UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 29, 2009

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number: 0-15086

SUN MICROSYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware	94-2805249
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

4150 Network Circle, Santa Clara, CA 95054

(Address of principal executive offices with zip code)

(650) 960-1300

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ¨    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x	Accelerated filer  ¨
Non-accelerated filer  ¨  (Do not check if a smaller reporting company)		Smaller reporting company	¨

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

Shares outstanding of the registrant’s common stock.

Class	Outstanding at April 30, 2009
Common Stock - $0.001 par value	746,252,519

INDEX

PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements:	3
	Condensed Consolidated Statements of Operations	3
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
	Report of Independent Registered Public Accounting Firm	24
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 6.	Exhibits	42
SIGNATURES		43

2

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SUN MICROSYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in millions, except per share amounts)

	Three Months Ended						Nine Months Ended
	March 29, 2009			March 30, 2008			March 29, 2009			March 30, 2008
Net revenues:
Products	$	1,519		$	2,003		$	5,222		$	6,232
Services		1,095			1,263			3,602			3,868
Total net revenues		2,614			3,266			8,824			10,100
Cost of sales:
Cost of sales-products		877			1,106			3,200			3,296
Cost of sales-services		621			692			1,957			2,022
Total cost of sales		1,498			1,798			5,157			5,318
Gross margin		1,116			1,468			3,667			4,782
Operating expenses:
Research and development		393			457			1,227			1,366
Selling, general and administrative		843			989			2,679			2,923
Restructuring charges and total related impairment of long-lived assets		46			14			331			159
Purchased in-process research and development		3			24			3			25
Impairment of goodwill		—			—			1,445			—
Total operating expenses		1,285			1,484			5,685			4,473
Operating income (loss)		(169	)		(16	)		(2,018	)		309
Gain on equity investments, net		3			—			8			22
Interest and other income (expense), net		(2	)		34			(3	)		145
Income (loss) before income taxes		(168	)		18			(2,013	)		476
Provision for income taxes		33			52			74			161
Net income (loss)	$	(201	)	$	(34	)	$	(2,087	)	$	315
Net income (loss) per common share-basic	$	(0.27	)	$	(0.04	)	$	(2.80	)	$	0.38
Net income (loss) per common share-diluted	$	(0.27	)	$	(0.04	)	$	(2.80	)	$	0.38
Shares used in the calculation of net income (loss) per common share-basic		745			785			746			821
Shares used in the calculation of net income (loss) per common share-diluted		745			785			746			837

See accompanying notes.

3

SUN MICROSYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except for par value)

	March 29, 2009			June 30, 2008
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,569		$	2,272
Short-term marketable debt securities		1,134			429
Accounts receivable (net of allowances of $61 and $64)(1)		2,265			3,019
Inventories		561			680
Deferred and prepaid tax assets		185			216
Prepaid expenses and other current assets, net		1,036			1,218
Total current assets		6,750			7,834
Property, plant and equipment (net of accumulated depreciation of $3,118 and $3,269)(1)		1,670			1,611
Long-term marketable debt securities		287			609
Goodwill		1,740			3,215
Other acquisition-related intangible assets, net		357			565
Other non-current assets, net		458			506
	$	11,262		$	14,340
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,049		$	1,387
Accrued payroll-related liabilities		595			734
Accrued liabilities and other		1,142			1,105
Deferred revenues		2,190			2,236
Warranty reserve		160			206
Current portion of long-term debt		562			—
Total current liabilities		5,698			5,668
Long-term debt		695			1,265
Long-term deferred revenues		548			683
Other non-current obligations		970			1,136
Stockholders’ equity:
Preferred stock ($0.001 par value, 10 shares authorized; no shares issued and outstanding)(1)		—			—
Common stock and additional paid-in-capital ($0.001 par value, 1,800 shares authorized; issued: 901 shares and 901 shares)		7,541			7,391
Treasury stock, at cost: (155 shares and 149 shares)(1)		(2,680	)		(2,726	)
Retained earnings (accumulated deficit)		(1,819	)		430
Accumulated other comprehensive income		309			493
Total stockholders’ equity		3,351			5,588
	$	11,262		$	14,340

⁽¹⁾ As of March 29, 2009 and June 30, 2008, respectively.

See accompanying notes.

4

SUN MICROSYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in millions)

	Nine Months Ended
	March 29, 2009			March 30, 2008
Cash flows from operating activities:
Net income (loss)	$	(2,087	)	$	315
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		321			354
Amortization of acquisition-related intangible assets		224			224
Stock-based compensation expense		150			157
Purchased in-process research and development		3			25
Impairment of goodwill		1,445			—
(Gain) loss on investments and other, net		23			(54	)
Deferred taxes		2			8
Changes in operating assets and liabilities:
Accounts receivable, net		752			603
Inventories		118			(205	)
Prepaid and other assets, net		177			(105	)
Accounts payable		(341	)		(114	)
Other liabilities		(405	)		31
Net cash provided by operating activities		382			1,239
Cash flows from investing activities:
Decrease (increase) in restricted cash		(19	)		22
Purchases of marketable debt securities		(1,535	)		(1,292	)
Proceeds from sales of marketable debt securities		423			1,404
Proceeds from maturities of marketable debt securities		684			764
Proceeds from sales of equity investments, net		7			25
Purchases of property, plant and equipment, net		(404	)		(297	)
Payment for acquisitions, net of cash acquired		(55	)		(923	)
Net cash used in investing activities		(899	)		(297	)
Cash flows from financing activities:
Purchase of common stock under stock repurchase plans		(130	)		(2,300	)
Proceeds from the exercise of options and ESPP purchases, net		24			121
Principal payments on borrowings and other obligations		(12	)		(20	)
Net cash used in financing activities		(118	)		(2,199	)
Effect of exchange rates on cash and cash equivalents		(68	)		—
Net decrease in cash and cash equivalents		(703	)		(1,257	)
Cash and cash equivalents, beginning of period		2,272			3,620
Cash and cash equivalents, end of period	$	1,569		$	2,363

See accompanying notes.

5

SUN MICROSYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. DESCRIPTION OF BUSINESS

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, telecommunications, 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.

On April 19, 2009, we entered into a definitive agreement under which Oracle Corporation (Oracle) will acquire all of our common stock, through a merger, for $9.50 per share in cash and Sun will become a wholly owned subsidiary of Oracle. The completion of the transaction is subject to the approval of our stockholders, regulatory approvals and various other closing conditions.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fiscal Year

Our first three quarters in fiscal year 2009 ended on September 28, 2008, December 28, 2008 and March 29, 2009. In fiscal year 2008, the quarters ended on September 30, 2007, December 30, 2007 and March 30, 2008. The fourth quarter in all fiscal years ends on June 30.

Basis of Presentation

The accompanying condensed consolidated financial statements (Interim Financial Statements) include our accounts and the accounts of our subsidiaries. Intercompany accounts and transactions have been eliminated.

Our Interim Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) for interim financial information and the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial statements and accounting policies, consistent, in all material respects, with those applied in preparing our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2008, filed with the SEC on August 29, 2008 (2008 Form 10-K). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. These estimates are based on management’s knowledge about current events and expectations about actions we may undertake in the future. Actual results could differ materially from those estimates. Our interim financial statements are unaudited but reflect all adjustments, including normal recurring adjustments management considers necessary for a fair presentation of our financial position, operating results and cash flows for the interim periods presented. The results for the interim periods are not necessarily indicative of the results for the entire year. The condensed consolidated balance sheet as of June 30, 2008, has been derived from the audited consolidated balance sheet as of that date. The information included in this report should be read in conjunction with our 2008 Form 10-K.

Recent Pronouncements

Collaborative Arrangements: In November 2007, the Financial Accounting Standards Board (FASB) ratified Emerging Issues Task Force (EITF) 07-1, “Accounting for Collaborative Arrangements,” (EITF 07-1). EITF 07-1 requires collaborators to present the result of activities for which they act as the principal on a gross basis and report any payments received from (made to) other collaborators based on other applicable GAAP or, in the absence of other applicable GAAP, based on analogy to authoritative accounting literature or a reasonable, rational and consistently applied accounting policy election. In addition, a participant in a collaborative arrangement should provide the following disclosures separately for each collaborative arrangement: (a) the nature and purpose of the arrangement, (b) its rights and obligations under the collaborative arrangement, (c) the accounting policy for the arrangement in accordance with APB Opinion 22, “Disclosure of Accounting Policies,” and (d) the income statement classification and amounts arising from the collaborative arrangement between participants for each period an income statement is presented. EITF 07-1 will be effective for annual periods beginning after December 15, 2008 and we are required to adopt the pronouncement in our first quarter of fiscal 2010. We are currently evaluating the impact of adopting EITF 07-1 on our condensed consolidated financial statements.

6

Business Combinations: In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” (SFAS 141(R)) and SFAS No. 160, “Non-Controlling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51,” (SFAS 160). These new standards will significantly change the accounting and reporting for business combination transactions and non-controlling interests in consolidated financial statements. SFAS 141(R) and SFAS 160 are required to be adopted simultaneously and are effective for the first annual reporting period beginning on or after December 15, 2008 and we are required to adopt the pronouncement in the first quarter of our fiscal 2010. We are currently evaluating the impact of adopting SFAS 141(R) and SFAS 160 on our condensed consolidated financial statements.

Fair Value: In February 2008, the FASB issued FASB Staff Position (FSP) No. SFAS 157-2, “Effective Date of FASB Statement No. 157,” (FSP SFAS 157-2). FSP SFAS 157-2 amends SFAS 157, to delay the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis. For items within its scope, FSP SFAS 157-2 defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years and we are required to adopt the pronouncement in our first quarter of fiscal 2010. We are currently evaluating the impact of adopting FSP SFAS 157-2 on our condensed consolidated financial statements.

Intangibles: In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets,” (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets” and requires enhanced related disclosures. FSP 142-3 must be applied prospectively to all intangible assets acquired as of and subsequent to fiscal years beginning after December 15, 2008 and we are required to adopt the pronouncement in our first quarter of fiscal 2010. We are currently evaluating the impact, if any, that FSP 142-3 will have on our condensed consolidated financial statements.

Accounting For Convertible Debt: In May 2008, the FASB issued FSP APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion,” (FSP APB 14-1). FSP APB 14-1 will require entities to separately account for the liability and equity components of certain convertible instruments in a manner that reflects the nonconvertible debt borrowing rate. The FSP will require bifurcation of a component of the debt, classification of that component in equity and then accretion of the resulting discount on the debt as part of interest expense being reflected in the income statement. In addition, the FSP will require certain additional disclosures.

We first issued convertible debt that is subject to the provisions of FSP APB 14-1 in January 2007. The FSP is effective for fiscal years beginning after December 15, 2008 and we are required to adopt the FSP in our first quarter of fiscal 2010. The FSP does not permit early application and will require retrospective application to all periods presented.

The following tables illustrate our convertible long-term debt, net income (loss) and net income (loss) per share on an as reported basis and the estimated pro forma effect had we applied the provisions of FSP APB 14-1 for all periods affected (in millions):

	March 29, 2009		June 30, 2008
Convertible long-term debt, as reported	$	700	$	700
Convertible long-term debt, pro forma	$	579	$	558

Amortization of bond discount, for the three and nine months ended March 29, 2009 and March 30, 2008, and for the fiscal years ended June 30, 2008 and June 30, 2007, respectively, is estimated as follows (in millions, except for per share amounts):

	Three Months Ended						Nine Months Ended						Twelve Months Ended
	March 29, 2009			March 30, 2008			March 29, 2009			March 30, 2008			June 30, 2008			June 30, 2007
Net income (loss), as reported	$	(201	)	$	(34	)	$	(2,087	)	$	315		$	403		$	473
Amortization of bond discount		(7	)		(7	)		(21	)		(20	)		(26	)		(11	)
Pro forma net income (loss)	$	(208	)	$	(41	)	$	(2,108	)	$	295		$	377		$	462
Basic net income (loss) per share
As reported	$	(0.27	)	$	(0.04	)	$	(2.80	)	$	0.38		$	0.50		$	0.54
Pro forma	$	(0.28	)	$	(0.05	)	$	(2.83	)	$	0.36		$	0.47		$	0.52
Diluted net income (loss) per share
As reported	$	(0.27	)	$	(0.04	)	$	(2.80	)	$	0.38		$	0.49		$	0.52
Pro forma	$	(0.28	)	$	(0.05	)	$	(2.83	)	$	0.35		$	0.46		$	0.51

7

The amortization of bond discount required under FSP APB 14-1 is a non-cash expense and has no impact on the total operating, investing or financing cash flows in the prior periods or future condensed consolidated statements of cash flows.

In June 2008, the FASB issued EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (EITF 07-5). EITF 07-5 provides guidance on determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity’s own stock. EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and we are required to adopt EITF 07-5 in our first quarter of fiscal 2010. We are currently evaluating the impact that EITF 07-5 will have on our condensed consolidated financial statements.

Defined Benefit Plan Disclosures: In December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets, ” (FSP FAS 132(R)-1). FSP FAS 132(R)-1 amends SFAS 132(R), Employers’ Disclosures about Pensions and Other Postretirement Benefits,” to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. FSP FAS 132(R)-1 is effective for fiscal years ending after December 15, 2009 and we are required to adopt FSP FAS 132(R)-1 in our first quarter of fiscal 2010. We are currently evaluating the impact of adopting FSP FAS 132(R)-1 will have on our condensed consolidated financial statements.

Fair Value and Decreasing Volume and Transactions that are not Orderly: In April 2009 the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” (FSP FAS 157-4). FSP FAS 157-4 affirms that in an inactive market, fair value is the price to sell the asset in an orderly transaction and clarifies and includes additional factors for determining inactive markets. FSP FAS 157-4 is effective for interim and fiscal years ending after June 15, 2009, and we are required to adopt FSP FAS 157-4 in our fourth quarter of fiscal 2009. We are currently evaluating the impact that FSP FAS 157-4 will have on our condensed consolidated financial statements.

Other-Than-Temporary Impairments: In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” ( FSP FAS 115-2 and FAS 124-2). FSP FAS 115-2 and FAS 124-2 amends the requirements for the recognition and measurement of other-than-temporary impairments for debt securities by modifying the pre-existing “intent and ability” indicator. Under FSP FAS 115-2 and FAS 124-2, an other-than-temporary impairment is triggered when there is an intent to sell the security, it is more likely than not that the security will be required to be sold before recovery, or the security is not expected to recover the entire amortized cost basis of the security. FSP FAS 115-2 and FAS 124-2 requires the presentation of the total other-than-temporary impairment in the statement of earnings for those impairments involving credit losses with an offset for the remainder of the impairment recognized in other comprehensive income. Upon adoption, FSP FAS 115-2 and FAS 124-2 requires a cumulative-effect adjustment in earnings. FSP FAS 115-2 and FAS 124-2 is effective for interim and fiscal years ending after July 15 , 2009, and we are required to adopt FSP FAS 115-2 and FAS 124-2 in our fourth quarter of fiscal 2009. We are currently evaluating the impact that FSP FAS 115-2 and FAS 124-2 will have on our condensed consolidated financial statements.

Interim Disclosures about Fair Value: In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” ( FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 and APB 28-1 requires FAS 107 disclosures related to the fair value of its financial instruments when summarized financial information is presented for interim reporting periods. FSP FAS 107-1 and APB 28-1 is effective for interim and fiscal years ending after July 15 , 2009, and we are required to adopt FSP FAS 107-1 and APB 28-1 in our fourth quarter of fiscal 2009. We are currently evaluating the impact that FSP FAS 107-1 and APB 28-1 will have on our condensed consolidated financial statements.

3. FAIR VALUE

On July 1, 2008, we adopted SFAS No. 157 “Fair Value Measurements,” (SFAS 157), for all financial assets and financial liabilities. SFAS 157 defines fair value, establishes a framework for measuring fair value, and enhances fair value measurement disclosure. The adoption of SFAS 157 did not have a significant impact on our condensed consolidated financial statements, and the resulting fair values calculated under SFAS 157 after adoption were not significantly different than the fair values that would have been calculated under previous guidance. We did not elect to adopt SFAS 157 for acquired non-financial assets and assumed non-financial liabilities. On July 1, 2008, we also adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115,” (SFAS 159). SFAS 159 permits companies to choose to measure certain financial instruments and other items at fair value using an instrument-by-instrument election. The standard requires that unrealized gains and losses are reported in earnings for items measured using the fair value option. SFAS 159 also requires cash flows from purchases, sales, and maturities of trading securities to be classified based on the nature and purpose for which the securities were acquired. Our debt and equity instruments offsetting deferred compensation will continue to be classified as operating activities as they are maintained to offset changes in liabilities related to the equity market risk of certain deferred compensation arrangements. SFAS 159 does not allow for retrospective application to periods prior to fiscal year 2008, therefore all trading asset activity for prior periods will continue to be presented as operating activities. As we did not elect to fair value any of our current financial instruments under the provisions of SFAS 159, our adoption of this statement did not have an impact on our financial statements.

8

SFAS 157 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There are three levels of inputs to fair value measurements: Level 1, the use of quoted prices for identical instruments in active markets; Level 2, the use of quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities; and Level 3, the use of unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

Many, but not all, of our financial instruments are carried at fair value. For example, substantially all of our cash equivalents, short-term investments and long-term investments are classified as available-for-sale securities and are carried at fair value, with unrealized gains and losses, net of tax, reported in other comprehensive income.

Our cash equivalents and marketable debt and equity securities are classified within Level 1 or Level 2. This is because our cash equivalents and marketable debt and equity securities are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs. Our foreign currency derivative contracts are classified within Level 2 because of the use of observable inputs for similar derivative instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable.

Fair Value Measurements

Information about certain of our financial assets and liabilities for the quarter ended March 29, 2009 (in millions):

	Fair Value
	Total		Level 1		Level 2		Level 3
Financial assets carried at fair value:
Cash and cash equivalents	$	1,569	$	1,147	$	422	$	—
Trading securities		45		45		—		—
Asset backed and mortgage backed securities		235		—		235		—
Corporate bonds		272		—		272		—
Government agency		845		—		845		—
U.S. Government notes and bonds		40		40		—		—
Certificates of deposit		14		—		14		—
Commercial paper		15		—		15		—
Available for sale equity securities		11		11		—		—
Interest rate swaps(1)(2)		12		—		12		—
Foreign exchange contracts(1)		63		—		63		—
Total	$	3,121	$	1,243	$	1,878	$	—

⁽¹⁾ See Note 4, Derivative Instruments and Hedging Activities, for more information regarding our foreign exchange contracts.

⁽²⁾ See Note 8, Borrowing Arrangements, for more information regarding our interest rate contracts.

In the third quarter and the first nine months of fiscal 2009, we determined that the declines in the fair value for certain of our debt investment securities were other than temporary due to the significant deterioration of the financial condition of the investees and our expectation that the investment would not fully recover, or would not recover before they were sold. As a result, we recorded impairment charges of approximately of $6 million and $30 million, respectively, as adjustments to interest and other income (expense), net, in our condensed consolidated statement of operations.

4. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

On December 29, 2008, we adopted SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—An Amendment of FASB Statement No. 133,” (SFAS 161). SFAS 161 expanded the disclosure requirements for derivative instruments and hedging activities. Under SFAS 161, we have provided enhanced disclosures addressing how and why we use derivative instruments, how we account for derivative instruments and related hedged items under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities, as amended” (SFAS 133) and its related interpretations, and how derivative instruments and related hedged items affect our financial position, financial performance and cash flows.

SFAS 133 requires us to recognize all of our derivative instruments as either assets or liabilities in our statement of operations at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies

9

as part of a hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we must designate the hedging instrument based upon the exposure being hedged as a cash flow hedge or a fair value hedge. All derivatives are recognized in our condensed consolidated balance sheet at fair value in accordance with SFAS 157 (see Note 3, Fair Value) and are reported in Prepaid expenses and other current assets, net, and Accrued liabilities and other. Classification of all of our derivatives are current because the maturity of the instrument is less than 12 months.

We are exposed to certain risks relating to our ongoing business operations. The primary risks managed by using derivative instruments are foreign currency exchange rate risk and interest rate risk. Option and forward contracts on various foreign currencies are entered into to manage the foreign currency exchange rate risk on forecasted revenue denominated in foreign currencies. Other forward exchange contracts are entered into to hedge against changes in the value of monetary assets and liabilities denominated in a non functional currency. We also use natural hedges by purchasing components and incurring expenses in local currencies.

We are exposed to interest rate risk that is generated by our corporate borrowing activities. Our management has decided that it will have discretion over the levels of fixed and floating rate interest rate exposure present in our debt portfolios, and that derivative instruments may be employed to achieve a desired mix. Approved financial instruments for managing interest rate risk are limited to plain vanilla interest rate swaps.

Cash Flow Hedges

We have significant international sales and purchase transactions denominated in foreign currencies. As a result, we purchase currency option and forward contracts as cash flow hedges to reduce or eliminate certain foreign currency exposures that can be identified and quantified. These contracts generally expire within 12 months. We are primarily exposed to changes in exchange rates for the Euro, Japanese Yen and British Pound.

Our hedging contracts are primarily intended to protect against changes in the value of the U.S. dollar. Accordingly, for forecasted transactions, U.S. dollar functional subsidiaries hedge foreign currency revenues and non-U.S. dollar functional subsidiaries selling in foreign currencies hedge U.S. dollar inventory purchases. Changes in the fair value of our derivatives designated as a cash flow hedge are recorded, net of applicable taxes, in accumulated other comprehensive income, a component of stockholders’ equity. When net income is affected by the variability of the underlying cash flow, the applicable offsetting amount of the gain or loss from the derivative that is deferred in stockholders’ equity is released to revenue and cost of sales, and reported in the consolidated statement of operations based on the nature of the underlying cash flow hedged. The net gains or losses relating to ineffectiveness were not material for the three and nine month periods ended March 29, 2009 and March 30, 2008, respectively.

Fair Value Hedges

We enter into interest rate derivatives to modify our aggregate exposure to interest rates generated by our borrowing activities. Interest rate derivatives will not be entered into on a regular basis, but when there is a desire to modify our interest rate exposure with respect to our fixed rate borrowings or other ordinary obligations. These transactions are characterized as “fair value” hedges for financial accounting purposes because they protect us against changes in the fair value of our fixed rate borrowings or other obligations due to interest rate movements. Interest rate derivatives in this category will be denominated in the same currency as the relevant hedged debt instrument. For our Senior Notes, we have hedged against the risk of changes in fair value associated with their fixed interest rate by entering into fixed-to-variable interest rate swap agreements, designated as fair value hedges, of which four are outstanding, with a total notional amount of $550 million as of March 29, 2009 and March 30, 2008. Our Senior Notes are due on August 15, 2009 (see Note 8).

The gains and losses on our fair value hedges, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in current earnings during the period of change in fair values. If the change in the value of the hedging instrument offsets the change in the value of the hedged item, the hedge is considered perfectly effective. Hedge effectiveness is measured at least quarterly based on the relative change in fair value between the derivative contract and the hedged item over time. Any change in fair value resulting from ineffectiveness, which is the amount by which the change in the value of the hedge does not exactly offset the change in the value of the hedged item, is recognized immediately in earnings. Our interest rate swaps qualify as perfectly effective fair value hedges and therefore there is no ineffective portion to the hedge recognized in earnings. Adjustments to the fair value of the interest rate swap agreements are recorded as either an other asset or other liability. The differential to be paid or received under these agreements is accrued consistently with the terms of the agreements and is recognized in interest expense over the term of the related debt. The related amounts payable to or receivable from counterparties are included in accounts receivable or accrued liabilities.

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Non SFAS 133 Balance Sheet Hedging Strategy

Our balance sheet hedges are designed to hedge the gains and losses generated by remeasurement of nonfunctional currency denominated assets and liabilities. The program is designed so that hedging transactions are entered into to reduce the risk that foreign currency exchange rate fluctuations will adversely impact the functional currency value of nonfunctional currency denominated monetary assets and liabilities. To manage these foreign currency risk exposures, we enter into forward contracts to offset the foreign currency gains and losses. These contracts are entered into at the beginning of a designated fiscal month and mature after the end of such month. In some cases, these transactions may be entered into in the middle of the month to adjust existing hedges for changes in existing or anticipated nonfunctional currency denominated assets and liabilities. These are hedges of less than 3 months in duration.

Currency transaction gains (losses), net of our hedging activities derived from monetary assets and liabilities stated in a currency other than the functional currency, are recognized in Selling, general and administrative (SG&A) expenses in our condensed consolidated statements of operations.

Derivative Activity

We had the following net outstanding foreign currency contracts (in millions of USD):

Foreign Currency Contract	March 29, 2009	June 30, 2008
Euro	140	90
Great British pound	123	32
Japanese yen	90	233

Credit Risk

We manage our counterparty credit risk by monitoring the financial health of the banks with whom we have option and forward contracts on foreign currency and interest rate swaps by analyzing the banks’ credit rating and the Credit Default Swap (CDS) spread, or the price, denominated in basis points, to obtain a contract to protect against default of an underlying financial instrument. A company with a higher CDS spread is considered more likely to default by the market. Our option or forward contracts do not have credit risk related contingent features such as the requirement for immediate payment of any net liability position in the event a rating agency were to downgrade our Senior Notes.

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Fair Value of Derivative Instruments

As of March 29, 2009 and June 30, 2008 (in millions):

	Asset Derivatives
	2009			2008
Derivatives Designated as Hedging Instruments Under SFAS 133	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate contracts(1)(3)	Other current assets	12		Other current assets	21
Foreign exchange contracts(2)	Other current assets	37		Other current assets	6
		49			27
	Liability Derivatives
	2009			2008
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Foreign exchange contracts(2)	Other current assets	(4	)	Other current assets	(3	)
	Asset Derivatives
	2009			2008
Derivatives Not Designated as Hedging Instruments Under SFAS No. 133	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Foreign exchange contracts(2)	Other current assets	74		Other current assets	26
	Liability Derivatives
	2009			2008
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Foreign exchange contracts(2)	Other current assets	(44	)	Other current assets	(16	)

⁽¹⁾ See Note 3, Fair Value, for more information regarding our interest rate contracts.

⁽²⁾ See Note 3, Fair Value, for more information regarding our foreign exchange contracts.

⁽³⁾ See Note 8, Borrowing Arrangements, for more information regarding our interest rate contracts.

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Effect of Derivative Instruments on the Statement of Financial Performance

(In millions)

	Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)
	2009		2008
Derivatives in SFAS 133 Cash Flow Hedging Relationships	Three Months Ended March 29	Nine Months Ended March 29	Three Months Ended March 30		Nine Months Ended March 30
Foreign exchange contracts	15	88	(26	)	(50	)
	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
	2009		2008
Location of Gain (Loss) Reclassified From Accumulated OCI into Income (Effective Portion)	Three Months Ended March 29	Nine Months Ended March 29	Three Months Ended March 30		Nine Months Ended March 30
Revenue/Cost of goods sold	27	60	(15	)	(34	)
	Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amounts Excluded from Effectiveness Testing)
	2009		2008
Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amounts Excluded From Effectiveness Testing)	Three Months Ended March 29	Nine Months Ended March 29	Three Months Ended March 30		Nine Months Ended March 30
Other income and expense	—	8	(2	)	(6	)

	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative
		2009				2008
Derivatives Not Designated as Hedging Instruments Under SFAS 133		Three Months Ended March 29		Nine Months Ended March 29		Three Months Ended March 30	Nine Months Ended March 30
Foreign exchange contracts	Operating expenses	(19	)	(149	)	72	130

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5. BALANCE SHEET DETAILS

Inventories

Inventories consisted of the following (in millions):

	March 29, 2009		June 30, 2008
Raw materials	$	99	$	154
Work in process		61		90
Finished goods		401		436
	$	561	$	680

Warranty Reserve

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

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

Balance at June 30, 2008	$	206
Charged to cost of sales		160
Utilized		(206	)
Balance at March 29, 2009	$	160

6. GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS, NET

Information regarding our goodwill by operating segment is as follows (in millions):

	Product Group			Services Group			Total
Balance as of June 30, 2008	$	1,828		$	1,387		$	3,215
Goodwill acquired during the period		40			—			40
Adjustment to acquired companies’ tax reserves		(35	)		(35	)		(70	)
Impairments		(1,445	)		—			(1,445	)
Balance as of March 29, 2009	$	388		$	1,352		$	1,740

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

	Gross Carrying Amount						Accumulated Amortization									Net
	June 30, 2008		Additions		March 29, 2009		June 30, 2008			Additions			March 29, 2009			March 29, 2009
Developed technology	$	1,007	$	14	$	1,021	$	(753	)	$	(109	)	$	(862	)	$	159
Customer base		731		1		732		(523	)		(103	)		(626	)		106
Trademark		97		—		97		(19	)		(7	)		(26	)		71
Acquired workforce and other		120		1		121		(95	)		(5	)		(100	)		21
	$	1,955	$	16	$	1,971	$	(1,390	)	$	(224	)	$	(1,614	)	$	357

Amortization expense of other acquisition-related intangible assets was $72 million and $224 million for the three and nine months ended March 29, 2009, respectively, and $76 million and $224 million for the three and nine months ended March 30, 2008, respectively. Our acquisition-related intangible assets are amortized primarily over periods ranging between one and five years on a straight-line basis.

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Estimated amortization expense for other acquisition-related intangible assets on our March 29, 2009 balance sheet for the fiscal years ending June 30, is as follows (in millions):

Remainder of 2009	$	72
2010		107
2011		59
2012		50
2013		27
Thereafter		42
	$	357

In accordance with SFAS 142, “Goodwill and Other Intangible Assets” (SFAS 142), we apply a fair value based impairment test to the net book value of goodwill and indefinite-lived intangible assets on an annual basis and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. The analysis of potential impairment of goodwill requires a two-step process. The first step is the estimation of fair value. If step one indicates that impairment potentially exists, the second step is performed to measure the amount of impairment. Goodwill impairment exists when the estimated fair value of goodwill is less than its carrying value.

During our quarter ended September 28, 2008, based on a combination of factors, including the current economic environment, our operating results, and a sustained decline in our market capitalization, we concluded that there were sufficient indicators to require us to perform an interim goodwill impairment analysis as of September 28, 2008. As a result, during the first quarter of fiscal 2009, we recorded an impairment charge of $1,445 million which represented our best estimate of the resulting goodwill impairment. We completed our goodwill impairment analysis during the second quarter of fiscal 2009. For the purposes of this analysis, our estimates of fair value were based on a combination of the income approach, which estimates the fair value of our reporting units based on the future discounted cash flows, and the market approach, which estimates the fair value of our reporting units based on comparable market prices. There was no change in the second quarter of fiscal 2009 to the $1,445 million non-cash goodwill impairment charges estimated and recorded in the first quarter of fiscal 2009. In connection with completing our goodwill impairment analysis, we reviewed our long-lived tangible and intangible assets within the impaired reporting unit under SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” We determined that the forecasted undiscounted cashflows related to these assets or asset groups were in excess of their carrying values, and therefore these assets were not impaired.

7. RESTRUCTURING CHARGES AND RELATED IMPAIRMENT OF LONG-LIVED ASSETS

In accordance with SFAS 112, “Employers’ Accounting for Post Employment Benefits” (SFAS 112) and SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146), we recognized a total of $46 million and $331 million in restructuring for the three and nine months ended March 29, 2009, respectively, and $14 million and $159 million for the three and nine months ended March 30, 2008, respectively. The determination of when we accrue for severance costs, and which standard applies, depends on whether the termination benefits are provided under a one-time benefit arrangement as defined by SFAS 146 or under an on-going benefit arrangement as described by SFAS 112.

We estimated the cost of exiting and terminating our facility leases or acquired leases by referring to the contractual terms of the agreements and by evaluating the current real estate market conditions. In addition, we have estimated sublease income by evaluating the current real estate market conditions, or where applicable, by referring to amounts being negotiated. Our ability to generate this amount of sublease income, as well as our ability to terminate lease obligations at the amounts we have estimated, is highly dependent upon the commercial real estate market conditions in geographies at the time we perform our evaluations or negotiate the lease termination and sublease arrangements with third parties. The amounts we have accrued represent our best estimate of the obligations we expect to incur and could be subject to adjustment as market conditions change.

Restructuring Plan IX

In November 2008, we initiated a restructuring plan to further align our resources with our strategic business objectives through reducing our workforce by approximately 5,000 to 6,000 employees. Under this plan, we estimate in total that we will incur between $500 million to $600 million in severance and benefit costs. Through the third quarter of 2009, we notified approximately 2,900 employees and recognized total related severance and benefit costs of $246 million. The remainder of the estimated costs under this restructuring plan are expected to be incurred over the next several quarters.

Restructuring Plan VIII

In May 2008, we initiated a restructuring plan to further align our resources with our strategic business objectives through reducing our workforce by approximately 1,500 to 2,500 employees. Under this plan, we estimate in total that we will incur up to $220 million in severance and benefit costs. Through the third quarter of fiscal 2009, we notified approximately 1,950 employees and recognized a total related severance and benefit costs of $174 million. The remainder of the estimated costs under this restructuring plan are expected to be incurred during fiscal 2009.

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Restructuring Plan VII

In August 2007, we initiated a restructuring plan to further align our resources with our strategic business objectives. Through the third quarter of fiscal 2009, we notified approximately 1,450 employees of their termination and recognized total related severance and benefit costs of $131 million. Additionally, we incurred $6 million in expenses related to facilities other and restructuring related charges.

Restructuring Plans Prior to Phase VII

Prior to the initiation of Restructuring Plans VII, VIII and IX, we implemented certain workforce reduction and facilities exit actions. All employees to be terminated under these plans have been notified and all facilities relating to the amounts accrued under these restructuring plans have been exited.

The following table sets forth an analysis of our restructuring accrual activity for the nine months ended March 29, 2009 (in millions):

	Restructuring Plans
	IX			VIII						VII						Prior to VII			Total
	Severance and Benefits			Severance and Benefits			Facilities Related and Other			Severance and Benefits			Facilities Related and Other			Severance, Benefits, Facilities Related and Other
Balance as of June 30, 2008	$	—		$	107		$	—		$	20		$	2		$	207		$	336
Severance and benefits		246			73			—			—			—			—			319
Accrued lease costs		—			—			9			—			—			—			9
Provision adjustments		—			(6	)		—			(4	)		—			13			3
Total restructuring charges	$	246		$	67		$	9		$	(4	)	$	—		$	13		$	331
Cash paid		(31	)		(152	)		(2	)		(15	)		(1	)		(36	)		(237	)
Translation adjustments		—			(3	)		—			—			—			(3	)		(6	)
Balance as of March 29, 2009	$	215		$	19		$	7		$	1		$	1		$	181		$	424

The restructuring charges are based on estimates that are subject to change. Changes to the previous estimates have been reflected as “Provision adjustments” on the above table in the period the changes in estimates were determined. As of March 29, 2009, our estimated sublease income to be generated from sublease contracts not yet negotiated approximated $15 million. Accrued lease costs include accretion expense associated with the passage of time.

The remaining cash expenditures relating to workforce reductions are expected to be paid over the next several quarters. Our accrual as of March 29, 2009, for facility-related leases (net of anticipated sublease proceeds), will be paid over their respective lease terms through fiscal 2024. As of March 29, 2009, of the total $424 million accrual for workforce reductions and facility-related leases, $282 million was classified as current accrued liabilities and other and the remaining $142 million was classified as other non-current obligations.

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

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8. BORROWING ARRANGEMENTS

As of March 29, 2009 and June 30, 2008, the balance of long-term debt is as follows (in millions):

	Maturities	March 29, 2009			June 30, 2008
7.65% Senior Notes	2009	$	550		$	550
0.625% Convertible Notes	2012		350			350
0.75% Convertible Notes	2014		350			350
Interest rate swap agreements(1)			12			21
Other			(5	)		(6	)
Total borrowing arrangements		$	1,257		$	1,265
Less: current maturities			(562	)		—
Total carrying value long-term borrowing arrangements		$	695		$	1,265
Total fair value of long-term borrowings arrangements		$	592		$	1,165
Total fair value of current maturities		$	554		$	—

⁽¹⁾ See Note 4, Derivative Instruments and Hedging Activities, for more information regarding our interest rate contracts.

In August 1999, we issued $1.5 billion of unsecured senior debt securities in four tranches (the Senior Notes) of which $550 million (due on August 15, 2009 and bearing interest at 7.65%) remains. Interest on the Senior Notes is payable semi-annually. We may redeem all or any part of the Senior Notes at any time at a price equal to 100% of the principal plus accrued and unpaid interest in addition to an amount determined by a quotation agent, representing the present value of the remaining scheduled payments. The Senior Notes are subject to compliance with certain covenants that do not contain financial ratios. We are currently in compliance with these covenants. In addition, we also entered into various interest-rate swap agreements to modify the interest characteristics of the Senior Notes so that the interest associated with the Senior Notes effectively becomes variable. For our publicly traded Senior Notes, estimates of fair value are based on observable market prices.

In January 2007, we issued $350 million principal amount of 0.625% Convertible Senior Notes due February 1, 2012 and $350 million principal amount of 0.75% Convertible Senior Notes due February 1, 2014 (the Convertible Notes), to KKR PEI Solar Holdings, I, Ltd., KKR PEI Solar Holdings, II, Ltd. and Citibank, N.A. in a private placement. Each $1,000 of principal of the Convertible Notes is convertible into 34.6619 shares of our common stock (or a total of approximately 24 million shares), which is the equivalent of $28.85 per share, subject to adjustment upon the occurrence of specified events set forth under terms of the Convertible Notes. Concurrent with the issuance of the Convertible Notes, we entered into note hedge-transactions with a financial institution whereby we have the option to purchase up to 24 million shares of our common stock at a price of $28.85 per share, and we sold warrants to the same financial institution whereby they have the option to purchase up to 24 million shares of our common stock. The separate note hedge and warrant transactions were structured to reduce the potential future share dilution associated with the conversion of the Convertible Notes. For our Convertible Notes, fair value is calculated based on volatility and rates currently estimated to be available to us for debt with similar terms and remaining maturities.

Uncommitted Lines of Credit

At March 29, 2009 and June 30, 2008, we and our subsidiaries had uncommitted lines of credit available for uses including overnight overdrafts, letters of credit and bank guarantees, aggregating approximately $266 million and $277 million, respectively. No amounts were drawn under these lines of credit as of March 29, 2009 and June 30, 2008. Fees and other terms of utilizing these lines of credit vary from country to country depending on local market conditions. There is no guarantee that the banks would approve our request to utilize these uncommitted lines of credit.

9. STOCKHOLDERS’ EQUITY

Stock-based Compensation

We have a stock-based compensation program that provides our Board of Directors broad discretion in creating employee equity incentives. This program includes incentive and non-statutory stock options and restricted stock-based awards, including restricted stock units and performance-based restricted stock units. These awards are granted under our 2007 Omnibus Incentive Plan, which was approved by our stockholders on November 8, 2007. Stock options and restricted stock unit awards are generally time-based, vesting 25% on or near each annual anniversary of the grant date over four years. Stock options generally expire eight years from the date of grant. Additionally, we have an Employee Stock Purchase Plan (ESPP) that allows employees to purchase shares of common stock at 85% of the fair market value at the date of purchase. Shares issued as a result of stock option exercises, restricted stock-based awards and our ESPP are generally first issued out of treasury stock. As of March 29, 2009, we had approximately 144 million shares of common stock reserved for future issuance under these plans.

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On July 1, 2005, we adopted the provisions of SFAS 123R “Share-Based Payment,” (SFAS 123(R)) requiring us to recognize expense related to the fair value of our stock-based compensation awards. We elected to use the modified prospective transition method as permitted by SFAS 123R. Under this transition method, stock-based compensation expense after adoption includes compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of July 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, “Accounting for Stock-Based Compensation.” Stock-based compensation expense for all stock-based compensation awards granted subsequent to July 1, 2005 was based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. We recognize compensation expense for stock option awards on a straight-line basis over the requisite service period of the award.

The following table sets forth the total stock-based compensation expense resulting from stock options, restricted stock awards, ESPP and options assumed as a result of our acquisitions included in our condensed consolidated statements of operations (in millions):

	Three Months Ended				Nine Months Ended
	March 29, 2009		March 30, 2008		March 29, 2009		March 30, 2008
Cost of sales - products	$	2	$	3	$	8	$	8
Cost of sales - services		10		10		31		28
Research and development		14		17		45		47
Selling, general and administrative		23		27		66		74
Stock-based compensation expense	$	49	$	57	$	150	$	157

Net cash proceeds from the exercise of stock options were $2 million and $4 million for the three and nine months ended March 29, 2009, respectively, and $20 million and $71 million for the three and nine months ended March 30, 2008, respectively.

The fair value of stock options was estimated using the Black-Scholes model with the following weighted-average assumptions for the three and nine months ended March 29, 2009 and March 30, 2008, respectively:

	Three Months Ended						Nine Months Ended
Options	March 29, 2009			March 30, 2008			March 29, 2009			March 30, 2008
Expected life (in years)		4.88			3.53			5.27			4.27
Interest rate		1.67	%		2.43	%		3.20	%		3.41	%
Volatility		57.66	%		39.91	%		47.13	%		41.76	%
Dividend yield		—			—			—			—
Weighted-average fair value at grant date	$	2.42		$	11.72		$	4.15		$	9.91

Our computation of expected volatility for the three and nine months ended March 29, 2009, is based on a combination of historical and market-based implied volatility. Our computation of expected life is based on historical settlement patterns. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.

Stock option activity for the nine months ended March 29, 2009, is as follows (in millions, except per share amounts):

	Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at June 30, 2008	91		$	32.05	3.92	$	46
Grants	—			—
Exercises	(2	)		2.81
Forfeitures or expirations	(10	)		82.23
Outstanding at March 29, 2009	79		$	26.15	3.26	$	15
Exercisable at March 29, 2009	64		$	28.28	2.60	$	10

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between our closing stock price on the last trading day of our third quarter of fiscal 2009 and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their options on March 29, 2009. This amount changes based on the fair market value of our stock. The total intrinsic value of the options exercised was $4 million and $7 million for the three and nine months ended March 29, 2009, respectively, and $82 million and $105 million for the three and nine months ended March 30, 2008, respectively. The total fair value of options that vested during the three and nine months ended March 29, 2009, was $8 million and $73 million, respectively. The total fair value of options that vested during the three and nine months ended March 30, 2008, was $19 million and $98 million, respectively.

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As of March 29, 2009, $104 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of two years.

The following table summarizes our restricted stock award activity for the nine months ended March 29, 2009 (in millions, except per share amounts):

	Number of Shares		Weighted-Average Grant Date Fair Value (per share)
Restricted stock awards at June 30, 2008	23		$	19.90
Granted	15			7.42
Vested	(4	)		18.77
Forfeited	(3	)		18.03
Restricted stock awards at March 29, 2009	31		$	13.99

As of March 29, 2009, we retained purchase rights to approximately 33,000 shares issued pursuant to stock purchase agreements and other stock plans at a weighted-average price of approximately $0.03 per share. As of March 29, 2009, $306 million of total unrecognized compensation costs related to restricted stock based awards is expected to be recognized over a weighted-average period of two years.

Computation of Net Income (Loss) per Common Share

Basic net income (loss) per common share is computed using the weighted-average number of common shares outstanding (adjusted for treasury stock and common stock subject to repurchase activity) during the period. Diluted net income per common share is computed using the weighted-average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares are anti-dilutive when their conversion would increase earnings per share. Dilutive common equivalent shares consist primarily of stock options and restricted stock awards (restricted stock and restricted stock units that are settled in stock).

For the three and nine months ended March 30, 2008, we added zero and 16 million common equivalent shares, respectively, to our basic weighted-average shares outstanding to compute the diluted weighted-average shares outstanding for the period. We are required to include these dilutive shares in our nine months ended March 30, 2008 calculations of net income per share because we earned a profit during that period.

Shares used in the diluted net income per share calculations exclude anti-dilutive common equivalent shares, consisting of stock options, restricted stock awards, written call options and shares associated with convertible notes. These anti-dilutive common equivalent shares totaled 118 million and 105 million shares for the three and nine month periods ended March 30, 2008, respectively.

As a result of our net loss for the three and nine months ended March 29, 2009, all potentially dilutive shares were anti-dilutive, and therefore, excluded from the computation of diluted net loss per share. While these common equivalent shares are currently anti-dilutive, they could be dilutive in the future.

The following table sets forth the computation of diluted income (loss) per share for the three and nine months ended March 29, 2009 and March 30, 2008 (in millions, except earnings per common share):

	Three Months Ended						Nine Months Ended
	March 29, 2009			March 30, 2008			March 29, 2009			March 30, 2008
Net income (loss)	$	(201	)	$	(34	)	$	(2,087	)	$	315
Weighted average common shares outstanding - basic		745			785			746			821
Diluted potential common shares		—			—			—			16
Weighted average common shares outstanding - diluted		745			785			746			837
Basic earnings per common share	$	(0.27	)	$	(0.04	)	$	(2.80	)	$	0.38
Diluted earnings per common share	$	(0.27	)	$	(0.04	)	$	(2.80	)	$	0.38

Common Stock Repurchase Programs

On July 31, 2008, our Board of Directors authorized management to repurchase up to $1.0 billion of our outstanding common stock. Under this authorization, the timing and actual number of shares subject to repurchase are at the discretion of management and are contingent on a number of factors, such as levels of cash generation from operations, cash requirements for acquisitions, repayment of debt and our share price.

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In May 2007, our Board of Directors authorized management to repurchase up to $3.0 billion of our outstanding common stock. Under this authorization, the timing and actual number of shares subject to repurchase are at the discretion of management and are contingent on a number of factors, such as levels of cash generation from operations, cash requirements for acquisitions, repayment of debt and our share price. As of September 2008, all funds authorized under the May 2007 authorization were used. We repurchased 161 million shares for an aggregate purchase price of $3.0 billion under the May 2007 authorization, all of which are initially recorded as treasury stock and recorded using the cost method.

When treasury shares are reissued on a first-in-first-out basis, and the price of the reissued shares exceeds the cost of the respective treasury share, the gain is recorded to additional paid in capital. When the price of the reissued shares is lower than the cost of the respective treasury share, the loss is charged to additional paid in capital to the extent of previous gains, and then to retained earnings.

The stock repurchase activity under the stock repurchase programs during the first nine months of fiscal 2009 is summarized as follows (in millions, except per share amounts):

	Shares Repurchased	Weighted- Average Price per Share		Amount Repurchased
Cumulative repurchases through June 30, 2008	161	$	18.44	$	2,964
Repurchase of common stock	15		8.85		130
Cumulative repurchases through March 29, 2009	176	$	17.64	$	3,094

Comprehensive Income(Loss)

The components of comprehensive income (loss) were as follows (in millions):

	Three Months Ended						Nine Months Ended
	March 29, 2009			March 30, 2008			March 29, 2009			March 30, 2008
Net income (loss)	$	(201	)	$	(34	)	$	(2,087	)	$	315
Change in net unrealized holding gain (loss) on available-for-sale investments		14			(25	)		(23	)		(15	)
Change in unrealized holding gain on derivatives and pension-related benefit		(6	)		1			43			13
Translation adjustments		(31	)		95			(204	)		179
	$	(224	)	$	37		$	(2,271	)	$	492

The components of accumulated other comprehensive income were as follows (in millions):

	March 29, 2009			June 30, 2008
Accumulated net unrealized loss on available-for-sale investments	$	(36	)	$	(13	)
Accumulated net unrealized holding gain (loss) on derivatives		19			(9	)
Accumulated net unrealized pension-related benefit, net of tax		27			12
Cumulative translation adjustments		299			503
	$	309		$	493

10. INCOME TAXES

The third quarter and first nine months of fiscal 2009 includes a tax benefit of $6 million and $13 million, respectively, as a result of the enactment of legislation which provides that taxpayers may elect to forego bonus depreciation on certain additions of qualified eligible property and, in turn, claim a refundable credit for a portion of its unused alternative minimum tax and research credits. The Housing and Economic Recovery Act of 2008, which was signed by the President of the United States on July 30, 2008, applied to certain property additions from April 1, 2008 through December 31, 2008. On February 17, 2009, the American Recovery and Reinvestment Tax Act of 2009 was enacted which extended the period for eligible property additions for another year through December 31, 2009.

During the third quarter of fiscal 2009, as a result of the expiration of the statute of limitations with respect to certain U.S. federal tax reserves, the total amount of gross unrecognized tax benefits was reduced by $17 million and recorded as an adjustment against our valuation allowance. During the first quarter of fiscal 2009, as a result of the expiration of the statute of limitations with respect to certain acquisition-related tax reserves, the total amount of gross unrecognized tax benefits was reduced by $54 million and recorded as an adjustment against goodwill.

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The total amount of gross unrecognized tax benefits was $163 million as of March 29, 2009. Of this amount, $105 million would benefit our tax provisions if realized and the remaining $58 million which relates to acquisition-related reserves, would be an adjustment to goodwill if realized.

Our policy is to recognize interest and penalty expense associated with uncertain tax positions as a component of income tax expense in the consolidated statements of operations. During the first quarter of fiscal 2009, as a result of expiration of the statutes of limitation, we reduced our accrued interest and recorded a benefit to our tax provision of $12 million. The amount of interest and penalties accrued at March 29, 2009 was approximately $23 million.

We conduct business globally and, as a result, file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Canada, France, Germany, Japan, the Netherlands, United Kingdom and the United States. With few exceptions, we are no longer subject to U.S. federal, state, local, and non-U.S. income tax examinations for fiscal years before 2001.

We are currently under examination by the IRS for tax returns filed for fiscal years 2006 and 2007. Although the ultimate outcome is unknown, we have reserved for potential adjustments that may result from the examination and we believe that the final outcome will not have a material effect on our results of operations.

11. OPERATING SEGMENTS

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

Our CODM manages our company based primarily on broad functional categories of sales, services, manufacturing, product development and engineering and marketing and strategy. Starting in fiscal 2008, our CODM began reviewing consolidated financial information on revenues and gross margins for products and services and also began reviewing operating expenses. Our CODM does not use asset allocation for purposes of making decisions about allocating resources to the segment and assessing the segment’s performance. Our Product Group segment comprises our end-to-end networking architecture of computing products including our Computer Systems and Storage product lines. Our Services Group segment comprises a full range of services to existing and new customers, including Support Services (Support Services and Managed Services) and Professional Services and Educational Services.

We have a Worldwide Operations (WWOPS) organization and a Global Sales and Services (GSS) organization that are responsible for the manufacturing and sale, respectively, of all of our products. Our CODM holds GSS accountable for overall products and services revenue and margins on a consolidated level. GSS and WWOPS manage the majority of our accounts receivable and inventory, respectively.

Operating expenses (primarily sales, marketing and administrative) related to the GSS are not allocated to the reportable segments and, accordingly, are included under the Other segment reported below. With the exception of goodwill, we do not identify or allocate assets by operating segment, nor does the CODM evaluate operating segments using discrete asset information. We do not report inter-segment revenue because the operating segments do not record it. We do not allocate interest and other income, interest expense, or taxes to operating segments. Although the CODM uses operating income to evaluate the segments, operating costs included in one segment may benefit other segments.

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Segment Information

The following table presents revenues and operating income (loss) for our segments (in millions):

	Product Group		Services Group		Total
Three Months Ended:
March 29, 2009
Revenues	$	1,519	$	1,095	$	2,614
Gross margin	$	642	$	474	$	1,116
Other Operating expenses						(1,285	)
Operating loss					$	(169	)
March 30, 2008
Revenues	$	2,003	$	1,263	$	3,266
Gross margin	$	897	$	571	$	1,468
Operating expenses						(1484	)
Operating loss					$	(16	)

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	Product Group			Services Group		Total
Nine Months Ended:
March 29, 2009
Revenues	$	5,222		$	3,602	$	8,824
Gross margin	$	2,022		$	1,645	$	3,667
Goodwill Impairment		(1445	)		—		(1,445	)
Other Operating expenses							(4,240	)
Operating loss						$	(2,018	)
March 30, 2008
Revenues	$	6,232		$	3,868	$	10,100
Gross margin	$	2,936		$	1,846	$	4,782
Operating expenses							(4,473	)
Operating income						$	309

12. LITIGATION AND OTHER CONTINGENCIES

In September 2004, private plaintiffs known as “relators” filed an action against us on behalf of the government of the United States in the United States District Court for the District of Arkansas alleging that certain rebates, discounts and other payments or benefits provided by us to our resellers and technology integrators constitute “kickbacks” in violation of the federal Anti-Kickback Act, because such benefits allegedly should have been disclosed to and/or passed on to the government. That action was filed under seal, and the complaint was not unsealed until April 2007. Later in fiscal 2005, the General Services Administration (GSA) began auditing our records under the agreements it had with us at that time. The GSA’s auditors alleged that we failed to provide agreed-upon discounts in accordance with the contracts’ “price reduction clauses” and further alleged that certain pricing disclosures made by us to the GSA were substantially incomplete, false or misleading, resulting in defective pricing. In April 2007, the United States Department of Justice filed a complaint intervening in the lawsuit in Arkansas described above. The government’s complaint includes claims related to both the “kickback” claims in the relators’ original complaint and other claims related to the GSA audit described above, including claims under the federal False Claims Act, breach of contract, and other related claims. The government’s complaint does not identify the amount of damages it claims or intends to claim. The parties continue to discuss the nature of the government’s current and potential claims on our GSA and other government sales. If this matter proceeds to trial, possible sanctions include an award of damages, including treble damages, fines, penalties and other sanctions, up to and including suspension or debarment from sales to the federal government. Although we are interested in pursuing an amicable resolution, we intend to present a vigorous factual and legal defense throughout the course of these proceedings.

As required by SFAS 5, we accrue for contingencies when we believe that a loss is probable and that we can reasonably estimate the amount of any such loss. We have made an assessment of the probability of incurring any such losses and such amounts are reflected in Other non-current obligations in our condensed consolidated financial statements. Litigation is inherently unpredictable and it is difficult to predict the outcome of particular matters with reasonable certainty and, therefore, the actual amount of any loss may prove to be larger or smaller than the amounts reflected in our condensed consolidated financial statements.

13. SUBSEQUENT EVENT

Three putative shareholder class actions were filed by individual shareholders on April 20, 2009, April 30, 2009 and April 30, 2009, respectively, in Santa Clara County Superior Court naming Sun and certain of our officers and directors, as well as Oracle Corporation, as defendants. The complaints, which are similar, seek to enjoin the proposed acquisition of Sun by Oracle Corporation and allege claims for breach of fiduciary duty against the individual defendants and for aiding and abetting a breach of fiduciary duty against the corporate defendants. The complaints generally allege that the consideration offered in the proposed transaction is unfair and inadequate. Sun and the other defendants have not yet responded to the complaints.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have reviewed the condensed consolidated balance sheet of Sun Microsystems, Inc. as of March 29, 2009 and the related condensed consolidated statements of operations for the three-month and nine-month periods ended March 29, 2009 and March 30, 2008 and the condensed consolidated statements of cash flows for the nine-month periods ended March 29, 2009 and March 30, 2008. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Sun Microsystems, Inc. as of June 30, 2008 and the related consolidated statements of operations, stockholders’ equity and cash flows for the year then ended, not presented herein, and in our report dated August 26, 2008, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph relating to the change in method of accounting for uncertain tax positions in accordance with guidance provided in Financial Accounting Standards Board Interpretation No.48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB statement No.109”. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of June 30, 2008, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

San Jose, California

May 4, 2009

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, telecommunications, 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.

On April 19, 2009, we entered into a definitive agreement under which Oracle Corporation (Oracle) will acquire all of our common stock, through a merger, for $9.50 per share in cash and Sun will become a wholly owned subsidiary of Oracle. The completion of the transaction is subject to the approval of our stockholders, receiving regulatory approvals and various other closing conditions.

Overview of Third Quarter Fiscal 2009 Results

Our third quarter of fiscal 2009 results were negatively affected by the economic downturn. This has adversely impacted our customers across nearly all geographies and industries. Revenues and gross margins were impacted by the following:

• Customers delaying, canceling or downsizing projects.

• Competitive pricing pressure.

• Reduced sales of our high end Systems products.

• A one time legal settlement.

Other key financial metrics for the quarter ended March 29, 2009, as compared to the quarter ended March 30, 2008, include the following:

• Total revenue decreased by $652 million, or 20.0%.

• North American revenue decreased by $211 million, or 16.8%.

• European revenue decreased by $265 million, or 23.8%.

• Gross margin as a percentage of net revenue decreased by 2.2 percentage points.

• Research and development expenses decreased by $64 million, or 14.0%.

• Selling, general, and administrative expenses decreased by $146 million, or 14.8%.

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RESULTS OF OPERATIONS

Net Revenues and Gross Margin

(dollars in millions)

	Three Months Ended											Nine Months Ended
Systems Products	March 29, 2009			March 30, 2008			Change $			Change %		March 29, 2009			March 30, 2008			Change $			Change %
Server products	$	1,094		$	1,473		$	(379	)	(25.7	)%	$	3,720		$	4,542		$	(822	)	(18.1	)%
Storage products		425			530			(105	)	(19.8	)%		1,502			1,690			(188	)	(11.1	)%
Systems Products net revenue	$	1,519		$	2,003		$	(484	)	(24.2	)%	$	5,222		$	6,232		$	(1,010	)	(16.2	)%
Systems Products gross margin		42.3	%		44.8	%				(2.5	)pts		38.7	%		47.1	%				(8.4	)pts
Support Services	$	853		$	961		$	(108	)	(11.2	)%	$	2,762		$	2,981		$	(219	)	(7.3	)%
Professional and Educational Services		242			302			(60	)	(19.9	)%		840			887			(47	)	(5.3	)%
Services net revenue	$	1,095		$	1,263		$	(168	)	(13.3	)%	$	3,602		$	3,868		$	(266	)	(6.9	)%
Services gross margin		43.3	%		45.2	%				(1.9	)pts		45.7	%		47.7	%				(2.0	)pts
Total net revenues	$	2,614		$	3,266		$	(652	)	(20.0	)%	$	8,824		$	10,100		$	(1,276	)	(12.6	)%
Total gross margin		42.7	%		44.9	%				(2.2	)pts		41.6	%		47.3	%				(5.7	)pts

Systems Products Revenue and Gross Margin

Our Systems products provide clients with business solutions requiring advanced Server and Storage capabilities. Our enterprise Server products include our high end and midrange SPARC^® based servers which provide solutions for virtualization and consolidating, web tier environments and large-scale enterprise applications. Our volume servers, which offer flexible low cost enterprise, midrange and entry-level solutions include our Chip Multi-Threading (CMT) servers and x64 based servers. Our enterprise, midrange and entry-level Storage products include disk and tape products which provide solutions for mainframe and open systems environments. Our disk Storage products include entry-level, midrange and enterprise arrays and associated connectivity devices such as host bus adapters. Our tape products include entry-level, midrange and enterprise libraries and virtual storage solutions.

Server Revenue

The decrease in our Server product revenue during the third quarter and first nine months of fiscal 2009, as compared to the corresponding periods in fiscal 2008, was primarily due to the continued economic downturn as projects were scaled back, delayed or canceled in addition to aggressive discounting. Revenue was also unfavorably impacted by changes in foreign currency exchange rates. These decreases were partially offset by increased sales of our CMT volume servers.

Storage Revenue

The decrease in Storage products revenue during the third quarter and first nine months of fiscal 2009, as compared to the corresponding periods in fiscal 2008, was primarily attributable to decreased sales of our disc array products due to increased competition and aggressive discounting. Revenue was also unfavorably impacted by changes in foreign currency exchange rates. These decreases were partially offset by increased sales of our tape and open storage products.

Systems Products Gross Margin

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

For the third quarter of fiscal 2009, as compared to the corresponding period in fiscal 2008, Systems products gross margin decreased approximately 3 percentage points primarily due to: pricing and discounting actions of 5 percentage points and unfavorable changes in sales mix and volume of 5 percentage points. Unfavorable margin impacts associated with pricing and discounting were due to increased competitive pressure. Unfavorable volume and mix variances were primarily due to a result of decreased sales of our higher-end Systems products as a percentage of total sales. These unfavorable impacts to gross margin were partially offset by a 4 percentage point increase associated with material cost savings and a 3 percentage point increase from a one time legal settlement.

For the first nine months of fiscal 2009, as compared to the corresponding period in fiscal 2008, Systems products gross margin decreased approximately 8 percentage points primarily due to a 7 percentage point decrease associated with pricing and discounting

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actions, a 6 percentage point decrease associated with unfavorable changes to sales mix and volume and a 2 percentage point decrease resulting from higher excess and obsolete inventory costs. Unfavorable margin impacts associated with pricing and discounting were due to increased competitive pressure. Unfavorable volume and mix were driven by decreased sales of high end Systems products as a percentage of total sales. These unfavorable impacts to gross margin were partially offset by a 7 percentage point increase in gross margin associated with decreased material costs and a 1 percentage point increase from a one time legal settlement.

Services Revenue and Gross Margin

Services revenue consists of sales of Support Services and Professional Services and Educational Services.

Support Services Net Revenue

Support Services consists of Support Services and Managed Services. Support Services 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 information technology (IT) infrastructure, including operating systems, third-party and custom applications, databases, networks, security, storage and the web.

The decrease in Support Services revenue during the third quarter and first nine months of fiscal 2009, as compared to the corresponding periods in fiscal 2008, was primarily due to decreases in our customer installed Systems product base over the last five quarters, increased discounting and unfavorable changes in foreign currency exchange rates. These decreases were partially offset by increases in our Managed Services.

Professional Services and Educational Services Net Revenue

Professional Services enable customers to reduce costs and complexity, improve operational efficiency and build or transform a customer’s 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 decrease in Professional Services and Educational Services net revenue during the third quarter and first nine months of fiscal 2009, as compared to the corresponding periods in fiscal 2008, was primarily due to projects that were delayed or scaled back. In addition, discretionary training was reduced due to the unfavorable economic environment. Services sales were also negatively impacted by unfavorable currency exchange rates.

Services Gross Margin

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

For the third quarter of fiscal 2009, as compared to the corresponding period in fiscal 2008, Services gross margin decreased by approximately 2 percentage points. The decrease in gross margin was primarily due to a 5 percentage point decrease associated with unfavorable changes in sales mix and volume. This decrease was partially offset by a 3 percentage point increase due to improved utilization of our engineers.

For the first nine months of fiscal 2009, as compared with the corresponding period in fiscal 2008, Services gross margin decreased by approximately 2 percentage points. The decrease in gross margin was primarily due to a 5 percentage point decrease associated with unfavorable changes in sales mix and volume. This decrease was partially offset by a 3 percentage point increase due to improved utilization of our engineers.

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Net Revenues by Geographic Area

(dollars in millions)

	Three Months Ended											Nine Months Ended
	March 29, 2009			March 30, 2008			Change $			Change %		March 29, 2009			March 30, 2008			Change $			Change %
North America	$	1,042		$	1,253		$	(211	)	(16.8	)%	$	3,513		$	4,046		$	(533	)	(13.2	)%
Percentage of total net revenues		39.8	%		38.4	%				1.4	pts		39.8	%		40.1	%				(0.3	)pts
Europe Region		849			1,114			(265	)	(23.8	)%		2,870			3,379			(509	)	(15.1	)%
Percentage of total net revenues		32.5	%		34.1	%				(1.6	)pts		32.5	%		33.5	%				(1.0	)pts
Emerging Markets		407			463			(56	)	(12.1	)%		1,428			1,441			(13	)	(0.9	)%
Percentage of total net revenues		15.6	%		14.2	%				1.4	pts		16.2