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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Commission file number 0-15086

SUN MICROSYSTEMS, INC.

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

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES     x          No     o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

The aggregate market value of the voting stock (Common Stock) held by non-affiliates of the Registrant, as of September 10, 2002, was approximately $11.0 billion based upon the last sale price reported for such date on The Nasdaq National Market. For purposes of this disclosure, shares of Common Stock held by persons who hold more than 5% of the outstanding shares of Common Stock and shares held by officers and directors of the Registrant have been excluded because such persons may be deemed to be affiliates. This determination is not necessarily conclusive.

The number of shares of the Registrant’s Common Stock (par value $0.00067) outstanding as of September 10, 2002 was 3,135,404,506.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Proxy Statement for the 2002 Annual Meeting of Stockholders are incorporated by reference into Items 10, 11, 12 and 13 hereof.

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INDEX

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PART I

ITEM 1.     BUSINESS

GENERAL

Sun’s business is singularly focused on products and services for network computing. Network computing has been the company’s focus for the 20 years of our existence, and is based on the premise that the power of a single computer can be increased dramatically as it is interconnected with other computer systems for the purposes of communication and sharing of computing power. Our product line consists of computer systems and workstations, storage, software and associated services. Our customers use our products and services to build mission-critical computing systems on which they operate all elements of their businesses. Our products and services are used in a wide range of technical/scientific and engineering applications in industries such as telecommunications, financial services, government, manufacturing, education, retail, life sciences, media and entertainment and healthcare.

Our products are based on several core technologies including our Solaris^TM Operating Environment, our UltraSPARC® (UltraSPARC Scalable Processor Architecture) microprocessor architecture, and the Java^TM programming language. Key brands associated with Sun in addition to these are Sun^TM ONE (Open Net Environment), our software architecture, products and associated services for the creation of Services on Demand, the Sun Fire^TM series of computer servers, the Sun StorEdge^TM family of storage hardware and software, and our Sun Blade^TM series of workstations. In August of 2002, we extended this product line with our first entry level server, the Sun LX-50 capable of running both the Solaris Operating Environment and the Linux operating system.

For the fiscal year ended June 30, 2002, we had revenues of $12.5 billion, employed approximately 39,400 employees, and conducted business in over 100 countries. We were incorporated in California in February 1982 and reincorporated in Delaware in July 1987.

BUSINESS STRATEGY

Our business strategy is built around our single focus on network computing, and the computer systems, storage, software and services to enable our customers to achieve competitive advantages through the strategic use of information technology. The core elements of our business strategy include:

•	An end-to-end architecture that extends our common Java technology based programming environment from devices as small as smart cards and cell phones to large multi-million dollar servers.
•	On-going innovation in microprocessor architecture, systems design, and software to help ensure continuing technology leadership and resulting price-performance advantage.
•	Commitment to open public application programming interfaces. Sun believes that our customers are best served when they have a choice and a competitive vendor environment. This requires that the industry agree on programming standards and compete to create the highest quality implementation.
•	A robust partner community. We cultivate a large community of commercial software developers, system integrators, and resellers to add value to Sun products and services and to extend our reach and expertise. Our partner community enables us to deliver an increasing level of integration of our systems, storage, software and services to make our solutions faster to deploy and to help ensure the best possible performance.
•	A direct sales organization for large customer accounts increasingly organized to deliver a single point of contact with Sun.
•	A mission-critical support organization staffed worldwide to help ensure high satisfaction and profitable use of our products.

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Developing and deploying services over the network requires an infrastructure platform that is enterprise ready, developer rich and economically compelling. This means that rather than offering the customer the cheapest server or storage array, we are focused on providing the combination of software and hardware that will give them the best value including: (1) minimize porting and migration costs when upgrading; (2) maximize system uptime and availability; and (3) provide the richest applications suite to a growing developer community. With this strategy, we believe we are able to offer the customer a platform that entails less annual administrative costs, developer training costs, and downtime costs, which decreases customers’ “total cost of ownership”.

In fiscal 2002, we introduced a number of new products supporting our strategy as an end-to-end infrastructure platform company and we completed the roll out of our UltraSPARC III microprocessor across our low, mid and high-end server lines. The UltraSPARC III processor is fully binary compatible with our previous generation processor, so customers can run existing applications without the time and cost of rewriting applications. In addition, we released our Solaris 9 operating system, which has created significant benefits to customers as it reduces system downtime and upgrade costs because it is designed to run all existing applications currently running on previous Solaris OE releases.

We also introduced a new line of low-end servers running the Linux Operating System on our UltraSPARC microprocessor as well as the Solaris Operating Environment on the X86 platform edition microprocessor architecture. These servers are part of our larger strategy to deliver highly dense racks of low cost and very manageable server groups that are based on open application programming interfaces.

Our Sun ONE platform consists of a number of Sun’s powerful and scalable products, including the Solaris Operating Environment, Sun ONE middleware products, and the Sun ONE Studio development environment. It also builds upon our well-established Java technology to help enable the creation and deployment of Sun ONE Services on Demand (i.e., the ability to provide information, data and applications anywhere, anytime and on any device, using open application programming interfaces that will work with a wide array of operating systems and applications).

We believe that in order to be a leading developer of enterprise and network computing products and technologies, we must continue to invest and innovate. As indicated by our research and development investments of approximately 10-15% of annual revenues during each of the last three fiscal years, we are continually focused on technological innovation. Over the past few years, we have made significant investments in several of our product technologies. These investments include:

•	the highly scalable UltraSPARC processor and systems architecture;
•	our highly reliable and scalable Solaris Operating Environment;
•	mission critical clustering, messaging, directory and web services infrastructure;
•	the cross-platform Java software development environment, spanning smart cards, cellular handsets, set top boxes, desktop computers, and servers — used by our customers and independent software vendors;
•	our highly scalable enterprise servers, from entry level to data center class, and workstations; and
•	network-based storage systems and software, including Sun HighGroundTM storage management software and SunTM QFS and SunTM SAM-FS software.

In addition, during the first quarter of fiscal year 2003, we introduced our first line of X86 microprocessor general purpose entry level servers that can run either the Solaris Operating Environment or Linux open-source operating system. We intend to continue our investments into new computing technologies and are focused on continuing to develop and deliver leading-edge network computing products based upon our innovations.

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Many of these technologies provide us with a competitive advantage and differentiation in the marketplace. We believe by investing in research and development, we are able to develop and deliver more valuable systems technology to our customers, and therefore, are able to generate better long-term profit margins on our products.

From inception, we have focused on developing products and technologies based upon open APIs. We coined the phrase, “The Network is the Computer^TM”. Behind that simple phrase is the belief that the real power in computing lies in the ability to freely access and share information over the network, while unconstrained by proprietary software and hardware standards. In short, the network has become an integral part of our personal lives and our economy. Individuals access e-mail, the Internet, or private corporate networks through multiple devices including personal computers, cell phones, personal digital assistants, and even automobiles. Companies are interested in using networking technologies to link various constituencies across their organizations to better share information and intelligence, to streamline processes, gain efficiencies, accelerate time to market for key products, improve customer service, and ultimately gain competitive advantage.

The need for open APIs is at the heart of the Internet’s development. We believe that without them, too many proprietary software and hardware protocols cause both incompatibility and cost issues, making it too difficult and uneconomical for individuals and organizations to fully access and harness the network. Through open APIs, we believe application adoption and service deployments over the network will grow more quickly, which will increase the workload on the network, leading to increased demand for our computer systems. In addition, by adhering to open APIs, we are able to deliver more flexible and compatible systems products to our customers, reducing administrative costs and adding to the demand for our systems. For example, we have created technologies, such as the Network File System (NFS), UltraSPARC architecture and the Java technologies, providing customers with flexibility for their networking environments, and facilitating industry growth. In addition, through our Sun ONE software platform, we have extended our well-established Java technology platform and utilized Web industry standards including XML (Extensible Markup Language), SOAP (Simple Object Access Protocol), UDDI (Universal Description, Discovery and Integration) and WSDL (Web Services Description Language).

Partner Community

While our product and service offerings are very broad, we recognize that no single supplier of computing solutions can meet all of the needs of all of its customers. We have established relationships with leading value-added resellers, original equipment manufacturers, channel development providers, independent distributors, independent software vendors, and computer systems integrators to deliver solutions that our customers demand. Through these relationships, we are able to provide the end-to-end solutions that customers require to compete. As an extension of this strategy, in fiscal 2002, we entered into an OEM agreement with Hitachi Data Systems to provide highly reliable and available storage to the datacenter through the offering of the Sun StorEdge 9900 series of storage systems.

Our sales force serves the telecommunications, financial services, government, manufacturing, education, retail, life sciences, media and entertainment and healthcare. Our direct sales organization for large customer accounts are increasingly organized to deliver a single point of contact with Sun. We have approximately 140 sales and service offices in the United States and 150 sales and service offices in 45 countries.

We provide expertise in network computing through a broad range of global services, including support services (systems support for hardware and software), professional services (IT consulting, systems integration and system/ network management), and educational services (education consulting, skills migration and training).

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BUSINESS ORGANIZATION

To facilitate innovation and provide world-class support for our global client base, we have focused our organization on the following products and services businesses. Each provides products and services for commercial and technical computing. The primary competitive differentiators for these products in the marketplace are their price/performance, scalability and reliability.

The Enterprise Systems Products group provides an integrated family of mid-range and high-end enterprise servers systems for mission critical and high-performance computing environments. These products run application environments, directories, databases, web sites and many other applications.

The Volume Systems Products group provides entry enterprise servers, blade computing (management of a pool of modular, single board servers, as one computing environment, which allows companies to dynamically allocate and re-allocate resources to changing workloads) and workstations with low price point and high computing density for horizontally scalable environments (large computing environments composed of clusters of smaller servers). The entry servers deliver network computing in a compact package, with a range of options in processing power, form factor and scalability.

The Processor and Network Products group develops UltraSPARC microprocessors, associated companion application specific integrated circuits (ASICS), and leading-edge Network and Cryptographic products and technologies. At the heart of Sun systems, these components deliver world-class performance, scalability, and security to products ranging in price from less than $1,000 to multi-million dollar solutions, while maintaining binary compatibility across the entire spectrum.

The Network Storage group directly, and through third party relationships, provides complete storage solutions for an end-to-end IT infrastructure, from the operating system to servers, storage, software, services, and support. Sun’s complete Sun StorEdge arrays are optimized for Sun’s end-to-end infrastructure, while supporting heterogeneous environments.

The Software group designs, develops and brings to market our Sun ONE software offerings, including the Solaris Operating Environment, the Java platform, Sun ONE middleware, our core technologies for consumer and embedded markets, which utilize the Java technology, Jini^TM network technology, software development tools and our StarOffice^TM application software, which are based upon open source standards, including XML technology.

The Sun Services group provides a broad range of worldwide services for our network computing environment. These services include design, implementation and operation of enterprise and Internet computing environments, systems integration and support, professional services and education.

PRODUCTS

Our products and technologies, from our microprocessors to our Solaris Operating Environment to our full line of low-end and high-end scalable workgroup and enterprise servers, are designed, developed and produced for the network computing environment.

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Enterprise Systems Products

Data Center/ High-Performance Computing Servers. In the data center/high-performance computing server group, we offer the Sun Fire 15K, the Sun Fire 12K, and the Sun Enterprise^TM 10000 servers. The Sun Fire 15K is one of the most scalable UNIX® platform-based systems in the marketplace, which incorporates our UltraSPARC III microprocessor, mainframe features such as dynamic partitioning (Dynamic System Domains) and a supercomputer-class Gigaplane-XB^TM interconnect. The Sun Fire 15K server and the Sun Fire 12K are designed to offer greater performance and lower total cost of ownership than mainframe products. They are used for consolidations, application migrations, data mining and warehousing, custom applications, on-line transaction support, enterprise resource planning, high performance technical computing and databases. The Sun Enterprise 10000 server is our legacy product offering similar features as our Sun Fire 15K while running on our UltraSPARC II processor.

Mid-Range Servers. We offer nine midrange server products. Midrange servers provide reliability, availability and scalability to address the needs of data centers and enterprise-scale network computing at a moderate cost. Our Sun Fire 3800, Sun Fire 4800, Sun Fire 4810, and Sun Fire 6800 servers were introduced in fiscal 2001 and utilize the UltraSPARC III processor and the Solaris 8 Operating Environment. With these servers, we have enhanced processing power and various options available in processor and memory expandability, hardware redundancy and component accessibility. The Sun Fire 880R server was released in fiscal 2002 and uses the UltraSPARC III processor. It is built to deliver the most enhanced multiprocessing capability to the low-end of our family of Sun Fire servers. The Sun Enterprise 3500, Sun Enterprise 4500, Sun Enterprise 5500, and Sun Enterprise 6500 servers are our legacy systems that offer similar features while utilizing the UltraSPARC II processor and Solaris 7 Operating Environment.

Volume Systems Products

Entry Servers. We offer four high-end entry server products: the Sun Fire 880, Sun Fire 480R, Sun Enterprise 420R, and the Netra^TM t 1400/1405 servers. In addition, we offer 10 low-end entry server products: the Sun Fire V100, Sun Fire V120, Sun Fire 280R, Sun Enterprise 250, Netra 120, Netra t1 200/205, Netra t 1120/1125, Netra 20, CT400 and Netra CT800. Low-end entry servers deliver network computing in a compact, low-cost package. The Netra CT servers are high density rack mountable servers, based on the Compact PCI standard, for telecommunication and network equipment providers.

In fiscal 2003, we introduced our first line of entry level X86 servers, the Sun LX50, which provide high density scalable solutions for Solaris and the Linux operating environments. This line is in addition to the Sun Linux-based Cobalt Appliance Servers, which include the Sun Cobalt Qube^TM and the Sun Cobalt RaQ^TM series (4, 4i, 4r, XTR and 550), which have been designed to run Internet-related applications including file serving and web hosting, and support software applications such as electronic mail and electronic commerce.

Workstations and Information Appliances. Our workstation products include the Sun Blade 100 and Sun Blade 2000 workstations. Sun information appliances include Sun Ray^TM 100 and Sun Ray 150 enterprise appliances.

UltraSPARC s-Series processors power the high-end and midrange server products from Sun, as well as, power desktops. These CPUs offer our highest level of performance, unmatched scalability and leading-edge RAS.

UltraSPARC i-Series processors offer a higher level of integration on the central processing unit enabling the price and performance design points deployed in Sun’s workgroup servers, rack mount servers, and high performance desktops.

UltraSPARC e-Series processors balance cost, power consumption and performance enabling economical, 64-bit server and desktop solutions, while maintaining binary compatibility with all SPARC® processors, past and present.

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Sun’s Network and Cryptographic portfolio includes solutions based on technologies such as Ethernet, SSL (secure socket layer) and IPSec VPN (virtual private network), enabling high speed, secure network solutions.

High-End Data Center Storage. In fiscal 2002, we signed an OEM agreement with Hitachi Data Systems to distribute their high-end storage product with our resource management and file management software as the Sun StorEdge 9900 series. Designed for extreme availability, performance, scalability, connectivity, and manageability, Sun StorEdge 9900 series systems offer lower total cost of ownership because of storage consolidation and heterogeneous data sharing. These products provide a platform for direct attach storage or storage area network (SAN) solutions. The latest additions to the product family, Sun StorEdge 9980 and 9970 systems, incorporate our highest levels of performance and capacity, along with a functional blade architecture.

Midrange Storage. We offer a wide range of flexible, scalable storage systems that scale from the midrange to the data center, supporting high-performance computing and enterprise SAN implementations, as well as storage virtualization technology. In fiscal 2002, we introduced the StorEdge 6900 series and 3900 series storage systems. For midrange storage consolidation, Sun StorEdge 6900 series systems have built-in virtualization for management of open-SAN storage pools. The Sun StorEdge 3900 series delivers exceptional performance and high availability for clustered environments and focused applications, such as high-performance computing and decision support systems. In addition, we offer the Sun StorEdge T3 and Sun StorEdge A5200 arrays for the enterprise.

Workgroup Storage. Sun StorEdge products for workgroup applications offer a flexible, compact, cost-effective approach for growing storage demands. Their building-block architecture is designed to allow users to expand and customize as needed, for increased return on investment. The Sun StorEdge T3 array for the workgroup combines advanced RAID technology with industry-standard fiber-channel technology in a scalable package. In addition to the T3 array, we offer the Sun StorEdge D2 and Sun StorEdge A1000/ D1000 arrays, which offer performance and flexibility at low cost for a variety of environments.

Tape Backup and Restore. Our tape automation products provide the flexibility, scalable capacity, and high performance to meet the full range of needs from the desktop to the data center. Sun offers tape autoloaders, small-footprint libraries, and large-capacity, fast-access tape backup and restore solutions for mission-critical data centers. The complete family of Sun StorEdge tape libraries has been designed using leading robotics technology.

Storage Software. As an integral part of our complete storage solutions, we have implemented Storage ONE, a storage management strategy to provide an open, integrated, and automated storage management family. Built on Sun ONE, Storage ONE is based on industry standards and allows customers to choose best-of-class management components to provide automation and service-level management capabilities. Current Storage ONE software products include:

•	Sun StorEdge Availability Suite software provides local and remote data replication services that are designed to reduce planned and unplanned disruptions and provide rapid recovery from disasters.
•	Sun StorEdge Performance Suite (Sun StorEdge QFS) software provides a shared file-system service with quick data access for high-performance, data-intensive environments with very large volumes.
•	Sun StorEdge Resource Management Suite software provides central monitoring, reporting, and analysis for proactive capacity management, cost charge-back, and strategic planning.
•	Sun StorEdge Utilization Suite (Sun StorEdge SAM-FS) software provides fully integrated backup, archiving, remote copy, and volume management software to improve storage utilization and IT operational efficiencies.

SAN Solutions. The Sun StorEdge Open SAN Architecture provides a comprehensive set of products and services to help ease storage area network management and to allow the consolidation of storage resources on

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Solaris Operating Environment. The Solaris OE product line includes desktop, intranet, Internet Service Provider (ISP) and enterprise operating environments for SPARC and Intel platforms. The Solaris Operating Environment is a high performance, highly reliable, scalable and secure operating environment that is easy to install and use, is optimized for the Java platform and supports more than 12,000 applications. The Solaris Operating Environment is optimized for enterprise computing, Internet and intranet business requirements, powerful databases and high performance technical computing environments.

In fiscal 2002, we introduced the Solaris 9 Operating Environment (Solaris 9 OE). The Solaris 9 OE creates a services platform by combining traditional operating systems functionality, application services, and identity management (management of user identities over the Internet or complex corporate networks, so that users can use a single sign-on to be authenticated and authorized to access certain files). It also delivers the security, manageability and performance to assist IT professionals in increasing service levels and decreasing costs and risks.

The Solaris 9 OE features the integration of the new J2EE^TM 1.3 software compliant Sun ONE Application Server 7, Platform Edition with a single server development and deployment license for use on Sun systems. The Application Server includes the high performance http engine and web infrastructure from the Sun ONE Web Server and the Sun ONE Message Queue. It also integrates the Sun ONE Directory Server, an industry-leading foundation for open, scalable identity management. The integration of these Sun ONE middleware elements into the Solaris 9 OE makes it easier to build and deploy application and web services based on Java, XML and SOAP technologies, while helping customers to save on acquisition, integration, testing, support, and management costs.

We also provide software solutions that focus on network management and network security that complement our server and storage product offerings. In addition, we provide Solaris Operating Environment and Java technology-based tools for software developers who create high performance applications for enterprises, telecommunications and the Internet.

Java Technology. Our Java platform is one of the first widely accepted application environments to allow development of application software independent of the underlying operating system or microprocessor. Sun expanded the definition and availability of the Java platform and extended it to small devices including mobile phones, smart cards, digital set top boxes, and residential gateways with the Java 2 Platform, Micro Edition (J2ME^TM platform), Java Card^TM, and Java 2 Platform, Enterprise Edition (J2EE) technologies. These Java platforms address very different markets yet share a common core architecture. These platforms complement our Java 2 Platform, Standard Edition (J2SE^TM) technology, which is used on personal computers and workstation clients. The Java 2 Software Development Kit enables developers to create and run both applets (miniature applications written in the Java programming language) that run inside a web browser, as well as applications that run outside a browser.

Jini^TM Network Technology. Jini^TM network technology is an open architecture that enables developers to create network-centric services, whether implemented in hardware or software, that are highly adaptive to change. Jini technology can be used to build adaptive networks that are scalable, flexible and can evolve as typically required in dynamic computing environments. There are two Jini network technology offerings: the Jini Starter Kit and the Jini Technology Core Platform Compatibility Kit.

StarOffice^TM Productivity Suite. StarOffice^TM is an office productivity suite which runs on most major operating environments and platforms including the Solaris Operating Environment, Microsoft Windows 95/98/ NT, Linux, OS/2, and Java platform. It has a fully integrated set of applications which provide word

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Sun ONE Developer Tools. We develop and market software development tools designed to aid in application development and integration. The Sun ONE Developer Platform provides a desktop-to-mainframe development and test environment that spans portal, identity, application and integration functionality. Sun ONE development environments for programming in C, C++, and Java programming languages help developers to be more productive in creating fast, reliable, and scalable applications.

Sun ONE Middleware (formerly iPlanet^TM software). The Sun ONE middleware products include Sun ONE Directory Server, Sun ONE Identity Server, Sun ONE Meta-Directory Server, Sun ONE Integration Server, EAI Edition, Sun ONE Portal Server, Sun ONE Web Server, Sun ONE Application Server, as well as Sun ONE Calendar Server, Sun ONE Messaging Server and various other applications, all of which enable enterprises to leverage their information and applications into services offered on intranets and the Internet. Sun ONE middleware products support the Solaris Operating Environment, Windows NT, HP-UX, AIX and Linux operating systems.

SERVICES

Our Sun Services team (formerly Enterprise Services) provides expertise in network computing through a broad range of global services, including support services (systems support for hardware and software), professional services (IT consulting, systems integration and system/network management), and educational services (education consulting, skills migration and training). Sun assists both technical and commercial customers, supporting more than 1.6 million systems in more than 100 countries, training more than 400,000 students annually, and providing consulting, integration and operations assistance to IT organizations worldwide.

The SunSpectrum^SM support services product offerings allow customers the power and flexibility to customize their support services contracts. Customers can choose from four levels of support that range from mission-critical to self-support. This service is sold separately or packaged with hardware, software and peripherals in a single price support service. Each contract type is specifically designed to provide our customers with high availability and continuous operation. We have invested resources in the field for direct service delivery. Higher levels of field resources are important to the overall investments being made in mission critical support capability. Our direct services are complemented by third-party service providers who primarily deliver hardware support services. Software support continues to be primarily delivered by our software support engineers. Third-party service providers provide additional support to important field resources (such as parts inventories and staff) to meet the service requirements of our installed base. Investments by these third-party service providers help us expand geographic coverage without additional fixed cost investment on our part.

We offer a variety of warranties for parts and labor on hardware products, ranging from one year to five years from date of sale, and a limited warranty on software, generally for 90 days from date of sale. We service products during the warranty period and provide contract service after the initial product warranty has expired. Post-warranty and warranty upgrade support services are primarily offered through the SunSpectrum service. Warranty and post-warranty services are provided through approximately 50 solution centers worldwide.

Sun Professional Services provides a suite of technical consulting and systems integration services to help customers plan, implement, and manage complex distributed network computing environments. Our professional services team specializes in providing customers with advanced systems, storage, and network architecture design consulting, platform integration, enterprise systems management and operation, and advanced Sun ONE and Java software integration. We provide the people, processes and technology and we

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To implement solutions, our integration experts help customers develop and deploy distributed computing environments for new applications, with an emphasis on solutions built on the Sun ONE platform and Java technology. To keep customer computing environments operating at peak performance, operations experts help customers manage the complexity of heterogeneous systems and networks. The Sun Professional Services team also delivers highly technical assistance to customers in critical areas such as network security and identity management, wireless network-based systems, and storage area networks.

Our Educational Services group develops and delivers integrated learning solutions for enterprises, IT organizations, and individual IT professionals. These solutions help ensure that the necessary talent is available and properly aligned to meet our clients’ network computing needs, as well as business objectives. Sun learning solutions include: (1) education consulting services; (2) learning management technologies; (3) multi-mode learning content; and (4) professional certifications. In order to recommend an educational solution, we evaluate our customers’ unique individual and organizational learning needs. For example, we assess individual and team skills and identify gaps that may pose risks to business, project, or career objectives. We then conduct job, work, and role analyses to help ensure the right people with the right skills are performing the right jobs. We provide specific recommendations to assist customers in acquiring and retaining the knowledge and talent that can help increase their overall business success. When additional skill development is required, we offer products and services to deliver training in a variety of formats. Learning products include: (1) Sun or partner online content and comprehensive eLibraries; (2) instructor-led learning at over 400 Sun and Sun-authorized centers in more than 60 countries; (3) custom and third-party learning content; and (4) professional certification to validate skills learned. To help customers manage the knowledge and skills throughout their organization, we offer a web-based learning platform that makes it easy to manage, track, deliver, and forecast needed skills.

SALES, DISTRIBUTION AND MARKETING

The Global Sales Operations group manages field sales organizations and all field marketing organizations. We sell our products, services and solutions in most major markets worldwide through a combination of direct and indirect channels. We also offer component products such as CPU chips, ASICs and embedded boards on an OEM basis to other hardware manufacturers, and supply after-market and peripheral products to their end-user installed base, both directly and through independent distributors and resellers.

Our sales force serves the telecommunications, financial services, government, manufacturing, education, retail, life sciences, media and entertainment and healthcare industries. We have approximately 140 sales and service offices in the United States and 150 sales and service offices in 45 countries. In addition, we use independent distributors in over 100 countries. In general, our sales coverage model calls for independent distributors to be deployed in partnership with our direct sales force but in some smaller markets independent distributors may be our sole means of distribution.

Our relationship with resellers and distributors (collectively our “Channel Partners”) is very important to our future revenues and profitability. Channel relationships accounted for more than 65% of our revenues during fiscal 2002 and more than 60% in fiscal 2001. Our sales force is compensated on a channel-neutral basis to reduce potential conflict between our sales force and channel partners. Our partners include:

•	systems integrators, both government and commercial, who serve the market for large commercial projects requiring substantial analysis, design, development, implementation and support of custom solutions;
•	channel development providers who supply product and provide product marketing and technical support services to our smaller resellers;

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•	resellers who provide added value in the form of software packages, proprietary software development, high-end networking integration, vertical integration, vertical industry expertise, training, installation and support;
•	OEMs who integrate our products with their hardware and software; and
•	independent distributors who primarily serve foreign markets in which we do not have a direct presence.

Revenues from outside the United States were approximately 54% of our total net revenues in fiscal 2002 and 53% and 48% in fiscal 2001 and 2000, respectively. Direct sales we make outside of the United States are generally priced in local currencies and can be subject to currency exchange fluctuations. The net impact of currency fluctuations on net revenues and operating results cannot be precisely measured as our product mix and pricing change over time in various markets, partially in response to currency movements. We are primarily exposed to changes in exchange rates for the euro, Japanese yen, and British pound. We are a net receiver of currencies other than the U.S. dollar and, as such, can benefit from a weaker dollar, and can be adversely affected by a stronger dollar relative to major currencies worldwide. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, may adversely affect our consolidated sales and operating margins as expressed in U.S. dollars. To minimize currency exposure gains and losses, we often borrow funds in local currencies, enter into forward exchange contracts, purchase foreign currency options and promote natural hedges by purchasing components and incurring expenses in local currencies. Currently, we have no plans to discontinue our hedging programs. However, these programs are discretionary and they could be discontinued in the future.

Some of our sales to foreign customers are made under export licenses that must be obtained from the United States Department of Commerce. In addition, all of our export transactions are subject to U.S. export control laws, and certain transactions could require prior approval of the U.S. Dept of Commerce. Protectionist trade legislation in either the United States or other countries, such as a change in the current tariff structures, export compliance laws or other trade policies, could adversely affect our ability to sell or to manufacture in international markets. Furthermore, revenues from outside the United States are subject to inherent risks, including the general economic and political conditions in each country.

Japan represents the largest portion of our international sales (approximately 9% of our total net revenues in fiscal 2002, and 10% in both fiscal 2001 and 2000). Sales to telecommunication and information technology manufacturing industries together represent a significant portion of Sun’s revenues in Japan. Sales to or through C. Itoh Technoscience Co. Ltd., Fujitsu, Ltd. and Toshiba Corporation together represent a significant portion of Sun’s revenues in Japan. Economic conditions in Japan have declined substantially in recent years and have adversely impacted our sales in this region. If the economic trends in Japan significantly worsen in a quarter or decline over an extended period of time, our results of operations and cash flows could be further adversely affected.

Sales to General Electric Company (GE) and its subsidiaries in the aggregate accounted for approximately 12%, 13% and 19% of our fiscal 2002, 2001 and 2000 total net revenues, respectively. Our Chairman of the Board of Directors, President and Chief Executive Officer, Scott McNealy, is a member of GE’s Board of Directors. More than 90% of the revenue attributed to GE was generated through GE subsidiaries acting as either a reseller or financier of our products. Sales through MRA Systems, Inc., a master reseller and a GE subsidiary, consisted of 8%, 10% and 16% of total net revenues in 2002, 2001 and 2000, respectively, and sales to GE Capital, a finance/ leasing company and a GE subsidiary, consisted of 2%, 2%, and 3% of total net revenues in fiscal 2002, 2001 and 2000, respectively. As a master reseller, MRA Systems, Inc. acts as a distributor of our products to resellers who in turn sell those products to end users. Revenue is generated from GE Capital whenever our customers elect to lease equipment through GE Capital; in such cases, we sell the equipment to GE Capital, which in turn, leases that equipment to customers. Our business could be adversely affected if GE or another significant customer terminated its business relationship with us or significantly reduced the amount of business it did with us. Also, see Note 15 to the Consolidated Financial Statements for additional information concerning sales to foreign customers and business segments.

Our marketing activities include advertising in computer publications and the business press, direct mailings to customers and prospects, televised programs and attendance at trade shows. We also sponsor a series of

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Our product order backlog at June 30, 2002 was $841 million, as compared with $853 million at June 30, 2001. Our backlog includes orders for which a delivery schedule within six months has been specified by the customer and shipped products for which revenue has not been recognized. Backlog levels vary with demand, product availability and our delivery lead times, and are subject to significant decreases as a result of, among other things, customer order delays, changes or cancellations. As such, backlog levels are not a reliable indicator of future operating results.

PRODUCT DEVELOPMENT

Our research and product development programs are intended to sustain and enhance our competitive position by incorporating the latest worldwide advances in hardware, software, graphics, networking, data communications and storage technologies. Sun’s product development continues to focus on enhancing the performance, reliability, availability, and serviceability of our existing hardware and systems software standards and the development of new technology standards. Additionally, we remain focused on system software platforms for Internet and intranet applications, telecommunications and next-generation service provider networks, developing advanced workstation, server and storage architectures, as well as designing application-specific integrated circuits and software for networking and distributed computing.

We conduct research and development principally in the United States, United Kingdom, France, Ireland, Germany, Japan, India, and Israel. Research and development (R&D) expenses were $1,832 million, $2,016 million and $1,630 million in fiscal 2002, 2001 and 2000, respectively. R&D expenses reflected our continued development of a broad line of scalable and reliable systems, including servers, desktop systems, storage technologies and UltraSPARC (most recently, SPARC III) microprocessors, as well as software products which utilize the Java platform, Solaris Operating Environment software, the Sun ONE, N1, Jini and JXTA software and network technology. We believe that software development provides and will continue to provide significant competitive differentiation. Therefore, we devote substantial resources to the development of operating system software and middleware; networking and data communications software; high availability software; video graphics, disk array and storage management software; object technology software; security software and a software development environment and developer tools.

MANUFACTURING AND SUPPLY

Worldwide Operations Supplier Management manages Sun-wide purchasing of materials used in producing Sun products. Our manufacturing operations consist primarily of final assembly, test and quality control of systems. We manufacture in California, Oregon and Scotland, and distribute from California, the Netherlands and Japan. We have continued efforts to simplify the manufacturing process by reducing the diversity of system configurations offered and increasing the standardization of components across product types. However, our costs could be increased and product shipments delayed by reliance on single source suppliers. Similarly, our ability to purchase components in sufficient quantities to meet customer demand could impact our future operating results.

We depend on many suppliers for the necessary parts and components to manufacture our products. There are a number of vendors producing the parts and components that we need. However, there are some components that can only be purchased from a single vendor due to price, quality, or technology reasons. For example, we depend on Texas Instruments for our SPARC microprocessors, Sony for various monitors and several other companies for custom integrated circuits. If we were unable to purchase the necessary parts and components on acceptable terms from a particular vendor and we had to find a new supplier for such parts and components, our new and existing product shipments could be delayed, adversely affecting our business and operating results.

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COMPETITION

Our competitors are some of the largest, most successful companies in the world. They include International Business Machines Corporation (IBM), Hewlett-Packard Company (HP) which now owns Compaq Computer Corporation, EMC Corporation (EMC) Fujitsu and the Fujitsu-Siemens joint venture company. We also compete with distributors and resellers of systems based on microprocessors manufactured by Intel Corporation (Intel) and the Windows family of operating systems software developed by Microsoft Corporation (Microsoft). These competitors include Dell Computer Corporation, and HP, in addition to Intel and Microsoft. This competition creates increased pressure, including pricing pressure on our workstation and certain server product lines. We expect this competitive pressure to continue to intensify during fiscal year 2003 with the anticipated releases of new products from our competitors.

We compete in the hardware and software products and services markets. Our competitors compete with us primarily on price, service, warranty and product performance. These markets are intensely competitive. If we fail to compete successfully in these markets our resulting loss of competitive position could result in price reductions, fewer customer orders, reduced revenues, reduced margins, reduced levels of profitability and loss of market share.

We have encouraged the use of SPARC technology as a standard in the computer marketplace by licensing much of the technology, and promoting open interfaces to the Solaris Operating Environment, as well as by offering microprocessors and enabling technologies to third party customers. As a result, several licensees, including Fujitsu and the Fujitsu-Siemens joint venture company, also offer products based on the Solaris Operating Environment and the SPARC architecture that compete directly with our products. We have also worked to make our Java programming language a standard for complex networks. We develop applications, tools and systems platforms, as well as work with third-parties to create products and technologies, in order to continue to enhance the Java platform’s capabilities. As part of this effort, we license Java technology which widely encourages competitors of Sun to also develop products competing with these applications, tools and platforms. If we are unable to compete effectively, our business could be harmed.

PATENTS, TRADEMARKS AND INTELLECTUAL PROPERTY LICENSES

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

We hold a number of U.S. and foreign patents relating to various aspects of our products and technology. While we believe that patent protection is important, we also believe that patents are of less competitive significance than factors such as innovative skills and technological expertise. From time to time we have been notified that we may be infringing certain patents or other intellectual property rights of others. Several pending claims are in various stages of evaluation. With the exception of a current pending claim further disclosed at ITEM 3. Legal Proceedings, no material litigation has arisen from these claims. We are evaluating the desirability of entering into licensing agreements in certain of these cases. Based on industry practice, we believe that any necessary licenses or other rights could be obtained on commercially reasonable terms. However, no assurance can be given that licenses can be obtained on acceptable terms or that litigation will not occur. The failure to obtain necessary licenses or other rights, or litigation arising out of such claims, could adversely affect our business.

EMPLOYEES

As of September 10, 2002, we had approximately 39,100 employees (at June 30, 2002 we had approximately 39,400 employees). We depend on key employees and face competition in hiring and retaining qualified employees. Our employees are vital to our success, and our key management, engineering and other employees are difficult to replace. Although we have entered into a limited number of employment contracts with certain current and former executive officers, we generally do not have employment contracts with our key employees. Further, we do not maintain key person life insurance on any of our employees. The decrease in IT spending

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ITEM 2.     PROPERTIES

At June 30, 2002, Sun’s facilities in the United States represented aggregate floor space of 12.3 million square feet, of which 4.8 million was owned and 7.5 million square feet was leased. Of these amounts, 1.4 million square feet was vacant and 0.3 million square feet was being leased to non-Sun businesses. Similar facilities in 45 other countries totaled 4.9 million square feet, of which 0.6 million square feet was owned and 4.3 million square feet was leased. Of these amounts, 0.3 million square feet was vacant and 0.1 million square feet was being leased to non-Sun businesses.

At June 30, 2002, our owned properties consisted of:

In addition to the above-noted “Square Footage Under Construction”, we have approximately 1.6 million square feet of facilities available for future construction. We continually evaluate our facility requirements in light of our business needs and stage the future construction accordingly. In addition, we own approximately 38 acres of undeveloped land in Austin, Texas.

We currently have a plan to vacate 56 facilities (consisting of 2.0 million square feet of space) around the world, of which 30 are in the United States. At June 30, 2002, 1.1 million square feet of that leased space was vacant and 0.2 million square feet was subleased to non-Sun businesses. We plan to vacate the remaining 0.7 million square feet by no later than December 31, 2002. See Note 6 to the Consolidated Financial Statements for further discussion.

Substantially all of our facilities are used jointly by our Computer Systems and Network Storage, Enterprise Services, iPlanet and Other operating segments. Our manufacturing facilities are located in Linlithgow, Scotland, Beaverton, Oregon and Newark, California.

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ITEM 3.     LEGAL PROCEEDINGS

On February 11, 2002, Eastman Kodak Company (Kodak) filed a civil lawsuit against us, Eastman Kodak Company v. Sun Microsystems, Inc., Civil Action No. 02-CV-6074, in the US District Court for the Western District of New York. Kodak filed a First Amended Complaint on March 22, 2002. In the First Amended Complaint Kodak asserts that our products, including those relating to Java technology, infringe one or more claims of U.S. Patent No. 5,206,951, U.S. Patent No. 5,421,012, and U.S. Patent No. 5,226,161 (collectively, “the Kodak Patents”) and seeks injunctive relief against future infringement, unspecified damages for past infringement, as well as costs and attorney’s fees. On May 24, 2002, we filed an Answer to First Amended Complaint and Counterclaims, denying infringement of any valid and enforceable claim of any of the Kodak Patents. In the Answer and Counterclaims, we are also seeking declaratory judgment of noninfringement, invalidity and/or unenforceability of the Kodak Patents, we further allege that Kodak’s claims are barred in whole or in part by the doctrines of estoppel, laches and patent exhaustion, and that we have license and/or sublicense rights to the Kodak Patents. We also sought declaratory judgment of noninfringement, invalidity and/or unenforceability of four other patents that Kodak cited in letters to us but which were not included in Kodak’s First Amended Complaint (the “Additional Kodak Patents”). On August 23, 2002, the Court dismissed our counterclaims regarding the Additional Kodak Patents on the grounds that we had no reasonable apprehension that we would be sued for infringement of those patents, and that accordingly, the Court lacked jurisdiction to hear counterclaims with respect to those patents. Based on discussions over many months with Kodak, we believe that this suit is without merit, and, accordingly, we will defend ourselves and pursue our counterclaims vigorously. We cannot forecast at this time with reasonable certainty the potential costs associated with an adverse outcome of this matter.

On March 8, 2002, we filed suit against Microsoft Corporation (Microsoft) in the United States District Court for the Northern District of California pursuant to United States and State of California antitrust laws alleging illegal efforts to acquire, maintain and expand a number of monopolies; illegal tying arrangements; exclusive dealings; copyright infringement; unreasonable restraint of trade; and unfair competition. Sun is seeking remedies that include: (1) preliminary injunctions that require Microsoft to distribute our binary implementation of the Java Run-time Environment as part of Windows XP and Internet Explorer and to stop the unlicensed distribution of Microsoft’s Virtual Machine for Java in violation of the January 23, 2001 settlement agreement; (2) a permanent injunction to restore competition to the markets in which Microsoft is unlawfully attempting to acquire, maintain and expand a number of monopolies; and (3) compensation for losses we suffered as a result of Microsoft’s unlawful actions. We filed an amended complaint on August 26, 2002, alleging additional illegal tying arrangements and acts of illegal monopoly maintenance. On August 9, 2002, the Judicial Panel on Multidistrict Litigation issued an order transferring Sun’s lawsuit to the District of Maryland for inclusion in the central pretrial proceedings in the Microsoft Corp. Windows Operating System Antitrust Litigation, MDL-1332. An evidentiary hearing on our pending motion for preliminary injunctions will be conducted by the District of Maryland beginning December 3, 2002. At the conclusion of the pretrial proceedings in MDL-1332, the lawsuit will return for trial to the Northern District of California.

In early February 2002, Sun and two of its subsidiaries received several charging letters from the United States Department of Commerce, Bureau of Industry and Security, Office of Export Enforcement (BIS) claiming that we had violated export control regulations. The letters relate to sales in 1998 in Egypt and in 1997 to a reseller in Hong Kong for subsequent resale in the People’s Republic of China. The letters specify, and the export statute authorizes the imposition of monetary penalties, denial of export privileges and exclusion from practice before the BIS if a violation is found. Sun representatives and outside counsel have been in settlement discussions with authorities at the BIS regarding penalties and remedies. In order to facilitate these discussions, the BIS granted us an extension until November 1, 2002 to respond to the charging letters. In addition, the BIS informed us verbally that additional charges would be added to the current claims against us. Based on settlement discussions with the BIS, we believe that it is reasonably likely that we will reach a negotiated resolution of these charging letters that will not have a material adverse effect on our operations. However, absent a negotiated resolution, an administrative hearing would be set at some date after November 1, 2002. In such case, we would assert a vigorous defense. We believe that any monetary penalties imposed would not have a material adverse effect on our financial condition. In addition, while we do not

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

No matters were submitted to a vote of stockholders of Sun during the fourth quarter of fiscal 2002.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following sets forth certain information regarding our Executive Officers as of September 10, 2002. All of our executive officers are at-will employees.

Mr. McNealy is a Founder of Sun and has served as Chairman of the Board of Directors, President and Chief Executive Officer since July 2002, as Chairman of the Board and Chief Executive Officer from April 1999 to June 2002, as Chairman of the Board of Directors, President and Chief Executive Officer from December 1984 to April 1999, as President and Chief Operating Officer from February 1984 to December 1984 and as Vice President of Operations from February 1982 to February 1984. Mr. McNealy has served as a Director of the Company since the incorporation of the Company in February 1982.

Mr. Agnello has served as Senior Vice President, Workplace Resources of Sun since July 2000, as Vice President, Workplace Resources from August 1999 to July 2000 and as Vice President, Real Estate and the Workplace from March 1994 to August 1999.

Mr. Beveridge has served as Executive Vice President, People and Places, and Chief Human Resources Officer of Sun since July 2002, as Executive Vice President and Chief Human Resources Officer from March 2000 to

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Mr. Canepa has served as Executive Vice President, Network Storage Products of Sun since April 2001, as Vice President and General Manager, Internet Desktop and Server Products from June 2000 to April 2001 and as Vice President, Workgroup Server Products from October 1996 to June 2000.

Mr. Croll has served as Senior Vice President, General Counsel and Secretary of Sun since April 2002, as Vice President, Legal; General Counsel, Global Sales Organization from July 2001 to March 2002, as Vice President, Sales Operations, Global Sales Organization from July 2000 to March 2002, as Vice President and General Counsel of Sun Microsystems Computer Corporation, a wholly-owned subsidiary of the Company from August 1995 to June 2000, and as Vice President, Corporate Development and Strategy, and General Counsel, SunSoft, Inc., a wholly-owned subsidiary of Sun, from September 1994 to August 1995. Mr. Croll held various positions in the corporate development and legal organizations of SunSoft, Inc. from April 1991 to August 1994.

Mr. Howard has served as Senior Vice President, Chief Information Officer of Sun since July 2000 and as Vice President, Chief Information Officer from September 1998 to July 2000. From September 1990 to September 1998, he served as Corporate Vice President, Information Technology and Chief Information Officer for Inland Steel Industries, Inc.

Mr. Joy is a Co-Founder of Sun. He has served as Executive Vice President, Co-Founder and Chief Scientist since December 1998, as Executive Vice President from July 1996 to December 1998, as Vice President, Corporate Executive Officer from December 1990 to June 1996, as Executive Vice President from May 1990 to December 1990, as Vice President, Research and Development from June 1984 to May 1990 and as Director of Software from July 1982 to May 1984.

Mr. Knox has served as Executive Vice President, Volume System Products of Sun since July 2002, as Vice President and General Manager, Volume System Products from July 2001 to July 2002, and as Vice President and General Manager, Network Systems of the Company from July 1995 to July 2001.

Mr. Masters has served as Executive Vice President, Enterprise Systems Products of Sun since July 2002, as Vice President, Enterprise Systems Products from June 2000 to July 2002, and as Vice President, Data Center and High Performance Computing from July 1996 to June 2000.

Mr. McGowan has served as Executive Vice President, Corporate Resources and Chief Financial Officer of Sun since July 2002, as Vice President, Finance, Global Sales Operations from July 2001 to June 2002, as Vice President, Staff Operations, Global Sales Operations from June 2000 to June 2001 as Vice President, Finance; Computer Systems, Network Storage and Network Service Providers of the Company from February 1998 to June 2000, as Vice President, Finance, Worldwide Financial Operations of Sun Microsystems Computer Corporation (SMCC), a wholly-owned subsidiary of the Company, from July 1994 to February 1998 and as Vice President, Finance, North America and Australia Field Operations of SMCC from October 1992 to July 1994.

Mr. Morris has served as Senior Vice President, Special Counsel of Sun since April 2002, as Senior Vice President General Counsel and Secretary from April 2000 to March 2002 and as Vice President, General Counsel and Secretary from October 1987 to July 2000.

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

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Ms. Peterson has served as Executive Vice President, Worldwide Operations and Chief Customer Advocate of Sun since July 2002, as Executive Vice President, Worldwide Operations from January 2000 to July 2002, and as Vice President, Worldwide Operations from April 1998 to December 1999. She served as Vice President, Worldwide Operations, Logistics from December 1995 to April 1998 and as Director, U.S. Manufacturing from December 1993 to April 1995.

Mr. Popov has served as Vice President and Corporate Controller of Sun since April 1999, as Vice President, Chief Operating Officer, Staff Operations from April 1998 to April 1999, as Vice President, Finance, SunService from June 1994 to April 1998 and as Assistant Corporate Controller from January 1992 to June 1994.

Ms. Sage-Gavin has served as Senior Vice President, Global Talent Organization of Sun since July 2002 and as Vice President, Human Resources Computer Systems, Network Storage and Worldwide Operations from August 2000 to June 2002. From August 1997 to July 2000, Ms. Sage-Gavin served as Senior Vice President, Human Resources at Disney Consumer Products.

Mr. Schwartz has served as Executive Vice President, Software of Sun since July 2002, as Senior Vice President, Corporate Strategy and Planning from July 2000 to July 2002, as Vice President, Ventures Fund from October 1999 to July 2000, as Vice President, Internet and Application Products of the Company from May 1999 to October 1999, as Vice President, Enterprise Products Group from July 1998 to May 1999 and as Director, Product Marketing, Javasoft, from July 1997 to July 1998.

Ms. Sueltz has served as Executive Vice President, Sun Services since July 2002, as Executive Vice President, Software Systems Group of Sun from July 2000 to June 2002 and as President, Software Products & Platforms from September 1999 to June 2000. Ms. Sueltz served in various management capacities at IBM Corporation from 1979 to 1999.

Mr. Tolliver has served as Executive Vice President, Marketing and Strategy and Chief Strategy Officer of Sun since July 2002, as Executive Vice President and President, iPlanet, Sun-Netscape Alliance of the Company from July 2000 to July 2002, as President and General Manager, Sun-Netscape Alliance of the Company from March 1999 to July 2000, as President, Consumer and Embedded Division of the Company from April 1998 to March 1999, as Vice President, Market Development from July 1996 to April 1998 and as Vice President, Strategy from December 1995 to July 1996.

Mr. Yen has served as Executive Vice President, Processor and Network Products of Sun since July 2002, as Vice President and General Manager, Processor Products Group from February 2001 to June 2002, as Vice President and General Manager, Integrated Products Group from July 2000 to January 2001, and as Vice President and General Manager, Enterprise Servers Products from September 1996 to June 2000. Mr. Yen held various positions in the Server Systems Engineering and Networked Resources Group organizations of the Company from October 1988 to August 1996.

Mr. Youngjohns has served as Executive Vice President, Global Sales Operations of Sun since July 2002, as Vice President, Europe Middle East and Africa from April 1998 to July 2002, and as Vice President, UK from November 1995 to April 1998.

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PART II

Our common stock trades on The Nasdaq National Market under the symbol “SUNW”. As of September 10, 2002, there were approximately 23,000 stockholders and the closing price of Sun’s common stock was $3.51 per share as reported by The Nasdaq National Market.

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

No cash dividends were declared or paid in fiscal 2002 or fiscal 2001. We anticipate retaining all available funds to finance future internal growth and product development.

Effective July 1, 2002, we modified our policies concerning “Certification”, to eliminate the need for the Section 16 Officer and Board of Director certificate regarding trading on insider information, and concerning “Sale of Stock by Certain Company Directors and Employees”, to eliminate the reporting in our periodic reports of the sales of stock for the last quarter. The modification was approved by the majority of independent directors.

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ITEM 6.     SELECTED FINANCIAL DATA

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

(1)	Fiscal years ended June 30. All historical financial information has been restated to reflect the merger with Forte Software, Inc. on October 19, 1999.
(2)	Share and per share amounts for all periods presented have been adjusted to reflect stock splits through June 30, 2002.
(3)	Includes approximately $204 million classified as current portion of long-term debt.

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This annual report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements relating to Sun’s business strategy; our intention to continue investments into new computing technologies and to focus on delivering leading-edge network computing products based on our innovations; our belief that our investment in research and development will generate better long-term profit margins; our plans to continue our hedging programs; our belief that software development will continue to provide significant competitive differentiation; our belief that we will be able to obtain licenses in certain cases where we have received patent and intellectual property infringement claims; our plan to exit 56 facilities around the world; and our expectation to exit certain leases by December 31, 2002; our belief that the Kodak suit is without merit; our belief regarding our ability to reach a negotiated settlement with the BIS; the potential non-cash goodwill impairment charge of approximately $2.2 billion; our belief that to maintain our competitive position, we must invest significant resources in new systems, software, and microprocessor development; our long-term objective to invest 10-11% of net revenues in R&D; management’s objective to reduce SG&A expenses to approximately 25% of net revenues and our near-term expectations regarding SG&A expenses; statements regarding sublease income and termination of lease obligations; our intention to pay the remaining cash expenditures relating to the workforce reductions and termination of leases by the second quarter of fiscal 2003; our expectation to generate positive cash flow from operations in fiscal 2003; our expectations regarding the volatility of our marketable securities portfolio; statements regarding our liquidity and capital resources; our belief that Fujitsu intends to continue as our strategic channel partner; and as set forth in the section entitled “Purchased In-Process Research and Development,” statements regarding percentage of completion, expected product release dates, dates for which we expect to begin generating benefits from projects, projected revenues, costs of sales, SG&A expenses and R&D expenses, and discount rates we used to calculate discounted cash flows, and our expectations to continue to successfully complete product development as well as realize our expected economic return. These statements are just predictions and involve risks and uncertainties, and the cautionary statements below and those contained in this report under “Risk Factors” identify important factors that could cause actual results and performance to differ materially. Factors that might cause such a difference include increased competition, continued adverse macroeconomic conditions in the U.S. and internationally, including adverse business conditions in specific markets for our products, lack of acceptance of new products, pricing pressures, lack of success in technological advancements, failure to reduce costs or improve operating efficiencies, and our ability to retain key employees.

Changes to Previously Announced Fiscal 2002 Fourth Quarter and Annual Results

On July 18, 2002, we announced our fiscal 2002 fourth quarter and annual results. Subsequent to that date, we became aware of additional information related to our vacation and commission accruals that indicated that our initial estimates of these costs should be reduced. In the case of the vacation accrual, we learned that one element of underlying source data for a limited number of employees was not correct. In the case of the sales commission accrual, actual individual performance compared to established goals was different from what we expected. After reviewing and evaluating the information, we reduced vacation and sales commission costs, along with the related accrual balances at June 30, 2002, by $19 million and $42 million, respectively. Out of the $19 million related to the vacation costs, $1 million reduced cost of sales, $4 million reduced research and development costs and $14 million reduced selling, general and administrative costs. In addition, we also recorded the effects of an intercompany shipment that was inadvertently processed incorrectly. As a result of this adjustment, gross margin increased by $7 million. For our fiscal 2002 fourth quarter and fiscal 2002 year, these adjustments increased our net income, and reduced our net loss, respectively, by approximately $41 million, net of $27 million in tax.

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Below is a reconciliation of the effects of these changes on the reported results in our July 18, 2002 press release to amounts reported in this Annual Report on Form 10-K (in millions except per share data):

Critical Accounting Policies

The accompanying discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (US GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and the best estimates and judgments routinely require adjustment. US GAAP requires us to make estimates and judgments in several areas, including those related to fair value of derivative financial instruments, recording various accruals (including our accrual for restructuring charges), the useful lives of long lived assets such as property and equipment, income taxes, warranty obligations and potential losses from contingencies and litigation, however, we believe the policies discussed below are the most critical to our financial statements because their application places the most significant demands on management’s judgment. Our critical accounting policies are described in the following paragraphs.

As discussed in Note 2 to our Consolidated Financial Statements, we enter into agreements to sell hardware, software, services and other arrangements (multiple element arrangements) that include any combination of products and/or services. While the vast majority of our sales transactions contain standard business terms and conditions, there are transactions that contain non-standard business terms and conditions. As a result, significant contract interpretation is sometimes required to determine the appropriate accounting including: (1) whether an arrangement exists; (2) how the price should be allocated among the deliverables if there are multiple deliverables; (3) whether undelivered elements are essential to the functionality of delivered elements; and (4) when to recognize revenue. In addition, our revenue recognition policy requires an assessment as to whether collectibility is probable, which inherently requires us to evaluate the creditworthiness of our customers.

Channel Partners selling our high volume products generally carry Sun products as inventory and we recognize revenue when we sell to the Channel Partners, if our revenue recognition criteria are met. Channel Partners selling our high-end products generally purchase our products at the time an end user is identified. The revenue we recognize associated with channel sales transactions requires us to make estimates in several areas including: (1) creditworthiness; (2) the amount of credits we will give to the Channel Partners for subsequent changes in our price list (i.e., price protection); and (3) customer returns.

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As discussed in Note 4 to our Consolidated Financial Statements, we adopted Statement of Financial Accounting Standard No. 142 (SFAS 142), “Goodwill and Other Intangible Assets” on July 1, 2001. This standard requires that goodwill no longer be amortized, and instead, be tested for impairment on a periodic basis. At June 30, 2002, we had $2.2 billion in goodwill.

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

Accordingly, the process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment at many points during the analysis. In estimating the fair value of the businesses with recognized goodwill for the purposes of our fiscal 2002 financial statements, we made estimates and judgments about the future cash flows of these businesses. Our cashflow forecasts were based on assumptions that are consistent with the plans and estimates we are using to manage the underlying businesses. In addition, we made certain judgments about allocating shared assets such as accounts receivable and inventory to the estimated balance sheet for those businesses. We also considered our market capitalization (adjusted for unallocated monetary assets such as cash, marketable debt securities and debt) on July 1, 2001 ($15.97 per share) and April 1, 2002 ($9.52 per share), representing the dates of our impairment tests under SFAS 142, in determining the fair value of the respective businesses.

Based on our best estimates, we have concluded that there is no impairment of our goodwill. However, changes in these estimates, including our market capitalization, could cause one or more of the businesses to be valued differently. For example, during the fourth quarter of 2002, while our long-term business projections did not change, we experienced a significant decline in our market capitalization. In the second quarter of fiscal 2003, if our market capitalization does not recover to the levels of April 2002 ($29.1 billion), then we will perform another impairment analysis. This analysis could potentially result in a non-cash goodwill impairment charge, for the entire goodwill balance at June 30, 2002, of up to approximately $2.2 billion, depending on the estimated value of the businesses to which the goodwill relates and the value of the other assets and liabilities attributed to those businesses at that time.

Other Intangible Assets

In accordance with US GAAP, we perform tests for impairment of intangible assets other than goodwill (Other Intangible Assets) whenever events or circumstances suggest that Other Intangible Assets may be impaired. We recognized $6 million, $1 million and $21 million in fiscal years 2002, 2001 and 2000, respectively, as impairment charges against the carrying value of Other Intangible Assets. At June 30, 2002, we had Other Intangible Assets with a carrying value of approximately $215 million. These consisted of Other Intangible Assets related to business combinations of approximately $104 million and an intangible asset with a carrying value of $111 million related to a revenue generating technology license, acquired as part of the Strategic Alliance with AOL, see Note 5 to the Consolidated Financial Statements for further discussion. To evaluate potential impairment, US GAAP requires us to assess whether the future cash flows related to the asset will be greater than its carrying value at the time of the test. Accordingly, while our cashflow assumptions are consistent with the plans and estimates we are using to manage the underlying businesses, there is significant judgment in determining the cashflows attributable to our Other Intangible Assets over their respective estimated useful lives. For example, if we reduced the estimated useful life of all intangible

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Bad Debt Reserves

At June 30, 2002, our bad debt reserve was approximately $114 million. We evaluate the collectibility of our accounts receivable based on a combination of factors. In cases where we are aware of circumstances that may impair a specific customer’s ability to meet its financial obligations to us, we record a specific allowance against amounts due to us, and thereby reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize allowances for doubtful accounts based on the length of time the receivables are past due, industry and geographic concentrations, the current business environment and our historical experience. If the financial condition of our customers deteriorates or if economic conditions worsen, additional allowances may be required in the future.

Inventory Reserves

At June 30, 2002, our inventory balance of $591 million was net of an approximate write-down of $90 million for slow moving and excess inventory. We evaluate our ending inventories for estimated excess quantities and obsolescence. This evaluation includes analyses of sales levels by product and projections of future demand within specific time horizons (generally six months or less). Inventories in excess of future demand, as defined, are reserved. In addition, we assess the impact of changing technology on our inventory-on-hand and we write off inventories that are considered obsolete. Remaining inventory balances are adjusted to approximate the lower of our standard manufacturing cost or market value. If future demand or market conditions are less favorable than our projections, additional inventory write-downs may be required and would be reflected in cost of sales in the period in which the revision is made.

Equity Investments in Privately-Held Companies

In 1999, we formed Sun’s Venture & Strategic Investment Fund to invest in companies developing products, markets and services that are strategic to Sun. As discussed in Note 2 to our Consolidated Financial Statements, investments in privately-held companies were made as part of Sun’s Venture & Strategic Investment Fund’s strategy. These equity investments were generally made in connection with a round of financing with other third party investors. At June 30, 2002, we had approximately $229 million (book value) of equity investments in privately-held companies. As our equity investments generally do not permit us to exert significant influence or control over the entity in which we are investing, these amounts generally represent our cost of the investment, less any adjustments we make when we determine that an investment’s net realizable value is less than its carrying cost.

The process of assessing whether a particular equity investment’s net realizable value is less than its carrying cost requires a significant amount of judgment. In making this judgment, we carefully consider the investee’s cash position, projected cashflows (both short and long-term), financing needs, most recent valuation data, the current investing environment, management/ ownership changes, and competition. This evaluation process is based on information that we request from these privately-held companies. This information is not subject to the same disclosure and audit requirements as the reports required of U.S. public companies, and as such, the reliability and accuracy of the data may vary. Based on our evaluation, we recorded impairment charges related to our investments in privately-held companies of $64 million, $72 million and none in fiscal years 2002, 2001 and 2000, respectively.

Estimating the net realizable value of investments in privately-held early-stage technology companies is inherently subjective and may contribute to significant volatility in our reported results of operations. For example, if the current weak investing environment continues throughout fiscal 2003, we may incur additional impairments to our equity investments in privately-held companies.

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RESULTS OF OPERATIONS

Net Revenues
(dollars in millions)

Products Net Revenue

Products net revenue consists of revenue generated from the sale of our computing systems and storage products, and our operating system and other software for network computing.

In fiscal 2002, our products net revenue decreased, as compared with fiscal 2001, primarily as a result of the adverse macroeconomic conditions that began at the end of the second quarter of fiscal 2001 and continued throughout fiscal 2002. These conditions led to significant reductions and deferrals in information technology (IT) spending, particularly by customers in the telecommunications and financial services industries. Our business is highly dependent upon both IT spending and these industries. As a result, we experienced lower sales volumes, and increased competitive pricing pressure on substantially all of our product lines.

In fiscal 2001, our products net revenue increased as compared with fiscal 2000, primarily due to significant revenue growth in the first half of fiscal 2001, as a result of increased IT spending during the period.

Services Net Revenue

Services net revenue consists of revenue generated from Sun Services (formerly Enterprise Services) which includes Support Services, Professional Services and Educational Services.

In fiscal 2002, the 5.2% growth in services net revenue, as compared with fiscal 2001, was due to an increase in revenue from Support Services, partially offset by decreases in revenue from Professional Services and Educational Services. Support Services revenue, which represents over 65% of services net revenue for all periods presented, consists of maintenance contract revenue, which is recognized ratably over the contractual period. Support Services revenue growth was primarily a result of: (1) an increase in our installed base of servers; and (2) a better mix of platinum, gold, silver and bronze service level contracts in our portfolio (i.e. more premium services with higher revenue value). Sun Professional Services revenue is generated from technical consulting and systems integration services to help customers plan, implement, and manage distributed network computing environments. Sun Educational Services revenue is generated by developing and delivering integrated learning solutions for enterprises, IT organizations, and individual IT professionals. The Professional Services and the Educational Services revenue decrease was due to a combination of: (1) a reduction in customers’ discretionary spending, and (2) a decline in new product sales.

In fiscal 2001, the 40.7% growth in services net revenue, as compared with fiscal 2000, was primarily the result of: (1) a continuing shift towards premium service and support contracts generated from a larger installed base of high-end server products and an overall shift in customer demand for higher levels of support; (2) a larger installed base of product units; and (3) an increase in revenues associated with our professional and educational services.

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A significant portion of our services net revenue is generated by contracts related to new product sales; as a result, our services net revenue could be negatively impacted if a further deterioration in global macroeconomic conditions continue to negatively impact our products net revenue.

Net Revenues by Geographic Area

(dollars in millions)

At the end of the second quarter of fiscal 2001, there was an unexpected and significant reduction in capital spending in many industries, which resulted in decreased demand in the U.S. for our products and a decline in our products net revenue. The weak U.S. economic situation evolved into adverse global macroeconomic conditions beginning in the fourth quarter of fiscal 2001, resulting in reductions in capital spending in many countries within the international regions in which we do significant business and negatively impacting our non-U.S. product net revenues. These adverse global macroeconomic conditions have continued throughout fiscal 2002, resulting in a 32.8% decrease in U.S. net revenues, and a 30.4% decrease in international net revenues in fiscal 2002, as compared with fiscal 2001. Overall, during fiscal 2001, as compared with fiscal 2000, we experienced net revenue growth in the U.S. as well as in the majority of the countries within the international regions.

In fiscal 2002, within the Americas-Other region, net revenues decreased by 30.6% as compared with fiscal 2001, primarily because of decreases in net revenues in Canada and Brazil. The ongoing financial crisis in Argentina had an insignificant impact on our overall revenues for fiscal 2002.

In fiscal 2002, within the EMEA region, net revenues decreased by 30.3% as compared with fiscal 2001, primarily because of decreases in net revenues in the United Kingdom, Northern Europe and Germany. Northern Europe consists primarily of the Scandinavian countries, the Netherlands, Belgium/ Luxembourg, Eastern European countries and Russia.

In fiscal 2002, within the APAC region, net revenues decreased by 30.5% as compared with fiscal 2001, primarily because of decreases in net revenues in Japan, China and Korea. Economic conditions in Japan have declined substantially in recent years and have adversely impacted our sales in this region. If the economic

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In fiscal 2002, decreases in net revenues in Japan, the United Kingdom, Northern Europe, and Germany collectively accounted for approximately 63% of the total decrease in international net revenues, as compared with fiscal 2001.

In fiscal 2001, within the Americas-Other region, net revenues increased by 38.8% (primarily contributed by Canada and Brazil) as compared with fiscal 2000. In fiscal 2001, within the APAC region, net revenues increased by 30.5% (primarily contributed by Japan and China) as compared with fiscal 2000. In fiscal 2001 within the EMEA region, net revenues increased by 22.6% (primarily contributed by the United Kingdom, Northern Europe and Germany) as compared with fiscal 2000.

In fiscal 2001, net revenues in the United Kingdom, Germany, Japan and China collectively accounted for more than 40% of the total increase in international net revenues for fiscal 2001. Also, see Note 15 to the Consolidated Financial Statements.

Gross Margin

(dollars in millions)

Products Gross Margin

In fiscal 2002, products gross margin decreased by 7.6 percentage points, as compared with fiscal 2001. Substantially all of the 7.6 percentage point decline in products gross margin was due to reductions in product pricing (normal price list reductions and competitive transaction pricing) and higher platform transition costs associated with conversion of a majority of our product lines to UltraSPARC III. These transition costs primarily consisted of write-offs for excess and obsolete inventory and costs associated with rework. However, the resulting decline in products gross margin was partially offset by lower purchased component costs. Our products gross margin was 36.9% for the first half of fiscal 2002, and 41.8% for the second half of fiscal 2002. The majority of the 4.9 percentage point increase in our products gross margin in the second half of fiscal 2002, as compared with the first half of fiscal 2002, was attributable to: (1) a reduction in the platform transition costs associated with the conversion of a majority of our product lines to UltraSPARC III that were incurred during the first half of fiscal 2002; and (2) reductions in our fixed manufacturing costs as a result of lower production volumes.

In fiscal 2001, products gross margin decreased by 7.6 percentage points as compared with fiscal 2000. Substantially all of the 7.6 percentage point decrease in products gross margin was due to: (1) higher purchased component costs; (2) lower volumes of products manufactured; and (3) competitive transaction pricing.

Should the global macroeconomic conditions deteriorate further, or the pricing pressures associated with competition intensify, products gross margin could be adversely impacted.

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Services Gross Margin

In fiscal 2002, the 3.4 percentage point increase in services gross margin, as compared with fiscal 2001, reflected the impact of: (1) variable costs decreasing as a result of discretionary spending controls; (2) support services revenue increasing as a percentage of total services net revenue (support services typically generates a higher gross margin than professional services or educational services); and (3) infrastructure headcount-related costs decreasing due to the workforce reduction in the second quarter of fiscal 2002 (direct services headcount decreased by 2% or approximately 240 employees while services revenue continued to grow). The impact of these favorable items on services gross margin in fiscal 2002, as compared with fiscal 2001, was partially offset by: (1) increased fixed infrastructure costs; and (2) increased third party costs necessary to support global customer service expectations. For the first half of fiscal 2002, our services gross margin was 36.5%, while our services gross margin was 41.5% for the second half of fiscal 2002. The majority of the 5.0 percentage point increase in our services gross margin in the second half of fiscal 2002, as compared with the first half of fiscal 2002, was attributable to: (1) lower overall costs generated by the workforce reduction, and (2) other actions taken to reduce services infrastructure.

In fiscal 2001, the 1.1 percentage point decrease in services gross margin, as compared with fiscal 2000, reflected the impact of: (1) increased fixed and variable costs to support our services infrastructure; (2) increased capital and operating expenditures related to the deployment of service delivery technologies and processes; (3) expanded field service delivery headcount to support increased customer service expectations and expected future growth in the service business; and (4) increased pricing pressure. During fiscal 2001, approximately 2,300 of Sun’s total increase in global headcount of 7,000 personnel represented service employees.

Operating Expenses

(dollars in millions)