on the Company’s cash equivalents are short-
The Company’s interest income and expense and most based systems, which often employ solutions from multiple
based systems, which often employ solutions from multiple
term investments asin the as interest paid U.S.its short-term
sensitive to changes well general level of on interest rates.
vendors. Competition in these markets will also continue
vendors. Competition in these markets will also continue
borrowings. Tochanges in the U.S. interest rates affect U.S.
In this regard, mitigate the impact of fluctuations in the to intensify as Sun and its competitors, principally Hewlett-
to intensify as Sun and its competitors, principally Hewlett-
interest earned on Company has entered into an interest rate
interest rates, the the Company’s cash equivalents and short-
Packard Co., International Business Machines Corporation,
Packard Co., International Business Machines Corporation,
swap investments This swap is intended to on its short-term
term transaction. as well as interest paid better match the Compaq Computer Corporation, and Silicon Graphics, Inc.,
Compaq Computer Corporation, and Silicon Graphics, Inc.,
Company’s floating-rate the impact of on its cash in U.S.
borrowings. To mitigateinterest incomefluctuations equiva- aggressively position themselves to benefit from this shifting
aggressively position themselves to benefit from this shifting
interest rates, the Company has entered into an interest rate of customer buying patterns and demand. The Company is
lents and short-term investments with the interest expense of customer buying patterns and demand. The Company is
on its transaction. This swap is intended to better match the
swap note payable. also facing competition from certain systems manufacturers,
also facing competition from certain systems manufacturers,
Company’s floating-rate interest income on its cash equiva-
including Dell Computer Corporation and certain of its
including Dell Computer Corporation and certain of its
Net interest income increased to $46.1 million in fiscal 1998,
lents and short-term investments with the interest expense competitors listed above, whose products are based on micro-
competitors listed above, whose products are based on micro-
compared with $32.4 million and $33.9 million in fiscal 1997
on its note payable. processors from Intel Corporation coupled with Windows NT
processors from Intel Corporation coupled with Windows NT
and fiscal 1996, respectively. The increase in net interest
operating system software from Microsoft Corporation. These
Net interest income increased to $46.1 million in fiscal 1998, operating system software from Microsoft Corporation. These
income for fiscal 1998 is primarily the result of higher interest
products demonstrate the viability of certain networked
earnings due to a larger average $33.9 million in and invest-
compared with $32.4 million and portfolio of cash fiscal 1997 products demonstrate the viability of certain networked
personal computer solutions and have increased the com-
ments as compared with the corresponding in net in fiscal
and fiscal 1996, respectively. The increase period interest personal computer solutions and have increased the com-
petitive pressure, particularly in the Company’s workstation
petitive pressure, particularly in the Company’s workstation
1997. The decrease in is primarily the result for higher 1997, as
income for fiscal 1998 net interest income of fiscal interest
and lower-end server product lines. Finally, the timing of
compared with fiscal 1996, was primarily thecash and invest-
earnings due to a larger average portfolio of result of lower and lower-end server product lines. Finally, the timing of
introductions of new products and services by Sun’s competi-
interest earnings due to athe corresponding period in fiscal
ments as compared with smaller average portfolio of cash introductions of new products and services by Sun’s competi-
tors may negatively impact the future operating results
1997. The decrease in net interest income for fiscal 1997, as tors may negatively impact the future operating results
of the Company, particularly when such introductions occur
22

in periods leading up to the Company’s introduction of its payments to certain suppliers and often enters into non-
own new enhanced products. Thesuch introductions occur
of the Company, particularly when Company expects this cancelable purchase commitments with vendorsintroduction
components for development, production, and early in the
pressure to continue and the Company’s introduction of its
in periods leading up tointensify into fiscal 1999. While many design process. Due to Company frequently makes advanced
of new products, the the variability of material requirement
othernew enhanced products. The Company expects this
own technical, service, and support capabilities affect a specifications certain the design and often enters intomust
payments to during suppliers process, the Company non-
customer’s buying decision, the into fiscal future operating
pressure to continue and intensifyCompany’s1999. While many closely manage material purchase with vendors and in the
cancelable purchase commitments commitments earlyrespec-
other technical, service, and support capabilities affect a tive delivery schedules. In variability of a delay or flaw in the
design process. Due to the the event of material requirement
results will depend, in part, on its ability to compete with
customer’s buying decision, the Company’s future operating Company’s design process, the process, the Company must
specifications during the designCompany’s operating results
these technologies.
results will depend, in part, on its ability to compete with closely manage material purchase commitments and respec-
could be adversely affected due to the Company’s obligations
The Company’s future operating results will depend to a
these technologies. to fulfill suchschedules. In the event ofcommitments. in the
tive delivery noncancelable purchase a delay or flaw
considerable extent on its ability to rapidly and continuously Company’s design process, the Company’s operating results
The Company’s future operating results will depend to a
develop, introduce, and deliver in quantity new systems, Generally, the computer systems the Company’ssuch as the
could be adversely affected due to sold by Sun, obligations
software, andextent on its ability to rapidly and continuously
considerable service products, as well as new microprocessor productssuch noncancelable purchase commitments.
to fulfill based on UltraSPARC processors, are the result of
technologies, that offer itsdeliver in quantity new systems,
develop, introduce, and customers enhanced performance hardware and software development such that delays in the
at competitive prices. The as well as new microprocessor
software, and service products, development of new high- software development can systems sold by of the such as the
Generally, the computer delay the ability Sun, Company to
performance that offer its customers enhanced performance
technologies, computer products, such as the Company’s ship new based on our UltraSPARC processors, are the a new
products hardware products. In addition, adoption of result
development of the UltraSPARCdevelopment of new high-
at competitive prices. The microprocessor, is a complex release of an operating system may require such that delays
of hardware and software development effort on the part
and uncertaincomputerrequiring high levels of Company’s
performance process products, such as the innovation of the customer development can delay the ability of the
in the software and porting by software vendors providing
from the Company’sUltraSPARC microprocessor, is a complex
development of the designers and suppliers, as well as accu- Company to shipanew hardware products. In addition,aadop-
applications. As result, the timing of conversion to new
rate anticipation of customer requirements and of innovation
and uncertain process requiring high levels technological release is new release of an operating system may require
tion of a inherently unpredictable.
trends. Once a hardware product issuppliers, asthe Company
from the Company’s designers and developed, well as accu- effort on the part of the customer and porting by software
Moreover, delays by customers inAs a result, new release of
vendors providing applications. adopting a the timing of
must rapidly bring customer requirements manufacturing, a
rate anticipation ofsuch products to volumeand technological
an operating system can limit theinherently unpredictable.
conversion to a new release is acceptability of hardware
process Once requires accurate forecasting of volumes, mix of
trends. that a hardware product is developed, the Company
products tied to that release. Such delays a new release of
Moreover, delays by customers in adopting could adversely
must rapidly bring such products to volumethings, in order to
products and configurations, among other manufacturing, a affect the future operating results of the Company. hardware
an operating system can limit the acceptability of
process that requires accurate costs. Future operating results
achieve acceptable yields and forecasting of volumes, mix of
products tied to that release. Such delays could adversely
will depend toconfigurations, among on the things, in order to
products and a considerable extent other Company’s ability A significant portion of the Company’s revenues is derived
from international sales and is therefore Company. inherent
affect the future operating results of the subject to
to closely manage productand costs. Futureorder to minimize
achieve acceptable yields introductions in operating results
unfavorable to a considerable extent on the Company’s ability
will depend patterns of customer orders, to reduce levels of risks related portion of the Company’s revenues is derived
A significant thereto, including the general economic and
to closely manage product introductions in order to minimize political conditionssales and is therefore subject to inherent
from international in each country, currency exchange rate
older inventory, and to ensure that adequate supplies of new
unfavorable patterns of customer orders, to reduce levels of fluctuations, the effectincluding the general of various juris-
risks related thereto, of the tax structures economic and
products can be delivered to meet customer demand. The
abilityinventory, and toto match supply and demand is further
older of the Company ensure that adequate supplies of new dictions, conditions in each country, with a variety of foreign
political changes to and compliance currency exchange rate
complicated by the Company’s meet to adjust prices to reflect
products can be delivered to need customer demand. The laws and regulations, trade protection measures, and import
fluctuations, the effect of the tax structures of various juris-
changing competitive match conditions as well as the
ability of the Company tomarketsupply and demand is further and export licensing requirements. There can be no assurance
dictions, changes to and compliance with a variety of foreign
variability and timing of customer orders with respect reflect
complicated by the Company’s need to adjust prices to to the that the economic crisis and currency issues currentlyimport
laws and regulations, trade protection measures, and being
Company’s competitive marketresult, the Company’s as the
changing older products. As a conditions as well operat- experienced in certain parts of Asia will not have an adverse
and export licensing requirements. There can be no assurance
ing resultsand timing of customer orders the Company to not
variability could be adversely affected if with respect is the effect oneconomic crisis and currency issues growth rates in
that the the Company’s revenue or revenue currently being
able to correctly products. As a result, the Company’s operat-
Company’s older anticipate the level of demand for the mix the future. The certain parts ofof thewill not have an adverse
experienced in impact of any Asia foregoing factors could
of products. Because the Company is if the Company is not
ing results could be adversely affectedcontinuously engaged have an adverse effect on the Company’s future financial
effect on the Company’s revenue or revenue growth rates in
in this product development, introduction, andfor the mix
able to correctly anticipate the level of demand transition condition and operatingof any of the foregoing factors could
the future. The impact results.
process, its operating the Company issubject to considerable
of products. Because results may be continuously engaged
Seasonality also effect on the Company’s future financial
have an adverse affects the Company’s operating results,
fluctuation, particularly when introduction, and transition
in this product development,measured on a quarterly basis.
particularly inoperatingand third quarter of each fiscal year.
condition and the first results.
process, its operating results may be subject to considerable
In addition, the Company’s operating expenses are increasing
The Company is increasingly dependent on a quarterly of its
fluctuation, particularly when measured on the ability basis. Seasonality also affects the Company’s operating results,
as the Company continues third quarter ofoperations, year.
particularly in the first and to expand its each fiscal and
suppliers to design, manufacture, and deliver advanced com-
ponents requiredincreasingly dependent on the ability of its
The Company is for the timely introduction of new products. future operatingCompany’s operating expenses areifincreasing
In addition, the results will be adversely affected revenues
The failure of any of manufacture, and deliver advanced com-
suppliers to design, these suppliers to deliver components on do the Company accordingly. Additionally, the Company
as not increase continues to expand its operations, and
time or in sufficient the timely introduction of new products.
ponents required for quantities, or the failure of any of the plans to continue to evaluate and, when affected if revenues
future operating results will be adversely appropriate, make
Company’s of any designers to develop advanced innovative
The failure own of these suppliers to deliver components on acquisitions of complementary technologies, products or
do not increase accordingly. Additionally, the Company
products on a timely basis, couldthe failure a significant
time or in sufficient quantities, or result in of any of the businesses. As part of this process, the Company will continue
plans to continue to evaluate and, when appropriate, make
adverse impact designers to develop advanced innovative
Company’s own on the Company’s operating results. The acquisitions ofvalue of its assets, technologies, products or
to evaluate the complementary and when necessary, make
inability to secure enough components toin a significant
products on a timely basis, could result build products, adjustments thereto. Acquisitions may involve the amor-
businesses. As part of this process, the Company will continue
includingimpact on the in the quantities and configurations
adverse new products, Company’s operating results. The tization of acquired intangible assetswhen necessary, make
to evaluate the value of its assets, and in periods following
required, to secure enough components sufficient products,
inability or to produce, test and deliver to build products such acquisitions. In addition, acquisition transactions are
adjustments thereto. Acquisitions may involve the amor-
including new products, in the quantities and configurations accompanied by a number of risks, including, among other
to meet demand in a timely manner, would adversely affect tization of acquired intangible assets in periods following
required, or to produce, test and deliver sufficient products things, those associated with integrating operations, personnel,
the Company’s net revenues and operating results. To secure such acquisitions. In addition, acquisition transactions are
to meet demanddevelopment, production, and introduction
components for in a timely manner, would adversely affect and technologiesaacquired,of risks, including, among other
accompanied by number and the potential for unknown
of new products, the Company frequently results. advanced
the Company’s net revenues and operating makes To secure liabilities of the acquired business.
things, those associated with integrating operations, personnel,
23

Management’s Discussion and Analysis of Results of Operations and Financial Condition
In order to remain competitive in a rapidly changing industry, operating results. In addition, the Company believes that its
the Company is continually improving and changing its busi- internal system implementation efforts (as described in the
ness practices, processes, and information systems. In this above paragraph), principally conducted to improve operat-
regard, the Company has begun to implement a number ing efficiencies, will also address the Company’s internal Year
of new business practices and a series of related information 2000 compliance issues. Additionally, the Company is in the
systems across the enterprise that affect numerous opera- process of evaluating the need for contingency plans with
tional and financial systems and processes. Such activities respect to Year 2000 requirements. The necessity of any con-
are currently planned to be fully operational in the first half tingency plan must be evaluated on a case-by-case basis and
of fiscal 1999. The time period in which the new business will vary considerably in nature depending on the Year 2000
practices and related information systems will be imple- issue it may need to address. The Company’s expectations as
mented are forward-looking statements subject to risks and to the extent and timeliness of modifications required in
uncertainties, and actual results may differ materially from order to achieve Year 2000 compliance is a forward-looking
those set forth above as a result of a number of risk factors. In statement subject to risks and uncertainties. Actual results
particular, the timing and duration of the implementation of may vary materially as a result of a number of factors, includ-
the new business practices and information systems are subject ing, among others, those described in this paragraph and the
to a number of risks, including the complexity of the conver- paragraph below. There can be no assurance however, that
sion process and the new systems themselves, the transfer the Company will be able to successfully modify on a timely
of business data and information from the previous system basis such products, services, and systems to comply with
to the new system, and the need for substantial and compre- Year 2000 requirements, which failure could have a material
hensive employee training in connection with the adoption adverse effect on the Company’s operating results.
of such new business practices and information systems. Based on the Company’s assessment to date, most newly
While the Company tests these new systems and processes introduced products and services of the Company are Year
in advance of implementation, there are inherent limitations 2000 compliant, however some of the Company’s customers
in the Company’s ability to simulate a full-scale operating are running product versions that are not Year 2000 compli-
environment in advance of implementing these systems. In ant. The Company has been encouraging such customers to
addition, the implementation of these systems will require migrate to current product versions. In addition, the Company
the Company to be without certain capabilities critical to faces risks to the extent that suppliers of products, services,
normal operation of its business (such as processing orders and systems purchased by the Company and others with
and shipping product) for a period of time as the Company whom the Company transacts business on a worldwide basis
shifts to the new systems. There can be no assurance that this do not have business systems or products that comply with
interruption in the use and availability of enterprise-wide the Year 2000 requirements. To the extent that Sun is not
information systems will not have a material adverse effect able to test technology provided by third-party hardware or
on the Company’s business and operating results. In addition, software vendors, Sun is in the process of obtaining assur-
to the extent that the Company encounters problems after ances from such vendors that their systems are Year 2000
introduction of these new systems and practices that prevent compliant. In the event any such third parties cannot, in a
or limit their full utilization, there could be a material adverse timely manner, provide the Company with products, services,
impact on the Company’s operating results. or systems that meet the Year 2000 requirements, the Com-
Many currently installed computer systems and software pany’s operating results could be materially adversely effected.
products are coded to accept only two digit entries in the date Although the Company believes that the cost of Year 2000
code field. As the year 2000 approaches, these code fields modifications for both internal-use software and systems or
will need to accept four digit entries to distinguish years the Company’s products are not material, there can be no
beginning with “19” from those beginning with “20.” As a assurance that various factors relating to the Year 2000 com-
result, in less than two years, computer systems and/or pliance issues, including litigation, will not have a material
software products used by many companies may need to adverse effect on the Company’s business, operating results,
be upgraded to comply with such Year 2000 requirements. or financial position.
The Company is currently expending resources to review its Eleven of the 15 member countries of the European Union are
products and services, as well as its internal-use software scheduled to establish fixed conversion rates between their
in order to identify and modify those products, services, and existing sovereign currencies and the Euro, and to adopt
systems that are not Year 2000 compliant. The costs associ- the Euro as their common legal currency effective January 1,
ated with this effort are not incremental to the Company, but 1999. The Euro will then trade on currency exchanges and be
represent reallocation of existing resources. The Company available for non-cash transactions. The Company is currently
believes any modifications deemed necessary will be made expending resources to review and modify its products to
on a timely basis and does not believe that the cost of such support the Euro’s requirements, determine pricing strategies
modifications will have a material effect on the Company’s in the new economic environment, analyze the legal and
24

contractual implications for contracts, evaluate system campuses in Colorado, Massachusetts, California, and the
capabilities, and ensure banking vendors can for unknown
and technologies acquired, and the potential support the on a timely basis and does not believe that the cost of such
United Kingdom. In connection with the acquisition of
Company’s operations business.
liabilities of the acquiredwith respect to Euro transactions. modifications Inc. and other acquisitions expectedCompany’s
NetDynamics, will have a material effect on the to be com-
operatingthe first and second quarters of fiscal 1999,that its
pleted in results. In addition, the Company believes contin-
In order to remain competitive in a rapidly changing industry,
The Company expects that modifications will be made to its
internal system implementation efforts (as described in the
the Company is continually improving and changing its busi-
business operations and systems on a timely basis and does gent upon the completion of various closing conditions,
above paragraph), principally conducted to improve operat-
ness practices, processes, and information systems. In this
not believe that the cost of such modifications will have a the Company also expects to record in-process research
ing efficiencies, will also address the Company’s internal Year
materialthe Company has begun to implement a number
regard, adverse impact on the Company’s operating results. and development write-offs that are not likely to exceed
2000 compliance issues. Additionally, the Company is in the
There can be nopractices and a series of related information
of new business assurance, however, the Company will be $170 million.
process of evaluating the need for contingency plans with
able to complete such modifications to comply withopera-
systems across the enterprise that affect numerous Euro
respect to Year $195 requirements. The necessity of any con-
Approximately 2000 million of cash was used by financing
requirements, which systems and material adverse activities
tional and financial could have a processes. Such effect on
activities in fiscal 1998, compared with $430 million used in
tingency plan must be evaluated on a case-by-case basis and
the currently planned to be fully operational inthe Company
are Company’s operating results. In addition, the first half
will vary considerably in nature dependingto athe Year 2000
fiscal 1997. This change is primarily due on reduction in
faces risks to The time period in which the new business
of fiscal 1999. the extent that vendors upon whom the
issue it may need to address. The Company’s $456 million for
the dollar value of shares repurchased, from expectations as
Company and relatedtheir suppliers are unable be imple-
practices relies and information systems will to make
to the1997 to $284 timeliness fiscal 1998, retirement of the
fiscal extent and million for of modifications required in
appropriate forward-looking statements subject to risks and
mented are modifications to support Euro transactions. The
receivable purchase agreement of $125 million in 1997, and
order to achieve Year 2000 compliance is a forward-looking
uncertainties, and actual results may differ materially from
Company has not yet completed it evaluation of the impact repayment of short-term borrowings of $93 million.
statement subject to risks and uncertainties. Actual results
of the set forth above as a resultcurrency designations.
those Euro upon its functional of a number of risk factors. In
may Company’s exposureresult of a number ofon the $40 mil-
The vary materially as a to interest rate risk factors, includ-
particular, the timing and duration of the implementation of
While the Company cannot predict what effect these various ing, among others, those in May 1999,this paragraph and the
lion mortgage loan, due described in and the international
the new business practices and information systems are subject
factors may have on its financial results, the aggregate effect paragraph borrowings of canmillion is not material, giventhat
short-term below. There $7 be no assurance however, the
to a number of risks, including the complexity of the conver-
of these and other factors could result in significant volatility the Company will beof these instruments and theon a timely
short-term maturity able to successfully modify Company’s
sion process and the new systems themselves, the transfer
in the Company’s future performance and stock price. Also basis such of the potential for rate changes associated with
evaluation products, services, and systems to comply with
of business data and information from the previous system
see Footnote 1 “Summary of Significant Accounting Policies.” Year 2000 requirements, which failure could have anmaterial
such instruments. The Company has entered into a interest
to the new system, and the need for substantial and compre-
adverse effect on the Company’s operating rate for variable)
rate swap agreement (exchanging a fixed results.
LIQUIDITY AND CAPITAL in connection with the adoption
hensive employee training RESOURCES
related to the $40 million mortgage loan. The potential
The Company’s financial condition strengthened as systems.
of such new business practices and information of fiscal Based on the Company’s assessment to date, most newly
introduced productsagreement on of the Company are Year
impact of this swap and services the Company’s mortgage
1998 year end when tests thesewith fiscal 1997. During fiscal
While the Company compared new systems and processes
2000 interest ratehowever some of the Company’s customers
loan compliant, is not expected to be material.
in advance of implementation, there are inherent limitations
1998, operating activities generated $1,527 million in cash
in the Company’s ability to simulate a full-scale operating areJune 30, 1998, the versions that are not Year 2000 compli-
At running product Company’s primary sources of liquidity
and cash equivalents, compared with $1,105 million in fiscal
environment in advance of implementing these systems. In ant. The Company has been encouraging such customers to
consisted of cash, cash equivalents, and short-term invest-
1997. Accounts receivable increased $179 million, or 11%,
addition, the implementation of these systems will require migrate to current productand a revolving creditthe Company
ments of $1,298 million, versions. In addition, facility with
to $1,846 million, due primarily to a 13% increase in net
the Company to be without certain capabilities critical to faces risks to the extent million, which was availableservices,
banks aggregating $500 that suppliers of products, subject
revenues in the fourth quarter of fiscal 1998 as compared with
normal operation of its business (such as processing orders and systems purchased by covenants, and $694 million of
to compliance with certain the Company and others with
the corresponding period of 1997. Deferred tax assets and
and shipping product) for a period of time as the Company whom the Company transacts business on a worldwide basis
borrowings under available lines of credit to the Company’s
other current and noncurrent assets increased $240 million,
shifts to the new systems. There can be no assurance that this do not have business systemsOctober 16, 1997, the Company
international subsidiaries. On or products that comply with
or 35% to $920 million, due primarily to the timing of pay-
interruption in the use and availability of enterprise-wide the YearRegistration Statementthe extent that Sun is and
filed a 2000 requirements. To with the Securities not
ments for income and other taxes, and due to the recording of
information systems will not have a material adverse effect able to test technologyrelating toby third-party hardware or
Exchange Commission provided the registration for public
goodwill and other intangible assets related to the Company’s
on the Company’s business and operating results. In addition, software vendors, Sun is in the process of obtaining assur-
offering of senior and subordinated debt securities and
acquisitions. Accrued liabilities and other increased $185
to the extent that the Company encounters problems after ances from such vendors that their systems are Year 2000
common stock with an aggregate initial public offering price
million, or 30%, due in part to increases in sales and market-
introduction of these new systems and practices that prevent compliant. In the event any such third parties cannot, in a
of up to $1 billion. On October 24, 1997, the Registration
ing costs. Accounts payable increased $27 million, or 6% due
or limit their full utilization, there could be a material adverse timely manner, provide the Company with products, services,
Statement became effective, so that the Company may now
in part to additional operating expenses associated with
impact on the Company’s operating results. or systems that meet the Year 2000 requirements, the Com-
choose to offer, from time to time, the debt securities and
the expansions of business and corresponding increase in
pany’s operating results could be materially adversely effected.
Many currently installed computer systems and software common stock pursuant to Rule 415 in one or more separate
head count.
Although the Company believes that the cost of Year 2000
products are coded to accept only two digit entries in the date series, in amounts, at prices, and on terms to be set forth in
The Company’s investing activities used $1,169 million of modifications for both internal-use software and systems or
code field. As the year 2000 approaches, these code fields the prospectus contained in the Registration Statement and
cash in fiscal 1998, an increase of $625 million from the $544 the Company’s products are not material, there can be no
will need to accept four digit entries to distinguish years in one or more supplements to the prospectus. The Company
million used in fiscal 1997. The increase resulted primarily assurance that various factors relating to the Year 2000 com-
beginning with “19” from those beginning with “20.” As a believes that the liquidity provided by existing cash and short-
from payments made for additions to property, plant and pliance issues, including litigation, will not have a material
result, in less than two years, computer systems and/or term investment balances and the borrowing arrangements
equipment, and in connection with acquisitions. Additions to adverse effect on the Company’s business, operating results,
software products used by many companies may need to described above will provide sufficient capital to meet the
property, plant and equipment totaled $830 million, up $276 or financial position.
be upgraded to comply with such Year 2000 requirements. Company’s requirements through fiscal 1999. However the
million, or 50%, from fiscal 1997 additions, primarily due
The Company is currently expending resources to review its Company the 15 member countries of theresources is a signifi-
Eleven of believes the level of financial European Union are
to the real estate development of the Company’s facilities
products and services, as well as its internal-use software cant competitive factor in its industry ratesmay choose at
scheduled to establish fixed conversion and between their
and capital additions to support increased head count. The
in order to identify and modify those products, services, and any timesovereign currencies and the Euro,debt or equity
existing to raise additional capital through and to adopt
Company plans tonot Year $800 to $900 million duringassoci-
systems that are expend 2000 compliant. The costs fiscal financing to strengthen legal currencyposition, January 1,
the Euro as their common its financial effective facilitate
1999 with this effort are not incremental to theapproximately
ated related to fixed asset additions, including Company, but growth, and provide the trade on currency exchanges and be
1999. The Euro will then Company with additional flexibility
represent redeployment with the developmentTheadditional
$300 million associated of existing resources. of Company
to take advantage of business opportunities thatismay arise.
available for non-cash transactions. The Company currently
believes any modifications deemed necessary will be made expending resources to review and modify its products to
25

Consolidated Statements of Income
Years Ended June 30,
1998 1997 1996
(In thousands, except per share amounts)
Net revenues:
Products $8,603,259 $7,747,115 $6,392,358
Services 1,187,581 851,231 702,393
Total net revenues 9,790,840 8,598,346 7,094,751
Costs and expenses:
Cost of sales—products 3,972,283 3,790,284 3,468,416
Cost of sales—services 721,053 530,176 452,812
Research and development 1,013,782 825,968 653,044
Selling, general and administrative 2,777,264 2,402,442 1,787,567
Purchased in-process research
and development 176,384 22,958 57,900
Total costs and expenses 8,660,766 7,571,828 6,419,739
Operating income 1,130,074 1,026,518 675,012
Gain on sale of equity investment — 62,245 —
Interest income 47,663 39,899 42,976
Interest expense (1,571) (7,455) (9,114)
Income before income taxes 1,176,166 1,121,207 708,874
Provision for income taxes 413,304 358,787 232,486
Net income $ 762,862 $ 762,420 $ 476,388
Net income per common share—basic $ 2.04 $ 2.07 $ 1.28
Net income per common share—diluted $ 1.93 $ 1.96 $ 1.21
Shares used in the calculation of net income
per common share—basic 373,728 368,426 371,134
Shares used in the calculation of net income
per common share—diluted 394,274 388,967 393,380
See accompanying notes.
26

Consolidated Balance Sheets
At June 30,
1998 1997
(In thousands, except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 822,267 $ 660,170
Short-term investments 476,185 452,590
Accounts receivable, net of allowances of
$235,563 in 1998 and $196,091 in 1997 1,845,765 1,666,523
Inventories 346,446 437,978
Deferred tax assets 371,841 286,720
Other current assets 285,021 224,469
Total current assets 4,147,525 3,728,450
Property, plant and equipment:
Machinery and equipment 1,251,660 1,057,239
Furniture and fixtures 113,636 93,078
Leasehold improvements 256,233 166,745
Land and buildings 635,699 341,279
2,257,228 1,658,341
Accumulated depreciation and amortization (956,616) (858,448)
1,300,612 799,893
Other assets, net 262,925 168,931
$5,711,062 $4,697,274
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings $ 7,169 $ 100,930
Accounts payable 495,603 468,912
Accrued payroll-related liabilities 315,929 337,412
Accrued liabilities and other 810,562 625,600
Deferred service revenues 264,967 197,616
Income taxes payable 188,641 118,568
Note payable 40,000 —
Total current liabilities 2,122,871 1,849,038
Deferred income taxes and other obligations 74,563 106,299
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value, 10,000,000 shares
authorized; no shares issued and outstanding — —
Common stock, $0.00067 par value, 950,000,000 shares authorized;
issued: 430,311,441 shares in 1998 and 430,535,886 shares in 1997 288 288
Additional paid-in capital 1,345,508 1,229,797
Retained earnings 3,150,935 2,409,850
Treasury stock, at cost: 54,007,866 shares in 1998 and
60,050,380 shares in 1997 (1,003,191) (915,426)
Currency translation adjustment and other 20,088 17,428
Total stockholders’ equity 3,513,628 2,741,937
$5,711,062 $4,697,274
See accompanying notes.
27

Consolidated Statements of Cash Flows
Years Ended June 30,
1998 1997 1996
(In thousands)
Cash flows from operating activities:
Net income $ 762,862 $ 762,420 $ 476,388
Adjustments to reconcile net income to operating
cash flows:
Depreciation and amortization 439,921 356,003 294,541
Gain on sale of equity investment — (62,245) —
Tax benefit of options exercised 111,375 59,799 53,000
Purchased in-process research and development 176,384 22,958 57,900
Net increase in accounts receivable (176,075) (334,911) (160,238)
Net (increase) decrease in inventories 97,394 22,936 (135,742)
Net increase (decrease) in accounts payable (12,298) 143,845 17,275
Net increase in other current and non-current assets (206,210) (152,510) (43,701)
Net increase in other current and non-current liabilities 333,159 286,793 128,891
Net cash provided from operating activities 1,526,512 1,105,088 688,314
Cash flows from investing activities:
Additions to property, plant and equipment (830,143) (554,018) (295,638)
Acquisition of other assets (91,521) (37,645) ( 83,889)
Acquisition of short-term investments (958,354) (973,884) (1,301,798)
Maturities of short-term investments 523,032 634,765 1,424,324
Sales of short-term investments 432,047 347,771 228,377
Proceeds from sale of equity investment — 62,245 —
Payments for acquisitions, net of cash acquired (244,020) (22,958) (96,100)
Net cash used by investing activities (1,168,959) (543,724) (124,724)
Cash flows from financing activities:
Issuance of stock, net of employee repurchases 71,975 52,969 59,554
Acquisition of treasury stock (284,396) (456,090) (522,336)
Proceeds from employee stock purchase plans 93,581 81,313 54,840
Proceeds (reduction) of short-term borrowings, net (92,967) 51,769 (1,625)
Repayment of receivable purchase agreement — (125,000) —
Proceeds (reduction) of note payable and other 16,351 (35,009) (39,038)
Net cash used by financing activities (195,456) (430,048) (448,605)
Net increase in cash and cash equivalents 162,097 131,316 114,985
Cash and cash equivalents, beginning of year 660,170 528,854 413,869
Cash and cash equivalents, end of year $ 822,267 $ 660,170 $ 528,854
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 905 $ 15,126 $ 18,140
Income taxes $ 334,550 $ 380,814 $ 193,461
Supplemental schedule of non-cash investing and
financing activities:
In conjunction with the Company’s acquisitions,
liabilities were assumed as follows:
Fair value of assets acquired $ 301,415 — $ 101,500
Cash paid for assets (249,806) — (96,100)
Liabilities assumed $ 51,609 — $ 5,400
Stock issued in conjunction with acquisitions — — $ 19,012
See accompanying notes.
28

Consolidated Statements of Stockholders’ Equity
Common stock Treasury stock
Shares Amount Additional Retained Shares Amount Currency Total
Three years ended June 30, 1998 Paid-in Earnings Translation Stockholders’
Capital Adjustment Equity
(In thousands, except share amounts)
Balances at June 30, 1995 425,509,924 $ 72 $1,089,478 $1,205,483 (31,452,316) $ (206,067) $33,629 $2,122,595
Issuance of stock, net of
employee repurchases (40,468) — — (19,516) 14,561,928 131,493 — 111,977
Issuance of restricted stock 850,662 — 19,012 — — — — 19,012
Treasury stock purchased — — — — (37,465,488) (522,336) — (522,336)
Net income — — — 476,388 — — — 476,388
Tax benefit and other — — 55,859 — — — (12,009) 43,850
Balances at June 30, 1996 426,320,118 72 1,164,349 1,662,355 (54,355,876) (596,910) 21,620 2,251,486
Issuance of stock, net of
employee repurchases (10,000) — — (14,710) 10,378,115 137,574 — 122,864
Treasury stock purchased — — — — (16,072,619) (456,090) — (456,090)
Exercise of warrants 4,225,768 1 1,611 — — — — 1,612
Net income — — — 762,420 — — — 762,420
Tax benefit and other — — 63,837 — — — (4,192) 59,645
Issuance of common
stock dividend — 215 — (215) — — — —
Balances at June 30, 1997 430,535,886 288 1,229,797 2,409,850 (60,050,380) (915,426) 17,428 2,741,937
Issuance of stock, net of
employee repurchases (224,445) — (2) (21,777) 12,638,384 196,631 — 174,852
Treasury stock purchased — — — — (6,595,870) (284,396) — (284,396)
Net income — — — 762,862 — — — 762,862
Tax benefit and other — — 115,713 — — — 2,660 118,373
Balances at June 30, 1998 430,311,441 $288 $1,345,508 $3,150,935 (54,007,866) $(1,003,191) $20,088 $3,513,628
See accompanying notes.
29

Notes to Consolidated Financial Statements
Realized and unrealized gains and losses are computed on
1. Summary of Significant Accounting Policies
the specific identification method based upon actual and
DESCRIPTION OF BUSINESS
quoted market prices, respectively. Unrealized holding gains
Sun Microsystems, Inc. (the Company or Sun) is a supplier of
and losses on available-for-sale securities are carried net
network computing products including workstations, servers,
of tax as a separate component of stockholders’ equity in
software, microprocessors, and a full range of services and
“currency translation adjustment and other.” The change in
support. The Company markets its products primarily to busi-
net unrealized gains and losses in investments, net of income
ness, government, and education customers. The Company
taxes, included in stockholders’ equity at June 30, 1998 and
operates in a single industry segment across geographically
1997, was not material.
diverse markets.
INVENTORIES
BASIS OF PRESENTATION
Inventories are stated at the lower of cost (first in, first out)
The consolidated financial statements include the accounts
or market (net realizable value). Given the volatility of the
of Sun and its wholly-owned subsidiaries. Intercompany
market for the Company’s products, the Company makes
accounts and transactions have been eliminated. Certain
inventory write downs for potentially excess and obsolete
amounts from prior years have been reclassified to conform
inventory based on backlog and forecast demand. However,
to current year presentation.
such backlog and forecast demand is subject to revisions,
The preparation of financial statements in conformity with cancellations, and rescheduling. Actual demand will
generally accepted accounting principles requires manage- inevitably differ from such backlog and forecast demand, and
ment to make estimates and assumptions that affect the such differences may be material to the financial statements.
amounts reported in the financial statements and accompa- Inventories consist of:
nying notes. Actual results could differ from those estimates. At June 30,
1998 1997
(In thousands)
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents consist primarily of highly liquid invest- Raw materials $ 92,197 $236,900
ments with insignificant interest rate risk and original Work in progress 58,765 50,577
maturities of three months or less at the date of acquisition. Finished goods 195,484 150,501
Short-term investments consist primarily of time deposits, Total $346,446 $437,978
commercial paper, floating rate notes, tax exempt securities,
and foreign debt with original maturities beyond three
months. The Company’s policy is to protect the value of its PROPERTY, PLANT AND EQUIPMENT
investment portfolio and minimize principal risk by earning Property, plant and equipment are stated at cost. Depre-
returns based on current interest rates. ciation and amortization are provided principally on the
straight-line method. Depreciation of fixed assets is generally
The Company accounts for investments in accordance with
calculated for machinery and equipment, furniture and
Financial Accounting Standards No. 115, (FAS 115) “Account-
fixtures, and buildings based upon useful lives of one to
ing for Certain Investments in Debt and Equity Securities. ”
five years, five years and twenty-five years, respectively.
Under FAS 115, debt securities that the Company does not
Leasehold improvement useful lives are the shorter of five
have the positive intent and ability to hold to maturity
years or the applicable lease term.
and all marketable equity securities are classified as either
trading or available-for-sale and are carried at fair market
OTHER ASSETS
value. All of the Company’s cash equivalents and short-term
Included in other assets are purchased technology rights,
investments are classified as available-for-sale at June 30,
other intangibles, and spare parts that are amortized using
1998 and 1997.
the straight line method over their useful lives ranging from
six months to seven years. Amortization expense for fiscal
30

1998, 1997, and 1996 was $41.8 million, $26.6 million, and on foreign currency option contracts that are designated
$13.4 million, respectively. The Company evaluates the recov- as hedges on anticipated transactions are deferred until
erability of intangibles on a quarterly basis. the designated net sales are recorded. Option contracts
that would result in losses if exercised are allowed to expire.
CURRENCY TRANSLATION
The Company uses forward foreign exchange contracts that
Sun translates the assets and liabilities of international non-
are designated to reduce a portion of its exposure to foreign
U.S. functional currency subsidiaries into dollars at the rates
currency risk from operational and balance sheet exposures
of exchange in effect at the end of the period. Revenues and
resulting from changes in foreign currency exchange rates.
expenses are translated using rates that approximate those
Such exposures result from the portion of the Company’s
in effect during the period. Gains and losses from currency
operations, assets, and liabilities that are denominated
translation are included in stockholders’ equity in the
in currencies other than the functional currency of the
consolidated balance sheets. Currency transaction gains
legal entity in which the contracts are entered, including
or losses are recognized in current operations and have
local currency denominated assets and liabilities in U.S.
not been significant to the Company’s operating results in
dollar functional currency entities. Forward contracts are
any period.
accounted for on a mark-to-market basis with realized and
OTHER FINANCIAL INSTRUMENTS unrealized gains or losses recognized currently. Discounts
The Company enters into interest-rate swap agreements to or premiums are recognized into income over the life of the
modify the interest characteristics of its outstanding long- contract. Amounts receivable and payable on certain forward
term debt. An interest-rate swap agreement is designated foreign exchange contracts are recorded as other current
as a hedge and its effectiveness is determined by matching assets or accrued liabilities, respectively.
principal balance and terms with that of a specific debt oblig-
The Company does not use derivative financial instruments
ation. Such an agreement involves the exchange of amounts
for speculative trading purposes, nor does it hold or issue
based on a fixed interest rate for amounts based on variable
leveraged derivative financial instruments.
interest rates over the life of the agreement without an
REVENUE RECOGNITION
exchange of the notional amount upon which payments are
Sun generally recognizes revenue from hardware and
based. The differential to be paid or received as interest rates
software sales at the time of shipment, with allowances
change is accrued and recognized as an adjustment of inter-
established for price protection, cooperative marketing
est expense related to the debt (the accrual method of
programs with distributors, and estimated product returns.
accounting). The related amount payable to or receivable
When significant obligations remain after products are
from counterparties is included in accrued liabilities or other
delivered, revenue is only recognized after such obligations
assets, respectively.
are fulfilled. Service revenues are recognized ratably over
The Company purchases foreign currency option contracts
the contractual period or as the services are provided.
that effectively enable it to sell currencies expected to be
received as a result of certain of its foreign currency denomi- ADVERTISING COSTS
nated sales during the ensuing quarter at specified dollar Advertising costs are charged to expense when incurred.
amounts. The option contracts, which have only nominal Advertising expenses were $235 million, $272 million, and $168
intrinsic value at the time of purchase, are denominated in million for fiscal years 1998, 1997, and 1996, respectively.
the same foreign currency in which sales are expected to be
SELF-INSURANCE
denominated. These contracts are designated and effective
The Company is self-insured up to specific levels for certain
as hedges of a portion of probable foreign currency exposure
liabilities. Accruals are provided each year based on historical
on anticipated net sales transactions during the next quarter,
claim costs and include estimated amounts for incurred but
which otherwise would expose the Company to foreign
not reported claims. The Company maintains stop loss cover-
currency risk. Premiums related to option contracts are
age with third-party insurance companies to cover aggregate
recognized into income over the life of the contract. Gains
annual losses in excess of $25 million.
31

Notes to Consolidated Financial Statements
WARRANTY
The Company provides currently for the estimated costs that
may be incurred under warranties for product shipped.
Included in the balance sheet caption “Accrued liabilities and
other” is an accrued warranty liability of $115.5 million and
$87.9 million at June 30, 1998 and 1997, respectively.
NET INCOME PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued
Financial Accounting Standards No. 128 (FAS 128), “Earnings
Per Share” which replaced the calculation of primary and
fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Dilutive earnings per
share is very similar to the previously reported fully diluted
earnings per share. The Company adopted FAS 128 in the
second quarter of fiscal 1998. Share and per share amounts
for all periods presented have been restated to comply with
FAS 128. Years Ended June 30,
1998 1997 1996
(In thousands, except per share amounts)
Net income $762,862 $762,420 $476,388
Shares used to compute net income per common share—basic 373,728 368,426 371,134
Effect of dilutive securities, options and warrants 20,546 20,541 22,246
Shares used to compute net income per common share—diluted 394,274 388,967 393,380
Net income per common share—basic $ 2.04 $ 2.07 $ 1.28
Net income per common share—diluted $ 1.93 $ 1.96 $ 1.21
customers in diversified industries as well as to a network of
CONCENTRATION OF CREDIT RISK
resellers. The Company performs ongoing credit evaluations
Financial instruments that potentially subject the Company
of its customers’ financial condition and limits the amount of
to concentrations of credit risk consist principally of invest-
credit extended when deemed necessary but generally
ment securities, foreign exchange contracts, and interest rate
requires no collateral. In fiscal 1998 the Company provided
instruments as well as trade receivables. The counterparties
approximately $23 million for doubtful accounts ($20 million
to the agreements relating to the Company’s investment
and $11 million in 1997 and 1996, respectively).
securities, foreign exchange contracts, and interest rate
instruments consist of various major corporations and finan- STOCK DIVIDEND
cial institutions of high credit standing. The Company does
The Company effected a two-for-one stock split (effected in
not believe there is significant risk of non-performance
the form of a stock dividend) to stockholders of record as of
by these counterparties because the Company limits the
the close of business on November 18, 1996. Share and per
amount of credit exposure to any one financial institution
share amounts presented have been adjusted to reflect the
and any one type of investment. The credit risk on receiv-
stock dividend.
ables due from counterparties related to foreign exchange
STOCK-BASED COMPENSATION
and currency option contracts is immaterial at June 30, 1998
As permitted by Financial Accounting Standards No. 123
and 1997. The Company’s receivables are derived primarily
(FAS 123), “Accounting for Stock-Based Compensation,” the
from sales of hardware and software products and services to
32

Company measures compensation expense for its stock- In 1998, the AICPA issued SOP 98-1, “Accounting for the Costs
based employee compensation plans using the intrinsic of Computer Software Developed or Obtained for Internal
method prescribed by APB No. 25 “Accounting for Stock Use.” SOP 98-1 is effective for fiscal years beginning after
Issued to Employees,” and has provided in Note 8 pro forma December 15, 1998 with early adoption permitted. The Com-
disclosures of the effect on net income and net income per pany has not yet completed its assessment of the impact of
common share as if the fair value-based method prescribed by SOP 98-1 on the Company’s consolidated financial position or
FAS 123 had been applied in measuring compensation expense. results of operations and may adopt SOP 98-1 in fiscal 1999.
LONG-LIVED ASSETS 2. Acquisitions
The Company reviews its long-lived assets for impairment
During fiscal 1998, 1997, and 1996, the Company acquired
whenever events or changes in circumstances indicate that
all of the outstanding securities of a total of six technology
the carrying amount of an asset may not be recoverable.
companies (Diba, Inc.; Integrity Arts, Inc.; Red Cape Software,
OTHER RECENT PRONOUNCEMENTS Inc.; Long View Technologies, LLC.; Integrated Micro Products,
plc; and Lighthouse Design, Ltd.) and acquired the assets
The Company intends to adopt Financial Accounting
of two other technology companies (Chorus Systems, S.A.
Standards No. 130 (FAS 130), “Reporting Comprehensive
and the storage products business of Encore Computer
Income” and Financial Accounting Standards No. 131
Corporation), in separate transactions. These companies
(FAS 131), “Disclosures About Segments of an Enterprise
were principally engaged in the development and/or sale of
and Related Information” in fiscal 1999. Both will require
additional disclosure but will not have a material effect on software and hardware products. The aggregate considera-
the Company’s consolidated financial position or results of tion for all transactions was approximately $404 million in
operations. FAS 130 will be reflected in the Company’s first cash, 850,000 shares of common stock, and the assumption
quarter of 1999 interim financial statements. Components of of certain liabilities. Sun has a payment due in fiscal 1999
comprehensive income for the Company include items such of $35 million related to the Encore Computer Corporation
as net income and changes in the value of available-for-sale transaction. These transactions were accounted for as
securities. FAS 131 requires segments to be determined purchases. The excess purchase price over the estimated fair
based upon how management measures performance and value of the net tangible assets acquired was allocated,
makes decisions about allocating resources. FAS 131 will first based upon independent third-party valuations, to various
be reflected in the Company’s 1999 Annual Report. intangible assets, primarily consisting of purchased in-process
research and development and goodwill. In connection with
In 1998, Financial Accounting Standards No. 133 (FAS 133),
these acquisitions, purchased in-process research and devel-
“Accounting for Derivative Instruments and Hedging Activities”
opment of approximately $176.4 million, $23 million, and $57.9
was issued and is effective for fiscal years commencing after
million, associated with products which had not achieved
June 15, 1999. The Company will comply with the require-
technological feasibility and for which no alternative future
ments of FAS 133 in fiscal year 2000 and does not expect
uses were established by the Company, was written off in
the adoption of FAS 133 will be material to the Company’s
1998, 1997, and 1996, respectively. Intangible assets, includ-
consolidated results of operations.
ing goodwill, are being amortized over their estimated useful
In 1997, the American Institute of Certified Public Accountants
lives, generally three years. The results of operations of each
(AICPA) issued Statement of Position (SOP) 97-2, “Software
company acquired from the dates of acquisition are included
Revenue Recognition.” SOP 97-2 establishes standards relat-
in the Company’s consolidated statements of income and are
ing to the recognition of all aspects of software revenue. SOP
not material to the Company.
97-2, as amended by SOP 98-4 “Deferral of the Effective Date
On June 30, 1998, the Company entered into an Agreement
of a Provision of SOP 97-2, Software Revenue Recognition, ”
and Plan of Reorganization (Merger Agreement) with
is effective for all transactions entered into in fiscal years
NetDynamics, Inc. (NetDynamics). Upon the effectiveness of
beginning after December 15, 1997. The Company will comply
the Merger Agreement, NetDynamics’ shareholders will
with the requirements of SOP 97-2, as amended by SOP 98-4,
exchange all of their shares of common stock and preferred
in fiscal year 1999. The Company has not yet completed
stock for shares of common stock of Sun at an agreed-upon
its assessment of the impact of SOP 97-2, as amended by SOP
exchange ratio. See Footnote 12 “Subsequent Events.”
98-4, on the Company’s consolidated results of operations.
33

Notes to Consolidated Financial Statements
3. Fair Value of Financial Instruments
Fair values of cash and cash equivalents and short-term
investments approximate cost due to the short period of time
to maturity. The fair value of long-term debt is estimated
based on current interest rates available to the Company
for debt instruments with similar terms, degrees of risk, and
remaining maturities. The estimated fair value of forward
foreign exchange contracts is based on the estimated
amount at which they could be settled based on market
exchange rates. The fair value of foreign currency option
contracts and the interest-rate swap agreement is obtained
from dealer quotes and represents the estimated amount the
Company would receive or pay to terminate the agreements.
However, considerable judgment is required in interpreting
market data to develop the estimates of fair value. Accord-
ingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in
a current market exchange.
The fair value of the Company’s cash equivalents and short-
term investments is as follows:
At June 30, 1998
Cost Gross Gross Estimated
Unrealized Unrealized Fair Value
Gains Losses
(In thousands)
State and local government debt $ 94,843 $ 22 $ 11 $ 94,854
Corporate and other non-governmental debt 421,573 — — 421,573
U.S. government debt 53,474 74 — 53,548
Floating rate notes 99,460 — — 99,460
Money market fund 97,900 — — 97,900
Other investments 16,599 — — 16,599
Total $783,849 $ 96 $ 11 $783,934
At June 30, 1997
Cost Gross Gross Estimated
Unrealized Unrealized Fair Value
Gains Losses
(In thousands)
State and local government debt $120,579 $ 16 $ 56 $120,539
Corporate and other non-governmental debt 282,240 5 89 282,156
U.S. government debt 85,628 233 13 85,848
Floating rate notes 45,870 — — 45,870
Foreign debt 15,026 24 — 15,050
Money market fund 119,600 — — 119,600
Other investments 27,500 — — 27,500
Total $ 696,443 $278 $158 $696,563
34

The cost and estimated fair values of cash equivalents
and short-term investments by contractual maturity are
as follows:
Cash equivalents and short-term At June 30, 1998
investments Cost Estimated
Fair Value
(In thousands)
Maturing in one year or less $684,389 $684,474
Maturing after one year 99,460 99,460
Total $783,849 $783,934
The fair value of the Company’s borrowing arrangements and
other financial instruments is as follows: At June 30, 1998 At June 30, 1997
Asset (Liability) Asset (Liability)
Carrying Fair Carrying Fair
Amount Value Amount Value
(In thousands)
10.18% mortgage loan $(40,000) $(41,495) $ (40,000) $ (42,541)
Forward foreign exchange contracts 4,265 4,265 (2,861) (2,861)
Foreign currency option contracts — 7,531 — 1,262
Short-term borrowings (7,169) (7,169) (100,930) (100,930)
Interest-rate swap agreement — 292 — 196
4. Derivative Financial Instruments At June 30, 1998 and 1997, the Company had forward foreign
exchange contracts of less than three months duration, to
Outstanding notional amounts for derivative financial instru-
exchange principally Japanese yen, British pounds sterling,
ments were as follows:
At June 30,
French francs, and German marks for U.S. dollars in the total
1998 1997
(In thousands) gross notional amounts of $930 million and $857 million,
respectively. Of these notional amounts, forward contracts
Swap hedging debt $ 40,000 $ 40,000
to purchase foreign currency represented $139 million and
Forward foreign exchange
$128 million and forward contracts to sell foreign currency
contracts 930,155 856,979
represented $791 million and $729 million, at June 30, 1998
Foreign currency option
and 1997, respectively. The Company also has purchased
contracts 241,861 254,182
foreign currency options of less than two months duration, to
exchange principally Japanese yen, British pounds sterling,
While the contract or notional amounts provide one French francs, and German marks for U.S. dollars.
measure of the volume of these transactions, they do not
5. Borrowing Arrangements
represent the amount of the Company’s exposure to credit
The Company has a $40 million mortgage loan which is
risk. The amounts potentially subject to credit risk (arising
secured by real property and a building and is included in
from the possible inability of counterparties to meet the
note payable and other obligations at June 30, 1998 and 1997,
terms of their contracts) are generally limited to the
respectively. Principal is due to the bank at maturity on May
amounts, if any, by which the counterparties’ obligations
18, 1999, with interest payable semiannually, in arrears. The
exceed the obligations of the Company. The Company
loan agreement provides for interest at a fixed interest rate
controls credit risk through credit approvals, limits, and mon-
of 10.18%. However, the Company has an interest-rate swap
itoring procedures. Credit rating criteria for off balance sheet
agreement with a third party (receive fixed, pay variable)
transactions are similar to those for investments. See addi-
that results in the Company paying a rate based on three-
tional information at “Other financial instruments” contained
month LIBOR, which was 5.625% at June 30, 1998. The interest-
in Footnote 1.
rate swap agreement matures with the loan agreement.
35

Notes to Consolidated Financial Statements
In August 1997, the Company negotiated a $500 million unse-
cured revolving credit agreement with an international
group of 20 banks. The agreement expires on August 28,
2002. Any borrowings under this agreement bear interest at
a floating rate based on prime, certificates of deposit, or
Eurodollar rates, at the Company’s option. Under the agree-
ment, Sun is required to maintain various financial ratios.
Sun was in compliance with all covenants at June 30, 1998.
There were no borrowings under this facility at June 30, 1998.
At June 30, 1998, Sun’s international subsidiaries had uncom-
mitted lines of credit aggregating approximately $694
million, of which approximately $7 million, denominated in
Japanese yen, had been drawn. The average interest rate at
June 30, 1998 was 0.89%.
On October 16, 1997, the Company filed a Registration State-
ment with the Securities and Exchange Commission relating
to the registration for public offering of senior and subordi-
nated debt securities and common stock with an aggregate
initial public offering price of up to $1 billion. On October 24,
1997, the Registration Statement became effective, so that
the Company may now choose to offer, from time to time,
the debt securities and common stock pursuant to Rule 415
in one or more separate series, in amounts, at prices, and
on terms to be set forth in the prospectus contained in the
Registration Statement and in one or more supplements to
the prospectus.
6. Income Taxes
Income before income taxes and the provision for income
taxes consist of the following:
Years Ended June 30,
1998 1997 1996
(In thousands)
Income before income taxes:
United States $ 589,387 $ 566,554 $291,126
Foreign 586,779 554,653 417,748
Total income before income taxes $1,176,166 $1,121,207 $708,874
Provision for income taxes:
Current:
United States federal $ 349,095 $ 303,537 $146,351
State 47,270 46,894 16,192
Foreign 106,192 67,234 67,959
Total current income taxes 502,557 417,665 230,502
Deferred:
United States federal (81,319) (66,027) (10,419)
State (6,492) (5,231) 1,178
Foreign (1,442) 12,380 11,225
Total deferred income taxes (89,253) (58,878) 1,984
Provision for income taxes $ 413,304 $ 358,787 $232,486
36

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 the
Company’s deferred tax liabilities and assets are as follows:
At June 30,
1998 1997
(In thousands)
Deferred tax assets:
Inventory valuation $ 67,006 $ 66,057
Reserves and other accrued expenses 165,724 115,722
Fixed asset basis differences 81,926 63,717
Compensation not currently deductible 41,407 38,979
State income taxes 15,468 21,926
Other 68,687 33,901
Gross deferred tax assets 440,218 340,302
Deferred tax liabilities:
Net undistributed profits of subsidiaries (124,777) (112,758)
Other 428 (928)
Gross deferred tax liabilities (124,349) (113,686)
Net deferred tax assets $315,869 $226,616
The provision for 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 are as follows:
Years Ended June 30,
1998 1997 1996
(In thousands)
Expected tax rate at 35% $411,658 $392,423 $ 248,106
State income taxes, net of federal tax benefit 26,506 27,081 11,291
Foreign earnings permanently reinvested in
foreign operations (49,600) (63,550) (36,580)
Acquired in-process research and development 25,194 — 5,690
Other (454) 2,833 3,979
Provision for income taxes $413,304 $358,787 $232,486
As of June 30, 1998, the Company has unrecognized deferred
tax liabilities of approximately $173 million related to cumu-
lative net undistributed earnings of foreign subsidiaries
of approximately $559 million. These earnings are consid-
ered to be permanently invested in operations outside the
United States.
37

Notes to Consolidated Financial Statements
The current federal and state provisions do not reflect the Common Shares, each Right not held by the Acquiring Person
tax savings resulting from deductions associated with the will entitle the holder to purchase for the exercise price that
Company’s various stock option plans. These savings (in number of Common Shares having market value equal to two
thousands) were $111,375, $59,799, and $53,000 in fiscal times the exercise price. In the event that (i) the Company is
1998, 1997 and 1996, respectively, and were credited to acquired in a merger or business combination in which the
stockholders’ equity. Company is not the surviving corporation or in which the
Common Shares are exchanged for stock or assets of another
The Company’s United States income tax returns for fiscal
entity, or (ii) 50% or more of the Company’s consolidated
years ended June 30, 1988 through 1996, are under examina-
assets or earning power is sold, each Right not held by an
tion, and the Internal Revenue Services has proposed certain
Acquiring Person will entitle the holder to purchase for the
adjustments. Management believes that adequate amounts
exercise price that number of shares of common stock of the
have been provided for any adjustments that may ultimately
acquiring company having a market value equal to two times
result from these examinations.
the exercise price. The Rights are redeemable, in whole but
7. Commitments not in part, at the Company’s option, at $0.01 per Right at
The Company leases certain facilities and equipment under any time prior to becoming exercisable and in certain other
noncancelable operating leases. The future minimum annual circumstances. The Rights expire on February 11, 2008.
lease payments are approximately $132 million, $114 mil-
STOCK OPTION AND INCENTIVE PLANS
lion, $86 million, $69 million, and $52 million for fiscal years
The Company’s 1990 Long-Term Equity Incentive Plan
1999, 2000, 2001, 2002, and 2003, respectively, and approxi-
(“1990 Incentive Plan”) and other employee stock option
mately $175 million for years following fiscal 2003. Rent
plans provide the Board of Directors broad discretion in
expense under the noncancelable operating leases was $139
creating employee equity incentives and authorize it to grant
million in 1998, $113 million in 1997, and $99 million in 1996.
incentive and non-statutory stock options as well as certain
8. Stockholders’ Equity other awards. In addition, these plans provide for issuance to
COMMON STOCK eligible employees of non-statutory stock options to purchase
common stock at or below fair market value at the date of
The Company has adopted a share purchase rights plan to
grant subject to certain limitations set forth in the 1990
protect stockholders’ rights in the event of a proposed
Incentive Plan. Options expire up to ten years from the date
takeover of the Company. Under the plan, a preferred share
of grant or up to three months following termination
purchase right (a “Right”) is associated with each share of
of employment or service on the Board, whichever occurs
the Company’s common stock (a “Common Share”). Upon
earlier, and are exercisable at specified times prior to such
becoming exercisable, each Right will entitle its holder to
expiration. Under the 1990 Incentive Plan, common stock
purchase 1/1000th of a share of Series A participating pre-
may also be issued pursuant to stock purchase agreements
ferred stock of the Company, a designated series of preferred
that grant Sun certain rights to repurchase the shares at
stock for which each 1/1000th of a share has economic attrib-
their original issue price in the event that the employment of
utes and voting rights equivalent to one Common Share at an
the employee is terminated prior to certain predetermined
exercise price of $300, subject to adjustment. The Rights
vesting dates. The above described plans provide that shares
are not exercisable or transferable apart from the Common
of common stock may be sold at less than fair market value,
Shares unless certain events occur, including a public
which results in compensation expense equal to the differ-
announcement that a person or group (an “Acquiring
ence between the market value on the date of grant and
Person”) has acquired or obtained the right to acquire 10% or
the purchase price. This expense, which is immaterial, is
more (20% or more for an Acquiring Person who has filed a
recognized over the vesting period of the shares. Sun’s 1988
Schedule 13G in accordance with the Securities Act of 1934
Directors’ Stock Option Plan provides for the automatic grant
(“13G Filer”)) of the outstanding Common Shares or until the
of stock options to non-employee directors at each annual
commencement or announcement of an intention to make a
meeting of stockholders and on the date each such person
tender or exchange offer for 10% or more of the outstanding
becomes a director. These options are granted at fair market
Common Shares. Unless the Rights are redeemed, in the
value on the date of grant and have a term of five years.
event that an Acquiring Person acquires 10% or more (20% or
Finally, in connection with the fiscal 1996 acquisition of
more if the Acquiring Person is a 13G Filer) of the outstanding
38

Lighthouse Design, Ltd., former shareholders who are
employees of the Company were entitled to receive up to
approximately 650,000 shares of stock upon achievement of
specific performance criteria over a three year period. Of this
amount, approximately 325,000 shares have vested.
Information with respect to stock option and stock purchase
rights activity is as follows:
Outstanding Options/Rights
Shares Number Price per Share Weighted
Available of Shares Average
for Grant Exercise Price
(In thousands, except per share amounts)
Balance at June 30, 1995 4,684 49,248 $ 0.0025 – $12.282 $ 6.84
Additional shares reserved 49,040 — — —
Grants (12,886) 12,886 $ 0.00034 – $30.125 $20.25
Exercises — (9,762) $ 0.00034 – $19.5 $ 6.78
Cancellations 4,440 (4,616) $ 0.005 – $30.125 $ 7.64
Balance at June 30, 1996 45,278 47,756 $ 0.005 – $30.125 $10.84
Additional shares reserved 300 — — —
Grants (13,289) 13,289 $0.00067 – $33.9375 $26.90
Exercises — (7,367) $ 0.01 – $30.125 $ 6.99
Cancellations 1,840 (2,319) $ 0.01 – $33.375 $13.32
Balance at June 30, 1997 34,129 51,359 $0.00067 – $33.9375 $15.44
Additional shares reserved 5,172 — — —
Grants (14,881) 14,881 $ 0.0006 – $47.3750 $37.81
Exercises — (9,263) $ 0.0006 – $33.9375 $ 8.53
Cancellations 1,991 (1,991) $ 1.350 – $47.3750 $21.25
Balance at June 30, 1998 26,411 54,986 $0.00067 – $47.3750 $22.28
The following table summarizes significant ranges of out-
standing and exercisable options at June 30, 1998:
Outstanding Options Options Exercisable
Shares Weighted Weighted Shares Weighted
Average Average Average
Remaining Exercise Exercise
Life in Years Price Price
$0.0007 – $5.00 2,247,449 5.4 $ 4.4713 1,407,509 $ 4.6831
$5.0001 – $10.00 16,491,580 4.6 $ 7.4620 8,415,847 $ 7.2509
$10.0001 – $15.00 2,222,150 5.0 $11.5499 581,070 $11.6474
$15.0001 – $20.00 1,699,320 5.4 $19.5000 485,520 $19.5000
$20.0001 – $25.00 7,245,162 6.2 $23.6803 1,864,404 $23.5609
$25.0001 – $30.00 9,075,495 6.6 $27.1952 1,641,853 $27.1933
$30.0001 – $40.00 5,040,863 7.3 $32.9105 559,492 $31.9555
$40.0001 – $45.00 10,302,247 8.1 $40.5786 — $ —
$45.0001 – $47.3750 661,500 7.2 $46.8873 4,240 $47.3750
54,985,766 6.1 $22.2831 14,959,935 $12.7343
39

Notes to Consolidated Financial Statements
At June 30, 1998, options to purchase approximately In August 1996, the Board of Directors approved a systematic
14,960,000 shares were exercisable at prices from $0.8496 common stock repurchase program related to the 1990 Long-
to $47.3750 with a weighted average and aggregate exercise Term Equity Incentive Plan. In fiscal 1998, the Company
price of $12.7343 and $190,505,000, respectively, (11,143,000 repurchased 3,654,230 shares at a cost of approximately $157
shares at an aggregate price of $101,264,000 at June 30, million under this program (4,248,729 shares at a cost of
1997). At June 30, 1998, the Company retains repurchase approximately $132 million in 1997).
rights to 1,003,536 shares issued pursuant to stock purchase When the treasury shares are reissued, any excess of the
agreements and other stock plans. average acquisition cost of the shares over the proceeds from
The weighted average fair value at date of grant for options reissuance is charged to retained earnings.
granted during 1998, 1997, and 1996 were $26.179, $17.873,
STOCK-BASED COMPENSATION
and $11.517 per option, respectively.
The Company has elected to follow Accounting Principles
EMPLOYEE STOCK PURCHASE PLAN Board (APB) Opinion No. 25, “Accounting for Stock Issued
To provide employees with an opportunity to purchase to Employees,” and related interpretations, which require
common stock of Sun through payroll deductions, Sun compensation expense for options to be recognized when
established the 1990 Employee Stock Purchase Plan. Under the market price of the underlying stock exceeds the exercise
this plan, Sun’s employees, subject to certain restrictions, price on the date of grant.
may purchase shares of common stock at 85% of the fair Financial Accounting Standards No. 123 (FAS 123), “Account-
market value at either the date of enrollment or the date ing for Stock-Based Compensation, permits companies to
”
of purchase, whichever is less. Pursuant to this plan, the recognize as expense over the vesting period the fair value
Company issued approximately 3,505,046, 2,928,689, and of all stock-based awards on the date of grant. In manage-
4,714,000 shares of common stock in fiscal 1998, 1997, and ment’s opinion, the existing stock option valuation models
1996, respectively. At June 30, 1998, approximately 19,730,799 do not necessarily provide a reliable single measure of the
shares remained available for future issuance. fair value of stock-based awards. Therefore, as permitted, the
Company will continue to apply the existing accounting rules
COMMON STOCK REPURCHASE PROGRAMS
under APB No. 25 and provide pro forma net income and pro
In December 1990, the Board of Directors approved a system-
forma net income per common share disclosures for stock-
atic common stock repurchase program related to the 1990
based awards made during the year as if the fair-value-
Employee Stock Purchase Plan. In fiscal 1998, the Company
based method defined in FAS No. 123 had been applied. For
repurchased 2,941,640 shares at a cost of approximately
employee stock options, the fair value of the stock options
$127 million under this program (2,919,632 shares at a cost
was estimated as of the date of grant using the Black-Scholes
of approximately $88 million in 1997).
option pricing model. Input variables used in the model
In June 1995, the Board of Directors approved a plan to repur-
include a weighted average risk-free interest rate using the
chase approximately 48 million shares of the Company’s
7.75 year Treasury Yield as of the date of grant, ranging from
common stock. In July and August 1996, the Company repur-
5.38% to 6.37% for fiscal year 1998.
chased 8,904,258 shares at a cost of approximately $236
million under this program.
40

The fair value of options at the date of grant was estimated
using the Black-Scholes model with the following weighted
Years Ended June 30,
average assumptions:
1998 1997 1996
Expected life 7.8 8.1 7.7
Interest rate 5.73% 6.06% 6.36%
Volatility 49.60% 46.60% 57.99%
Dividend yield — — —
For the Employee Stock Purchase Plan, the fair value of
the stock was calculated using actuals for the plans expiring
during the year. For plans expiring after year end, the fair
value was calculated using estimated shares to be purchased
and estimated purchase price.
Stock based compensation costs would have reduced pretax
income by $132,985,000, and $76,033,000, and$35,116,000 in
income by $132,985,000, $76,033,000, and $35,116,000
1998, 1997, and 1996, respectively, ($89,374,000, $51,703,000,
and $23,879,000 after taxes, and $.17,$.08, and $.05 per diluted
$23,879,000 after tax, and $.17, $.08, and $.05
share) if the fair values of the options granted in that year
had been recognized as compensation expense on a straight
line basis over the vesting period of the grant. The pro forma
effect on net income for 1998 and 1997 is not representative
net income for 1998, 1997, and 1996 is not repre-
sentative offorma effect on net incomeincome in the future
of the pro the pro forma effect on net in the future years
years because it does not take into considerationpro forma
because it does not take into consideration pro forma
compensation expense related to grants made prior to 1996.
Pro forma net income and net income per common share are
forma net income and income per share are as follows:
as follows:
Years Ended June 30,
1998 1997 1996
(In thousands, except per share amounts)
Pro forma net income $673,488 $710,717 $452,509
Basic:
Pro forma shares used in the calculation of pro
forma net income per common share 373,728 368,426 371,134
Pro forma net income per common share $ 1.80 $ 1.93 $ 1.22
Diluted:
Pro forma shares used in the calculation of pro
forma net income per common share 383,377 377,288 390,390
Pro forma net income per common share $ 1.76 $ 1.88 $ 1.16
9. Industry Segment, Geographic, 14% of revenues. No customer accounted for 10% or more
and Customer Information
9. Industry Segment, Geographic, 14% of revenues. No customer accounted for 10% of Sun’s
of revenues in fiscal 1997 or 1996. Operations or more
and Customer Information of revenues in fiscal consistor 1996. Operations of Sun’s
overseas subsidiaries 1997 of sales, service, distribution,
Sun, which operates in a single industry segment, designs,
overseas subsidiaries consist of sales, service, distribution,
and manufacturing.
Sun, which operates in and services network computing sys-
manufactures, markets, a single industry segment, designs,
and manufacturing.
manufactures, markets, and that feature networked desktops
tems and software solutions services network computing sys- Intercompany transfers between geographic areas are
temsservers. In fiscal 1998, one customer accounted for
and and software solutions that feature networked desktops Intercompany transfers that approximate arm’s length
accounted for at prices between geographic areas are
and servers. In fiscal 1998, one customer accounted for accounted for at prices that approximate arm’s length
41

Notes to Consolidated Financial Statements
transactions. In addition, United States export sales approxi-
mated 2.3%, 3.0%, and 3.8% of net revenues during fiscal
1998, 1997, and 1996, respectively.
Information regarding geographic areas at June 30, 1998,
1997, and 1996, and for each of the years then ended, is
as follows: Geographic Area
United Europe Japan Rest of Eliminations Total
States World
(In thousands)
June 30, 1998, and for
the year then ended:
Sales to unaffiliated customers $5,349,634 $2,708,514 $ 899,029 $833,663 $ — $9,790,840
Intercompany transfers 969,752 1,938,940 17,609 45,652 (2,971,953) —
Net revenues $6,319,386 $4,647,454 $ 916,638 $879,315 $(2,971,953) $9,790,840
Operating income $ 642,685 $ 510,919 $ 25,225 $ 16,480 $ (65,235) $1,130,074
Identifiable assets $4,005,490 $2,939,584 $ 352,529 $556,087 $(2,142,628) $5,711,062
Liabilities $1,763,617 $1,484,335 $ 345,115 $543,080 $(1,938,713) $2,197,434
June 30, 1997, and for
the year then ended:
Sales to unaffiliated customers $4,709,343 $2,177,319 $ 958,753 $752,931 $ — $8,598,346
Intercompany transfers 978,981 2,018,531 17,973 61,724 (3,077,209) —
Net revenues $5,688,324 $4,195,850 $ 976,726 $814,655 $(3,077,209) $8,598,346
Operating income $ 477,136 $ 522,575 $ 13,958 $ 8,116 $ 4,733 $1,026,518
Identifiable assets $4,079,585 $2,408,106 $ 360,814 $385,763 $(2,536,994) $4,697,274
Liabilities $2,351,239 $1,284,970 $ 350,076 $369,868 $(2,400,816) $1,955,337
June 30, 1996, and for
the year then ended:
Sales to unaffiliated customers $3,791,154 $1,778,712 $ 991,044 $533,841 $ — $7,094,751
Intercompany transfers 944,785 1,586,615 16,847 50,868 (2,599,115) —
Net revenues $4,735,939 $3,365,327 $1,007,891 $584,709 $(2,599,115) $7,094,751
Operating income $ 280,296 $ 370,034 $ 23,690 $ 6,497 $ (5,505) $ 675,012
Identifiable assets $3,721,745 $1,542,890 $ 325,417 $319,262 $(2,108,405) $3,800,909
Liabilities $2,023,047 $ 891,360 $ 305,045 $318,834 $(1,988,863) $1,549,423
10. Contingencies
In March 1990 Sun received a letter from Texas Instruments will not have a material adverse impact on Sun’s financial
Incorporated (TI) alleging that a substantial number of Sun’s position or its results of operations or cash flows in any given
products infringe certain of TI’s patents. Based on discussions fiscal year. Such a negotiated license may or may not have a
with TI, Sun believes that it will be able to negotiate a license material adverse impact on Sun’s results of operations or
agreement with TI and that the outcome of this matter cash flows in a given fiscal quarter depending upon various
42

factors, including but not limited to the structure and
amount of royalty payments, offsetting consideration from
TI, if any, and allocation of royalties between past and future
product shipments, none of which can be forecast with
reasonable certainty at this time.
In the normal course of business, the Company receives
and makes inquiries with regard to other possible patent
infringements. Where deemed advisable, the Company may
seek or extend licenses or negotiate settlements.
The estimate of the potential impact on the Company’s finan-
cial position or overall results of operations for the above
legal proceedings could change in the future.
11. Quarterly Financial Data (unaudited)
Fiscal 1998 Quarter Ended,
June 30 March 29 December 28 September 28
(In thousands, except per share amounts)
Net revenues $2,881,065 $2,360,928 $2,450,243 $2,098,604
Gross margin 1,488,429 1,259,292 1,278,613 1,071,170
Operating income 402,448 333,916 212,835 180,875
Net income 272,988 232,009 149,432 108,433
Net income per common share—diluted $ 0.69 $ 0.59 $ 0.38 $ 0.27
Fiscal 1997 Quarter Ended,
June 30 March 30 December 29 September 29
(In thousands, except per share amounts)
Net revenues $2,543,121 $2,114,618 $2,081,588 $1,859,019
Gross margin 1,281,358 1,061,424 1,048,186 886,918
Operating income 337,679 257,010 255,845 175,984
Net income 237,178 223,511 178,341 123,390
Net income per common share—diluted $ 0.61 $ 0.58 $ 0.46 $ 0.32
12. Subsequent Events (unaudited)
of the shares of iPlanet, Inc. will be converted into the right
On August 28, 1998, the Company acquired all of the out-
to receive cash. Upon and subject to closing, the transaction
standing capital stock of NetDynamics, by means of a
will be accounted for as a purchase, and the purchase
merger transaction pursuant to which all the shares of
price will be allocated to tangible and intangible assets
NetDynamics capital stock were converted into the right
and in-process research and development based upon an
to receive shares of Sun common stock as described in Foot-
independent third-party valuation. The closing of this
note 2. The transaction will be accounted for as a purchase,
acquisition is contingent upon the completion of various
and the purchase price will be allocated to tangible and
closing conditions.
intangible assets and in-process research and development
based upon an independent third-party valuation.
On September 2, 1998, the Company signed a definitive agree-
ment to acquire all the outstanding capital stock of iPlanet,
Inc. by means of a merger transaction pursuant to which all
43

Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders, Sun Microsystems, Inc.
We have audited the accompanying consolidated balance sheets of Sun Microsystems, Inc. as of June 30, 1998 and
1997, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the
three years in the period ended June 30, 1998. 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 generally accepted auditing standards. 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, 1998 and 1997, and the consolidated results of its opera-
tions and its cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally
accepted accounting principles.
Palo Alto, California
July 15, 1998
44

About Your Investment
Stock symbol Stock trading
SUNW The following table sets forth the per share high and low
sales prices for each quarter shown, as well as the per share
Stock market
closing sales prices on the last trading day of each quarter.
The Company’s stock trades on The Nasdaq Stock Market.
In addition, the table shows the average trading volume
for each quarter listed.
High Low Closing Sales Daily Average
Prices Trading Volume
Fiscal year ended June 30, 1998
First quarter $ 53.3125 $ 35.9375 $ 46.8125 5,062,402
Second quarter 48.0469 30.3750 39.8750 7,340,261
Third quarter 50.0000 37.6250 41.7188 6,947,744
Fourth quarter 45.5625 38.1875 43.4375 4,633,556
Fiscal year ended June 30, 1997
First quarter $ 32.5625 $ 22.0000 $ 31.0625 9,502,834
Second quarter 35.1250 25.5000 25.6875 8,704,392
Third quarter 35.0000 26.2500 28.8750 5,834,969
Fourth quarter 38.7500 25.8750 37.2188 5,076,927
Stock Ownership Profile Comparison of two-year cumulative total return
(as of June 30, 1998) $100 invested on June 30, 1995, in stock or applicable index assuming
reinvestment of dividends.
Officers and directors
2%
400
350
Total stockholder return in dollars
300
Individual investors
41% 250
200
150
100
6/95 9/95 12/95 3/96 6/96 9/96 12/96 3/97 6/97 9/97 12/97 3/98 6/98
Sun Microsystems, Inc.
S&P 500 Index
Institutional investors
57%
S&P Computers (Hardware) Index
45

About Your Investment
Sun on the Internet Additional Information Requests
Sun’s home on the Internet’s World Wide Web provides To receive an original Annual Report and Form 10-K (available
access to a wide range of information about the company, without charge), and for questions about Sun operations,
its products, and its services—you can even order our prod- recent results, or historical performance, please contact:
ucts online. Using any Web browser, you can visit Sun on Investor Relations
the Internet by entering the following address: Mail Stop UPAL01-207
www.sun.com Sun Microsystems, Inc.
901 San Antonio Road
Palo Alto, California 94303-4900 USA
Phone: +1 (800) 801-SUNW (within the U.S.)
+1 (650) 336-6299 (outside the U.S.)
Fax: +1 (650) 336-0646
To receive faxed information such as earnings announce-
ments, historical financial results, and product datasheets,
please call:
+ 1 (800) FAX-SUNW (within the U.S.)
+ 1 (201) 946-9049 (outside the U.S.)
Stock Transfer Agent
If you have questions concerning stock certificates, change
For information related to investing in SUNW, we invite you to of address, consolidation of accounts, transfer of ownership,
take advantage of our Investor Relations site to assist you in or other stock account matters, please contact Sun’s trans-
your research. We have included the following features at: fer agent:
www.sun.com/corporateoverview/InvestorRelations Shareholder Services
Boston EquiServe LP
• Financial Documents
Box 8040
• News and Communication
Boston, Massachusetts 02266-8040 USA
• Answers to Frequently Asked Questions + 1 (800) 730-6001 (within the U.S.)
• Links to Free Stock Quote Services + 1 (781) 575-3120 (outside the U.S.)
Internet address: www.equiserve.com
• Financial Analysts Covering SUNW
• Calendar of Events Sun has never declared cash dividends and presently intends
to continue this policy. Sun’s principal credit agreements
An electronic version of the Annual Report and proxy are
limit the payment of cash dividends without the consent of
available on the Internet. They can be found at:
its lenders.
www.sun.com/annualreport
www.sun.com/proxy98
46

Corporate Information/Sun Worldwide
John S. McFarlane
BOARD OF DIRECTORS
President, Solaris Software
Scott G. McNealy
Chairman of the Board of Directors, President,
Michael H. Morris
and Chief Executive Officer, Sun Microsystems, Inc.
Vice President, General Counsel, and Secretary
L. John Doerr
Alton D. Page
General Partner, Kleiner Perkins Caufield & Byers
Vice President, Treasurer
Judith L. Estrin
Gregory M. Papadopoulos
Chief Technology Officer, Senior Vice President,
Vice President, Chief Technology Officer
Cisco Systems, Inc.
William J. Raduchel
Robert J. Fisher
Vice President, Chief Strategy Officer
Executive Vice President and Director, Gap, Inc.,
President, Gap Division, Gap, Inc. George Reyes
Vice President, Corporate Controller
Robert L. Long
Independent Management Consultant Janpieter T. Scheerder
President, Network Storage
M. Kenneth Oshman
Chairman of the Board of Directors, President, Mark E. Tolliver
and Chief Executive Officer, Echelon Corporation President, Consumer and Embedded
A. Michael Spence Edward J. Zander
Dean, Graduate School of Business, Stanford University Vice President, Chief Operating Officer
OFFICERS SUN WORLDWIDE
Scott G. McNealy Manufacturing
Chairman of the Board of Directors, President, 2 countries
and Chief Executive Officer
International Research & Development
William T. Agnello 8 countries
Vice President, Real Estate and the Workplace
International Sales, Service, and Support
Kenneth M. Alvares 45 countries
Vice President, Human Resources
International Distributors
Alan E. Baratz More than 150 countries
President, Java Software
Mel Friedman
© 1998 Sun Microsystems, Inc. All rights reserved. Sun, Sun
President, Microelectronics
Microsystems, the Sun logo, The Network Is The Computer, Java,
the Java coffee cup logo, JavaOS, JavaOS for Business, 100% Pure
Lawrence W. Hambly Java, PersonalJava, JavaStation, Jini, Solaris, Trusted Solaris, the
Solaris logo, the Solaris compatible logo, Ultra, Sun Enterprise, Sun
President, Enterprise Services
StorEdge, Netra, VIS, Java Developer Connection, and Write Once,
Run Anywhere are trademarks or registered trademarks of Sun
Masood A. Jabbar Microsystems, Inc., in the United States and other countries. All SPARC
trademarks are used under license and are trademarks or registered
President, Computer Systems
trademarks of SPARC International, Inc., in the United States and other
countries. Products bearing SPARC trademarks are based upon an
Michael E. Lehman architecture developed by Sun Microsystems, Inc. UNIX is a registered
trademark in the United States and other countries, exclusively licensed
Vice President, Corporate Resources,
through X/Open Company, Ltd. JavaOS for Business technology is the
and Chief Financial Officer result of a collaboration between Sun and IBM.
47

SUN MICROSYSTEMS, INC. 901 San Antonio Road, Palo Alto, California 94303-4900 USA Phone: +1(650) 960-1300 Internet: www.sun.com
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