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Article by DailyStocks_admin    (10-31-08 03:10 AM)

Filed with the SEC from Oct 16 to Oct 22:

Sun Microsystems (JAVA)
Southeastern Asset Management will continue discussions with Sun's management or third parties regarding ways to maximize shareholder value, and might suggest actions to assist in boosting or realizing that value.
Southeastern reported ownership of about 160.57 million shares (21.2% of the total outstanding).

BUSINESS OVERVIEW

GENERAL

Sun Microsystems, Inc. (NASDAQ: JAVA) provides network computing infrastructure solutions that drive global network participation through shared innovation, community development and open source leadership. Guided by a singular vision, “The Network is the Computer™”, we provide a diversity of software, systems, storage, services and microelectronics that power everything from consumer electronics, to developer tools and the world’s most powerful data centers.

With core brands including the Java™ technology platform, the Solaris™ Operating System, the MySQL™ database management system, Sun StorageTek™ storage solutions and the UltraSPARC ® processor, our network computing platforms are used by nearly every sector of society and industry, and provide the infrastructure behind some of the world’s best known search, social networking, entertainment, financial services, manufacturing, healthcare, retail, news, energy and engineering companies.

By investing in research and development, we create products and services that address the complex information technology issues facing customers today, including increasing demands for network access, bandwidth and storage. We share these innovations in order to grow communities, in turn increasing participation on the network and building new market opportunities while maintaining partnerships with some of the most innovative technology companies in the world.

For the fiscal year ended June 30, 2008, we reported net revenues of $13.9 billion, employed approximately 34,900 employees and conducted business in over 100 countries. We were incorporated in California in February 1982, and reincorporated in Delaware in July 1987.

Our Internet address is http://www.sun.com. The following filings are posted to our Investor Relations web site, located at http://www.sun.com/investors as soon as reasonably practical after submission to the United States (U.S.) Securities and Exchange Commission (SEC): annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, the proxy statement related to our most recent annual stockholders’ meeting and any amendments to those reports or statements filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. All such filings are available free of charge on our Investor Relations web site. We periodically webcast company announcements, product launch events and executive presentations which can be viewed via our Investor Relations web site. Additionally, we provide notifications of our material news including SEC filings, investor events, press releases and CEO blogs as part of the Official Investor Communications section of our Investor Relations web site. The contents of these web sites are not intended to be incorporated by reference into this report or in any other report or document we file and any references to these web sites are intended to be inactive textual references only.

BUSINESS STRATEGY

Our business strategy is to provide superior network computing infrastructure solutions that rely on innovation as a core differentiator. A key driver behind this strategy is the development, integration and sharing of our software, microprocessors, storage, services and systems in order to grow communities of developers and users around the world, while increasing participation on the network and building new markets for our solutions. We intend to continue to invest in this model, with a focus on the development and delivery of leading-edge, energy-efficient network computing products based upon our latest innovations.

With a strong commitment to open standards, open interfaces and the open source community, we believe sharing and collaboration is key to our long-term success. We focus on creating communities and sharing innovations and technologies to foster global network participation and advance the use of the Internet as a social utility, driving increases in use and demand for the infrastructure to support that increased use. Our open source initiatives are intended to increase participation in software and hardware design by making our innovative hardware and software intellectual property freely available. A core premise to the success of our software business is our ability to attract innovative application developers to our Java platform and Solaris Operating System. We build relationships with these communities of developers to stimulate demand for our commercial products and services. For example, more Java technology-driven devices means more demand for what we build to support those devices. Today, there are billions of Java-enabled devices in the marketplace. As more people gain access to the network, more opportunities surface for developers and businesses to deploy applications that create value, from educational institutions deploying high-performance computing grids, to banks and social networks serving millions of users. Bringing more people to the network and encouraging development of community-based intellectual property fuels greater demand for the innovative technologies and services that we create.

Accordingly, the cornerstones of our business strategy include:

Innovation and Intellectual Property Creation. In order to maintain our position as a leading developer of enterprise and network computing solutions, we must continue to invest and innovate. A sampling of these innovations during fiscal 2008 includes the introduction of the following products:



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Our first quad-core Intel ® Xeon ® processor-based systems, offering advanced performance, density and expandability and an energy-efficient design.



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Our entry into the commercial silicon market with our UltraSPARC ® T2 commodity microprocessor, a volume processor with 8 cores and 8 threads per core.



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Our Sun SPARC ® Enterprise T5120 and T5220 servers, the first servers to use the UltraSPARC T2 processor.


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Third-generation CMT SPARC Enterprise T5140 and T5240 servers based on the UltraSPARC T2 Plus processor — an expansion of the Sun and Fujitsu SPARC Enterprise server line optimized and managed by the Solaris 10 Operating System.


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Our Sun Blade™ X8440 server module, a blade server designed for quad-core AMD Opteron™ processors.


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Our Sun Blade X8450 server module, bringing the energy-efficient performance of Quad-Core Intel Xeon processors to the Sun Blade 8000 system family.


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Our Sun Constellation and Sun StorageTek 5800 Systems, next generation open petascale computing and storage systems designed to address extreme compilation, scale and storage requirements.


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Our Sun Netra™ T5220 server, a carrier grade, 64-thread rackmount server.


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Key enhancements to the Solaris 10 Operating System, including the integration of PostgreSQL 8.2 for Solaris, new virtualization capabilities with Solaris Containers for Linux Applications, enabling customers to run existing Linux applications on x86 systems running the Solaris Operating System without modification and improved performance and power-management capabilities on AMD and Intel processors.


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Our OpenSolaris™ Operating System based on our Solaris kernel and created through community collaboration, featuring a new network-based Image Packaging System (IPS) and featuring ZFS™ as its default file system.


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Our Project Blackbox release as the Sun Modular Data center (Sun MD) S20, highlighting global demand and broad applicability of a virtualized, modular data center housed in an enhanced twenty-foot shipping container.


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Our MySQL Cluster Carrier Grade Edition 6.3, the latest version of the MySQL high-availability open source database, especially designed and certified for use in carrier grade telecom environments, such as Subscriber Data Management systems (HLR, HSS) and in Service Delivery Platforms.

Interoperability and Choice. We take a “whole system” view of the products that we deliver into the marketplace. We are uniquely qualified to integrate our microelectronics, servers, storage, software and services into eco-responsible solutions that can transform information technology (IT) into a competitive weapon for customers. Our focus on providing multi-platform implementations provides customers with greater choice for their heterogeneous environments. The Java Enterprise System is available on Linux, Windows and HP-UX platforms in addition to Solaris. Our x64 systems are available for use with Solaris, Windows, Red Hat and SuSe Linux operating systems, and our SPARC systems are available with Solaris and Ubuntu Linux. We remain committed to standards-based designs and implementations, including standards-based networking protocols and Web services that allow customers to build heterogeneous network computing environments. Interoperability gives customers choice so they can choose best-of-breed hardware and software solutions for their IT environments and lowers barriers to entry and exit.

Environmentally Responsible Products and Business Practices. Eco-responsibility is part of our overall corporate social responsibility strategy, which strives to create positive social change, minimize environmental impact and generate business. Our approach to eco-responsibility is to deliver eco-friendly products that enable sustainable computing, reduce the environmental impact of our own operations and build and share open source solutions.

We are innovating to develop products and programs that reduce energy needs and carbon dioxide production at all levels including microprocessors, servers, thin clients and computer grids. We are also reducing the environmental impact of our own operations by streamlining data center operations for maximum efficiency, choosing less harmful materials; working to recover, remanufacture or recycle products; and continuing to strive to minimize electronic waste.

In 2006, the Sun Fire™ T1000 and T2000 servers became the first servers to qualify for a local utility company rebate. Our cost control objectives are facilitated by our Open Work program, which allows employees to work wherever they need or want to — while armed with a cell phone and Internet access — which has contributed to reduced real estate costs and we believe has eased pollution and reduced energy use. More than 56% of our employees around the world work from home or a flexible office, saving us tens of millions of dollars annually in real estate costs. We have driven out additional costs by significantly consolidating our global data center square footage and implementing state-of-the-art energy efficient data center design principles. During fiscal 2008, we have significantly reduced our annual energy costs in the Bay Area as a result of the consolidation into our new Santa Clara data center which was completed in June 2007. Silicon Valley Power, a local utility company, has recognized the breakthrough efficiencies and design of this data center by giving us approximately $1.2 million in rebates and awards, which included a $250,000 innovation grant.

SEGMENT INFORMATION

During fiscal 2008, our Products revenue was comprised of revenue from Computer Systems products and Storage products. Our Services revenue was comprised of sales from two classes of services: (1) Support Services (Support and Managed Services) and (2) Professional Services and Educational Services. Support Services are services that offer customers technical support, software, and firmware updates, online tools, product repair and maintenance and preventive services for system, storage and software products. Managed Services include on-site and remote monitoring and management for the components of their IT infrastructure, including operating systems, third-party and custom applications, databases, networks, security, storage and the web. Professional Services are services that enable customers to reduce costs and complexity, improve operational efficiency and build or transform their IT infrastructure. Professional Services include IT assessments, architectural services, implementation services and consolidation and migration services. Educational Services include training and certification for individuals and teams. In fiscal 2008, 2007 and 2006, Computer Systems represented approximately 45%, 46% and 46%, respectively, of total net revenues. In fiscal 2008, 2007 and 2006, Storage products represented approximately 17%, 17% and 18%, respectively, of total net revenues. In fiscal 2008, 2007 and 2006, Support Services represented approximately 29%, 29% and 28%, respectively, of total net revenues. In fiscal 2008, 2007 and 2006, Professional Services and Educational Services represented approximately 9%, 8% and 8%, respectively, of total net revenues. A table providing external revenue for similar classes of products and services for the last three fiscal years is found in Note 15 to the Consolidated Financial Statements in Item 8. Financial information for each segment for fiscal 2008, 2007 and 2006 is found in Note 15 to the Consolidated Financial Statements in Item 8.

PRODUCTS

We develop innovative networking computing products and technologies that include energy-efficient servers, storage, open source software, tools, services and training. For information about revenue for similar classes of products and services, refer to Note 15 to the Consolidated Financial Statements in Item 8 and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations.

SYSTEMS

The substantial growth of network data and traffic, increasing compliance and regulatory demands, expanding needs for increased computing capacity and market pressure for energy and space reductions requires a broad set of system solutions that are cost effective, reliable, scalable and eco-responsible.

Servers. We offer a full line of scalable servers based on SPARC64 ® , UltraSPARC, AMD Opteron and Intel Xeon microprocessors, that range from cost and energy efficient entry level servers and blade systems through data center/high-performance business critical computing servers designed for heterogeneous computing environments.

Entry server systems. We offer a wide range of Sun Fire and Sun Blade entry server systems differentiated by their size, their cost, their processor architecture (UltraSPARC, SPARC64, AMD Opteron or Intel Xeon), their form factor (rack, blade or stand-alone systems) and the environment for which they are targeted (general purpose or specialized systems). These systems are compatible with the Solaris, Linux and Windows operating system environments.

Enterprise and data center servers. Our enterprise and data center servers, including the Sun Fire and SPARC Enterprise product families, are designed to offer greater performance and lower total cost of ownership than mainframe systems for business critical applications and more computational intensive environments. These systems are based on UltraSPARC, SPARC64, AMD and Intel microprocessor platforms and are also compatible with the Solaris, Linux and Windows operating system environments.

Desktops. Our Sun Ray™ Ultra-Thin Client platforms provide an alternative to traditional desktop personal computers where client applications are better suited and more economical to run on a network versus an individual desktop platform.

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

Microelectronics . Our microelectronics business develops and sells silicon-based chips that facilitate networking, cryptography and high-performance computing. These chips are utilized by OEM customers and hardware vendors worldwide in a broad range of devices from servers to routers, switches, network devices, medical imaging, industrial printing and more.

Storage. We offer a broad range of products and services for securely managing mission critical data assets. Our entry-to-enterprise-level data storage products and services include heterogeneous tape, disk, software, networking and services for mainframe and open systems environments.

Our tape storage includes libraries, drives, virtualization systems, media and software. The extensive disk system product line includes data center disks, Network Attached Storage (NAS), Enterprise Archive System, mid-range disks, workgroups disks, a boot disk and a full range of disk device software.

We are leveraging the Solaris Operating System across our storage portfolio to increase data management per administrator, scalability, security, utilization rates, observability and self-healing. The heterogeneous, industry-standard modular storage hardware works with Windows, Linux, z/OS, HP-UX, AIX and Solaris platforms and other software, so customers can more quickly and cost-effectively adapt to changing business needs. Our Storage solutions help to improve data availability, providing fast data access, dynamic data protection for restoration and secure archiving for compliance.

SOFTWARE

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

Solaris. The Solaris Operating System is a high performance, reliable, scalable and secure operating environment for SPARC and x64 platforms. It is optimized for enterprise computing, Internet and intranet business requirements, powerful databases and high-performance technical computing environments. The Solaris Operating System runs on hundreds of different server platforms including standard x64/x86 servers. The ability to run on multiple platforms has contributed to the rapid growth of the Solaris Operating System on non-SPARC based systems over the last two years. Additionally, we recently announced that Fujitsu-Siemens Computers will distribute the Solaris Operating System and Solaris Subscriptions for select x86-based PRIMERGY servers, joining other leading OEMs — including IBM, Dell and Intel — that support and offer Solaris on x86 hardware.

OpenSolaris. OpenSolaris is an open source project we created in 2005 to build a developer community around the Solaris Operating System. In May 2008, Sun and the global OpenSolaris community introduced the availability of the OpenSolaris Operating System, a single distribution for desktop, server and high-performance computing deployments. OpenSolaris, based on the Solaris kernel and created through community collaboration, delivers a development and deployment environment offering a combination of rapid innovation, platform stability and support to meet business and development needs. OpenSolaris features a new network-based IPS and features ZFS as its default file system.

Java Technology. Java technology plays a key role in powering compelling content and rich end-user experiences across various consumer electronics platforms. The Java platform is a global standard that powers billions of devices — from desktop browsers and computers to mobile phones and Blu-ray Disc players, TVs, Java smart cards and other connected consumer products.

Middleware. We also offer a full range of middleware solutions including mission-critical clustering, messaging, identity management, directory, service-oriented architecture (SOA), business integration, application server and Web services infrastructure software. Other software offerings include provisioning and monitoring software for network computing resource optimization and systems management simplification.

Virtualization. We announced our virtualization and management strategy in fiscal 2008, which includes an end-to-end portfolio of virtualization products from the desktop to the data center — Sun xVM VirtualBox™, Sun VDI, Sun xVM Ops Center and our to-be-released Sun xVM Server.

MySQL. MySQL is one of the fastest growing open source databases in the world. Many of the world’s largest and fastest-growing organizations use MySQL to save time and money powering their high-volume web sites, critical business systems and packaged software. We provide corporate users with commercial subscriptions and services and actively support the large MySQL open source developer community.

Network.com. Our Network.com™ site offers access to compute infrastructure on a pay-per-use basis via our Sun Grid compute utility at $1/CPU-hr. It is powered by the Solaris 10 Operating System and Sun Grid Engine running on our x64 hardware. CPU-hr is defined as the aggregate time spent across all CPUs and rounded up to the next hour.

SERVICES

We offer a broad range of services from Support Services and Managed Services for hardware, software and client solutions, to Professional Services and Educational Services. We assist customers globally with Support Services contracts in more than 100 countries.

Our services innovation is focused on integrating technology, knowledge, process and partners to deliver customer satisfaction, profitably, through our services to architect, implement and manage IT infrastructure. Our global service and support offerings help our customers increase system service levels, improve data center operational efficiency and effectiveness, and to deploy next-generation automation technologies to provide predictive, preemptive and proactive service to heterogeneous infrastructures.

SALES, MARKETING AND DISTRIBUTION

Our Global Sales and Services organization manages and has primary responsibility for our field sales organization, relationships with selling partners, technical sales support, sales operations and delivery of Support, Managed and Professional Services. We sell end-to-end networking architecture platform solutions, including products and services, in most major markets globally through a combination of direct and indirect channels. We also offer component products, such as central processor unit (CPU) chips and embedded boards, on an OEM basis to other hardware manufacturers and supply after-market and peripheral products to their end-user installed base, both directly and through independent distributors and value added resellers (VARs).

We have organized our sales coverage within 16 geographically established markets (GEMs) around the world and employ independent distributors in over 100 countries. In general, the sales coverage model calls for independent distributors to be deployed via strategic alliances with our direct sales force. However, in some smaller markets, independent distributors and joint venture partners may be the sole means of sales, marketing and distribution. Our relationships with channel partners are very important to our future revenues and profitability. Channel relationships accounted for more than 63%, 65% and 63% of our total net revenues in fiscal 2008, 2007 and 2006, respectively.

The partner community is essential to our success. With a vast and diverse product and service portfolio, we recognize that no single supplier of computing solutions can meet the needs of all of its customers. As a result, we have established relationships with leading Independent Software Vendors (ISVs), VARs, OEMs, channel development providers, independent distributors, computer systems integrators and Service Development Providers (SDPs) to deliver solutions that customers demand. Through these relationships, it is our goal to optimize our ability to be the technology of choice, the platform of choice, the partner of choice and to provide the end-to-end solutions that customers require to compete. Our Worldwide Marketing Organization oversees marketing planning, determines product and pricing strategy, coordinates advertising, demand creation and public relations activities, maintains strategic alliances with major ISVs and performs competitive analyses. Additionally, ISV partners help us to maximize our technology footprint by integrating their software products with our platforms and technologies. SDPs, such as Internet Service Providers (ISPs) and Application Service Providers (ASPs), allow us to expand our service coverage without new large-scale investments.

We seek out partner companies that align with our technology direction and vision of enabling network participation. We have long-standing partnerships with several companies, including: Advanced Micro Devices, Inc. (AMD) to expand its entry-level line of Opteron processor-based x64 systems; Intel Corporation, whereby Intel endorses the Solaris Operating System and we offer a comprehensive family of servers and workstations based on Xeon processors; Fujitsu to deliver and support a generation of SPARC-based systems that we have developed through collaboration (our relationship with Fujitsu is discussed in greater detail in Item 1A, “Risk Factors”) and is intended to enlarge the Solaris Operating System footprint, drive increased market share for our enterprise-class systems and allow for additional dedicated resources to our throughput computing initiative and next generation of processor products; and Hitachi Data Systems to provide high-end storage solutions and extend our storage offerings into other enterprise environments.

Several new or expanded partnerships were announced in fiscal 2008, including those with: IBM to distribute our Solaris 10 Operating System and Solaris for select x86-based IBM servers and blade servers; Google to make our StarOffice™ Suite available through the Google Pack software download service; Dell to establish a multi-year OEM agreement making the Solaris Operating System and support services available directly to customers for select Dell PowerEdge services; and Microsoft to expand our existing alliance with the official opening of the Sun/Microsoft Interoperability Center for optimizing Microsoft applications on Sun Fire x64 server systems and storage, and the availability of the Sun Infrastructure Solution for Microsoft Exchange Server 2007.

Revenues from outside the U.S. were approximately 63%, 59% and 58% of our total net revenues in fiscal 2008, 2007 and 2006, respectively. Direct sales outside of the U.S. are generally priced in local currencies and can be subject to currency exchange fluctuations. The net foreign currency impact on our total net revenues and operating results is difficult to precisely measure due to hedging and pricing actions we take to mitigate the effect of foreign exchange rate fluctuations. Excluding the effect of these actions, and due to the general weakening of the U.S. dollar, the maximum favorable impact related to foreign exchange rate changes during fiscal 2008, as compared with fiscal 2007, would be approximately 4% to net revenues.

For further financial information on our sales and long-lived assets by geographic area, see “Net Revenues by Geographic Area” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 15 to the Consolidated Financial Statements in Item 8.

For a discussion of risks attendant to our foreign operations, see “Risk Factors — Our international customers and operations subject us to a number of risks,” in Item 1A.

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

Sales to Avnet, Inc. (Avnet), the largest distributor of our products, accounted for approximately 11% of our net revenues in each of fiscal 2008, 2007 and 2006. In January 2007, Access Distribution, the largest distributor of our products at the time, was sold to Avnet by General Electric Company. Avnet was StorageTek’s largest distributor and became a distributor of our products after our acquisition of StorageTek in August 2005. The net revenue percentages for fiscal 2007 and 2006 represent sales to Avnet and Access Distribution on a combined basis. No other customer accounted for more than 10% of our net revenues in fiscal 2008.

Our product order backlog at June 30, 2008 was $1.1 billion, as compared with $1.0 billion at June 30, 2007. The product backlog total includes orders for which customer-requested delivery is scheduled within six months and orders that have been specified by the customer for which products have been shipped but revenue has been deferred. Although actual customer delivery can occur over several periods, product backlog can be used to identify potential revenue coverage for future periods. The larger the percentage coverage of targeted pending revenue, the lower the potential risk of non-achievement. Backlog levels vary with demand, product availability, product revenue recognition treatment, and delivery lead times and are subject to significant decreases as a result of, among other things, customer order delays, changes or cancellations. As such, backlog levels may not be a reliable indicator of future operating results.

WORLDWIDE OPERATIONS

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

Our manufacturing operations consist primarily of final assembly, test and quality control of enterprise and data center servers and storage systems. For all other systems, we rely on external manufacturing partners. We manufacture primarily in Oregon and Scotland and distribute much of our hardware products from our facilities and partner facilities located in California, the Netherlands and Japan.

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

RESEARCH AND DEVELOPMENT

Our research and product development programs are intended to sustain and enhance our competitive position by incorporating the latest advances in hardware, microprocessors, software, graphics, networking, data communications and storage technologies. As such, we have extended our product offerings and intellectual property through acquisitions of businesses, technologies and other arrangements with alliance partners. Product development continues to focus on enhancing the performance, scalability, reliability, availability, security, energy efficiency and serviceability of our existing systems and the development of new technology standards. Additionally, we remain focused on system software platforms for Internet and intranet applications, telecommunications and next-generation service provider networks, developing advanced workstation, server and storage architectures and advanced service offerings. We devote substantial resources to research and development (R&D) believing it provides and will continue to provide significant competitive differentiation. R&D expenses were $1.8 billion, $2.0 billion and $2.0 billion in fiscal 2008, 2007 and 2006, respectively.

COMPETITION

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

We continue to invest significantly in R&D to create hardware, software and services based on open standards and innovative business models to offer differentiated solutions to our customer, partner and developer communities. We focus our R&D investments to address complex customer issues such as escalating IT infrastructure costs, data security, under-utilized IT assets and the rising costs of power consumption, cooling and space in data-centers. We believe our innovations will continue to help businesses and developers address these IT concerns, drive high-growth business solutions and differentiate us from our major competitors.

We believe competition will be at least as intense in the next fiscal year as it was over the last fiscal year. In this environment, a lack of competitive advantage with respect to our hardware, software or services offerings could lead to a loss of competitive position resulting in fewer customer orders, reduced revenues, reduced margins, reduced levels of profitability and loss of market share. For more information about the competitive risks we face, refer to Item 1A. Risk Factors.

PATENTS, TRADEMARKS AND INTELLECTUAL PROPERTY LICENSES

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

We hold a number of U.S. and foreign patents relating to various aspects of our products and technology. While we believe that patent protection is important, we believe that factors such as innovative skills and technological expertise provide even greater competitive differentiation. From time to time we receive assertions that we may be infringing certain patents or other intellectual property rights of others. The action we take with respect to such assertions varies depending on our assessment of the nature of the particular assertion. When we believe there is a substantial likelihood that one of our products, component parts, or activities may infringe a valid intellectual property right of another party, there are several steps we may take to address such possible infringement, including securing alternative non-infringing products, designing our products or activities such that they do not infringe, or seeking a license on commercially reasonable terms. There is no guarantee that such efforts to remediate any infringement will be successful or that we will be able to obtain a license or that litigation will not occur. The adverse resolution of litigation arising out of such claims could adversely affect our business or financial condition, and could include injunctive relief that could limit our ability to market and sell certain of our products.

CEO BACKGROUND

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

Ms. Chatterjee-Tandon has served as Vice President, Corporate Controller and Chief Accounting Officer (Principal Accounting Officer) since September 2006 and Vice President, Finance and Assistant Controller from February 2006 until September 2006. From March 2004 to February 2006, Ms. Chatterjee served as Sun’s Senior Director and Assistant Corporate Controller. From January 2003 to March 2004, Ms. Chatterjee served as the Vice President, Finance with Hotwire, Inc, an online travel company. From January 2000 to November 2002, Ms. Chatterjee served as a Senior Manager at KPMG LLP, an accounting firm.

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

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

Mr. Gadre has served as Executive Vice President, Chief Marketing Officer since November 2004, as Vice President, Software Marketing from May 2002 to November 2004 and Vice President and General Manager of Solaris Software from April 1999 to May 2002. Previously, he has held several positions related to Product and Corporate Marketing at Sun.

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

Mr. Lehman has served as Chief Financial Officer and Executive Vice President, Corporate Resources since February 2006 and as Executive Vice President from July 2002 until his resignation from employment in September 2002. From September 2002 to February 2006, he was a member of the board of directors of Sun. He resigned from the Board when he returned to full-time employment at Sun. During that time, he was self-employed as a business consultant. From July 2000 to July 2002, he served as Executive Vice President, Corporate Resources and Chief Financial Officer of Sun and from January 1998 to July 2000, as Vice President, Corporate Resources and Chief Financial Officer. He is a director of MGIC Investment Corporation.

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

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

Mr. Ryan has served as Executive Vice President, Global Sales and Services of Sun since June 2008, as Senior Vice President, Global Sales for the Americas Region from July 2007 to June 2008 and as Senior Vice President, Global Sales and Services for the Europe, Middle East and Africa Region from July 2006 to July 2007. Prior to Sun, Mr. Ryan was a Consultant Executive and served as Chairman of three technology companies: Elateral Limited, an e-solution for marketing companies, from January 2003 to June 2006, Wesupply, a supply chain management company, from June 2003 to June 2006, and CopperEye Ltd., an enterprise data management solutions company, from December 2004 to September 2007. Previously, he served as President, Europe for Aspect Development, and had several leadership positions at IBM.

Mr. Splain has served as Executive Vice President, Microelectronics since April 2008, as Chief Engineer since January 2007 and Chief Technology Officer, Systems Group since June 2006. From March 2004 to June 2006, Mr. Splain served as Chief Technology Officer, Scalable Systems. From June 2002 to June 2004, Mr. Splain served as Chief Technology Officer, Processor Products.

MANAGEMENT DISCUSSION FROM LATEST 10K

Executive Overview

We provide network computing infrastructure solutions that drive global network participation through shared innovation, community development and open source leadership. Guided by a singular vision, “The Network is the Computer”, we provide a diversity of software, systems, storage, services and microelectronics that power everything from consumer electronics, to developer tools and the world’s most powerful data centers. Our core brands include the Java technology platform, the Solaris Operating System, the MySQL database management system, Sun StorageTek storage solutions and the UltraSPARC processor. Our network computing platforms are used by nearly every sector of society and industry, and provide the infrastructure behind some of the world’s best known search, social networking, entertainment, financial services, manufacturing, healthcare, retail, news, energy and engineering companies. By investing in research and development, we create products and services that address the complex information technology issues facing customers today, including increasing demands for network access, bandwidth and storage. We share these innovations in order to grow communities, in turn increasing participation on the network and building new market opportunities while maintaining partnerships with some of the most innovative technology companies in the world.

Summary of Results

For the quarter ended June 30, 2008, as compared to the quarter ended June 30, 2007:


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Total net revenue decreased by $55 million, or 1.4%, primarily as a result of decreased revenue in the U.S.


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U.S. net revenue decreased $148 million, or 9.4%.


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Computer Systems product revenue decreased by $131 million, or 7.1%.


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Gross margin as a percentage of net revenue decreased by 2.9 percentage points.


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We recorded a restructuring charge of $104 million as compared to $15 million in the fourth quarter of fiscal 2007.


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Cash flow from operations decreased from $564 million to $90 million.

For the fiscal year ended June 30, 2008, as compared to the fiscal year ended June 30, 2007:


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We improved operating income by $63 million primarily through increased gross margins and reduced research and development expenses.


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Our U.S. net revenue decreased $443 million, or 7.9%.


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We improved gross margin as a percentage of net revenue by 1.3 percentage points to 46.5% in part due to component cost reductions and other operational efficiencies.


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Research and development expenses decreased by $174 million, or 8.7%.


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Selling, general and administrative expenses increased by $104 million, or 2.7%.


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We recorded restructuring charges of $263 million as compared to $97 million in the prior year.


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We recorded $31 million in charges for purchased in-process research and development associated with our recent acquisitions as compared to no charges in the prior year.


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Products and Services deferred revenues increased by $213 million, or 7.9%.


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Interest and other income decreased by $53 million, or 24.8%.


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We ended the fiscal year 2008 with a cash and marketable debt securities balance of $3.3 billion and generated positive cash flow from operations of $1.3 billion.


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We repurchased approximately 151 million shares of common stock, at an average price of $18.30 for a total cost of approximately $2.76 billion under our 2007 Stock Repurchase Plan.


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We introduced next generation systems and storage solutions including the Sun SPARC Enterprise M8000 and M9000 servers based on the symmetric multiprocessing (SMP) architecture and utilizing the SPARC64 VI dual-core processor, specifically designed for high-volume, mission-critical computing. We introduced the Sun Netra T5220 based on the Ultra SPARC T2 processor, blades based on the UltraSPARC T2 processor and AMD Opteron processor the T5140 and T5240 CMT-based enterprise servers incorporating the UltraSPARC T2 Plus processor. Additionally, we introduced the T9840D enterprise tape drive and the Sun StorageTek VTL 2.0 Plus, an appliance that combines a server, disk storage and software in a single unit so that tape and disk storage resources can be deployed, managed, and monitored from a single point.

Foreign Currency Exchange Impact

Due to the generally weakened U.S. dollar during fiscal 2008 and fiscal 2007, as compared with fiscal 2007 and fiscal 2006, respectively, our total net revenues were favorably impacted by foreign currency exchange rates. The net foreign currency impact to our total net revenues is difficult to precisely measure due to pricing and hedging actions we take to mitigate the effect of foreign currency exchange rate fluctuations. Excluding the effect of these actions in fiscal 2008, the maximum impact related to foreign exchange rate changes during fiscal 2008, as compared with fiscal 2007, would be approximately 3% to Products net revenue and approximately 5% to Services net revenue. Excluding the effect of these actions in fiscal 2007, the maximum impact related to foreign exchange rate changes during fiscal 2007, as compared with fiscal 2006, would be approximately 2% to Products net revenue and approximately 3% to Services net revenue. Due to the imprecision of these calculations, we do not expect to provide quantitative estimates of the impact of foreign currency exchange rates in future periods.

Products net revenue consists of revenue generated from the sales of Computer Systems and Storage products.

We distribute our products to end users through a combination of direct sales through our Global Sales and Services organization and through our independent distributors. Beginning in the second quarter of fiscal 2008, we introduced programs in certain geographic markets entitling our distributors to a reduced price on hardware when sold to the end customer with a support services contract. Accordingly, in these cases, we are no longer able to meet the criteria for revenue recognition under U.S. generally accepted accounting principles at the time of sale to our distributors. We have deferred revenue on these sales until our distributors sell the hardware to the end customer. We introduced these programs in the U.S. and parts of Europe, the Middle East, Africa and Asia during fiscal 2008. As a result of these programs, our Products revenue was adversely impacted by approximately $150 million in fiscal 2008, as compared to fiscal 2007.

The decrease in Computer Systems products net revenue during fiscal 2008 of $191 million, as compared to fiscal 2007, was primarily due to the change to certain distributor programs described above. There was a corresponding increase in deferred products revenue over the same time period. In addition, we experienced decreased sales of our traditional volume SPARC-based server products, decreased sales of our x64-based rack server products and decreased sales of our mid-range server products. Decreased sales of our traditional volume SPARC-based server products were due to reduced customer demand as products are near their end of life (EOL). Decreased sales of our x64-based rack server products were primarily due to the delayed introduction of AMD quad core-based products. Decreased sales of our mid-range server products were primarily due to a partial shift to volume products and due to certain of our products nearing their EOL. These decreases were partially offset by increased sales of our CMT volume server products, increased sales of our blade server products and increased sales of our recently introduced Olympus Product Line (OPL) server products. Increased sales of our CMT volume server products and our blade server products were primarily the result of continued acceptance of our products based on the UltraSPARC T2 plus processor.

The increase in Storage products net revenue during fiscal 2008 of $38 million, as compared to fiscal 2007, was due to increased sales of enterprise and mid-range disk products, increased sales of connectivity products and increased sales of tape media. Increased sales of enterprise disk products were due to recent product introductions, including the SE9990 enterprise disk model. Increased sales of mid-range disk products were due to the improved functionality and scalability of the ST6140 and ST6150 product models and sales initiatives. Increased sales of our connectivity products were driven by increased sales of our enterprise and mid-range disk products. Increased sales of our tape media products were due to the increase in our installed base. These increases were partially offset by decreased sales of our enterprise and OEM tape drive products and Virtual Storage Manager (VSM) mainframe products. Decreased sales of our enterprise and OEM tape drive products were primarily due to delayed product introductions. Decreased sales of our VSM mainframe products were primarily due to the competitive and declining mainframe market.

The increase in Computer Systems products revenue during fiscal 2007 of $458 million, as compared to fiscal 2006, was due to increased sales of our CMT entry-level volume server products, increased sales of our x64-based server products and increased sales of our data center enterprise server products. These increases were partially offset by decreased sales of certain SPARC-based server products and decreased sales of our mid-range enterprise server products. During fiscal 2007, we drove down the worldwide level of product inventory at our channel partners. This reduction in channel inventory adversely impacted products revenue by approximately $90 million in fiscal 2007.

The decrease in Storage products revenue during fiscal 2007 of $58 million, as compared to fiscal 2006, was primarily due to decreased sales of data center and entry level disk storage products, decreased sales of our enterprise tape drive products and decreased sales of our virtual tape products. These decreases were partially offset by increased sales of high-end library tape products, mid-range disk storage products and the inclusion of StorageTek revenues for the full 2007 fiscal year. Declines in Storage revenues were generally due to product market competition and product age.

Support Services are services that offer customers technical support, software and firmware updates, online tools, product repair and maintenance and preventive services for system, storage and software products. Managed Services include on-site and remote monitoring and management for the components of their IT infrastructure, including operating systems, third-party and custom applications, databases, networks, security, storage and the web.

Support Services revenue consists primarily of maintenance contract revenue, which is recognized ratably over the contractual period and represented approximately 76%, 78% and 78% of Services net revenue in fiscal 2008, 2007 and 2006, respectively.

The increase in Support Services net revenue during fiscal 2008 of $61 million, as compared to fiscal 2007, was due to increased sales of our Managed Services and the favorable impact of foreign currency exchange movements. Increased sales of our Managed Services were primarily the result of increased demand for remote and managed site offerings and the shift to single supplier multi-vendor-support models which are displacing traditional maintenance support service models. We have experienced pricing pressure on maintenance contracts sold or renewed primarily due to customers choosing lower-cost solutions.

The increase in Support Services net revenue during fiscal 2007 of $284 million, as compared to fiscal 2006, was due to our focus on the maintenance and expansion of existing services with our largest customers and the impact of favorable movements in foreign currency exchange rates.

Professional Services are services that enable customers to reduce costs and complexity, improve operational efficiency and build or transform their IT infrastructure. Professional Services include IT assessments, architectural services, implementation services and consolidation and migration services. Educational Services include training and certification for individuals and teams.

The increase in Professional Services and Educational Services net revenue during fiscal 2008 of $99 million, as compared to fiscal 2007, was due to increased Professional Services revenue. Professional Services revenue increased due to demand for High Performance Computing (HPC), data management and specialized identity management projects. Additionally, we have experienced an increased demand for consolidation and virtualization project services, which use software applications to divide one physical server into multiple isolated environments creating greater efficiency in the use of servers. Increases in Educational Services revenue were primarily due to continued Solaris adoption and the related training needs.

The increase in Professional Services and Educational Services net revenue during fiscal 2007 of $121 million, as compared to fiscal 2006, was primarily due to more complex engagements that allowed us to sell additional service offerings as well as a strong demand for our certification services.

The decrease in U.S. net revenue of $443 million during fiscal 2008, as compared to fiscal 2007, was primarily due to decreased sales of our Computer Systems and Storage products, decreased sales of our Services and a change to certain distributor programs under which we are no longer able to meet certain criteria for revenue recognition at the time of sale in to our distributors. The change in certain distributor programs negatively impacted revenue in the U.S. by approximately $108 million. Decreased sales of Computer Systems products were due to decreased sales of our traditional SPARC volume products, data center and mid-range enterprise server products and x64-based rack server products. Decreased sales of our traditional volume SPARC-based server products were primarily due to reduced customer demand as products are near their EOL. Decreased sales of our data center and mid-range server products were due to a partial shift to volume products and certain products nearing their EOL. Decreased sales of our x64-based rack server products were primarily due to the delayed introduction of AMD quad core based products. These decreases were partially offset by increased sales of our CMT-based SPARC volume server products and blade server products. Increased sales of our CMT volume server products and our blade server products were the result of continued acceptance of our products based on the UltraSPARC T2 plus processor. Decreased sales of our Storage products were due to decreased sales of our enterprise and entry level disk products and decreased sales of our enterprise tape drive products due to weak demand in the first half of fiscal 2008 for these products. These decreases were partially offset by increased sales of tape media due to increases in our installed base. We experienced decreased Services revenue primarily due to a decrease in Support Services revenue. Decreased Support Services revenue was due to an increasingly competitive environment, particularly within the telecommunications sector due to recent acquisition and consolidation activity within the sector and increased competitive pressures. We have experienced increased competitive pressures in these markets and expect this will continue in the future.

The increase in U.S. net revenue of $106 million during fiscal 2007, as compared to fiscal 2006, was most significantly impacted by increased Computer Systems product sales and increased Services revenue. The increase in Computer Systems product net revenue was primarily due to increased sales of our CMT-based SPARC systems, x64-based systems and data center enterprise servers. These increases were partially offset by decreased sales of our Storage products. Computer Systems experienced growth in the telecommunications, government and financial services sectors. Partially offsetting these increases were weakness in certain areas of the energy and utility and insurance sectors.

International Revenues

In fiscal 2009, we plan to utilize a new Emerging Market geographic grouping. The geographies that will be reported under this grouping primarily include India, China, Latin America, and Southern and Eastern Europe.

The increase in CNE net revenues of $171 million during fiscal 2008, as compared to fiscal 2007, was due to increased sales of Computer Systems products, increased sales of Services and the benefit of favorable foreign currency exchange rates. Increased sales of Computer Systems products were due to increased sales of data center server products, increased sales of CMT-based SPARC server products and increased sales of our blade server products. Increased sales of our data center server products were attributable to the introduction of our OPL product offering. Increased sales of our CMT volume server products and our blade server products were the result of the continued acceptance of our products based on the UltraSPARC T2 plus processor. Increased Services sales were due to increased Support Services sales. Increased Support Services sales were due to increased demand from the government and telecommunications sectors. These increases were partially offset by decreased sales of traditional volume SPARC-based server products. Decreased sales of our traditional volume SPARC-based server products were primarily due to reduced customer demand as products are near their EOL.

The increase in net revenues in CNE of $180 million during fiscal 2007, as compared to fiscal 2006, was primarily due to increased Computer Systems sales and increased Services revenue in a variety of sectors and across the majority of our products and services categories. Computer Systems products revenue was most significantly impacted by increased sales of our CMT volume server products, our high-end server products and a moderate increase in sales of our Storage products.

United Kingdom (U.K.)

The increase in U.K. net revenues of $25 million during fiscal 2008, as compared to fiscal 2007, was due to increased sales of Computer Systems products and the benefit of favorable foreign currency exchange rates. Increased sales of Computer Systems products were partially offset by decreased Services revenue. Increased sales of Computer Systems products were due to increased sales of CMT volume server products and increased sales of data center server products. Increased sales of our CMT volume server products were the result of the continued acceptance of our products based on the UltraSPARC T2 plus processor. Increased sales of our data center server products were primarily attributable to the introduction of our OPL product offering. These increases were partially offset by decreased sales of traditional volume SPARC-based server products. Decreased sales of our traditional volume SPARC-based server products were due to reduced customer demand as products are near their EOL. We experienced decreased Services sales as a result of decreased Support Services sales partially offset by increased Managed Services sales. The declines in Support Services sales were due to decreased spending on services within the governmental and financial services sectors. U.K. net revenues were negatively impacted as a result of the fourth quarter introduction of certain sales programs with our channel partners. We have experienced overall increased sales within the government, retail, education and manufacturing sectors, while financial services, telecommunications and energy/utility sector sales have experienced overall declines.

Net revenues in the U.K. were relatively unchanged during fiscal 2007, as compared to fiscal 2006. Favorable foreign currency exchange rates and increased Services revenue were offset by reduced product sales. Strong pricing pressure from market competitors was the primary cause of reduced sales of our products. Computer Systems revenue was most adversely impacted by decreased sales of our workstation products and Storage revenue was adversely impacted by decreased sales of our tape and enterprise disk products.

Germany

Net revenues in Germany were unchanged during fiscal 2008, as compared to fiscal 2007. Increased Computer Systems product sales and the benefit of favorable foreign currency exchange rates were offset by decreased Services revenue. Increased Computer Systems product sales were a result of increased sales of our data center enterprise server products and our Netra server products. Increased sales of our data center server products were primarily attributable to the introduction of our OPL product offering. Increased Netra server product sales were primarily due to increased demand within the telecommunications sector. Decreased Services sales were primarily due to decreased Professional Services sales due to decreased demand from the financial services sector.

The increase in Germany net revenues of $80 million during fiscal 2007, as compared to fiscal 2006, was due to the benefit of foreign currency exchange rates and increased sales of Computer Systems products and Support Services. The telecommunications sector remained a source of overall strength during fiscal 2007. These increases were partially offset by pricing pressures caused by increased competition, weak demand for our Storage products and a challenging economic environment.

Japan

The decrease in net revenues in Japan of $70 million during fiscal 2008, as compared to fiscal 2007, was due to decreased sales of our Computer Systems and Storage products caused by modified sales and marketing arrangements with key channel partners and continued competitive market conditions. These modified sales and marketing agreements allow us to improve sales of certain OPL and UltraSPARC-based Computer Systems products in a majority of other geographies, but negatively impact certain related licensing revenues in Japan. These decreases were offset by increased Services sales and favorable foreign currency exchange rates. Increased Services sales were due to increased sales of our Professional Services. The increase in Professional Services sales were due to increased demand for customized architectural services.

Net revenues in Japan decreased $20 million during fiscal 2007, as compared to fiscal 2006. Products net revenues decreased partially as a result of unfavorable foreign currency exchange rates the implementation of certain elements of our broad-based strategic alliance with Fujitsu and significant decreases in Storage product sales. Services revenue was relatively unchanged in fiscal year 2007 as compared to fiscal year 2006.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS

Net Revenues

Revenue per employee is calculated by dividing the revenue over the last 12 months by the average number of employees during the period, including contractors. We use this as a measure of our productivity.

Foreign Currency Exchange Impact

Due to the generally weakened U.S. dollar during the third quarter and first nine months of fiscal 2008, as compared with the corresponding periods of fiscal 2007, our total net revenues were favorably impacted by foreign currency exchange rates. The net foreign currency impact to our total net revenues is difficult to precisely measure due to hedging and pricing actions we take to mitigate the effect of foreign exchange rate fluctuations. Excluding the effect of these actions, the maximum impact related to foreign exchange rate changes during the third quarter and first nine months of fiscal 2008, as compared with the corresponding periods of fiscal 2007, would be approximately 4% and 3%, respectively, of Products net revenue and approximately 5% and 4%, respectively, of Services net revenue.

Products Net Revenue

Products net revenue consists of sales of Computer Systems and Storage products.

We distribute our products to end users through a combination of direct sales through our Global Sales and Services organization and through our independent distributors. Beginning in the second quarter of fiscal 2008, we introduced programs in certain geographic markets entitling our distributors to a reduced price on hardware when sold to the end customer with a support services contract. Accordingly, in these cases, we are no longer able to meet the criteria for revenue recognition under U.S. generally accepted accounting principles at the time of sell-in to our distributors. We have deferred revenue on these sales until our distributors sell the hardware. We introduced these programs in the U.S. and parts of Asia during the second quarter of fiscal 2008. We plan to introduce these programs in Europe and certain other geographies in the fourth quarter of fiscal 2008 and expect that our Products revenue will be adversely impacted by approximately $20 million to $40 million in that period.

Computer Systems Net Revenue

The decrease in Computer Systems products net revenue during the third quarter of fiscal 2008 of $27 million, as compared to the corresponding period in fiscal 2007, was primarily due to decreased sales of our traditional volume SPARC ® server products and decreased sales of our data center server products. Decreased sales of our traditional volume SPARC processor-based server products were primarily the result of reduced customer demand as these products are near their end of life (EOL). Decreased sales of data center server products were primarily due to a change in sales mix toward our volume and mid-range servers away from the higher end products. These decreases were partially offset by the favorable impact of foreign currency exchange movements, increased sales of our CMT entry-level volume SPARC-based server products, increased sales of our mid-range server products and increased sales of our Netra line of SPARC-based server products. Increased sales of our CMT-based, entry-level volume SPARC-based server products and our Netra SPARC-based server products were primarily the result of continued acceptance of our recently introduced products based on the UltraSPARC T2 processor. Increased sales of our mid-range server products were primarily attributable to the increased acceptance of our Olympus Product Line (OPL) product offering.

The decrease in Computer Systems products net revenue during the first nine months of fiscal 2008 of $60 million, as compared to the corresponding period in fiscal 2007, was primarily due to decreased sales of our traditional volume SPARC-based server products. Decreased sales of these products were primarily the result of reduced customer demand as products are near their EOL. These decreases were partially offset by the favorable impact of foreign currency exchange movements, increased sales of our CMT entry-level volume SPARC-based server products, increased sales of our data center and mid-range server products and increased sales of our Netra line of SPARC server products. Increased sales of our CMT-based, entry-level volume SPARC-based server products and our Netra SPARC server products were primarily the result of continued acceptance of our recently introduced products based on the UltraSPARC T2 processor. Increased sales of our data center and mid-range server products were primarily attributable to continued acceptance of our OPL product offerings.

Storage Net Revenue

The decrease in Storage products net revenue during the third quarter of fiscal 2008 of $30 million, as compared to the corresponding period in fiscal 2007, was primarily due to decreased sales of our enterprise and OEM tape drive products and Virtual Storage Manager (VSM) mainframe products. Enterprise tape drive products sales decreased primarily due to pricing pressures and an increasingly competitive environment. OEM tape drive products and VSM mainframe product sales decreased primarily due to an increasingly competitive environment. Decreased sales were partially offset by the favorable impact of foreign currency exchange movements.

The increase in Storage products net revenue during the first nine months of fiscal 2008 of $13 million, as compared to the corresponding period in fiscal 2007, was primarily due to the favorable impact of foreign currency exchange movements, increased sales of mid-range disk products, increased sales of tape media, virtual storage products and increased sales of connectivity products. Increased sales of mid-range disk products were primarily due to the improved functionality and scalability of the ST6140 and ST6150 product models. Increased sales of our virtual storage products were due to recent product introductions such as our Virtual Tape Library (VTL). Increased sales of our connectivity products were principally driven by increases in our installed base. These increases were partially offset by decreased sales of our enterprise and OEM tape drive products, VSM mainframe products, entry level disk products and other third party disk products primarily due to an increasingly competitive environment.

Services Net Revenue

Services net revenue consists of revenue generated from Support Services and Professional and Educational Services.

Support Services Net Revenue

The increase in Support Services net revenue during the third quarter of fiscal 2008 of $11 million, as compared to the corresponding period in fiscal 2007, was primarily due to increased sales of our Network and Managed Services in our Europe, Middle East, Africa, and Asia Pacific geographies. Increases in these geographies were due mainly to key customer wins, increases in our installed base and the favorable impact of foreign currency exchange movements.

The increase in Support Services net revenue during the first nine months of fiscal 2008 of $43 million, as compared to the corresponding period in fiscal 2007, was due to increased Support Services sales in Europe, Middle East, Africa and Asia Pacific geographies, increased sales of our Network and Managed Services and the favorable impact of foreign currency exchange movements. Increased sales of our Network and Managed Services were primarily the result of increased demand for network services and the shift to single supplier multi-vendor support models which are displacing traditional maintenance support service models. Increases in these geographies were due mainly to key customer wins and increases in our installed base. These increases were partially offset by decreased Support Services sales in the U.S. market.

Professional and Educational Services Net Revenue

The increase in Professional and Educational Services net revenue during the third quarter and first nine months of fiscal 2008 of $29 million and $66 million, respectively, as compared to the corresponding periods in fiscal 2007, was primarily attributable to increased Professional Services revenue. Professional Services revenue increased due to demand for consolidation, installation and customization projects. Increases in Educational Services revenue were primarily due to continued Solaris adoption and the related training needs.

United States (U.S.)

Computer Systems revenue decreased in the U.S. during the third quarter of fiscal 2008, as compared to the corresponding period in fiscal 2007, due to decreased sales of our data center server products and traditional SPARC volume products. These decreases were partially offset by increased sales of our CMT-based SPARC volume server products.

Computer Systems revenue decreased in the U.S. during the first nine months of fiscal 2008, as compared to the corresponding period in fiscal 2007, due to decreased sales of our traditional SPARC volume products and x64-based rack server products. These decreases were partially offset by increased sales of our CMT-based SPARC volume server products, data center enterprise server products and Netra SPARC server products.

Storage products revenue decreased in the U.S. during the third quarter and first nine months of fiscal 2008, as compared to the corresponding periods of fiscal 2007, due to decreased sales of our enterprise and OEM tape drive products, VSM mainframe products and disk products primarily due to a significant number of deferrals of purchases from many of our large U.S. end-user customers. These decreases were partially offset by increased sales of our media products.

Services revenue decreased in the U.S. during the third quarter and first nine months of fiscal 2008, as compared to the corresponding periods in fiscal 2007, primarily due to a decrease in Support Services sales. The decline in Support Services sales was primarily attributable to a combination of competitive pricing pressures resulting from the consolidation of some of our largest customers and product shifts in the installed base to volume-based products. This shift drove down the average selling price of maintenance Support Services. These declines were partially offset by an increase in Professional and Educational Services sales.

International

United Kingdom

The increase of $25 million and $37 million in net revenue during the third quarter and first nine months of fiscal 2008, as compared to the corresponding periods in fiscal 2007, was primarily due to the impact of favorable foreign currency exchange rates and increased sales of data center and mid-range servers, CMT-based SPARC volume servers and mid-range disk products. Increases in data center server sales and CMT-based SPARC volume server sales were partially offset by decreased sales related to traditional SPARC volume server products. The decline in services sales revenue was driven primarily by decreased Professional and Educational Services sales, partially offset by a slight increase in Support Services.

Germany

Net revenue remained relatively unchanged during the third quarter of fiscal 2008, as compared to the corresponding period in fiscal 2007. The increase in revenue of $26 million during the first nine months of fiscal 2008, as compared to the corresponding period in fiscal 2007, was due to the impact of favorable foreign currency exchange rates and improved sales of Computer Systems products. Computer Systems products revenue increased primarily due to increased sales of CMT-based SPARC volume server products, mid-range server products and Netra server products. These increases were partially offset by decreased sales of traditional SPARC volume server products and x64-based rack server products. Our Services business declined primarily due to decreased Professional Services sales due to lower attach rates than previous quarters and project delays.

CNE

The increase in net revenue of $17 million during the third quarter of fiscal 2008, as compared to the corresponding period in fiscal 2007, was primarily due to increased sales of Computer Systems products and Support Services and the favorable impact of foreign currency exchange rates. The increase in Computer System sales was primarily due to increased sales of our CMT-based SPARC volume server products and workstation products. These increases were partially offset by decreased sales of our traditional SPARC volume server products. Increases in Support Services revenue were driven by increased customer demand for single supplier, multi-vendor support contracts.

The increase in net revenue of $96 million during the first nine months of fiscal 2008, as compared to the corresponding period in fiscal 2007, was due to increased sales of Computer Systems product and Support Services and the favorable impact of foreign currency exchange rates. The increase in Computer System sales was primarily due to increased sales of our CMT-based SPARC volume server products and data center server products. These increases were partially offset by decreased sales of our traditional SPARC volume servers and mid-range server products. Increases in Support Services revenue were driven by increased customer demand for single supplier, multi-vendor support contracts.

Japan

The decrease in net revenue of $4 million and $51 million, respectively, during the third quarter and the first nine months of fiscal 2008, as compared to the corresponding periods in fiscal 2007, was due to declines in sales of our Computer Systems and Storage products primarily caused by modified sales and marketing arrangements with key channel partners and continued competitive market conditions. These modified sales and marketing agreements allow us to improve sales of certain OPL and UltraSPARC-based Computer Systems products in a majority of other geographies, but negatively impacted certain related licensing revenues in Japan. We experienced an increase in our Services revenue primarily due to increased sales of our Support Services and Professional Services.

CONF CALL

Ron Pasek

Good morning. Thank you for joining the Sun Microsystems quarterly conference call. With me today is Jonathan Schwartz, Sun's CEO; and Mike Lehman, Sun's Chief Financial Officer and Executive Vice President of Corporate Resources.

The purpose of today's call is to discuss the results of Sun's full year and fourth quarter fiscal year 2008 which ended on June 30, 2008. During the last hour we published a copy of the operations analysis data sheet with nine quarters of financial and operations information, including the quarter just completed.

If you have not received the announcement or the detailed financial data sheet for any reason, or if you wish to hear the replay of this conference call, you may log on to our website at sun.com/investors. We have posted slides you can view on the web, which accompany our prepared remarks. These slides may be viewed at the same URL, sun.com/investors. After the prepared remarks of our call today, we will devote the remaining time to Q&A.

During the course of this conference call we will be making projections and other forward-looking statements regarding expected future financial results and business opportunities. Our actual future results may be very different from our current expectations. We encourage you to read the 10-Ks and 10-Qs that we file periodically with the SEC. These documents contain a discussion of the risks facing our business including factors that could cause these forward-looking statements to not come true. We do not currently intend to update these forward-looking statements except required by law.

In addition during the course of the conference call, we may describe certain non-GAAP financial measures, which should be considered in addition to and not in lieu of comparable GAAP financial measures. Please refer to the operations analysis posted on our website at sun.com/investors for the most directly comparable GAAP financial measures and related reconciliation.

Now, let's go to the financials for Q4. Sun's total revenues for the fourth quarter of fiscal year 2008 were $3.780 billion, a decrease of 1.4% as compared with $3.835 billion in revenue reported for the fourth quarter of fiscal year 2007. Total gross margin was 44.3% of revenue a decrease of 2.9 points over the gross margin for the fourth quarter fiscal year 2007.

Total R&D and SG&A expenses were $1.5 billion, an increase of $28 million year-over-year. In the fourth quarter of 2008 we recorded a $46 million tax provision. GAAP net income for the fourth quarter of fiscal year 2008 was $88 million or earnings per share of $0.11 as compared with GAAP net income of $329 million or earnings per share of $0.36 for the fourth quarter of fiscal year 2007.

Non-GAAP net income for the fourth quarter of fiscal year 2008 was $275 million or EPS or $0.35 as compared with non-GAAP net income of $458 million or EPS of $0.50 for the fourth quarter of fiscal year 2007.

Non-GAAP net income excludes the following: Purchased and processed R&D, amortization of acquisition related intangibles, stock-based compensation, restructuring and related impairment of long-lived assets, gain on investments, settlement income and the tax effect of these non-GAAP adjustments.

Q4 product revenues totaled $2.386 billion, a decrease of 4.3% year-over-year. Within product revenues; computer system product revenue was $1.722 billion, a decrease of 7.1% year-over-year. Storage product revenue was $664 million, an increase of 3.9% year-over-year.

Q4 services revenue totaled $1.394 billion, an increase of 3.8% year-over-year. Within services revenue; support services revenue was $1.42 billion, an increase of 1.8% year-over-year. Revenue from professional services and educational services totaled $352 million, an increase of 10.3% year-over-year.

We ended the quarter with a cash and marketable debt securities balance of $3.310 billion and generated positive cash flow from operations of $90 million in Q4.

In Q4 '08 we repurchased 35.7 million shares worth $464 million, shares were repurchased at an average price of $13.01. We now have $36 million remaining of the $3 billion share repurchase program that was announced in Q4 '07. You will note that our outstanding shares for the quarter decreased by 31 million from Q3 '08. Sun also announced today that its Board of Directors had authorized an additional repurchase up to $1 billion of the company's outstanding shares.

With that, I'll turn it over to Jonathan.

Jonathan Schwartz

Great. Thanks, Ron, and thank you all for joining us early this morning. Let me start with my perspective on the full year and followed by a discussion of the growth segments of our business and then I'll just end on the operating priorities for FY '09.

Sun's revenue for the year was roughly flat, with growth around the world entirely offset by declines in the US. The declines in the US were about 8% for the year. There's no question the challenging US macro environment has hindered our ability to grow the top line and we've got a greater share of our business in the US than many of our peers, and a more notable focus on data center versus consumer technologies and frankly a historic focus on a fairly challenged Financial Services sector.

With this in mind, we've been aligning ourselves with high growth customer segments, technologies and emerging economies across the world; where our developer communities are healthiest and thus where our business opportunities are growing most dramatically as well.

In the three geographies outside the US, we demonstrated solid growth during the year. Our '08 revenue in Europe, the Middle East and Africa grew 5%, our Asia Pacific business grew 3%, our International Americas grew 16%. Emerging markets growth continued to pace in '08 with Brazil growing 20% year-over-year, Russia growing 12%, India growing nearly 30%, and Greater China growing 13%.

I'd now like to provide a few specific examples of the areas of our business that fueled our progress during the fourth quarter. To start, our MySQL team delivered a solid Q4 with billings growth of over 44% year-over-year. I feel confident in saying MySQL remains the fastest growing database among the market leaders. The adoption of MySQL has been dramatic with 12 million installed users, and adoption that continues to accelerate.

In fact we just announced earlier this week another example of our momentum was LinkedIn, what appears to be the fastest growing professional social network purchasing a multi-year subscription to MySQL and Solaris to power their infrastructure and support their demands.

Our power efficient Niagara-based CMT systems delivered 61% year-over-year billings growth in Q4 with 84% growth for the full fiscal year. This was a $1.1 billion business for Sun in FY '08 growing well within, as well as beyond our install base. These systems really lead the market in energy efficiency at a point where many CIOs and our customers are finding themselves responsible for, and often limited by their energy budgets.

On the storage front, we've moved our investments toward open storage, and are seeing early returns. Our first open storage product in what will be a far broader line in the upcoming year, first product known as Thumper or the Sun Fire X4500 grew billings 37% year-over-year in Q4 and again this was driven by the popularity of our open source ZFS file system, which is the foundation of our open storage product line across the board. You'll see us expand aggressively in open storage in FY '09.

Revenues from professional and educational services were up 10% year-over-year in Q4 and up 9% for the full year. Customers are continuing to look to Sun for the implementation of high scale and mission critical data centers whether they're implementing a global MySQL deployment or a high performance computing facility.

Our x64 based systems were up 1% year-over-year in Q4 and up 3% for FY '08. This was certainly well below our expectations. And reflected both delays in AMD Quad-Core platforms and in fact frankly we did not have a full Intel product line up. During Q4, our Intel line up was more complete and as a result we saw billings for our Intel product platforms grow to over $62 million in Q4, up from less than $1 million a year ago.

As for the traditional SPARC based enterprise systems we were disappointed in the slowing in Q4, more sharply in the US, where delays on large purchases reflect the economic anxiety far more than competitive positioning. Our Solaris 10 based M series products continued to perform well with billings growth of 55% sequentially and over 200% year-over-year.

Now that being said, outside of the macro issues that continue to weigh on our customers, we are making changes to insure we deliver consistent and expanding operating profitability. We are at this point the industry's category leader in open source innovation across every aspect of the data center, and are positioning ourselves to be the biggest beneficiary.

Although the last two quarters were tough for Sun, we continue to see great progress from the accelerating adoption of MySQL to increased traction for ZFS to growing interest from customers that are looking to consolidate data centers with products like our open source virtualization offering Sun XBM.

Most importantly, the ongoing endorsements from customers tell us that open source will be their path forward in enterprise computing. In fact, we're already seeing evidence of this transition with companies like SugarCRM, who provides the world's largest open source customer relationship management platform. As a customer of ours and as a partner in the marketplace they see the value, and as stated and I quote, "The combined strength of MySQL and Solaris and OpenSolaris offers the best price performance in the industry".

As companies continue to compress budgets and move away from proprietary and closed source vendors, whether that's database vendors, storage vendors or operating system suppliers, Sun is uniquely positioned to capture that demand, and we aren't the only ones seeing that transition. According to a recent Gartner report, by 2012, more than 90% of enterprises will use open source indirect or embedded forms.

Now to support the open source strategy, we're making aggressive changes in our resourcing and sales force alignment and will continue to make hard choices to align Sun for the greatest value and opportunity in front of us.

Growing revenue and expanding profitability remain our number one priorities and as such, we'll be executing against and investing in four key focus areas to fuel growth in '09.

First, we'll continue to target incremental resources in emerging economies to take advantage of growth opportunities.

Second, we'll continue to focus on acquiring new customers by leveraging our partners and continuing to cultivate communities such as MySQL, ZFS, Solaris, Lustre and XBM.

Third, we are funding programs and sales alignment activities to support key market segments that align with Sun's innovation, including high growth segments such as high-performance computing, and the global web build out.

Fourth, we'll continue to optimize our software platforms to drive commercial revenue and sales.

The commercial adoption of open source technology is gaining traction, and we have begun to see the effects of this with our open storage products, such as with ZFS. You'll see a similar effect as we further optimize our systems around offerings to include optimizations for MySQL, for Lustre and other key product lines moving into '09 and beyond.

I'll look forward to updating you on these four areas in the coming quarters, and I remain confident in the future in our ability to deliver value to our customers, our shareholders, employees and communities around the world.

With that I'd like to pass it over to Mike Lehman.

Mike Lehman

Thanks, Jonathan. I will focus most of my remarks on the Q4 results, but also look at some things on an annual basis to help put our annual guidance for the current fiscal year into perspective. While overall Q4 revenues were essentially inline with our expectations, total gross margin was roughly a point to a point and a half less than we had expected about 90 days ago.

To be more specific, our products margins which last year improved sequentially in Q4 declined by just over 2 points. While our customers continue to push all vendors and partners for aggressive discounts, the principal reason for the sequential decrease in product margins was in fact the mix. As we experienced in Q3, the percentage of revenues from the high end of the server line decreased as a percent of total revenues and those carry relatively high gross margins.

Revenues from our midrange and enterprise storage products increased as a percentage of total revenues. Those products, which do not contain a significant amount of Sun's intellectual property, carry gross margins which are generally less than the corporate average. Our support service margins as expected improved sequentially as such margins are largely driven by the seasonal increase in revenues.

Our operating expenses increased sequentially in Q4 as expected. The primary reasons for the increase include increased commissions and other incentives related to higher revenue. Incremental sales headcount, we added approximately 200 people to the sales teams in Q4, mostly in the emerging markets, and we will continue to make changes to the alignment of the sales resources in the coming months.

Operating expenses also reflect the full quarter's impact of the MySQL team that joined Sun in late Q3. Such amounts also include increased amortization of intangibles acquired and stock-based compensation. With regard to the restructuring that we announced during our Q3 conference call, we recorded a charge of around $100 million in Q4.

As most of you know, many countries have different rules and regulations with regard to how and when individuals may be notified of such actions, and our accounting charge is driven by that. We expect to take a charge of up to a similar amount in Q1 which will largely get us to the levels that we had previously communicated.

Cash flow from operations in Q4 was $90 million the majority of the decrease year-over-year was due to the lower operating income. For all of fiscal '08, cash flow from operations totaled $1.3 billion, which compares to $958 million in the prior fiscal year.

It is also useful to note that total deferred revenues grew approximately 12% sequentially and around 8% versus Q4 of the prior year. This sequential increase continues to reflect two trends. The first is that an increasing number of our installations include professional services which increases the value we provide but necessarily requires that we record revenues when such projects are completed and/or accepted.

The second trend is that more of our software values are being captured as subscriptions, including MySQL and other products. Again, such revenues are recorded over longer periods than any one quarter. We are pleased with the growth of such deferred revenues as they form the foundation for a more predictable revenue and margin stream overtime.

It is also important to remind you that we worked with our channel partners around the world during the past fiscal year and greatly reduced the amount of inventory stocked by them. We also converted to the sellout method of recognizing such revenues during the year, including during Q4 when we converted the majority of our EMEA partners to this method.

During the fiscal year, we estimate that we reduced our revenues by around $150 million as a result of these initiatives. We enter fiscal year '09 with that largely behind us. As many of you know, we are engaged in a multiyear internal systems implementation effort. We have two of our five major modules that have gone live and another smaller one scheduled to go live later in August.

The two largest pieces of this overall effort are still in front of us. The next large phase is currently scheduled to go live in January of calendar '09 with the final phase of approximately one year later.

We continue to invest a significant level of internal and external resources on these necessary efforts. We remain confident that these efforts will result in a more cost-effective, efficient and responsive business model, but we still have our ways to go before being able to take full advantage of these initiatives. We will continue to update you along the way.

As we reflect on fiscal '08, despite the challenging US environment in the last six months, we delivered improved annual results in the following key areas: increased gross margin dollars by approximately 3%. We decreased total R&D and SG&A expenses by approximately $70 million despite acquisitions and the negative impact of currency. We improved our non-GAAP EPS by 21% for the fiscal year and increased cash flow from operations by over $370 million.

We entered the new fiscal year with a number of challenges. As Jonathan mentioned above, we have a plan and a number of specific initiatives underway to help our teams focus on the opportunities in front of us. As we evaluate the current fiscal year, and as we continue to monitor our progress on all fronts, the biggest variable will continue to be the buying patterns of our large base of US customers.

The following are some of the key assumptions inherent in our fiscal year '09 operating plan. And these are annual assumptions. We expect modest low single-digit growth in revenues. We expect year-over-year declines in the US until at least the second half of the fiscal year, and we expect the first quarter in particular, our first fiscal quarter to be challenging on an overall basis.

We expect a slight decline in revenues on a year-over-year basis in Q1. Given the normal seasonality in Q1, and our continued challenges in the US economy, coupled with a restructuring charge of approximately $100 million, pursuant to the previously announced restructuring, we do not expect Q1 to be profitable on a GAAP basis.

We are planning for roughly stable gross margins on an annual basis. There certainly will be the usual seasonal and volume impacts throughout the year. We are expecting total R&D and SG&A to be up slightly in fiscal '09 to reflect the impact, a full inclusion of the operations of MySQL, the impact of annual incentives and the increased amortization of the systems implementation we are undergoing.

We currently expect that our ending fiscal year '09 headcount will be approximately 33,000. We ended fiscal year '08 with approximately 34,900. We expect annual GAAP operating income in a range of 5% to 7%. We have provided a range at this point largely due to the uncertainties associated with the US economy. At those levels, we would be delivering a modest increase in GAAP operating income percentage on an annual basis.

While it is still our intention to drive towards a longer-term operating income level of at least 10%, given the current environment we are focusing on how to improve our results one year at a time. We expect to generate cash from operations in the range of $1.1 billion to $1.3 billion in fiscal year '09.

There are a few key assumptions beneath this overall model which I will highlight now as well. We expect approximately $230 million to $260 million of stock-based compensation expense. We expect amortization of acquisition related intangibles to be in the range of $275 million to $325 million. We expect net interest income of approximately $25 million $50 million. We expect the full year tax provision to be approximately $225 million to $275 million. We expect the full year capital expenditures to be approximately $450 million to $550 million.

With regard to the impact of MySQL in the current fiscal year, as we had stated at the end of Q3, we currently expect the overall impact of this to be slightly negative on a GAAP basis and essentially breakeven on a non-GAAP basis in fiscal year '09. We are clearly making decisions for the longer term and not simply attempting to maximize short-term income statement or balance sheet metrics. We are working to build a long-term sustainable franchise based on ownership, delivery, and monetization of intellectual property.

With that, I will turn it back to Ron.

Ron Pasek

Thank you, Mike and Jonathan. Before we begin the question-and-answer session, I'd like to request that each of you ask just one question consisting of one part. This way we hope to get most of the questions in the queue today. If there is time remaining we'll be happy to take your follow-up questions. Laurie, will you please start the question and answer session?

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