10-Q

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 31, 2002
 
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.)

901 San Antonio Road, Palo Alto, CA 94303
(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  (   )

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at April 25, 2002
Common Stock — $0.00067 par value	3,246,270,224

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II — OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
Exhibit 10.84
Exhibit 10.94
Exhibit 10.95

INDEX

PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements:
	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
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 6.	Exhibits and Reports on Form 8-K	34
SIGNATURES		36

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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 31, 2002		April 1, 2001		March 31, 2002		April 1, 2001
Net revenues:
		Products			$	2,269	$	3,262	$	6,586	$	11,922
		Services				838		833		2,490		2,333
			Total net revenues			3,107		4,095		9,076		14,255
Cost of sales:
		Cost of sales — products				1,306		1,864		4,030		6,170
		Cost of sales — services				494		539		1,544		1,519
			Total cost of sales			1,800		2,403		5,574		7,689
				Gross margin		1,307		1,692		3,502		6,566
Operating expenses:
		Research and development				468		486		1,369		1,473
		Selling, general and administrative				991		948		2,918		3,371
		Restructuring charges				(4)		—		521		—
		Goodwill amortization				—		105		—		160
		Purchased in-process research and development				—		1		3		72
			Total operating expenses			1,455		1,540		4,811		5,076
				Operating income (loss)		(148)		152		(1,309)		1,490
Loss on equity investments, net						(23)		(13)		(81)		(12)
Interest income, net						77		110		252		276
		Income (loss) before income taxes and cumulative effect of change in accounting principle				(94)		249		(1,138)		1,754
Provision (benefit) for income taxes						(57)		113		(490)		685
		Income (loss) before cumulative effect of change in accounting principle				(37)		136		(648)		1,069
Cumulative effect of change in accounting principle, net						—		—		—		(54)
Net income (loss)					$	(37)	$	136	$	(648)	$	1,015
Net income (loss) per common share — basic:
		Income (loss) before cumulative effect of change in accounting principle			$	(0.01)	$	0.04	$	(0.20)	$	0.33
Cumulative effect of change in accounting principle						—		—		—		(0.02)
Net income (loss) per common share — basic					$	(0.01)	$	0.04	$	(0.20)	$	0.31
Net income (loss) per common share — diluted:
	Income (loss) before cumulative effect of change in accounting principle				$	(0.01)	$	0.04	$	(0.20)	$	0.31
		Cumulative effect of change in accounting principle				—		—		—		(0.01)
Net income (loss) per common share — diluted					$	(0.01)	$	0.04	$	(0.20)	$	0.30
Shares used in the calculation of net income (loss) per common share — basic						3,245		3,256		3,242		3,230
Shares used in the calculation of net income (loss) per common share — diluted						3,245		3,417		3,242		3,428

See accompanying notes.

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SUN MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)

			March 31, 2002		June 30, 2001
			(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	1,672	$	1,472
	Short-term investments			712		387
	Accounts receivable, net			2,407		2,955
	Inventories			554		1,049
	Deferred and prepaid tax assets			1,733		1,102
	Prepaid expenses and other current assets			615		969
		Total current assets		7,693		7,934
Property, plant and equipment, net				2,512		2,697
Long-term marketable debt securities				3,564		4,312
Goodwill				2,182		2,126
Other acquisition-related intangible assets, net				121		185
Other non-current assets, net				802		927
			$	16,874	$	18,181
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Short-term borrowings		$	207	$	3
	Accounts payable			935		1,050
	Accrued payroll-related liabilities			520		488
	Accrued liabilities and other			1,615		1,778
	Deferred revenues and customer deposits			1,609		1,827
		Total current liabilities		4,886		5,146
Long-term debt				1,384		1,565
Other non-current obligations				873		884
Total stockholders’ equity				9,731		10,586
			$	16,874	$	18,181

See accompanying notes.

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SUN MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)

					Nine Months Ended
					March 31, 2002		April 1, 2001
Cash flows from operating activities:
	Net income (loss)				$	(648)	$	1,015
		Adjustments to reconcile net income (loss) to net cash provided by operating activities:
			Depreciation and amortization			717		610
			Amortization of goodwill (fiscal 2001 only) and other acquisition-related charges			89		221
			Tax benefits from employee stock plans			58		692
			Loss on equity investments, net			81		12
			Other			3		126
			Changes in operating assets and liabilities:
				Accounts receivable, net		548		(215)
				Inventories		495		(340)
				Prepaids and other assets		407		(461)
				Accounts payable		(115)		97
				Other liabilities		(932)		266
Net cash provided by operating activities						703		2,023
Cash flows from investing activities:
		Net sales and maturities of (purchases of) marketable debt securities				360		(819)
		Net purchases of equity investments				(31)		(96)
		Acquisitions of property, plant and equipment				(461)		(942)
		Acquisitions of spare parts and other assets				(67)		(164)
		Payments for acquisitions, net of cash acquired				(49)		(23)
Net cash used in investing activities						(248)		(2,044)
Cash flows from financing activities:
		Principal payments on borrowings and other obligations				(10)		(15)
		Proceeds from issuance of common stock, net				121		278
		Acquisition of treasury stock				(366)		(804)
Net cash used in financing activities						(255)		(541)
Net increase (decrease) in cash and cash equivalents						200		(562)
Cash and cash equivalents, beginning of period						1,472		1,849
Cash and cash equivalents, end of period					$	1,672	$	1,287

See accompanying notes.

5

SUN MICROSYSTEMS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. DESCRIPTION OF BUSINESS

Sun Microsystems, Inc. (“Sun” or the “Company”) is a leading worldwide provider of products, services and support solutions for building and maintaining network computing environments. Sun sells scalable computer and storage systems, high-speed microprocessors, and a complete line of high-performance software for operating networks, computing equipment and storage products. Sun also provides a full range of services including support, professional services and education. The Company markets its products primarily to business, governmental and educational customers and operates in various product categories across geographically diverse markets.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fiscal year

Sun’s first three quarters in fiscal 2002 ended on September 30, December 30 and March 31 (in fiscal 2001 the quarters ended on October 1, December 31 and April 1). The fourth quarter in all fiscal years ends on June 30.

Basis of presentation

The consolidated financial statements include the accounts of Sun and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated. Certain amounts from prior year financial statements have been reclassified to conform to the current year presentation.

While the quarterly financial information is unaudited, the financial statements included in this report reflect all adjustments (consisting of normal recurring adjustments) that the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and of the financial condition of the Company at the date of the interim balance sheet. 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, 2001 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 the Company’s Annual Report on Form 10-K for fiscal 2001 and its quarterly reports on Form 10-Q for the fiscal quarters ended September 30, 2001 and December 30, 2001 filed with the Securities and Exchange Commission on September 20, 2001, November 14, 2001, and February 12, 2002, respectively.

Computation of net income (loss) per common share

Basic net income (loss) per common share is computed using the weighted average number of common shares outstanding (adjusted for treasury stock and common stock subject to repurchase activity) during the period. Diluted net income (loss) per common share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period; dilutive common equivalent shares consist primarily of stock options. For the three and nine months ended March 31, 2002, 97 million and 107 million common equivalent shares, respectively, were excluded from the computation of diluted net income (loss) per common share because they were anti-dilutive. For the three and nine months ended April 1, 2001, 161 million and 198 million dilutive common equivalent shares, respectively, were included in the computation of diluted net income.

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Change in accounting

The Company changed its revenue recognition policy effective July 1, 2000, based on guidance provided in Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” as amended (SAB 101). The Company’s adoption of SAB 101 resulted in a change in accounting for certain product shipments where installation services were other than perfunctory. The cumulative effect of the change on prior year’s retained earnings resulted in a charge of $54 million (net of income taxes of $33 million) to fiscal 2001 income.

Recent pronouncements

On June 29, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 (SFAS 141), “Business Combinations,” which eliminates the pooling of interests method of accounting for all business combinations initiated after June 30, 2001, and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. As of July 1, 2001, the Company adopted this accounting standard.

In addition, as of July 1, 2001, the Company early adopted SFAS 142, “Goodwill and Other Intangible Assets,” which addresses the financial accounting and reporting standards for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill no longer be amortized, and instead, be tested for impairment on a periodic basis.

In accordance with SFAS 142, the Company discontinued the amortization of goodwill effective July 1, 2001. In addition, the Company recharacterized acquired workforce (and its related deferred tax liabilities) as goodwill because it is no longer defined as an acquired intangible asset under SFAS 141. Accordingly, no acquired workforce amortization was recognized during the three months and the nine months ended March 31, 2002.

The provisions of SFAS 142 also require the completion of a transitional impairment test within six months of adoption, with any impairments treated as a cumulative effect of change in accounting principle. During the quarter ended December 30, 2001, the Company completed the transitional impairment test, which did not result in an impairment of recorded goodwill.

For further discussion, see Note 5, “Goodwill and Other Acquisition-Related Intangible Assets.”

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A reconciliation of previously reported net income and earnings per share, to the amounts adjusted for the exclusion of goodwill and workforce amortization, net of the related income tax effect, follows (in millions, except per share amounts):

			Three Months Ended				Nine Months Ended
			March 31, 2002		April 1, 2001		March 31, 2002		April 1, 2001
Reported net income (loss)			$	(37)	$	136	$	(648)	$	1,015
	Add:	Goodwill amortization		—		105		—		160
		Workforce amortization		—		3		—		4
		Tax impact		—		(14)		—		10
Adjusted net income (loss)			$	(37)	$	230	$	(648)	$	1,189
Basic earnings per share:
	Reported earnings per share — basic		$	(0.01)	$	0.04	$	(0.20)	$	0.31
	Add:	Goodwill amortization		—		0.03		—		0.05
		Workforce amortization		—		—		—		—
		Tax impact		—		—		—		0.01
	Adjusted earnings per share — basic		$	(0.01)	$	0.07	$	(0.20)	$	0.37
Diluted earnings per share:
	Reported earnings per share — diluted		$	(0.01)	$	0.04	$	(0.20)	$	0.30
	Add:	Goodwill amortization		—		0.03		—		0.04
		Workforce amortization		—		—		—		—
		Tax impact		—		—		—		0.01
	Adjusted earnings per share — diluted		$	(0.01)	$	0.07	$	(0.20)	$	0.35

On October 3, 2001, the FASB issued SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144 supersedes SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of.” The primary objectives of SFAS 144 are to develop one accounting model based on the framework established in SFAS 121 for long-lived assets to be disposed of by sale, and to address significant implementation issues. The Company will adopt SFAS 144 for its fiscal year beginning July 1, 2002. At this time, management does not expect the adoption of SFAS 144 to have a material effect on the Company’s financial position or results of operations.

3. BUSINESS COMBINATIONS

The Company completed three acquisitions in the first nine months of fiscal 2002. Sun’s acquisition of ISOPIA, Inc. (Isopia) on July 26, 2001 is described below (the aggregate purchase price of the other two acquisitions was less than $15 million and, accordingly, are not considered significant to Sun’s financial statements). The consolidated financial statements include the operating results of each business from the date of acquisition. Pro forma results of operations have not been presented because the effects of these acquisitions were not material on either an individual or an aggregate basis.

The Company calculates amounts allocated to in-process research and development (IPRD) using established valuation techniques in the high-technology industry and expenses such amounts in the quarter that the related acquisition is consummated if technological feasibility of the in-process technology has not been achieved and no alternate future uses have been established. Research and development costs to bring the products from the acquired companies to technological feasibility are not expected to have a material impact on the Company’s future results of operations or cash flows. Intangible assets subject to amortization are being amortized on a straight line basis over periods not exceeding five years.

8

On July 26, 2001, Sun acquired Isopia, a corporation located in Toronto, Canada, by means of a plan of arrangement. Isopia develops on-line software that enables the delivery of on-line training and end-to-end management of training products via the Internet. Sun acquired Isopia to enhance its position in the corporate education market. A subsidiary of Sun, organized for the purpose of the acquisition, issued approximately 1.84 million exchangeable shares (which Isopia stockholders may exchange for shares of Sun common stock) at a fair value of $15.235 per share, or $28.0 million in the aggregate, and Sun paid $36.2 million in cash, in exchange for all of Isopia’s outstanding stock. Sun also assumed all of Isopia’s 1.4 million outstanding options at an estimated fair value of $1.3 million, and incurred $1.3 million in acquisition costs, resulting in an aggregate purchase price of approximately $66.8 million. This transaction was accounted for as a purchase, with the excess of the purchase price over the estimated fair value of the net tangible assets ($0.6 million) being allocated to developed technology ($3.7 million), IPRD ($3.2 million), goodwill ($39.0 million), and related deferred tax liabilities ($4.8 million). In addition, $25.1 million of the purchase price was allocated to deferred compensation, which primarily represents the pro-rata portion of the intrinsic value of unvested exchangeable shares held by certain key Isopia shareholders at the date of the acquisition.

4. BALANCE SHEET AND STATEMENT OF CASH FLOW INFORMATION

Inventories consist of the following (in millions):

	March 31, 2002		June 30, 2001
Raw materials	$	206	$	600
Work in process		118		137
Finished goods		230		312
	$	554	$	1,049

Long-term marketable debt securities of $3,564 million and $4,312 million as of March 31, 2002 and April 1, 2001, respectively, consist primarily of corporate bonds, floating-rate notes, and asset-backed securities with maturities greater than one year from the balance sheet date. All marketable debt securities are held in the Company’s name and are held in custody with primarily one major financial institution. The Company’s policy is to protect the value of its investment portfolio and minimize principal risk by earning returns based on current interest rates. Earnings related to marketable debt securities, including any realized gains and losses resulting from the sale of these securities, are classified under “interest income, net.”

Other non-current assets, net, includes $303 million and $365 million of equity investments as of March 31, 2002 and April 1, 2001, respectively. Equity investments consist of marketable equity securities, which represent equity holdings in publicly traded companies, and other equity holdings, which represent equity holdings in non-publicly traded companies and investments in third-party venture capital funds. Equity investments are contained within our internally-managed venture capital fund. The Company monitors for potential impairment of its equity investments and makes appropriate reductions in carrying values when such impairments are determined to be other-than-temporary. “Loss on equity investments, net” consists of gains and losses realized on the disposal of equity investments and impairment charges recognized on equity investments.

Net sales and maturities of (purchases of) marketable debt securities consist of the following for the nine months ended (in millions):

	March 31, 2002		April 1, 2001
Purchases of marketable debt securities	$	(11,020)	$	(9,610)
Proceeds from sales and maturities of marketable debt securities		11,380		8,791
	$	360	$	(819)

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Net purchases of equity investments consist of the following for the nine months ended (in millions):

	March 31, 2002		April 1, 2001
Purchases of equity investments	$	(38)	$	(139)
Proceeds from sales of equity investments		7		43
	$	(31)	$	(96)

Cash paid for interest and income taxes for the nine months ended was (in millions):

	March 31, 2002		April 1, 2001
Interest	$	113	$	114
Income taxes	$	142	$	385

Supplemental schedule of noncash investing activities for the nine months ended (in millions):

	March 31, 2002		April 1, 2001
Stock and options issued in connection with acquisitions	$	29	$	2,029

5. GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS

Changes in the carrying amount of goodwill for the nine months ended March 31, 2002, are as follows (in millions):

	Computer Systems
	and Network		Enterprise
	Storage		Services		Other		Total
Balance as of July 1, 2001	$	2,071	$	9	$	46	$	2,126
Workforce reclassified as goodwill		10		1		1		12
Goodwill acquired during the period		3		39		2		44
Balance as of March 31, 2002	$	2,084	$	49	$	49	$	2,182

Information regarding the Company’s other acquisition-related intangible assets is as follows (in millions):

	March 31, 2002						June 30, 2001
	Gross						Gross
	Carrying		Accumulated				Carrying		Accumulated
	Amount		Amortization		Net		Amount		Amortization		Net
Developed technology	$	308	$	(210)	$	98	$	290	$	(169)	$	121
Customer base		57		(37)		20		57		(19)		38
Other		7		(4)		3		53		(27)		26
	$	372	$	(251)	$	121	$	400	$	(215)	$	185

Amortization expense of other acquisition-related intangible assets was $24 million and $60 million for the three months and nine months ended March 31, 2002, respectively, and $16 million and $28 million for the three months and nine months ended April 1, 2001, respectively. Amortization expense for fiscal 2002 includes a $6 million charge for impairment of certain intangible assets. This amortization expense is included in “Selling, general and administrative.”

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Estimated amortization expense for the fiscal years ending June 30, is as follows (in millions):

2002	$	79
2003		68
2004		32
2005		3
	$	182

6. EXPIRATION OF THE STRATEGIC DEVELOPMENT AND MARKETING AGREEMENT WITH AOL-TIME WARNER, INC.

Pursuant to the Strategic Development and Marketing Agreement and related agreements (collectively the “SDMA”) signed in November 1998, as amended, the Sun and AOL-Time Warner (AOL) strategic alliance expired on March 17, 2002. Following such expiration, Sun retained rights equivalent to ownership of intellectual property developed by the strategic alliance, subject to AOL’s license rights; Sun retained broad licensing rights to intellectual property that existed prior to formation of the strategic alliance; and Sun retained limited licensing rights to certain third-party intellectual property. Sun has no on-going obligations to AOL under the SDMA.

7. RESTRUCTURING CHARGES

Fiscal 2002 restructuring plan

In response to the continuing global economic slowdown, the Company began implementing a workforce reduction and facility exit plan in the second quarter of fiscal 2002. This restructuring resulted in a charge of $511 million (consisting of a $146 million workforce reduction charge and a $365 million excess facility charge) in the second quarter of fiscal 2002. The goal of the restructuring is to reduce costs and improve operating efficiencies in order to adjust to the current business environment. Specifically, it is the Company’s intent under this plan to reduce its headcount by approximately 9% (or 3,400 employees and 500 contractors) and to eliminate excess facility capacity in light of revised facility requirements.

The Company recorded a workforce reduction charge of $146 million related to severance and fringe benefits for terminated employees. The restructuring will result in the termination of approximately 3,400 employees across all employee levels, business functions, operating units, and geographic regions. As of March 31, 2002, approximately 3,250 employees had been terminated as a result of the restructuring. The majority of the remaining identified employees reside outside of the United States, and the timing of their termination is dependent upon the local employment laws that govern such employees. All remaining employees are expected to be terminated by the fourth quarter of fiscal 2002.

In addition, the Company recorded a charge of $365 million related to the consolidation of excess facilities. The facility exit charges include:

• $282 million of estimated future obligations for non-cancelable lease payments (net of $80 million of estimated sublease income) or termination fees generated by exiting excess rental facilities. The Company estimated the cost of exiting and terminating the facility leases based on the contractual terms of the agreements and then current real estate market conditions. In addition, the Company intends to sublease certain leased facilities and estimated the sublease income based on then current real estate market conditions or, where applicable, amounts being negotiated;

• $66 million for the impairment of in-process construction costs related to the termination of certain building construction projects; and

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• $17 million for the impairment of property and equipment (primarily leasehold improvements) for which there are insufficient cash flows to support the carrying cost. The property and equipment impairment was determined based on the difference between the assets’ estimated fair value and their carrying value as of December 30, 2001.

The Company expects to exit the facilities relating to the amounts accrued under the restructuring by no later than December 31, 2002.

During the third quarter of fiscal 2002, the Company reduced its estimate of the total costs associated with the above restructuring activities and recorded an adjustment of $15 million. The adjustment reflects the settlement of one particular lease obligation.

Fiscal 2001 facility exit plan

In the fourth quarter of fiscal 2001, Sun elected to exit certain building leases and building projects. The Company charged approximately $75 million for facility exit costs associated with this decision, of which $46 million was reflected as an accrual as of June 30, 2001. As a result of the continued deterioration of certain commercial real estate markets, Sun reduced its sublease income assumptions and, accordingly, recorded an additional $25 million charge ($14 million and $11 million in the first and third quarters of fiscal 2002, respectively) to reflect this change in estimates. As of March 31, 2002, the revised estimated facility exit cost of $100 million is net of approximately $30 million in estimated sublease income.

The following table sets forth an analysis of the restructuring accrual activity for the nine months ending March 31, 2002 (in millions):

							FY'01 Facility
			FY'02 Restructuring Plan				Exit Plan		Total
			Severance and		Facilities-		Facilities-
			Benefits		related		related
Balance of accrual as of June 30, 2001			$	—	$	—	$	46	$	46
Restructuring provision in fiscal 2002:
	Severance and benefits			146		—		—		146
	Accrued lease costs			—		282		—		282
	Property and equipment impairment			—		83		—		83
	Provision adjustments			—		(15)		25		10
		Total restructuring charges in fiscal 2002		146		350		25		521
Cash paid				(116)		(5)		(9)		(130)
Non-cash charges				—		(83)		—		(83)
Balance of accrual as of March 31, 2002			$	30	$	262	$	62	$	354

The remaining cash expenditures relating to workforce reductions and the termination of lease agreements are expected to be paid by the second quarter of fiscal 2003. The current estimates accrued for abandoned leases (net of anticipated sublease proceeds) will be paid over their respective lease terms through fiscal 2018. As of March 31, 2002, $165 million of the $354 million accrual was classified as current and the remaining $189 million was classified as non-current.

The above restructuring charges are based on certain estimates which are subject to change. Changes to the estimates will be reflected as “Provision adjustments” on the above table in the period the changes in estimates are made.

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8. INCOME TAX RATE

The Company’s effective income tax benefit rate was 60.8% and 43.1% for the third quarter and first nine months of fiscal 2002, respectively, as compared with effective income tax expense rates of 45.4% and 39.1% for the corresponding periods of fiscal 2001.

The difference between the Company’s current and prior quarter tax rates is primarily due to a change in the Company’s estimate in projected statutory credits to be recognized in the current fiscal year.

The primary difference between the Company’s current and prior nine-month tax rates can be explained by: (1) the elimination of certain non-recurring, non-deductible accounting charges resulting from the Company’s adoption of SFAS No. 142; (2) increased projected statutory credits to be recognized in the current fiscal year; and (3) a reduction in benefits associated with decreased profitability in certain low-tax, non-U.S. jurisdictions.

The Company currently expects the fourth quarter fiscal 2002 tax benefit rate to be 46.0%. This expected rate, based on current tax law and current estimates of earnings, is subject to change.

9. COMPREHENSIVE INCOME (LOSS)

The components of comprehensive income (loss), net of related taxes, are as follows (in millions):

	Three Months Ended				Nine Months Ended
	March 31, 2002		April 1, 2001		March 31, 2002		April 1, 2001
Net income (loss)	$	(37)	$	136	$	(648)	$	1,015
Change in unrealized value of investments, net		(50)		(11)		(56)		(87)
Change in unrealized fair value of foreign exchange hedging contracts		(8)		37		(25)		44
Translation adjustments, net		(18)		23		18		4
	$	(113)	$	185	$	(711)	$	976

The components of accumulated other comprehensive income (loss), net of related taxes, are as follows (in millions):

	March 31, 2002		June 30, 2001
Unrealized gains (losses) on investments, net	$	(3)	$	53
Unrealized gains (losses) on foreign exchange hedging contracts		(10)		15
Cumulative translation adjustments		(79)		(97)
	$	(92)	$	(29)

10. OPERATING SEGMENTS

The following table presents revenues, interdivisional revenues and operating income (loss) for the Company’s segments. The Other segment consists of certain operating product groups that did not meet the requirements for a reportable segment, such as Sun’s Software Systems Group and iPlanet, and other miscellaneous functions, such as Corporate and Global Sales Operations. It is not unusual for the Company to have minor reorganizations from time-to-time during the year; under such circumstances, the historical information is updated to reflect the changes in business.

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	Computer Systems		Enterprise
Three Months Ended (in millions)	and Network Storage		Services		Other		Total
March 31, 2002
Revenues	$	2,157	$	838	$	113	$	3,107
Interdivisional revenues		—		113		(113)		—
Operating income (loss)		360		233		(741)		(148)
April 1, 2001
Revenues		3,088		833		173		4,095
Interdivisional revenues		1		117		(118)		—
Operating income (loss)	$	728	$	179	$	(755)	$	152

	Computer Systems		Enterprise
Nine Months Ended (in millions)	and Network Storage		Services		Other		Total
March 31, 2002
Revenues	$	6,176	$	2,490	$	410	$	9,076
Interdivisional revenues		—		363		(363)		—
Operating income (loss)		826		621		(2,756)		(1,309)
April 1, 2001
Revenues		11,421		2,333		501		14,255
Interdivisional revenues		2		343		(345)		—
Operating income (loss)	$	3,757	$	473	$	(2,740)	$	1,490

11. LEGAL PROCEEDINGS

On February 11, 2002, Eastman Kodak Company (Kodak) filed a lawsuit in the US District Court for the Western District of New York, making various patent infringement claims against the Company with respect to aspects of the Company’s Java™ technologies. The lawsuit was subsequently amended and served on the Company on April 3, 2002. The Lawsuit seeks injunctive relief against future infringement, unspecified damages for past infringement together with costs and attorney’s fees. Based on discussions over many months with Kodak, the Company believes that this suit is without merit, and, accordingly, will defend itself vigorously. Sun cannot forecast at this time with reasonable certainty the potential costs associated with an adverse outcome of this matter.

On March 8, 2002, Sun filed suit against Microsoft Corporation (Microsoft) in the United States District Court for the Northern District of California pursuant to United States and State of California antitrust laws alleging illegal efforts to acquire, maintain and expand a number of monopolies; illegal tying arrangements; exclusive dealings; copyright infringement; unreasonable restraint of trade; and unfair competition. Sun is seeking remedies that include (1) preliminary injunctions that require Microsoft to distribute Sun’s binary implementation of the Java Run-time Environment as part of Windows XP and Internet Explorer and to stop the unlicensed distribution of Microsoft’s Virtual Machine for Java in violation of the January 23, 2001 settlement agreement; (2) a permanent injunction to restore competition to the markets in which Microsoft is unlawfully attempting to acquire, maintain and expand a number of monopolies; and (3) compensation for losses suffered by Sun as a result of Microsoft’s unlawful actions.

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

This quarterly report, including the following sections, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements relating to our expectations as to product demand and products net revenue, our expectations regarding product mix trends, our expectations regarding services net revenue, revenues, results of operations, cash flows and products and services gross margin, our expectations regarding further product cost reductions, our belief that to maintain our competitive position we must continue to invest significant resources in new systems, software and microprocessor development as well as enhancing existing products, our expectations regarding the dollar amount of R&D expenses, and management’s long-term objectives to invest 10-11% of our net revenues in R&D, our expectations with regard to selling, general and administrative expenses, our continual focus on efforts to achieve additional operating efficiencies and to review and improve our business processes, our goal with regard to restructuring, our intent to reduce headcount by approximately 9%, statements regarding the timing for termination of the remaining employees to be terminated under our restructuring plan, and expectations about the timing of our exit from certain facilities under our restructuring plan, our intent to sublease certain leased facilities, our expectations regarding the volatility of our marketable debt securities portfolio and interest income, our expected tax benefit rate, our liquidity strategy, our belief that we have sufficient capital to meet our requirements for at least the next twelve months, our expectations regarding the timing of payments to be made related to workforce and facility reductions, our intent to focus on inventory management, our belief that the level of financial reserves is a competitive factor and our belief that the Kodak litigation is without merit, and as set forth in the section entitled “Purchased in-process research and development expenses”: statements regarding our belief about the realization of expected economic return from acquired in-processed technology and resulting or related products, our expected expense reductions or synergies, our ability to continue making substantial progress in the development and commercialization of acquired technologies, the expected total cost to complete the technologies and the significant assumptions underlying the valuation related to the IPRD.

These forward-looking statements involve risks and uncertainties, and the cautionary statements set forth below and those contained in “RISK FACTORS,” identify important factors that could cause actual results to differ materially from those predicted in any such forward-looking statements. Such factors include, but are not limited to, increased competition, continued adverse changes in general economic conditions in the U.S. and internationally, including adverse changes in the specific markets for our products, adverse business conditions, adverse changes in customer order patterns, inability to successfully manage inventory levels, lack of acceptance of new products, pricing pressures, lack of success in technological advancements, risks associated with foreign operations, failure to reduce costs or improve operating efficiencies, and our ability to attract, hire and retain key and qualified employees.

With respect to risks related to purchased in-process research and development, there can be no assurance that any new technologies will be developed into products, that such products will achieve either technological or commercial success, or that we will receive any economic benefit from such products as a result of delays in the development of the technology or release of such products into the market, the complexity of the technology, our ability to successfully manage product introductions, lack of customer acceptance, competition and changes in technological trends, and fluctuations in market or general economic conditions.

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RESULTS OF OPERATIONS
 
Net revenues
(dollars in millions)

		Three Months Ended						Nine Months Ended
		March 31, 2002		April 1, 2001		Change		March 31, 2002		April 1, 2001		Change
Products net revenue		$	2,269	$	3,262		(30.4)%	$	6,586	$	11,922		(44.8)%
	Percentage of total net revenues		73.0%		79.7%				72.6%		83.6%
Services net revenue		$	838	$	833		0.6%	$	2,490	$	2,333		6.7%
	Percentage of total net revenues		27.0%		20.3%				27.4%		16.4%
Total net revenues		$	3,107	$	4,095		(24.1)%	$	9,076	$	14,255		(36.3)%

Products net revenue

Products net revenue consists of revenue generated from the sale of our scalable computer systems and storage products, high-speed microprocessors, and our high-performance software for operating network computing equipment. The decrease in products net revenue in the third quarter as well as in the first nine months of fiscal 2002, as compared with the corresponding periods of fiscal 2001, was caused primarily by weak global macroeconomic conditions and a resulting reduction in information technology (IT) spending.

Over 90% of our products net revenue in the third quarter as well as in the first nine months of both fiscal 2002 and 2001 was generated by Computer Systems and Network Storage. Computer Systems and Network Storage consists primarily of servers, storage and desktop computers. Substantially all of the decrease in products net revenue during the third quarter and the first nine months of fiscal 2002, when compared with the corresponding periods of fiscal 2001, was attributable to a decrease in revenues generated by our server and storage products. Revenues from the sale of desktop systems represented approximately 9% and 14% of products net revenue in the third quarter of fiscal 2002 and 2001, respectively, and 11% and 13% of products net revenue in the first nine months of fiscal 2002 and 2001, respectively. While our product mix fluctuates from quarter to quarter, we expect over the long-term an increasing percentage of products net revenue will be from server and storage products and a decreasing percentage of products net revenue will be from desktop systems.

The weak macroeconomic conditions have caused a significant reduction in IT spending by our customers. We are unable to predict if the current adverse macroeconomic conditions and reduced IT spending levels will continue or further deteriorate. At this time, we expect our products net revenue in the fourth quarter of fiscal 2002 to increase slightly, as compared with the third quarter of fiscal 2002, assuming economic conditions and IT spending levels remain the same. If the macroeconomic conditions and IT spending levels decline further, then we expect our products net revenue in the fourth quarter of fiscal 2002 to be less than products net revenues in the third quarter of fiscal 2002. See “Net revenues by geographic area” for further discussion and analysis regarding specific regions.

Services net revenue

Services net revenue consists of Support Services, Professional Services and Educational Services. The 0.6% and 6.7% growth in services net revenue in the third quarter and first nine months of fiscal 2002, respectively, as compared with the corresponding periods of fiscal 2001, was due to an increase in revenue from Support Services, partially offset by decreases in revenue from Professional Services and Educational Services. Support Services revenue, which represents over 65% of services net revenue for all periods presented, consists of maintenance contract revenue which is recognized ratably over the contractual period. Support Services revenue growth was primarily a result of a better mix of platinum, gold, silver and bronze service level contracts in our portfolio. On a year-over-year basis, the Professional Services revenue decrease was primarily due to a decline in the installation of new products, while the Educational Services revenue decrease was due

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to a combination of: (1) a reduction in customers’ discretionary spending; and (2) a decline in new product sales.

Because a significant portion of our services net revenue is generated by contracts related to product sales, our services net revenue could be negatively impacted by the adverse macroeconomic conditions which have been and continue to negatively impact our products net revenue.

Net revenues by geographic area
(dollars in millions)

		Three Months Ended						Nine Months Ended
		March 31, 2002		April 1, 2001		Change		March 31, 2002		April 1, 2001		Change
U.S.		$	1,404	$	1,639		(14.3)%	$	4,130	$	6,776		(39.1)%
Americas — Other (Canada and Latin America)			176		229		(23.1)%		474		684		(30.7)%
Americas — Total			1,580		1,868		(15.4)%		4,604		7,460		(38.3)%
	Percentage of net revenues		50.9%		45.6%				50.7%		52.3%
EMEA (Europe, Middle East and Africa)			985		1,395		(29.4)%		2,810		4,336		(35.2)%
	Percentage of net revenues		31.7%		34.1%				31.0%		30.4%
APAC (Asia, Australia and New Zealand)			542		832		(34.9)%		1,662		2,459		(32.4)%
	Percentage of net revenues		17.4%		20.3%				18.3%		17.3%
Total net revenues		$	3,107	$	4,095		(24.1)%	$	9,076	$	14,255		(36.3)%

		Three Months Ended						Nine Months Ended
		March 31, 2002		April 1, 2001		Change		March 31, 2002		April 1, 2001		Change
U.S.		$	1,404	$	1,639		(14.3)%	$	4,130	$	6,776		(39.1)%
	Percentage of net revenues		45.2%		40.0%				45.5%		47.5%
International		$	1,703	$	2,456		(30.7)%	$	4,946	$	7,479		(33.9)%
	Percentage of net revenues		54.8%		60.0%				54.5%		52.5%
Total net revenues		$	3,107	$	4,095		(24.1)%	$	9,076	$	14,255		(36.3)%

Late in the second quarter of fiscal 2001, there was an unexpected and significant reduction in capital spending in many industries, which resulted in decreased demand in the U.S. for our products and a decline in our products net revenue. The weak U.S. economic situation evolved into adverse macroeconomic conditions beginning in the fourth quarter of fiscal 2001, resulting in reductions in capital spending in many countries within the international regions in which we do significant business and negatively impacting our non-U.S. product net revenues. These adverse macroeconomic conditions have continued throughout the third quarter of fiscal 2002, resulting in a 14.3% and 39.1% decrease in U.S. net revenues, and a 30.7% and 33.9% decrease in international net revenues in the third quarter and first nine months of fiscal year 2002, respectively, as compared with the corresponding periods of fiscal 2001.

Within the EMEA region, net revenues decreased by 29.4% and 35.2% (primarily because of decreases in revenue in the United Kingdom, Northern Europe and Germany) during the third quarter and the first nine months of fiscal 2002, respectively, as compared with the corresponding periods of fiscal 2001. Northern Europe is comprised primarily of the Scandinavian countries, the Netherlands, Belgium/Luxembourg, Eastern European countries and Russia. Within the APAC region, net revenues decreased by 34.9% and 32.4% (primarily because of decreases in revenue in Japan, Greater China and Korea) during the third quarter and the first nine months of fiscal 2002, respectively, as compared with the corresponding periods of fiscal 2001. Decreases in net revenues in the United Kingdom, Northern Europe, Germany, Japan, Greater China and Korea collectively accounted for approximately 70% of the total decrease in international net revenues for the third

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quarter and the first nine months of fiscal 2002, respectively, as compared with the corresponding periods of fiscal 2001.

If the adverse macroeconomic conditions persist, our revenues, and potentially our results of operations and cash flows, will continue to be adversely affected.

Gross margin
(dollars in millions)

		Three Months Ended						Nine Months Ended
		March 31, 2002		April 1, 2001		Change		March 31, 2002		April 1, 2001		Change
Products gross margin		$	963	$	1,398		(31.1)%	$	2,556	$	5,752		(55.6)%
	Percentage of products net revenue		42.4%		42.9%				38.8%		48.3%
Services gross margin		$	344	$	294		17.0%	$	946	$	814		16.2%
	Percentage of services net revenue		41.1%		35.3%				38.0%		34.9%
Total gross margin		$	1,307	$	1,692		(22.8)%	$	3,502	$	6,566		(46.7)%
	Percentage of net revenues		42.1%		41.3%				38.6%		46.1%

Products gross margin

In the third quarter of fiscal 2002, products gross margin decreased by 0.5 percentage point, as compared with the corresponding period of fiscal 2001. The 0.5 percentage point decline in products gross margin was primarily a result of reductions in product pricing (normal price list reductions and competitive transaction pricing), which were substantially offset by decreases in product costs (lower vendor product component costs and lower product quality costs).

In the first nine months of fiscal 2002, products gross margin decreased by 9.5 percentage points, as compared with the corresponding period of fiscal 2001. Substantially all of the 9.5 percentage point decline in products gross margin in the first nine months of fiscal 2002, as compared with the corresponding period of fiscal 2001, was due to: (1) reductions in product pricing (normal price list reductions and competitive transaction pricing); (2) increased product platform transition costs associated with the migration from UltraSPARC® II to UltraSPARC III; and (3) lower volumes of products manufactured. These impacts were exacerbated by a period of rapid decline in products net revenue.

Our products gross margin increased to 42.4% for the three months ended March 31, 2002, from 36.4% for the three months ended December 30, 2001. The majority of the sequential 6.0 percentage point increase in our products gross margin was attributable to: (1) lower product platform transition costs in the third quarter of fiscal 2002, as compared with the second quarter of fiscal 2002; and (2) the reductions we made to our fixed manufacturing costs to adjust to our current product volumes. We expect products gross margin in the fourth quarter of fiscal 2002 to be in the range of the fiscal 2002 third quarter products gross margin. Should the global macroeconomic conditions remain unfavorable, or the pricing pressures associated with competition continue, products gross margin could be adversely impacted.

Services gross margin

The 5.8 and 3.1 percentage point increases in services gross margin in the third quarter and the first nine months of fiscal 2002, respectively, as compared with the corresponding periods of fiscal 2001, reflect the impact of: (1) variable costs decreasing as a result of discretionary spending controls; (2) infrastructure headcount-related costs decreasing due to the restructuring in the second quarter of fiscal 2002; and (3) support services revenue increasing as a percentage of total services net revenue (support services typically generates a higher gross margin than professional services or educational services). The impact of these favorable items on services gross margin in the third quarter and the first nine months of fiscal 2002, as compared with the

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corresponding periods of fiscal 2001, was partially offset by: (1) increased fixed infrastructure costs; and (2) increased third party costs necessary to support global customer service expectations.

Our services gross margin increased to 41.1% for the three months ended March 31, 2002, from 37.3% for the three months ended December 30, 2001. The sequential 3.8 percentage point increase in the services gross margin rate was principally due to lower overall costs generated by the workforce reduction and other actions taken to reduce services infrastructure. We expect our services gross margin to remain in the low- to mid- 40% range in the fourth quarter of fiscal 2002.

Operating expenses
(dollars in millions)

		Three Months Ended						Nine Months Ended
		March 31, 2002		April 1, 2001		Change		March 31, 2002		April 1, 2001		Change
Research and development		$	468	$	486		(3.7)%	$	1,369	$	1,473		(7.1)%
	Percentage of net revenues		15.1%		11.9%				15.1%		10.3%
Selling, general and administrative		$	991	$	948		4.5%	$	2,918	$	3,371		(13.4)%
	Percentage of net revenues		31.9%		23.2%				32.2%		23.7%
Restructuring charges		$	(4)	$	—		N/M	$	521	$	—		N/M
	Percentage of net revenues		(0.1)%		—%				5.7%		—%
Goodwill amortization		$	—	$	105		N/M	$	—	$	160		N/M
	Percentage of net revenues		—%		2.6%				—%		1.1%
Purchased in-process research and development		$	—	$	1		N/M	$	3	$	72		(95.8)%
	Percentage of net revenues		—%		—%				—%		0.5%

Research and development expenses

R&D expenses, as a percentage of total net revenues, increased to 15.1% in the third quarter and the first nine months of fiscal 2002, respectively, from 11.9% and 10.3% in the corresponding periods of fiscal 2001. The increases in the percentage of R&D expenses to total net revenues are the result of a decrease in revenues in the third quarter and first nine months of fiscal 2002, as compared with the corresponding periods of fiscal 2001. In dollars, R&D expenses decreased by 3.7% to $468 million in the third quarter of fiscal 2002, as compared with $486 million for the corresponding period of fiscal 2001, and by 7.1% to $1,369 million in the first nine months of fiscal 2002, as compared with $1,473 million for the corresponding period of fiscal 2001.

In dollars, the decrease in R&D expenses for the third quarter of fiscal 2002, as compared with the corresponding period of fiscal 2001, was a result of: (1) significant cost cutting measures in the areas of consulting, travel and other types of discretionary spending; and (2) lower costs incurred for pre-customer release units (“prototypes”) developed during the early phases of product development. These reductions in expenses were partially offset by: (1) higher variable compensation; and (2) higher depreciation costs.

In dollars, the decrease in R&D expenses for the first nine months of fiscal 2002, as compared with the corresponding period of fiscal 2001, was a result of: (1) significant cost cutting measures in the areas of consulting, travel and other types of discretionary spending; (2) lower costs incurred for prototype development; (3) a reduction in incentive compensation costs; and (4) a decrease in compensation costs as a result of our mandatory shutdown in July 2001. These reductions were partially offset by higher depreciation costs. In general, fluctuations in R&D expenses will occur depending on the timing of product introductions, among other factors.

Our R&D spending reflects our continued development of a broad line of scalable and reliable systems, including servers, desktop systems, storage technologies and SPARC® microprocessors, as well as software

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products that utilize the Java platform, Solaris™ Operating Environment and Jini™ network technology. We believe that to maintain our competitive position in a market characterized by rapid rates of technological advancement, we must continue to invest significant resources in new systems, software, and microprocessor development, as well as continue to enhance existing products. We expect that the dollar amount of R&D expenses for the fourth quarter of fiscal 2002 will be in the same range as the amount of R&D expenses incurred during the third quarter of fiscal 2002. It is management’s long-term objective to invest 10 – 11% of our net revenues in R&D.

Selling, general and administrative expenses

SG&A expenses, as a percentage of total net revenues, increased to 31.9% and 32.2% in the third quarter and first nine months of fiscal 2002, respectively, from 23.2% and 23.7% in the corresponding periods of fiscal 2001. The increases in the percentage of SG&A expenses to total net revenues are the result of a decrease in revenues in the third quarter and first nine months of fiscal 2002, as compared with the corresponding periods of fiscal 2001.

In dollars, SG&A expenses increased by $43 million to $991 million in the third quarter of fiscal 2002, as compared with $948 million in the third quarter of fiscal 2001, due to higher variable compensation costs, partially offset by: (1) cost cutting measures in the areas of travel, advertising, marketing, facilities and other types of discretionary spending; and (2) lower headcount-related costs as a result of our restructuring in the second quarter of fiscal 2002.

In dollars, SG&A expenses decreased by $453 million to $2,918 million in the first nine months of fiscal 2002, as compared with $3,371 million in the corresponding period of fiscal 2001, as a result of: (1) significant cost cutting measures in the areas of travel, advertising, marketing, facilities and other types of discretionary spending; (2) lower headcount-related costs as a result of our restructuring in the second quarter of fiscal 2002; and (3) a decrease in compensation costs during the first quarter of fiscal 2002 (as a result of our mandatory shutdown in July 2001).

We are continuing to focus our efforts on achieving additional future operating efficiencies by reviewing and improving upon existing business processes and evaluating our cost structure. Our company performance-based compensation incentives costs could increase or decrease during the fourth quarter of fiscal 2002, as compared with the third quarter of fiscal 2002, depending on our ability to achieve certain financial goals. If we are able to achieve our financial goals for the fourth quarter of fiscal 2002, we would expect SG&A expenses to increase slightly, as compared with the SG&A expenses we recognized in the third quarter of fiscal 2002.

Restructuring charges

The following discussion should be read in connection with Note 7, “Restructuring Charges” in the Notes to Condensed Consolidated Financial Statements (Unaudited). Also, for the impact of the restructuring on our future cash flows, see discussion under “Liquidity and Capital Resources.”

In the fourth quarter of fiscal 2001, Sun elected to exit certain building leases and building projects and charged approximately $75 million for facility exit costs associated with this decision. As a result of the continued deterioration of certain commercial real estate markets, we reduced our sublease income assumptions and, accordingly, recorded an additional $25 million charge ($14 million and $11 million in the first and third quarters of fiscal 2002, respectively) to reflect this change in estimates. As of March 31, 2002, the revised estimated facility exit cost of $100 million is net of approximately $30 million in estimated sublease income.

In the second quarter of fiscal 2002, we began implementing a workforce reduction and facility exit plan in response to the continuing global economic slowdown. This restructuring resulted in a charge of $511 million (consisting of a $146 million workforce reduction charge and a $365 million excess facility charge). The goal

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of the restructuring is to reduce costs and improve operating efficiencies in order to adjust to the current business environment. Specifically, it is our intent under the plan to reduce headcount by approximately 9% (or 3,400 employees and 500 contractors) and to eliminate excess facility capacity in light of revised facility requirements. During the third quarter of fiscal 2002, we reduced our estimate of the total costs of $511 million associated with this restructuring activity and recorded an adjustment of $15 million. The amount reflects the settlement for one particular lease obligation.

The following discussion relates to the restructuring activities implemented in the second quarter of fiscal 2002.

Worldwide workforce reduction

We recorded a workforce reduction charge of $146 million related to severance and fringe benefits for terminated employees. The restructuring will result in the termination of approximately 3,400 employees across all employee levels, business functions, operating units, and geographic regions. As of March 31, 2002, approximately 3,250 employees had been terminated as a result of the restructuring. We anticipate that the remaining identified employees will be terminated during the fourth quarter of fiscal 2002, depending on the local employment laws that govern such employees.

Consolidation of excess facilities

We recorded a charge of $365 million related to the consolidation of excess facilities. The facility exit charges include:

• $282 million of estimated future obligations for non-cancelable lease payments (net of $80 million of estimated sublease income) or termination fees generated by exiting excess rental facilities. The Company estimated the cost of exiting and terminating the facility leases based on the contractual terms of the agreements and then current real estate market conditions. In addition, the Company intends to sublease certain leased facilities and estimated the sublease income based on then current real estate market conditions or, where applicable, amounts being negotiated;

• $66 million for the impairment of in-process construction costs related to the termination of certain building construction projects; and

• $17 million for the impairment of property and equipment (primarily leasehold improvements) for which there are insufficient cash flows to support the carrying cost. The property and equipment impairment was determined based on the difference between the assets’ estimated fair value and their carrying value as of December 30, 2001.

The Company expects to exit the facilities relating to the amounts accrued under the restructuring by no later than December 31, 2002.

Goodwill amortization

On July 1, 2001, we early-adopted SFAS 142. In accordance with SFAS 142, goodwill is no longer amortized. There was no impairment of goodwill upon adoption of SFAS 142. We are required to perform goodwill impairment tests on an annual basis, and on an interim basis in certain circumstances. There can be no assurance that future goodwill impairments tests will not result in a charge to earnings. See Note 2, “Summary of Significant Accounting Policies” in the Notes to Condensed Consolidated Financial Statements (Unaudited) for further discussion. The $105 million and $160 million goodwill amortization for the third quarter and first nine months of fiscal 2001, respectively, was primarily attributable to the acquisitions of Cobalt Networks, Inc.

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(acquired in December 2000), Star Division Corporation and certain assets of Star Division Software Entwicklung und Vertriebs GmbH, and MAXSTRAT Corporation.

Purchased in-process research and development expenses

Overview

In the first nine months of fiscal 2002, we acquired Isopia, Inc. (Isopia). Purchased in-process research and development expenses (IPRD) of $3.2 million in the first quarter of fiscal 2002 represented the write-off of in-process technologies associated with Isopia. There was no purchased IPRD in the second and third quarter of fiscal 2002. During fiscal 2001, there was no purchased IPRD in the first quarter, $71 million in the second quarter, and $1 million in the third quarter. At the date of the Isopia acquisition, the projects associated with the IPRD efforts had not yet reached technological feasibility and the IPRD had no alternative future uses. Accordingly, the amount was expensed on the acquisition date.

Valuation of IPRD

We used independent third-party sources to calculate the amounts allocated to IPRD. In calculating IPRD, the independent third party used established valuation techniques accepted in the high-technology industry. These calculations gave consideration to relevant market sizes and growth factors, expected industry trends, the anticipated nature and timing of new product introductions by us and our competitors, individual product sales cycles, and the estimated lives of each of the product’s underlying technology. The value of the IPRD reflects the relative value and contribution of the acquired research and development. In determining the value assigned to IPRD, we considered the R&D’s stage of completion, the complexity of the work completed to date, the difficulty of completing the remaining development, costs already incurred, and the projected cost to complete the project.

The values assigned to developed technologies related to each acquisition were based upon discounted cash flows related to the existing products projected income stream. Elements of the projected income stream included revenues, cost of sales (COS), SG&A expenses, and R&D expenses. The discount rates used in the present value calculations were generally derived from a weighted average cost of capital, adjusted upward to reflect the additional risks inherent in the development life cycle, including the useful life of the technology, profitability levels of the technology, and the uncertainty of technology advances that are known at the date of each acquisition. Because each acquired entity’s IPRD is unique, the discount rate, revenue, COS, R&D and SG&A assumptions used varied on a case-by-case basis. We did not expect to achieve a material amount of expense reductions or synergies, therefore the valuation assumptions did not include significant anticipated cost savings.

Valuation assumptions

The following table summarizes the significant assumptions underlying the valuation related to the IPRD for the nine months ended March 31, 2002 (dollars in millions):

					Percentage of Revenue
		Estimated Cost to
		Complete	Percentage	Average
		Technology at	Complete at	Revenue
Acquired		Time of	Time of	Growth		Average
Company	IPRD	Acquisition	Acquisition	Rate	Average COS	SG&A	Average R&D	Discount Rate Used
Isopia, Inc.	$3.2	$0.6	45%	58%	13%	35%	2%	26%

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Overview of significant purchased IPRD in the nine months ended March 31, 2002

Included below are further details regarding the nature of the purchased technology acquired during the nine months ended March 31, 2002.

Given the uncertainties of the commercialization process, we cannot assure you that deviations from our estimates will not occur. We believe there is a reasonable chance of realizing the economic return expected from the acquired in-process technology. However, there is risk associated with the realization of benefits related to commercialization of an in-process project due to rapidly changing customer needs, complexity of technology and growing competitive pressures. Therefore, we cannot assure you that any project will meet with commercial success. Failure to successfully commercialize an in-process project would result in the loss of the expected economic return inherent in the fair value allocation. Additionally, the value of our intangible assets acquired may become impaired.

At the acquisition date, Isopia was engaged in development activity associated with LearnTone™, a web-based training content delivery technology. As of the acquisition date, this technology was still under development and substantial efforts needed to be completed prior to the release of a commercially viable product. We completed the development of this technology in the third quarter of fiscal 2002, and the total cost at completion was not materially different from the estimated total costs as of the acquisition date.

Overall status of business combinations prior to fiscal 2002

With respect to acquisitions completed prior to fiscal 2002, we believe that the projections we used in performing our valuations for each acquisition are still valid in all material respects; however, we cannot assure you that the projected results will be achieved. We continue to make substantial progress related to the development and commercialization of acquired technologies. Although we have experienced delays in the completion of certain of our development efforts and their related commercialization, the expected total costs to complete such technologies have not materially increased, individually or in the aggregate. We periodically evaluate our product development timeline and modify our overall business plan in response to various factors. Modifications to our business plan include the reallocation of resources among various alternative development projects. The impact of delays in the realization of economic benefits related to acquired technologies, individually or in the aggregate, has not been material to our overall consolidated financial position or results of operations as of and for the quarter ended March 31, 2002.

Loss on equity investments
(dollars in millions)

		Three Months Ended						Nine Months Ended
		March 31, 2002		April 1, 2001		Change		March 31,2002		April 1, 2001		Change
Loss on equity investments, net		$	(23)	$	(13)		76.9%	$	(81)	$	(12)		N/M
	Percentage of net revenues		(0.7)%		(0.3)%				(0.9)%		0.1%

Our equity investments portfolio, which primarily consists of publicly traded and non-publicly traded technology companies contained within our internally-managed venture capital fund, was negatively impacted by the decline in The Nasdaq National Market and the adverse macroeconomic conditions of the technology sector during the third quarter and first nine months of fiscal 2002, as compared with the corresponding periods of fiscal 2001. The loss on equity investments in the third quarter and first nine months of fiscal 2002 included impairment losses on minority equity investments in publicly and privately traded companies of $22 million and $74 million, respectively.

Our decision to sell equity investments in the future will depend upon numerous factors, including economic and strategic factors, many of which are not predictable nor within our control.

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Interest income, net
(dollars in millions)

		Three Months Ended						Nine Months Ended
		March 31, 2002		April 1, 2001		Change		March 31, 2002		April 1, 2001		Change
Interest income, net		$	77	$	110		(30.0)%	$	252	$	276		(8.7)%
	Percentage of net revenues		2.5%		2.7%				2.8%		1.9%

The decline in interest income (net of interest expense) in the third quarter and the first nine months of fiscal 2002, as compared with the corresponding periods of fiscal 2001, is primarily due to a combination of lower interest rates and lower cash and marketable debt securities balances, substantially offset by a $38 million and $105 million gain realized on the sale of certain fixed income marketable debt securities during the third quarter and the first nine months of fiscal 2002, respectively.

The average duration of our portfolio of marketable debt securities decreased to 1.24 years as of March 31, 2002 from 1.49 years as of April 1, 2001. In general, we would expect that the volatility of this portfolio would decrease as its duration decreases. Our interest income and expenses are sensitive primarily to changes in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on our cash equivalents and marketable debt securities. To mitigate the impact of fluctuations in U.S. interest rates on our issued fixed-rate unsecured senior debt securities, we have entered into interest rate swap transactions so that the interest associated with these debt securities effectively becomes variable.

We expect our interest income, net in the fourth quarter of fiscal 2002 will be lower than our interest income, net earned in the third quarter of fiscal 2002, primarily due to lower gains on sales of marketable debt securities.

Income taxes
(dollars in millions)

		Three Months Ended						Nine Months Ended
		March 31, 2002		April 1, 2001		Change		March 31, 2002		April 1, 2001		Change
Provision (benefit) for income taxes		$	(57)	$	113		(150.4)%	$	(490)	$	685		(171.5)%
	Percentage of income (loss) before taxes and cumulative effect of change in accounting principle		60.8%		45.4%				43.1%		39.1%

Our effective income tax benefit rate was 60.8% and 43.1% for the third quarter and first nine months of fiscal 2002, respectively, as compared with effective income tax expense rates of 45.4% and 39.1% for the corresponding periods of fiscal 2001.

The difference between our current and prior quarter tax rates is primarily due to a change in our estimate of projected statutory credits to be recognized in the current fiscal year.

The primary difference between our current and prior nine-month tax rates can be explained by: (1) the elimination of certain non-recurring, non-deductible accounting charges resulting from our adoption of SFAS No. 142; (2) increased projected statutory credits to be recognized in the current fiscal year; and (3) a reduction in benefits associated with decreased profitability in certain low-tax, non-U.S. jurisdictions.

We currently expect the fourth quarter fiscal 2002 tax benefit rate to be 46.0%. Our expected rate, based on current tax law and current estimates of earnings, is subject to change.

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LIQUIDITY AND CAPITAL RESOURCES
(dollars in millions)

		March 31, 2002		June 30, 2001		Change
Cash and cash equivalents		$	1,672	$	1,472	$	200
Marketable debt securities			4,276		4,699		(423)
	Total cash, cash equivalents and marketable debt securities	$	5,948	$	6,171	$	(223)
	Percentage of total assets		35.2%		33.9%		3.8%
Days sales outstanding (DSO)			70		67		(4.5)%
Inventory turns			10.6		12.5		(15.2)%

	Nine Months Ended
	March 31, 2002		April 1, 2001		Change
Cash provided by operating activities	$	703	$	2,023	$	(1,320)
Cash used in investing activities		(248)		(2,044)		1,796
Cash used in financing activities		(255)		(541)		286
Net increase (decrease) in cash and cash equivalents	$	200	$	(562)	$	762

Our long-term strategy is to maintain the minimum amount of liquidity necessary in subsidiaries for operational purposes, and to invest the remaining amount of our cash in highly liquid cash equivalents and marketable debt securities. Accordingly, in addition to the $1,672 million in cash and cash equivalents we currently have for shorter-term requirements, we have approximately $4,276 million in marketable debt securities that are available for future operating, financing and investing activities, for a total liquidity position of $5,948 million.

We have a $500 million revolving credit facility (“Facility”) with a syndicate of commercial banks. No amounts were outstanding under the Facility as of March 31, 2002. The Facility is available subject to compliance with certain covenants and expires August 2002. If we failed to be in compliance with these covenants, the banks would have no obligation to lend us any money under this credit facility. Sun was in compliance with the financial covenants as of March 31, 2002.

In addition, Sun and its subsidiaries had uncommitted lines of credit aggregating approximately $552 million. No amounts were drawn from these lines of credit as of March 31, 2002. Interest rates and other terms of borrowing under these lines of credit vary from country to country depending on local market conditions at the time of borrowing. There is no guarantee that the banks would approve our request for funds under these uncommitted lines of credit.

Our future cash obligations consist primarily of our current liabilities and our long-term debt. Our current liabilities include approximately $165 million related to the restructuring charges expected to be paid in the next twelve months. Also, we have $1.5 billion in unsecured debt securities (the “Senior Notes”) that are due at various times between August 2002 and August 2009 ($200 million is due on August 15, 2002 and bears interest at 7%). The Senior Notes are subject to compliance with certain covenants. As of March 31, 2002, Sun was in material compliance with the covenants. If we failed to be in compliance with these covenants, the Trustee or Holders of not less than 25% in principal amount of the Senior Notes would have the ability to demand immediate payment of all amounts outstanding.

The remaining non-current obligations totaling $873 million as of March 31, 2002 ($884 million as of April 1, 2001) consist primarily of deferred tax liabilities, deferred revenue and amounts to be paid in excess of one year on abandoned leases. As of March 31, 2002, we expect to pay $189 million of the facility restructuring accrual over the respective facility lease terms through fiscal 2018. The facility accrual includes estimates such as expected sublease income or termination fees; actual results may materially differ from our current estimates, resulting in a change in our expected cash flow requirements. See Note 7, “Restructuring Charges” in the Notes to the Condensed Consolidated Financial Statements (Unaudited) for further discussion. None of these non-

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current obligations have covenants or other requirements which could accelerate Sun’s obligation to pay these amounts.

We believe that the liquidity provided by existing cash, cash equivalents, marketable debt securities, our borrowing arrangements described above and cash generated from operations, will provide sufficient capital to meet our requirements for at least the next 12 months. We believe our level of financial resources is a significant competitive factor in our industry and we may choose at any time to raise additional capital through debt or equity financing to strengthen our financial position, facilitate growth, and provide us with additional flexibility to take advantage of business opportunities that may arise.

Changes in Cash Flow

During the nine months ended March 31, 2002, cash, cash equivalents and marketable debt securities decreased by $223 million ($200 million increase in cash and cash equivalents and $423 million decrease in marketable debt securities). This decrease is primarily attributable to the $245 million we spent on our equity activities ($366 million spent to purchase our common stock in the open market, less $121 million received as consideration for the issuance of Sun’s common stock under our stock option and employee stock purchase plans). In addition, we spent approximately $461 million for real estate development and equipment additions to support product development and infrastructure initiatives. This amount was offset by our positive cash flow from operating activities of $703 million.

Cash flows provided by operating activities were generated primarily from net income (as adjusted by noncash items) and decreases in accounts receivable (net), inventory, as well as other assets; these cash influxes were partially offset by decreases in accounts payable and other liabilities. Accounts receivable (net) decreased to $2,407 million at March 31, 2002 from $2,955 million at June 30, 2001. The decrease in accounts receivable (net) was primarily due to the lower volume of sales, partially offset by an increase in days of sales outstanding (DSO). The increase in DSO was primarily attributable to earning revenue later in the quarter, as well as the timing of customer payments. Inventory decreased to $554 million at March 31, 2002 from $1,049 million at June 30, 2001. While we were successful in decreasing inventory during the first nine months of fiscal 2002, inventory turns slightly declined. The decrease in inventory turns was a reflection of increased inventory for new product releases and lower shipment volumes, and was impacted further by the decrease in demand for our products due to adverse macroeconomic conditions. Inventory management will continue to be an area of focus as we balance the need to maintain strategic inventory levels to help ensure competitive lead times with the risk of inventory obsolescence because of rapidly changing technology and customer requirements. The accounts payable and other liabilities decrease of $1,047 million in the first nine months of fiscal 2002 as compared with June 30, 2001 is primarily due to the reduction in inventory levels and operating expenses. In addition, we reduced our other liabilities by $116 million in severance and benefits payments and $14 million in facilities-related payments in connection with our restructuring.

RISK FACTORS

If we are unable to compete effectively with existing or new competitors, our resulting loss of competitive position could result in price reductions, fewer customer orders, reduced revenues, reduced margins, reduced levels of profitability, and loss of market share.

We compete in the hardware and software products and services markets. These markets are intensely competitive. If we fail to compete successfully in these markets, the demand for our products and services would decrease. Any reduction in demand could lead to a decrease in the prices of our products and services, fewer customer orders, reduced revenues, reduced margins, reduced levels of profitability, or loss of market share. These competitive pressures could adversely affect our business and operating results.

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Our competitors are some of the largest, most successful companies in the world. They include International Business Machines Corporation (IBM), Hewlett-Packard Company (HP), Compaq Computer Corporation (Compaq), and EMC Corporation (EMC). Our future competitive performance depends on a number of factors, including our ability to: continually develop and introduce new products and services with better prices and performance than those offered by our competitors; offer a wide range of products and solutions from small single processor systems to large complex enterprise level systems; offer solutions to customers that operate effectively within a computing environment that includes hardware and software from multiple vendors; offer products that are reliable and that ensure the security of data and information; create products for which third party software vendors will develop a wide range of applications; and offer high quality products and services. Two of our competitors, HP and Compaq, have merged, creating an entity that is significantly larger than Sun. To the extent that they are successful in integrating their businesses, the combined company could have greater access to resources, and our business and operating results could be adversely affected by the increased competitive pressures.

We also compete with systems manufacturers and resellers of systems based on microprocessors from Intel Corporation (Intel) and the Windows family of operating systems software from Microsoft Corporation (Microsoft). These competitors include Dell Computer Corporation (Dell), the combined HP and Compaq company, in addition to Intel and Microsoft.

This competition creates increased pressure, including pricing pressure, on our products . We expect this competitive pressure to continue through calendar year-end, due to continued new product introductions and aggressive marketing programs from our competitors.

The computer systems that we sell are made up of many products and components, including workstations, servers, storage products, microprocessors, the Solaris Operating Environment and other software products. In addition, we sell some of these components separately and as add-ons to installed systems. If we are unable to offer products and services that compete successfully with the products and services offered by our competitors or that meet the complex needs of our customers, our business and operating results could be adversely affected. In addition, if in responding to competitive pressures, we are forced to lower the prices of our products or services and we are unable to reduce our component costs or improve operating efficiencies, our business and operating results would be adversely affected.

Over the last several years, we have invested significantly in our storage products business with a view to increasing the sales of these products both on a standalone basis to customers using the systems of our competitors, and as part of the systems that we sell. The intelligent storage products business is intensely competitive. EMC is currently the leader in this market. To the extent we are unable to penetrate this market and compete effectively, our business and operating results could be adversely affected.

The products we make are very complex. If we are unable to rapidly and successfully develop and introduce new products and manage our inventory, we will not be able to satisfy customer demand.

We operate in a highly competitive, quickly changing environment, and our future success depends on our ability to develop and introduce new products that our customers choose to buy. If we are unable to develop new products, our business and operating results could be adversely affected. We must quickly develop, introduce, and deliver in quantity new, complex systems, software, and hardware products and components. These include products which incorporate our new UltraSPARC™ III architecture and the Solaris Operating Environment which we will continue to deploy during fiscal 2002, and other products. The development process for these complicated products is very uncertain. It requires high levels of innovation from both our product designers and the suppliers of the components used in our products. The development process is also lengthy and costly. If we fail to accurately anticipate our customers’ needs and technological trends, or are otherwise unable to complete the development of a product on a timely basis, we will be unable to introduce

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

Software and hardware products such as ours may contain known as well as undetected errors, and these defects may be found following introduction and shipment of new products or enhancements to existing products. Although we attempt to fix errors that we believe would be considered critical by our customers prior to shipment, we may not be able to detect or fix all such errors, and this could result in lost revenues and delays in customer acceptance, and could be detrimental to our business and reputation.

The manufacture and introduction of our new hardware and software products is also a complicated process. Once we have developed a new product we face several challenges in the manufacturing process. We must be able to manufacture new products in high enough volumes so that we can have an adequate supply of new products to meet customer demand. We must be able to manufacture the new products at acceptable costs. This requires us to be able to accurately forecast customer demand so that we can procure the appropriate components at optimal costs. Forecasting demand requires us to predict order volumes, the correct mixes of our software and hardware products, and the correct configurations of these products. We must manage new product introductions, like the continued deployments of systems which incorporate our new UltraSPARC III architecture during fiscal 2002, to minimize the impact of customer-delayed purchases of existing products in anticipation of new product releases. We must also try to reduce the levels of older product and component inventories to minimize inventory write-offs. If we have excess inventory, it may be necessary to reduce our prices and write down inventory, which could result in lower gross margins. Additionally, we may decide to adjust prices of our existing products during this process to try to increase customer demand for these products. If we are introducing new products at the same time or shortly after the price adjustment, this will complicate our ability to anticipate customer demand for our new products. We continuously evaluate the competitiveness of our product and service offerings. These evaluations could also result in repricing actions in the near term. Our future operating results would be adversely affected if such repricing actions were to occur and we were unable to mitigate the resulting margin pressure by maintaining a favorable mix of systems, software, service and other products, or if we were unsuccessful in achieving component cost reductions, operating efficiencies and increasing volumes.

If we are unable to timely develop, manufacture, and introduce new products in sufficient quantity to meet customer demand at acceptable costs, or if we are unable to correctly anticipate customer demand for our new and existing products, our business and operating results could be materially adversely affected.

Our reliance on single source suppliers could delay product shipments and increase our costs.

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

Our future operating results depend on our ability to purchase a sufficient amount of components to meet the demands of our customers.

We depend heavily on our suppliers to timely design, manufacture, and deliver the necessary components for our products. While many of the components we purchase are standard, we do purchase some components, specifically color monitors and custom memory integrated circuits such as static random access memories (SRAMS) and video random access memories (VRAMS), that require long lead times to manufacture and deliver. Long lead times make it difficult for us to plan component inventory levels in order to meet the customer demand for our products. In addition, in the past, we have experienced shortages in certain of our

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components (specifically, dynamic random access memories (DRAMS) and SRAMS). If a component delivery from a supplier is delayed, if we experience a shortage in one or more components, or if we are unable to provide for adequate levels of component inventory, our new and existing product shipments could be delayed and our business and operating results could be adversely affected.

Since we order our components (and in some cases commit to purchase) from suppliers in advance of receipt of customer orders for our products which include these components, we face a substantial inventory risk.

As part of our component inventory planning, we frequently pay certain suppliers well in advance of receipt of customer orders. For example, we often enter into noncancelable purchase commitments with vendors early in the manufacturing process of our microprocessors to make sure we have enough of these components for our new products to meet customer demand. Because the design and manufacturing process for these components is very complicated it is possible that we could experience a design or manufacturing flaw that could delay or even prevent the production of the components for which we have previously committed to pay. We also face the risk of ordering too many components, or conversely, not enough components, since the orders are based on the forecasts of customer orders rather than actual orders. If we cannot change or be released from the noncancelable purchase commitments, we could incur significant costs from the purchase of unusable components, due to a delay in the production of the components or as a result of inaccurately predicting component orders in advance of customer orders. Our business and operating results could be adversely affected as a result of these increased costs.

Delays in product development or customer acceptance and implementation of new products and technologies could seriously harm our business.

Generally, the computer systems we sell to customers incorporate hardware and software products that we sell, such as UltraSPARC microprocessors, the Solaris Operating Environment and Sun StorEdge™ storage products. Any delay in the development of the software and hardware included in our systems could delay our shipment of these systems. Delays in the development and introduction of our products may occur for various reasons. For example, delays in software development could delay shipments of related new hardware products.

In addition, if customers decided to delay the adoption and implementation of new releases of our Solaris Operating Environment this could also delay customer acceptance of new hardware products tied to that release. Adopting a new release of an operating environment requires a great deal of time and money for a customer to convert its systems to the new release. The customer must also work with software vendors who port their software applications to the new operating system and make sure these applications will run on the new operating system. As a result, customers may decide to delay their adoption of a new release of an operating system because of the cost of a new system and the effort involved to implement it. Such delays in product development and customer acceptance and implementation of new products could adversely affect our business.

If we are unable to continue generating substantial revenues from international sales our business could be adversely affected.

Currently, more than half of our revenues come from international sales. Our ability to sell our products internationally is subject to a number of risks. General economic and political conditions in each country could adversely affect demand for our products and services in these markets. Currency exchange rate fluctuations could result in lower demand for our products, as well as currency translation losses. Changes to and compliance with a variety of foreign laws and regulations may increase our cost of doing business in these jurisdictions. Trade protection measures and import and export licensing requirements subject us to additional regulation and may prevent us from shipping products to a particular market, and increase our operating costs.

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

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

Seasonality. Our sequential quarterly operating results usually fluctuate downward in the first quarter of each fiscal year when compared with the immediately preceding fourth quarter.

Business Practices, Processes and Information Systems. In order to increase efficiencies and remain competitive in a rapidly changing industry, we are continually improving and changing our business practices, processes and information systems. In this regard, during the first month of fiscal 2003, we plan to upgrade our business practices and related information systems affecting order entry, order fulfillment and accounts receivable (the “Upgrade”). The timing and duration of the implementation of the Upgrade are subject to a number of risks due to the complexity of the conversion process. This includes verifying the accuracy of the business data and information prior to conversion, the actual conversion of that data and information to the new system and then using that business data and information in the new system after the conversion. In addition, because the Upgrade is enterprise-wide, there is a need for substantial and comprehensive enterprise-wide employee training. While testing of these new systems and processes and training of employees are done in advance of implementation, there are inherent limitations in our ability to simulate a full-scale operating environment in advance of implementation. Moreover, the implementation will require Sun to be without automated order entry, order fulfillment and accounts receivable capabilities for a period of time as the company shifts to the new systems. There can be no assurance that this interruption in the use and availability of enterprise-wide information systems will not have an adverse effect on our business and operating results. Finally, to the extent that we encounter problems after introduction of these new systems and practices that prevent or limit their full utilization, our operating results could be adversely affected.

Significant Customers and Industries. Sales to a single customer (General Electric Company (GE)) accounted for approximately 13%, 19% and 15% of our fiscal 2001, 2000 and 1999 net revenues, respectively. The major customer revenues in fiscal 2001, 2000 and 1999 were primarily generated by two GE subsidiaries: (1) MRA Systems, Inc., a reseller (10%, 16% and 14% of net revenues in 2001, 2000 and 1999, respectively), acquired by GE in fiscal 1999; and (2) GE Capital, a finance/leasing company (2%, 3% and 1% of net revenues in fiscal 2001, 2000 and 1999, respectively). Revenue is generated with the finance/leasing company whenever our customer elects to lease equipment; in such cases, we sell the equipment to the leasing company. Our business could be adversely affected if GE or any other significant customer terminated its business relationship with us or significantly reduced the amount of business it did with us.

Acquisitions/Alliances. If, in the future, we acquire technologies, products, or businesses, or we form alliances with companies requiring technology investments or revenue commitments we will face a number of risks to our business. The risks we may encounter include those associated with integrating or co-managing operations, personnel, and technologies acquired or licensed, and the potential for unknown liabilities of the acquired or combined business. Also, we early adopted the new Statement of Financial Accounting Standards No. 142 (SFAS 142) “Goodwill and Other Intangible Assets,” as of July 1, 2001. Accordingly, our goodwill and other intangible assets that have an indefinite useful life are no longer amortized but instead reviewed at least annually for impairment. If we do not meet our long-term forecasts, we could be required to record impairment charges related to goodwill and other intangible assets, which could adversely affect our financial results. In addition, our business and operating results could be adversely affected if our acquisition or alliance activities are not successful.

Adverse Business Conditions in Specific Industries. We depend on the telecommunications, financial services and manufacturing industries for a significant portion of our revenues. Significant reduction in technology capital spending in these industries caused by adverse economic conditions, such as we experienced over the last two quarters of fiscal 2001 and the first three quarters of fiscal 2002, may continue to result in decreased

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revenues and earnings. Our revenues are dependent on the level of technology capital spending in the United States and international economies. A number of companies recently filed for bankruptcy protection, and others announced significant reductions and deferrals in capital spending. If capital spending continues to decline in these industries over an extended period of time, our business will continue to be adversely affected.

Our acquisition and alliance activities could disrupt our ongoing business.

We intend to continue to make investments in companies, products, and technologies, either through acquisitions or investment alliances. For example, we have purchased several companies in the past and have also formed alliances, such as our recently announced alliance with Hitachi for the collaboration on, and delivery of, a broad range of storage products and services. Acquisitions and alliance activities often involve risks, including: difficulty in assimilating the acquired operations and employees; difficulty in managing product codevelopment activities with our alliance partners; retaining the key employees of the acquired operation; disruption of our ongoing business; inability to successfully integrate the acquired technology and operations into our business and maintain uniform standards, controls, policies, and procedures; and lacking the experience to enter into new product or technology markets.

Failure to manage these alliance activities effectively and to integrate entities or assets that we acquire could adversely affect our operating results or financial condition.

We depend on key employees and face competition in hiring and retaining qualified employees.

Our employees are vital to our success, and our key management, engineering, and other employees are difficult to replace. We generally do not have employment contracts with our key employees. Further, we do not maintain key person life insurance on any of our employees. The on-going decrease in IT spending and resulting decrease in revenues has put pressure on high technology companies to retain highly qualified technical personnel. We may not be able to attract, assimilate, or retain highly qualified technical employees in the future. These factors could adversely affect our business.

Business interruptions could adversely affect our business.

Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond our control. A substantial portion of our facilities, including our corporate headquarters and other critical business operations, is located near major earthquake faults. In addition, many of our facilities are located on filled land and, therefore, may be more susceptible to damage if an earthquake occurs. We do not carry earthquake insurance for direct earthquake related losses. Our facilities in the State of California, including our corporate headquarters and other critical business operations, may be subject to electrical blackouts as a consequence of a shortage of available electrical power. In the event these blackouts occur, they could disrupt the operations of our affected facilities. In addition, we do not carry business interruption insurance or carry financial reserves against business interruptions arising from earthquakes and certain electrical blackouts. If a business interruption occurs, our business could be adversely affected.

Our marketable equity securities are subject to equity price risk and their value may fluctuate.

From time to time, we make equity investments for the promotion of business and strategic objectives in publicly traded and non-publicly traded companies. The market price and valuation of the securities that we hold in these companies may fluctuate due to market conditions and other circumstances over which we have little or no control. Many of the companies in which we have invested have experienced significant volatility in their stock prices. We typically do not attempt to reduce or eliminate this equity price risk, through hedging or similar techniques, and market price and valuation fluctuations could impact our financial results. To the extent that the fair value of these securities was less than our cost over an extended period of time, our net income would be reduced. See Item 3. “Quantitative and Qualitative Disclosures about Market Risk” for further discussion.

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Our stock price can be volatile.

Our stock price, like that of other technology companies, can be volatile. For example, our stock price can be affected by many factors such as quarterly increases or decreases in our earnings; speculation in the investment community about our financial condition or results of operations and changes in revenue or earnings estimates, announcement of new products, technological developments, alliances, acquisitions or divestitures by us or one of our competitors. In addition, general adverse macroeconomic and market conditions unrelated to our performance may also adversely affect our stock price.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk related to changes in interest rates, foreign currency exchange rates, and equity security prices. To mitigate some of these risks, we utilize derivative financial instruments to hedge these exposures. We do not use derivative financial instruments for speculative or trading purposes. All of the potential changes noted below are based on sensitivity analyses performed on our financial position at March 31, 2002. Actual results may differ materially.

Interest Rate Sensitivity

Our investment portfolio of marketable debt securities consists primarily of fixed income instruments with an average duration of 1.24 years as of March 31, 2002. The primary objective of our investments in marketable debt securities is to preserve principal while maximizing yields, without significantly increasing risk. These available-for-sale securities are subject to interest rate risk. The fair market value of these securities may fluctuate with changes in interest rates. A sensitivity analysis was performed on this investment portfolio based on a modeling technique that measures the hypothetical fair market value changes (using a three month horizon) that would result from a parallel shift in the yield curve of plus 150 basis points (BPS). Based on this analysis, a hypothetical 150 BPS increase in interest rates would result in an approximate $59 million decrease in the fair value of our investments in marketable debt securities as of March 31, 2002.

We also have various interest-rate swap agreements which modify the interest characteristics of the Senior Notes so that the interest payable on the Senior Notes effectively becomes variable and thus matches the variable interest rate received from our cash and marketable debt securities. Accordingly, interest rate fluctuations impact the fair value of our Senior Notes outstanding, which will be offset by corresponding changes in the fair value of the swap agreements. However, by entering into these swap agreements, we have a cash flow exposure related to the risk interest rates may increase. For example, a hypothetical 150 BPS increase in interest rates would result in an approximate $23 million decrease in cash.

Foreign Currency Exchange Risk

The majority of our revenue, expense, and capital purchasing activities are transacted in U.S. dollars. However, since a portion of our operations consists of manufacturing and sales activities outside of the U.S., we enter into transactions in other currencies, primarily the Japanese yen, the British pound and the Euro. As a result, the Company purchases currency options and forward contracts to reduce or eliminate certain foreign currency exposures that can be identified and quantified. The Company’s hedges are primarily intended to protect changes in the value of the U.S. dollar.

Based on our foreign currency exchange instruments outstanding at March 31, 2002, we estimate a maximum potential one-day loss in fair value of approximately $9 million, using a Value-at-Risk (VAR) model. The VAR model estimates were made assuming normal market conditions and a 95% confidence level. We used a Monte Carlo simulation type model that valued foreign currency instruments against three thousand randomly generated market price paths. Anticipated transactions, firm commitments, receivables, and accounts payable denominated in foreign currencies were excluded from the model. The VAR model is a risk estimation tool, and as such is not intended to represent actual losses in fair value that will be incurred by us. Additionally, as we utilize foreign currency instruments for hedging anticipated and firmly committed transactions, a loss in fair value for those instruments is generally offset by increases in the value of the underlying exposure. Foreign currency fluctuations did not have a material impact on our results of operations and financial position during the three month and nine month periods ended March 31, 2002.

Euro Conversion

On January 1, 1999, certain member countries of the European Union established fixed conversion rates between their existing currencies and the Euro. The transition period for the introduction of the Euro ends

33

June 30, 2002. Issues facing us as a result of the introduction of the Euro include converting information technology systems, reassessing currency risk, negotiating and amending licensing agreements and contracts, and processing tax and accounting records. We continue to address these issues and do not currently expect the Euro to have a material effect on our financial conditions or results of operations.

Equity Security Price Risk

We are exposed to price fluctuations on the marketable portion of equity securities included in our portfolio of equity investments. These investments are generally in companies in the high-technology industry sector, many of which are small capitalization stocks. We typically do not attempt to reduce or eliminate the market exposure on these securities. A 20% adverse change in equity prices would result in an approximate $5 million decrease in the fair value of our available-for-sale equity investments as of March 31, 2002. At March 31, 2002, three equity securities represented approximately $17 million of the total fair value of the marketable equity securities of $24 million.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On February 11, 2002, Eastman Kodak Company (Kodak) filed a lawsuit in the U.S. District Court for the Western District of New York, making various patent infringement claims against Sun with respect to aspects of our Java™ technologies. The lawsuit was subsequently amended and served on the Company on April 3, 2002. The Lawsuit seeks injunctive relief against future infringement, unspecified damages for past infringement together with costs and attorney’s fees. Based on discussions over many months with Kodak, we believe that this suit is without merit, and, accordingly, will defend ourselves vigorously. Sun cannot forecast at this time with reasonable certainty the potential costs associated with an adverse outcome of this matter.

On March 8, 2002, Sun filed a suit against Microsoft Corporation (Microsoft) in the United States District Court for the Northern District of California pursuant to United States and State of California antitrust laws alleging illegal efforts to acquire, maintain and expand a number of monopolies; illegal tying arrangements; exclusive dealings; copyright infringement; unreasonable restraint of trade; and unfair competition. Sun is seeking remedies that include: (1) preliminary injunctions requiring Microsoft to distribute Sun’s binary implementation of the Java Run-time Environment as part of Windows XP and Internet Explorer and to stop the unlicensed distribution of Microsoft’s Virtual Machine for Java in violation of the January 23, 2001 settlement agreement; (2) a permanent injunction to restore competition to the markets in which Microsoft is unlawfully attempting to acquire, maintain and expand a number of monopolies; and (3) compensation for losses suffered by Sun as a result of Microsoft’s unlawful actions.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

10.84	Registrant’s Nonqualified Deferred Compensation Plan, as amended June 30, 2002.
10.94	Promissory Notes issued to Robert L. Long on November 12, 2001 and January 10, 2002, and related documents (1)
10.95	Promissory Notes issued to Masood A. Jabbar on November 7, 2001, and related documents (1)

(1)   Loans paid in full as of February 8, 2002.

34

     (b)  Reports on Form 8-K

(1)

We filed a report on Form 8-K with the Securities and Exchange Commission on February 14, 2002 announcing that we were informed by Eastman Kodak Company that Kodak had filed a lawsuit on February 11, 2002 in the U.S. District Court for the Western District of New York, alleging patent infringement against Sun with respect to aspects of Sun’s Java™ technologies.

(2)

The Company filed a report on Form 8-K with the Securities and Exchange Commission on May 3, 2002, announcing: (1) on April 25, 2002, the resignation of Michael E. Lehman, Executive Vice President, Corporate Resources and Chief Financial Officer and the appointment of Stephen T. McGowan as Executive Vice President, Corporate Resources and Chief Financial Officer effective as of July 1, 2002; and (2) on May 1, 2002, the resignation of Edward J. Zander, President and Chief Operating Officer, and the appointment of Scott G. McNealy, Chairman of the Board and Chief Executive Officer, as Chairman of the Board, Chief Executive Officer and President, effective July 1, 2002.

35

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SUN MICROSYSTEMS, INC.
 
 
 
BY
 
 
 
/s/ Michael E. Lehman
Michael E. Lehman
Executive Vice President, Corporate Resources
and Chief Financial Officer
(Principal Financial Officer)
 
 
 
/s/ Michael L. Popov
Michael L. Popov
Vice President and Corporate Controller
(Chief Accounting Officer)

Dated: May 13, 2002

36 EX-10.84 3 f81521ex10-84.txt EXHIBIT 10.84 Exhibit 10.84 SUN MICROSYSTEMS, INC. U.S. NON-QUALIFIED DEFERRED COMPENSATION PLAN AMENDED AS OF JUNE 30, 2002 1 TABLE OF CONTENTS Page ---- 1. Purpose ............................................................ 4 2. Definitions ........................................................ 4 3. Eligibility ........................................................ 6 4. Election to Participate in Plan .................................... 6 5. Accounts ........................................................... 7 6. Deferral Increments and Growth ..................................... 7 7. Earnings or Losses on Accounts ..................................... 7 8. Certain In-Service Account Distributions ........................... 8 9. Statements ......................................................... 8 10. Form and Time of Payment of Accounts ............................... 8 11. Effect of Death of Participant ..................................... 9 12. General Duties of Trustee .......................................... 10 13. Withholding Taxes .................................................. 10 14. Participant's Unsecured Rights ..................................... 10 15. Non-assignability of Interests ..................................... 11 16. Limitation of Rights ............................................... 11 17. Administration of the Plan ......................................... 11 18. Amendment or Termination of the Plan ............................... 11 19. Choice of Law and Claims Procedure ................................. 12 20. Execution and Signature ............................................ 12 2 SUN MICROSYSTEMS, INC. U.S. NON-QUALIFIED DEFERRED COMPENSATION PLAN AMENDED AS OF JUNE 30, 2002 Sun Microsystems, Inc. (the "Company"), acting on behalf of itself and its U.S. subsidiaries, initially adopted the Sun Microsystems, Inc. U.S. Non-Qualified Deferred Compensation Plan (the "Plan"), effective July 1, 1995 RECITALS 1. The Company maintains the Plan, a deferred compensation plan for the benefit of a select group of management or highly compensated employees of the Company as well as members of the Company's Board of Directors. 2. Under the Plan, the Company is obligated to pay vested accrued benefits to Plan Participants and their Beneficiary or Beneficiaries from the Company's general assets. 3. The Company intends to enter into an agreement (the "Trust Agreement") with a person or persons, including an entity, who shall serve as trustee (the "Trustee") under an irrevocable trust, to be used in connection with the Plan (the "Trust"). 4. The Company intends to make contributions to the Trust so that such contributions will be held by the Trust and invested, reinvested and distributed, all in accordance with this Plan and the Trust Agreement. 5. The Company intends that amounts contributed to the Trust and the earnings thereon shall be used by the Trustee to satisfy the liabilities of the Company under the Plan with respect to each Plan Participant for whom an Account has been established and such utilization shall be in accordance with the procedures set forth herein. 6. The Company intends that the Trust be a "grantor trust" with the principal and income of the Trust treated as assets and income of the Company for federal and state income tax purposes. 7. The Company intends that the assets of the Trust shall at all times be subject to the claims of the general creditors of the Company as provided in the Trust Agreement. 8. The Company intends that the existence of the Trust shall not alter the characterization of the Plan as "unfunded" for purposes of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and shall not be construed to provide income to Plan Participants under the Plan prior to actual payment of the vested accrued benefits hereunder. NOW THEREFORE, the Company does hereby adopt this amended and restated Plan as follows and does also hereby agree that the Plan shall be structured, held and disposed of as follows: 3 1. Purpose: The Plan provides Participants an opportunity to defer payment of a portion of: - Employee salary and incentive bonus/commissions (for Sales Vice Presidents and Directors); - Employee annual bonus awards; and - Board of Directors retainer payments. 2. Definitions: (a)Account means a bookkeeping account established pursuant to Section 5(a) for Compensation that is subject to a Participant's deferral election. (b)Beneficiary means the person or persons designated by the Participant or by the Plan under Section 11(b) to receive payment of the Participant's Account in the event of the Participant's death. (c) Board means the Board of Directors of the Company, as constituted from time to time. (d) Committee means the Benefits Plan Committee, appointed by the Board from time to time. (e) Company means Sun Microsystems, Inc. and its U.S. subsidiaries. (f) Compensation means: (i) The amount of the Eligible Employee's base salary paid by the Company or one of its U.S. subsidiaries; and (ii) The amount paid by the Company or one of its U.S. subsidiaries to an Eligible Employee as an annual corporate bonus award and any other bonus/incentive award that is approved by the Committee as earnings that can be deferred under the Plan (some incentive/bonus awards will not be eligible for deferral); and (iii) For Sales Vice Presidents and Directors, incentive bonus/commissions; and (iv) In the case of an Eligible Board Member, the amount of his or her director's fees from the Company, which includes only retainer payments. Compensation does not include directors' expense reimbursements or meeting fees. For purposes of the foregoing, Compensation as described in clauses (i), (ii) and (iii) shall be eligible for deferral only to the extent such amounts are otherwise subject to U.S. payroll reporting and withholding. (g) Election Period means: 4 (i) Generally June of each year; and (ii) For newly hired vice presidents, at the sole discretion of the Benefits Plan Committee, may be eligible to enroll within thirty (30) days of hire. (iii) With respect to the Plan Restatement, September, 1997. (h) Eligible Board Member means a member of the Board (other than a member who is also an Eligible Employee). (i) Eligible Employee means an officer of the Company or other common-law employee of the Company or one of its U.S. subsidiaries. (j) Participant means an Eligible Board Member or an Eligible Employee who has elected to defer Compensation. (k) Plan means this Sun Microsystems, Inc. U.S. Non-Qualified Deferred Compensation Plan, as amended from time to time. (l) Plan Restatement means the amendment and restatement of the Plan as approved by the Board on August 13, 1997. (m) Plan Restatement Effective Date means October 1, 1997. (n) Retirement Date means the last day of the month coinciding with or following the Participant's termination of employment following the earlier of his or her: (i) 55th birthday, if the Participant's full years of Service with the Company added to Participant's age (in full years) equals or exceeds 65; or (ii) 20th year anniversary of Service. (o) Service means: (i) Employment as a common-law employee of the Company or one of its subsidiaries; or (ii) Period served as an elected Board Member. A Participant's Service shall be determined by the Committee in its sole discretion. (p) Total Disability has the same meaning as "Disability" under Sun Microsystems, Inc. Comprehensive Welfare Plan. (q) Unforeseeable Emergency means a severe financial hardship to the Participant resulting from: 5 (i) Sudden or unexpected illness or accident of either the Participant or dependent of same; or (ii) Loss of the Participant's property due to casualty or other extraordinary and unforeseeable circumstances beyond the control of the Participant. Hardship shall not constitute an unforeseeable Emergency under the Plan to the extent that it is, or may be, relieved by: (i) Reimbursement or compensation, by insurance or otherwise; or (ii) Liquidation of the Participant's assets to the extent that the liquidation of such assets would not itself cause severe financial hardship. Such assets shall include but not be limited to stock options, company stock, and 401(k) plan balances. An Unforeseeable Emergency under the Plan does not include: (i) Sending a child to college; or (ii) Purchasing a home, per Rev. Proc. 95-64. (r) Year means the Company's fiscal year unless otherwise noted. 3. Eligibility: Participation in the Plan is limited to Eligible Board Members, and Eligible Employees, who are eligible to participate in the Plan if: (a) He or she is subject to U.S. income and social security taxes and not covered under a non-U.S. retirement plan; (b) He or she is an officer, or his or her position is approved as a director level, or higher; or (c) He or she has been designated expressly as an Eligible Employee by the Committee. If a Participant receives a distribution described in Section 10(c), the Participant shall be ineligible to participate in the Plan for the balance of the Plan Year in which the distribution occurs and the following Plan Year. 4. Election to Participate in Plan: (a) Deferral Election. A Participant may elect to participate in the Plan by submitting an election in such forms as the Company may specify during any Election Period. (b) Election Form. All deferral elections under this Section 4 shall be made in a manner prescribed for this purpose by the Committee. 6 5. Accounts: (a) Establishment of Account. The Company shall establish an Account for the terms of the Deferred Compensation Election. (b) Credits to Account. A Participant's Account shall be credited with an amount equal to the percentage of each Compensation payment which would have been payable currently to the Participant but for the terms of the Deferred Compensation Election Form. Deferred Compensation for Participants shall be credited to the Participant's Account as of the first day of the month in which such deferred amounts would otherwise be paid to the Participant. (c) Vesting. Participants shall at all times be 100% vested in their deferrals under the Plan and all earnings or losses allocable thereto. 6. Deferral Increments and Growth: (a) The minimum deferral per year will be determined by the Committee. (b) The Participant who is an Eligible Employee may elect to defer (less any withholding requirements). (i) Up to 100% of any eligible annual bonus award; and (ii) Up to 60% of base salary and incentive awards/commissions. (c) The Participant who is an Eligible Board Member may elect to defer (less any withholding requirements), up to 100% of their retainer payments (to be credited to the account quarterly). 7. Earnings or Losses on Accounts: (a) General Rule. Subject to Section 7(c) below, the amount in a Participant's Account shall be adjusted for gain or loss based on the performance of the investment options selected by the Participant in accordance with Section 7(b). Gain or loss shall be computed as of the last day of the month, using the closing price on the last business day of the month. All distributions from the Account will be withdrawn at the end of the last day of the month. (b) Designation of Investment Indices by the Committee. The Committee shall specify two or more investment funds that shall serve as benchmarks for the investment performance of amounts credited to the Accounts. Accounts shall be adjusted to reflect the gain or loss, net of any allocable costs or expenses, such accounts would experience had they actually been invested in the specified funds at the relevant times. The Committee may vary the available investment funds from time to time, but not more frequently than quarterly. Effective July 1, 2000, a Participant may select his or her investment options for new deferrals and contributions, or for amounts already credited to his or her Account, once per calendar month effective as of the end of the last day of the month and in such manner as the Committee may specify. 7 8. Certain In-Service Account Distributions. (a) After Completion of Two Years of Plan Participation. Each Participant may elect in his or her Deferred Compensation Election Form to have one or more distributions of a specified percentage or dollar amount of his or her Account, not more frequently than once in a Plan Year, commencing in his or her third year of participation, provided that the Participant has not terminated his or her Service with the Company. A Participant may delay once or cancel such distribution at any time prior to the date which is one year prior to the calendar year in which the originally scheduled distribution would take place, but such election is otherwise irrevocable. (b) Previously Scheduled In-Service Distributions. Elections in effect prior to the Plan Restatement Date for in-service distributions prior to January 1, 2000 shall remain in full force and effect. 9. Statements: Quarterly, and/or at intervals determined by the Committee, the Company shall prepare and deliver to each Participant a statement listing the amount credited to such Account as of the applicable date. 10. Form and Time of Payment of Accounts: (a) Timing and Method of Distribution of Accounts. In the event of a Participant's termination of Service on or after his or her Retirement Date, distribution of the value of the Participant's Account balance shall be made as soon as practicable after such termination consistent with the form of distribution specified on the Participant's election. Available forms shall include either a lump sum payment or a series of installments. Accounts subject to installment payouts shall continue to be adjusted for gains or losses in the same manner as active Accounts. Notwithstanding the foregoing, the Participant who is receiving an installment payout on or after his or her Retirement Date may request a lump sum distribution of such Participant's Account. Any such lump sum distribution shall be at the sole discretion of the Committee, and shall be reduced by a penalty equal to ten percent (10%) of the amount otherwise distributable, which penalty shall be forfeited to the Company. A Participant may modify his or her elected form of distribution (i.e., lump sum or installments) at any time prior to the date that is three years before his or her retirement date. If a Participant modifies his or her elected form of distribution but his or her retirement date is less than three years following the date of the modification election, his or her prior elected form of distribution shall apply. If the Participant terminates his or her service with the Company prior to his or her Retirement Date, (other than on account of death), he or she shall receive the value of his or her Account in one lump sum payment as soon as practicable after such termination. The account balance is determined as of the last day of the month in which he or she terminates his or her employment, based on the indexed value of his or her investment options. If a Participant elects a distribution date prior to termination of Service, the distribution will be paid as soon as reasonably practicable in a lump sum after such distribution date. 8 (b) Disability or Emergency. In the event of Participant's Total Disability or Unforeseeable Emergency, and upon application by such Participant, the Committee may determine at its sole discretion that payment of all, or part, of such Participant's Account shall be made in a different manner, or on an earlier date than the time or times specified in Subsection (a) above. Payments due to Participant's Total Disability or Unforeseeable Emergency shall be permitted only to the extent reasonably required to satisfy the Participant's need. The Participant's account will be valued on the last day of the month in which the distribution request is approved. (c) Early Distribution Penalty. Upon application by a Participant, the Committee may determine at its sole discretion that payments from such Participant's Account shall be made in a different manner, or on an earlier date than the time or times specified in Subsection (a) above. The Participant may request the distribution only once a year and the minimum amount of distribution is 50% of the Participant's account balance. All distributions under this Subsection (c) shall be reduced by a penalty equal to 10 percent (10%) of the amount otherwise distributable. The penalty is forfeited to the Company. A Participant who receives a distribution under this Subsection (c) is ineligible to participate in the Plan for the balance of the Plan Year in which the distribution occurs and the following Plan Year. 11. Effect of Death of Participant: (a) Distributions. In the event of a Participant's death while an Eligible Employee or Eligible Board Member (except in the case of a Participant's suicide during the first two years of their participation in the Plan), the Participant's Account balance, together with an amount equal to two times the sum of (i) the Participant's actual deferrals under the Plan after the Plan Restatement Effective Date (exclusive of earnings), plus (ii) the Participant's actual deferrals under the Plan before the Plan Restatement Effective Date (exclusive of earnings) to the extent such deferrals are scheduled to be distributed on or after January 1, 2000, shall be distributed to the Participant's Beneficiary. Notwithstanding the foregoing, the amount to be determined pursuant to this paragraph (a), shall not exceed Three Million Dollars ($3,000,000). In the event of (i) a Participant's death while no longer an Eligible Employee or Eligible Board Member (as applicable), or (ii) a Participant's suicide during the first two years of their participation in the Plan, the Account balance, if any, shall be distributed to the Participant's Beneficiary. Any distributions pursuant to this paragraph shall be made to the Beneficiary in three annual installments or, at the request of the Beneficiary and subject to the Committee's approval, in a single lump sum, commencing in either case as soon as reasonably practicable after the Participant's death. If installment payments are made, the remaining account balance (during the period of the installment payouts) shall cease to be credited with earnings on the investment chosen by the deceased Participant, and instead shall be credited with earnings based on a fixed rate of interest determined by the Committee in its discretion from time to time. (b) Beneficiary Designation. Upon enrollment in the Plan, each Participant shall file a prescribed form with the Company naming a person or persons as the Beneficiary who will receive distributions payable under the Plan in the event of the Participant's death. If the Participant does not name a Beneficiary, or if none of the named Beneficiaries is living at the time payment is due, then the Beneficiary shall be: 9 (i) The spouse of the deceased Participant; or (ii) The living children of the deceased Participant, in equal shares, if no spouse of the Participant is living; or (iii) The estate of the Participant if neither spouse nor children of Participant are living. The Participant may change the designation of a Beneficiary at any time in accordance with procedures established by the Committee. Designations of a Beneficiary, or an amendment or revocation thereof, shall be effective only if made in the prescribed manner and received by the Company prior to the Participant's death. 12. General Duties of Trustee: (a) Trustee Duties. The Trustee shall manage, invest and reinvest the Trust Fund as provided in the Trust Agreement. The Trustee shall collect the income on the Trust Fund, and make distributions therefrom, all as provided in this Plan and in the Trust Agreement. (b) Company Contributions. While the Plan remains in effect, the Company shall make contributions to the Trust Fund at least once each year. As soon as practicable after the close of each Plan Year, the Company shall make an additional contribution to the Trust Fund to the extent that previous contributions to the Trust Fund for the current Plan Year are less than total future liabilities (other than death benefits) created with respect to Participants' Accounts as of the close of the current Plan Year. Contributions to the Trust Fund are based on liabilities created with respect to Participants' Accounts on and after the Plan Restatement Effective Date. The Trustee shall not be liable for any failure by the Company to provide contributions sufficient to pay all accrued benefits under the Plan in accordance with the terms of this Plan. 13. Withholding Taxes: All distributions under the Plan shall be subject to reduction in order to reflect withholding tax obligations imposed by law. 14. Participant's Unsecured Rights: The Account of any Participant, and such Participant's right to receive distributions from his or her Account, shall be considered an unsecured claim against the general assists of the Company; such Accounts are unfunded bookkeeping entries. The Company considers the Plan to be unfunded for tax purposes and for purposes of Title I of ERISA. No Participant shall have an interest in, or make claim against, any specified asset of the Company pursuant to the Plan. 15. Non-assignability of Interests: The interest of a Participant under the Plan is not subject to option nor assignable by either voluntary or involuntary assignment or by operation of law, including without limitation to: bankruptcy, garnishment, attachment or other creditor's process. Any act in violation of this Section 15 shall make the Plan void. 16. Limitation of Rights: (a) Bonuses. Nothing in this Plan shall be construed to give any Eligible 10 Employee any right to be granted a bonus award. (b) Employment Rights. Neither the Plan nor deferral of any Compensation, nor any other action taken pursuant to the Plan, shall constitute, or be evidence of, any agreement or understanding, express or implied, that the Company or any of its subsidiaries will employ an Eligible Employee for any period of time, in any position at any particular rate of compensation. The Company and its subsidiaries reserve the right to terminate an Eligible Employee's Service at any time for any reason, except as otherwise expressly provided in a written employment agreement. 17. Administration of the Plan: The Plan shall be administered by the Committee. The Committee shall have full power and authority to administer, interpret, establish procedures for administering the Plan, prescribe forms, and take any and all necessary actions in connection with the Plan. The Committee's interpretation and construction of the Plan shall be conclusive and binding on all persons. The Committee may appoint a plan administrator or any other agent and delegate to them such powers and duties in connection with the administration of the Plan as the Committee may from time to time prescribe. In the event that any Participants are found to be ineligible, that is, not members of a select group of management or highly compensated employees, according to a determination made by the U.S. Department of Labor, the Committee shall take whatever steps it deems necessary, in its sole discretion, to equitably protect the interests of the affected Participants. 18. Amendment or Termination of the Plan: The Board may amend, suspend, or terminate the Plan at any time; provided, however, that no such action shall reduce a Participant's Account under the Plan without the Participant's written consent. In the event of termination of the Plan, the Accounts of Participants shall continue to be credited with earnings until distributed pursuant to Section 10, unless the Board prescribes an earlier time or different manner for the payment of such Accounts. Without limiting the generality of the foregoing, termination of the Plan following Change in Control shall constitute an event giving rise to distribution of Accounts. In such event, the Company shall pay all Account balances in a lump sum or in annual installments over three years (with earnings), in its discretion, to Participants and Beneficiaries of deceased Participants; and all deferrals and payment of benefits except as provided above shall cease. For purposes of this Plan, the term "Change in Control" shall mean the purchase or acquisition by any person, entity or group of persons, within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Act"), or any comparable successor provisions, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act) of 30% or more of either the outstanding shares of common stock or the combined voting power of the Company's then outstanding voting securities entitled to vote generally, where the approval by the stockholders of the Company or a reorganization, merger or consolidation, in each case with respect to which persons who are stockholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50% of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated Company's then outstanding securities, or a liquidation or dissolution of the Company or of the sale of all or substantially all of the Company's assets. 19. Choice of Law and Claims Procedure: 11 (a) Choice of Law. The validity, interpretation, construction and performance of the Plan shall be governed by ERISA, and, to the extent that they are not preempted, by the laws of the State of California, excluding California's choice-of-law provisions. (b) Claims and Review Procedure. In accordance with the regulations of the U.S. Secretary of Labor, the Committee shall: (i) Provide adequate notice in writing to any Participant or Beneficiary whose claim for benefits under the Plan has been denied. Specific reasons for such denial must be presented in a clear and precise manner intended to be easily understood by such Participant or Beneficiary, and (ii) Afford a reasonable opportunity for a full and fair review before the Board to any Participant or Beneficiary whose claim for benefits has been denied. 20. Execution and Signature: To record the adoption of the Plan by the Board, the Company has caused its duly authorized officer to affix the corporate name hereto: SUN MICROSYSTEMS, INC. By: __________________________________ Authorized Company Officer 12 EX-10.94 4 f81521ex10-94.txt EXHIBIT 10.94 Exhibit 10.94 PAID AND CANCELLED 2/8/02 PROMISSORY NOTE For value received, the undersigned, Robert L. Long (the "Maker") promises to pay to Sun Microsystems, Inc., a Delaware corporation (the "Company"), or order, in lawful money of the United States, the sum of Three Hundred Forty-Three Thousand Six Hundred Thirty-Four dollars ($343,634), plus interest on the outstanding principal amount of this Promissory Note, at a simple interest rate of 2.73% per annum. Repayment of the principal amount of this Promissory Note, together with interest accrued thereon, shall be made in full on or before the end of the fifteenth (15th) day following the date on which the Maker is informed by the proper officer of the Company that the Company's trading window applicable to officers subject to Section 16 of the Securities Exchange Act of 1934, as amended, is open (the "Maturity Date"). All money paid toward the satisfaction of this Promissory Note shall be applied first to the payment of expenses and then of interest as required hereunder and then to the retirement of principal. No waiver of any rights or remedies hereunder shall be effective unless in writing and signed by the holder; a waiver on one occasion shall not be construed as a bar to or waiver of any right or remedy on a further occasion. The Maker agrees to pay all expenses incurred in collection of this Promissory Note including reasonable attorneys' fees. The Maker shall have the right to prepay this Promissory Note in full or in part at any prior to the Maturity Date, without penalty. The Maker and all endorsers of this Promissory Note hereby waive presentment, demand, protest, notice of nonpayment and protest and any and all lack of diligence or delays that may occur in the collection of this Promissory Note. This Promissory Note, including all rights and obligations hereunder, shall be governed by, construed and interpreted in all respects in accordance with laws of the State of Delaware. If payment in full is not made at the time set out above, the Maker hereby authorizes and directs the Company to deduct the amounts owed hereunder, as they become due, from the wages, salary and other benefits and remuneration owed Robert L. Long, in accordance with applicable laws, rules and regulations and in such amounts as the Company shall deem appropriate, until payment in full has been made. The failure or inability of the Company to make any such deduction shall not relieve the Maker of his obligations hereunder. The obligation of payment under this Promissory Note is secured by a pledge of certain shares of the Company's Common Stock owned by the Maker, under the terms of a Pledge Agreement dated as of the date hereof and entered into between the Maker and the Company (the "Pledge Agreement"), a copy of which is attached hereto as Exhibit A, and is subject to the provisions thereof. Notwithstanding the foregoing, the holder of this Promissory Note shall have full recourse against the Maker and shall not be required to proceed against the collateral securing the Promissory Note in the event of the occurrence of a default or Event of Default under this Promissory Note, the Pledge Agreement or the Stock Option Exercise Notice and Irrevocable Subscription Agreement executed by [Maker] and attached hereto as Exhibit B. Maker(s) Date /s/ Robert L. Long November 12, 2001 - --------------------------------- ---------------------- 1 PAID AND CANCELLED 2/8/02 PROMISSORY NOTE For value received, the undersigned, Robert L. Long (the "Maker") promises to pay to Sun Microsystems, Inc., a Delaware corporation (the "Company"), or order, in lawful money of the United States, the sum of Two Hundred Fifty Thousand dollars ($250,000), plus interest on the outstanding principal amount of this Promissory Note, at a simple interest rate of 2.73% per annum. Repayment of the principal amount of this Promissory Note, together with interest accrued thereon, shall be made in full on or before the end of the fifteenth (15th) day following the date on which the Maker is informed by the proper officer of the Company that the Company's trading window applicable to officers subject to Section 16 of the Securities Exchange Act of 1934, as amended, is open (the "Maturity Date"). All money paid toward the satisfaction of this Promissory Note shall be applied first to the payment of expenses and then of interest as required hereunder and then to the retirement of principal. No waiver of any rights or remedies hereunder shall be effective unless in writing and signed by the holder; a waiver on one occasion shall not be construed as a bar to or waiver of any right or remedy on a further occasion. The Maker agrees to pay all expenses incurred in collection of this Promissory Note including reasonable attorneys' fees. The Maker shall have the right to prepay this Promissory Note in full or in part at any prior to the Maturity Date, without penalty. The Maker and all endorsers of this Promissory Note hereby waive presentment, demand, protest, notice of nonpayment and protest and any and all lack of diligence or delays that may occur in the collection of this Promissory Note. This Promissory Note, including all rights and obligations hereunder, shall be governed by, construed and interpreted in all respects in accordance with laws of the State of Delaware. If payment in full is not made at the time set out above, the Maker hereby authorizes and directs the Company to deduct the amounts owed hereunder, as they become due, from the wages, salary and other benefits and remuneration owed Robert L. Long, in accordance with applicable laws, rules and regulations and in such amounts as the Company shall deem appropriate, until payment in full has been made. The failure or inability of the Company to make any such deduction shall not relieve the Maker of his obligations hereunder. The obligation of payment under this Promissory Note is secured by a pledge of certain shares of the Company's Common Stock owned by the Maker, under the terms of a Pledge Agreement dated as of November 12, 2001 and entered into between the Maker and the Company (the "Pledge Agreement"), a copy of which is attached hereto as Exhibit A, and is subject to the provisions thereof. Notwithstanding the foregoing, the holder of this Promissory Note shall have full recourse against the Maker and shall not be required to proceed against the collateral securing the Promissory Note in the event of the occurrence of a default or Event of Default under this Promissory Note, the Pledge Agreement or the Stock Option Exercise Notice and Irrevocable Subscription Agreement executed by Maker and attached hereto as Exhibit B. Maker(s) Date /s/ Robert L. Long January 10, 2002 2 EXHIBIT A STOCK PLEDGE AGREEMENT This STOCK PLEDGE AGREEMENT, dated as of November 12, 2001 (this "Pledge Agreement"), is executed by Robert L. Long, ("Debtor"), in favor of Sun Microsystems, Inc., a Delaware corporation ("Secured Party"). RECITALS A. Debtor and the Secured Party have entered into a Stock Option Exercise Notice and Irrevocable Subscription Agreement (the "Subscription Agreement"), dated the date hereof and Debtor has executed a Promissory Note, dated as of the date hereof (the " First Promissory Note"), in favor of the Secured Party in the principal amount of $343,634. B. Debtor and the Secured Party may enter into a second Promissory Note (the "Second Promissory Note") in the amount of taxes Debtor will owe in connection with the exercise of the stock options under the Subscription Agreement (collectively the First Promissory Note and the Second Promissory Note shall be referred to as the "Promissory Note"). C. In order to induce the Secured Party to extend the credit evidenced by the Promissory Note, Debtor has agreed to enter into this Pledge Agreement and to pledge and grant to Secured Party the security interest in the Pledged Collateral described below. PLEDGE AGREEMENT NOW, THEREFORE, in consideration of the above recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Debtor hereby agrees with Secured Party as follows: 1. Definitions and Interpretation. Unless otherwise defined herein, all other capitalized terms used herein and defined in the Promissory Note shall have the respective meanings given to those terms in the Promissory Note, and all terms defined in the California Uniform Commercial Code (the "UCC") shall have the respective meanings given to those terms in the UCC. 2. The Pledge. To secure the Obligations as defined in Section 3 hereof, Debtor hereby pledges to Secured Party, and grants to Secured Party a security interest in, all of Debtor's right, title and interest, whether now existing or hereafter arising in all instruments, certificated and uncertificated securities, money and general intangibles of, relating to or arising from the following property (the "Pledged Collateral"): (a) The shares of stock of Sun Microsystems, Inc, a Delaware corporation ("Issuer") more particularly described on Schedule A attached hereto (the "Shares") and any additional shares of stock of Issuer hereafter acquired by Debtor (collectively with the Shares, the "Pledged Shares"); (b) All dividends (including cash dividends), other distributions (including stock redemption proceeds), or other property, securities or instruments in respect of or in exchange for the Pledged Shares, whether by way of dividends, stock dividends, recapitalizations, mergers, consolidations, split-ups, combinations or exchanges of shares or otherwise; and (c) All proceeds of the foregoing ("Proceeds"). 3. Security for Obligations. The obligations secured by this Pledge Agreement (the "Obligations") shall mean and include all loans, advances, debts, liabilities and obligations, howsoever arising, owed by Debtor to the Secured Party of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), now existing or hereafter arising under or pursuant to the terms of the Promissory Note, including, all interest, fees, charges, expenses, attorneys' fees and costs and accountants' fees and costs chargeable to and payable by Debtor hereunder and thereunder, in each case, whether direct or indirect, absolute or contingent, due or to become due, and whether or not arising after the commencement of a proceeding 3 under Title 11 of the United States Code (11 U.S.C. Section 101 et seq.), as amended from time to time (including post-petition interest) and whether or not allowed or allowable as a claim in any such proceeding. 4. Delivery of Pledged Collateral. All certificates or instruments representing or evidencing the Pledged Collateral shall be delivered to Secured Party and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to Secured Party. 5. Representations and Covenants. Debtor hereby represents and warrants as follows: (a) Issuance of Pledged Shares, Etc. The Pledged Shares are owned by Debtor free and clear of any and all liens, pledges, encumbrances or charges (other than the lien created in favor of Secured Party by this Pledge Agreement), and Debtor has not optioned or otherwise agreed to sell, hypothecate, pledge, or otherwise encumber or dispose of the Pledged Shares. (b) Security Interest. The pledge of the Pledged Collateral creates a valid security interest in the Pledged Collateral, which security interest is a perfected and first priority security interest, securing the payment of the Obligations and the obligations hereunder. (c) Restatement of Representations and Warranties. On and as of the date any property becomes Pledged Collateral, the foregoing representations and warranties shall apply to such additional Pledged Collateral. (d) Liens on Pledged Collateral. Debtor agrees not to create, incur, assume or suffer to exist any lien or security interest of any kind upon the Pledged Collateral. 6. Further Assurances. (a) Additional Instruments. Debtor agrees that at any time and from time to time, at Debtor's expense, Debtor will promptly execute and deliver all further instruments and documents, including without limitation all additional Pledged Shares, and take all further action, that may be necessary or desirable, or that Secured Party may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. (b) Margin Regulations. In the event that the credit extended pursuant to this Pledge Agreement and the Promissory Note is now or later classified as "purpose credit" as such term is defined under Regulation U of the Board of Governors of the Federal Reserve System ("Regulation U") and Secured Party is classified as a "lender" within the meaning of Regulation U, Debtor agrees to cooperate with Secured Party in making any amendments to the Promissory Note or providing any additional collateral as may be necessary to comply with such regulations. 7. Voting Rights; Dividends; Etc. (a) Rights Prior to an Event of Default. So long as no Event of Default shall have occurred and be continuing: (i) Debtor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Shares or any part thereof for any purpose not inconsistent with the terms of this Pledge Agreement. (ii) Debtor shall be entitled to receive and retain free and clear of the security interest of Secured Party hereunder any and all dividends and interest paid in respect of the Pledged Shares, provided, however, that any and all (A) dividends and interest paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for any Pledged Shares, (B) dividends and other distributions paid or payable in cash in respect of any Pledged Shares in 4 connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus, and (C) cash paid, payable or otherwise distributed in respect of principal of, or in redemption of, or in exchange for, any Pledged Shares, shall be, and shall be forthwith delivered to Secured Party to hold as, Pledged Collateral and shall, if received by Debtor, be received in trust for the benefit of Secured Party, be segregated from the other property or funds of Debtor and be forthwith delivered to Secured Party as Pledged Collateral in the same form as so received (with any necessary endorsement) to be held as part of the Pledged Collateral. (b) Rights Following an Event of Default. Upon the occurrence and during the continuance of an Event of Default: (i) All rights of Debtor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 7(a)(i) and to receive the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to Section 7(a)(ii) shall cease and all such rights shall thereupon become vested in Secured Party which shall thereupon have the sole right, but not the obligation, to exercise such voting and other consensual rights and to receive and hold as Pledged Collateral such dividends and interest payments. (ii) All dividends and interest payments which are received by Debtor contrary to the provisions of subparagraph (i) of this Section 7(b) shall be received in trust for the benefit of Secured Party, shall be segregated from other funds of Debtor and shall be forthwith delivered to Secured Party as Pledged Collateral in the same form as so received (with any necessary endorsement). 8. Events of Default. (a) Event of Default. An "Event of Default" shall mean the occurrence of one or more of the following described events and the continuance of such event for a period of ten days following the occurrence thereof: (i) Debtor shall default in the payment of principal or interest on the Promissory Note when the same is due, or default in the payment of any expense or other amount payable under the Promissory Note or under this Pledge Agreement; or (ii) Debtor shall breach the provisions of Section 5(d) of this Pledge Agreement; or (iii) Debtor shall default in the performance or any covenant, agreement or obligation (other than a covenant, agreement or obligation referred to in Section 8(a)(i) or Section 8(a)(ii) of this Pledge Agreement) contained in the Promissory Note, the Subscription Agreement or this Pledge Agreement and Debtor shall fail to cure such default within ten (10) days after written notice thereof from Secured Party. (b) Rights Under the UCC. In addition to all other rights granted hereby, by the Promissory Note and by law, Secured Party shall have, with respect to the Pledged Collateral, the rights and obligations of a secured party under the UCC. (c) Notice, Etc. In any case where notice of sale is required, ten (10) days' notice shall be deemed reasonable notice. Secured Party may have resort to the Pledged Collateral or any portion thereof with no requirement on the part of Secured Party to proceed first against any other Person or property. (d) Other Remedies. Upon the occurrence and during the continuance of an Event of Default, (i) at the request of Secured Party, Debtor shall assemble and make available to Secured Party all records relating to the Pledged Shares at any place or places specified by Secured Party, together with such other information as Secured Party shall request concerning Debtor's ownership of the Pledged Shares and relationship to Issuer; and (ii) Secured Party or its nominee shall have the right, but shall not be obligated, to vote or give consent with respect to the Pledged Shares or any part thereof. 9. Secured Party Appointed Attorney-in-Fact. 5 Debtor hereby appoints Secured Party as Debtor's attorney-in-fact, with full authority in the place and stead of Debtor and in the name of Debtor or otherwise, from time to time in Secured Party's discretion and to the full extent permitted by law to take any action and to execute any instrument which Secured Party may deem reasonably necessary or advisable to accomplish the purposes of this Pledge Agreement in accordance with the terms and provisions hereof, including without limitation, to receive, endorse and collect all instruments made payable to Debtor representing any dividend, interest payment or other distribution in respect of the Pledged Collateral or any part thereof and to give full discharge for the same. Debtor hereby ratifies all reasonable actions that said attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. The powers conferred on Secured Party hereunder are solely to protect its interests in the Pledged Collateral and shall not impose any duty upon Secured Party to exercise any such powers. Secured Party shall be accountable only for amounts that it actually receives as a result of the exercise of such powers and in no event shall Secured Party or any of its officers, directors, employees or agents be responsible to Debtor for any act or failure to act, except for gross negligence or willful misconduct. 10. Miscellaneous. (a) Notices. Except as otherwise provided herein, all notices, requests, demands, consents, instructions or other communications to or upon Secured Party or Debtor under this Pledge Agreement shall be in writing and telecopied, mailed or delivered to each party at its telecopier number or address set forth on the signature page of this Pledge Agreement (or to such other telecopier number or address for any party as indicated in any notice given by that party to the other party). All such notices and communications shall be effective (a) when sent by Federal Express or other overnight service of recognized standing, on the business day following the deposit with such service; (b) when mailed by registered or certified mail, first class postage prepaid and addressed as aforesaid through the United States Postal Service, upon receipt; (c) when delivered by hand, upon delivery; and (d) when telecopied, upon confirmation of receipt. (b) Nonwaiver. No failure or delay on Secured Party's part in exercising any right hereunder shall operate as a waiver thereof or of any other right nor shall any single or partial exercise of any such right preclude any other further exercise thereof or of any other right. (c) Amendments and Waivers. This Pledge Agreement may not be amended or modified, nor may any of its terms be waived, except by written instruments signed by Debtor and Secured Party. Each waiver or consent under any provision hereof shall be effective only in the specific instances for the purpose for which given. (d) Assignments. This Pledge Agreement shall be binding upon and inure to the benefit of Secured Party and Debtor and their respective successors and assigns. (e) Cumulative Rights, etc. The rights, powers and remedies of Secured Party under this Pledge Agreement shall be in addition to all rights, powers and remedies given to Secured Party by virtue of any applicable law, rule or regulation of any governmental authority, the Promissory Note or any other agreement, all of which rights, powers, and remedies shall be cumulative and may be exercised successively or concurrently without impairing Secured Party's rights hereunder. Debtor waives any right to require Secured Party to proceed against any Person or to exhaust any Pledged Collateral or to pursue any remedy in Secured Party's power. (f) Partial Invalidity. If any time any provision of this Pledge Agreement is or becomes illegal, invalid or unenforceable in any respect under the law or any jurisdiction, neither the legality, validity or enforceability of the remaining provisions of this Pledge Agreement nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall in any way be affected or impaired thereby. (g) Expenses. Each of Debtor and Secured Party shall bear its own costs in connection with the preparation, execution and delivery of, and the exercise of its duties under, this Pledge Agreement. 6 (h) Governing Law. This Pledge Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without reference to conflicts of law rules (except to the extent governed by the UCC). (i) Jury Trial. EACH OF DEBTOR AND SECURED PARTY, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY AS TO ANY ISSUE RELATING HERETO IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS PLEDGE AGREEMENT. [Remainder of page intentionally left blank.] 7 IN WITNESS WHEREOF, Debtor has caused this Pledge Agreement to be executed as of the day and year first above written. ROBERT L. LONG /s/ Robert L. Long ADDRESS: ____________________________________ ____________________________________ Telephone:__________________________ Facsimile:__________________________ ACKNOWLEDGED: SUN MICROSYSTEMS, INC. By:_______________________________ Name:_____________________________ Title:____________________________ ADDRESS: __________________________________ __________________________________ Telephone:________________________ Facsimile:________________________ 8 SCHEDULE A TO PLEDGE AGREEMENT SHARES

Issuer Certificate Number Certificate Date Registered Holder Number of Shares ------ ------------------ ---------------- ----------------- ---------------- Sun Microsystems, Inc. Book Entry Robert L. Long 93,364

9 STOCK POWER AND ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Stock Pledge Agreement dated as of ______________, the undersigned hereby sells, assigns and transfers unto _______________________________, ______________________ (______) shares of Common Stock of Sun Microsystems, Inc., a Delaware corporation, standing in the undersigned's name on the books of said corporation represented by certificate number _______ delivered herewith, and does hereby irrevocably constitute and appoint ________________________ as attorney-in-fact, with full power of substitution, to transfer said stock on the books of said corporation. Dated: ____________________________________ (Signature) ____________________________________ (Please Print Name) ____________________________________ (Spouse's Signature, if any) ____________________________________ (Please Print Name) This Assignment Separate From Certificate was executed in conjunction with the terms of a Stock Pledge Agreement between the above assignor and Sun Microsystems, Inc., dated as of [DATE] __, 200_. INSTRUCTION: PLEASE DO NOT FILL IN ANY BLANKS OTHER THAN THE SIGNATURE AND NAME LINES. 10 EXHIBIT B SUN MICROSYSTEMS, INC. STOCK OPTION EXERCISE NOTICE AND IRREVOCABLE SUBSCRIPTION AGREEMENT Attn: Stock Administrator Ladies and Gentlemen: I, Robert L. Long, irrevocably elect to exercise my option to purchase an aggregate of 95,000 shares of common stock at an exercise price of $3.6172 per share (the "Shares") of Sun Microsystems, Inc. (the "Company") under and pursuant to the Nonstatutory Stock Option Agreement(s) attached as Exhibit A hereto and incorporated herein by this reference (the "Option Agreements") granted to me by the Company pursuant to the Company's 1988 Directors' Stock Option Plan. I agree to make full payment of the option exercise price for the Shares within the fifteen day period following the date on which the Company's General Counsel notifies me, together with the other directors and/or executive officers of the Company subject to Section 16 of the Securities Exchange Act of 1934, that the trading window governed by the Company's insider trading policy is open. I further agree that payment of the exercise price shall be (1) in cash, (2) by tender of stock of the Company having a fair market value not less than the option exercise price and held by me for at least six (6) months prior to the their tender, or (3) by such other consideration as may have been approved by the Board of Directors of the Company at the time these options were granted as specified in the applicable Option Agreement. In addition, I will make adequate provision for federal and state income tax withholding obligations of the Company, if any, which arise by virtue of my exercise, in whole or in part, of these options. I represent and agree that the Shares are being acquired by me in accordance with and subject to the terms, provisions and conditions of the Option Agreements, to all of which I hereby expressly assent. In addition, I acknowledge that my obligations hereunder are secured pursuant to the terms of that certain Security Agreement executed simultaneously herewith. These agreements shall bind and inure to the benefit of my heirs, legal representatives, successors and assigns. I UNDERSTAND THAT THIS EXERCISE NOTICE AND IRREVOCABLE SUBSCRIPTION AGREEMENT MAY NOT BE REVOKED, ALTERED, AMENDED OR TERMINATED. I FURTHER ACKNOWLEDGE THAT THE MARKET VALUE OF THE SHARES RECEIVED ON EXERCISE OF THE OPTIONS MAY DECREASE IN VALUE, AND REGARDLESS OF ANY SUCH DECREASE I WILL BE LIABLE 11 UNDER ALL CIRCUMSTANCES FOR PAYMENT OF THE FULL EXERCISE PRICE, WITHOUT EXCEPTION. I HAVE ALSO BEEN ADVISED TO CONSULT MY TAX ADVISOR CONCERNING THE EXERCISE OF THE SUBJECT OPTIONS AND THE ADVISABILITY OF ENTERING INTO ANY TAX OR OTHER ELECTIONS IN CONNECTION THEREWITH. My address of record is: _________________________________ _________________________________ _________________________________ and my Social Security Number is: _________________________________ Very truly yours, /s/ Robert L. Long _________________________________ The undersigned, being the spouse of the optionee exercising the options set forth above, does hereby acknowledge that the undersigned has read and is familiar with the provisions of the above Stock Option Exercise Notice and Irrevocable Subscription Agreement and the Option Agreements, and the undersigned hereby agrees to such Agreements and joins in them to the extent, if any, that the agreement and joinder of the undersigned may be necessary. Date:_____________________ Receipt of the above is hereby acknowledged. By:________________________________ Dated:_____________________________ 12 EX-10.95 5 f81521ex10-95.txt EXHIBIT 10.95 Exhibit 10.95 PAID AND CANCELLED 2/08/02 PROMISSORY NOTE For value received, the undersigned, Masood Jabbar (the "Maker") promises to pay to Sun Microsystems, Inc., a Delaware corporation (the "Company"), or order, in lawful money of the United States, the sum of $13,133.97, plus interest on the outstanding principal amount of this Promissory Note, at a simple interest rate of 2.73% per annum. Repayment of the principal amount of this Promissory Note, together with interest accrued thereon, shall be made in full on or before the end of the fifteenth (15th) day following the date on which the Maker is informed by the proper officer of the Company that the Company's trading window applicable to officers subject to Section 16 of the Securities Exchange Act of 1934, as amended, is open (the "Maturity Date"). All money paid toward the satisfaction of this Promissory Note shall be applied first to the payment of expenses and then of interest as required hereunder and then to the retirement of principal. No waiver of any rights or remedies hereunder shall be effective unless in writing and signed by the holder; a waiver on one occasion shall not be construed as a bar to or waiver of any right or remedy on a further occasion. The Maker agrees to pay all expenses incurred in collection of this Promissory Note including reasonable attorneys' fees. The Maker shall have the right to prepay this Promissory Note in full or in part at any prior to the Maturity Date, without penalty. The Maker and all endorsers of this Promissory Note hereby waive presentment, demand, protest, notice of nonpayment and protest and any and all lack of diligence or delays that may occur in the collection of this Promissory Note. This Promissory Note, including all rights and obligations hereunder, shall be governed by, construed and interpreted in all respects in accordance with laws of the State of Delaware. If payment in full is not made at the time set out above, the Maker hereby authorizes and directs the Company to deduct the amounts owed hereunder, as they become due, from the wages, salary and other benefits and remuneration owed Masood Jabbar, in accordance with applicable laws, rules and regulations and in such amounts as the Company shall deem appropriate, until payment in full has been made. The failure or inability of the Company to make any such deduction shall not relieve the Maker of his obligations hereunder. The obligation of payment under this Promissory Note is secured by a pledge of certain shares of the Company's Common Stock owned by the Maker, under the terms of a Pledge Agreement dated as of the date hereof and entered into between the Maker and the Company (the "Pledge Agreement"), a copy of which is attached hereto as Exhibit A, and is subject to the provisions thereof. Notwithstanding the foregoing, the holder of this Promissory Note shall have full recourse against the Maker and shall not be required to proceed against the collateral securing the Promissory Note in the event of the occurrence of a default or Event of Default under this Promissory Note, the Pledge Agreement or the Stock Option Exercise Notice and Irrevocable Subscription Agreement executed by [Maker] and attached hereto as Exhibit B. Maker(s) Date /s/ Masood Jabbar 11/7/01 - ----------------------------- ---------------------- - ----------------------------- ---------------------- 1 PAID AND CANCELLED 2/08/02 PROMISSORY NOTE For value received, the undersigned, Masood Jabbar (the "Maker") promises to pay to Sun Microsystems, Inc., a Delaware corporation (the "Company"), or order, in lawful money of the United States, the sum of $73,275.70, plus interest on the outstanding principal amount of this Promissory Note, at a simple interest rate of 2.73% per annum. Repayment of the principal amount of this Promissory Note, together with interest accrued thereon, shall be made in full on or before the end of the fifteenth (15th) day following the date on which the Maker is informed by the proper officer of the Company that the Company's trading window applicable to officers subject to Section 16 of the Securities Exchange Act of 1934, as amended, is open (the "Maturity Date"). All money paid toward the satisfaction of this Promissory Note shall be applied first to the payment of expenses and then of interest as required hereunder and then to the retirement of principal. No waiver of any rights or remedies hereunder shall be effective unless in writing and signed by the holder; a waiver on one occasion shall not be construed as a bar to or waiver of any right or remedy on a further occasion. The Maker agrees to pay all expenses incurred in collection of this Promissory Note including reasonable attorneys' fees. The Maker shall have the right to prepay this Promissory Note in full or in part at any prior to the Maturity Date, without penalty. The Maker and all endorsers of this Promissory Note hereby waive presentment, demand, protest, notice of nonpayment and protest and any and all lack of diligence or delays that may occur in the collection of this Promissory Note. This Promissory Note, including all rights and obligations hereunder, shall be governed by, construed and interpreted in all respects in accordance with laws of the State of Delaware. If payment in full is not made at the time set out above, the Maker hereby authorizes and directs the Company to deduct the amounts owed hereunder, as they become due, from the wages, salary and other benefits and remuneration owed Masood Jabbar, in accordance with applicable laws, rules and regulations and in such amounts as the Company shall deem appropriate, until payment in full has been made. The failure or inability of the Company to make any such deduction shall not relieve the Maker of his obligations hereunder. The obligation of payment under this Promissory Note is secured by a pledge of certain shares of the Company's Common Stock owned by the Maker, under the terms of a Pledge Agreement dated as of the date hereof and entered into between the Maker and the Company (the "Pledge Agreement"), a copy of which is attached hereto as Exhibit A, and is subject to the provisions thereof. Notwithstanding the foregoing, the holder of this Promissory Note shall have full recourse against the Maker and shall not be required to proceed against the collateral securing the Promissory Note in the event of the occurrence of a default or Event of Default under this Promissory Note, the Pledge Agreement or the Stock Option Exercise Notice and Irrevocable Subscription Agreement executed by [Maker] and attached hereto as Exhibit B. Maker(s) Date /s/ Masood Jabbar 11/7/01 - --------------------------------- ---------------------- - --------------------------------- ---------------------- 2 EXHIBIT A STOCK PLEDGE AGREEMENT This STOCK PLEDGE AGREEMENT, dated as of November 7, 2001 (this "Pledge Agreement"), is executed by Masood Jabbar, ("Debtor"), in favor of Sun Microsystems, Inc., a Delaware corporation ("Secured Party"). RECITALS A. Debtor and the Secured Party have entered into a Stock Option Exercise Notice and Irrevocable Subscription Agreement (the "Subscription Agreement"), dated the date hereof and Debtor has executed two Promissory Notes, dated as of the date hereof (collectively, the "Promissory Note"), in favor of the Secured Party in the aggregate principal amount of $86,409.67. B. In order to induce the Secured Party to extend the credit evidenced by the Promissory Note, Debtor has agreed to enter into this Pledge Agreement and to pledge and grant to Secured Party the security interest in the Pledged Collateral described below. PLEDGE AGREEMENT NOW, THEREFORE, in consideration of the above recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Debtor hereby agrees with Secured Party as follows: 1. Definitions and Interpretation. Unless otherwise defined herein, all other capitalized terms used herein and defined in the Promissory Note shall have the respective meanings given to those terms in the Promissory Note, and all terms defined in the California Uniform Commercial Code (the "UCC") shall have the respective meanings given to those terms in the UCC. 2. The Pledge. To secure the Obligations as defined in Section 3 hereof, Debtor hereby pledges to Secured Party, and grants to Secured Party a security interest in, all of Debtor's right, title and interest, whether now existing or hereafter arising in all instruments, certificated and uncertificated securities, money and general intangibles of, relating to or arising from the following property (the "Pledged Collateral"): (a) The shares of stock of Sun Microsystems, Inc, a Delaware corporation ("Issuer") more particularly described on Schedule A attached hereto (the "Shares") and any additional shares of stock of Issuer hereafter acquired by Debtor (collectively with the Shares, the "Pledged Shares"); (b) All dividends (including cash dividends), other distributions (including stock redemption proceeds), or other property, securities or instruments in respect of or in exchange for the Pledged Shares, whether by way of dividends, stock dividends, recapitalizations, mergers, consolidations, split-ups, combinations or exchanges of shares or otherwise; and (c) All proceeds of the foregoing ("Proceeds"). 3. Security for Obligations. The obligations secured by this Pledge Agreement (the "Obligations") shall mean and include all loans, advances, debts, liabilities and obligations, howsoever arising, owed by Debtor to the Secured Party of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), now existing or hereafter arising under or pursuant to the terms of the Promissory Note, including, all interest, fees, charges, expenses, attorneys' fees and costs and accountants' fees and costs chargeable to and payable by Debtor hereunder and thereunder, in each case, whether direct or indirect, absolute or contingent, due or to become due, and whether or not arising after the commencement of a proceeding under Title 11 of the United States Code (11 U.S.C. Section 101 et seq.), as amended from time to time (including post-petition interest) and whether or not allowed or allowable as a claim in any such proceeding. 4. Delivery of Pledged Collateral. All certificates or instruments representing or evidencing the Pledged Collateral shall be delivered to Secured Party and shall be in suitable form for transfer by delivery, or shall 3 be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to Secured Party. 5. Representations and Covenants. Debtor hereby represents and warrants as follows: (a) Issuance of Pledged Shares, Etc. The Pledged Shares are owned by Debtor free and clear of any and all liens, pledges, encumbrances or charges (other than the lien created in favor of Secured Party by this Pledge Agreement), and Debtor has not optioned or otherwise agreed to sell, hypothecate, pledge, or otherwise encumber or dispose of the Pledged Shares. (b) Security Interest. The pledge of the Pledged Collateral creates a valid security interest in the Pledged Collateral, which security interest is a perfected and first priority security interest, securing the payment of the Obligations and the obligations hereunder. (c) Restatement of Representations and Warranties. On and as of the date any property becomes Pledged Collateral, the foregoing representations and warranties shall apply to such additional Pledged Collateral. (d) Liens on Pledged Collateral. Debtor agrees not to create, incur, assume or suffer to exist any lien or security interest of any kind upon the Pledged Collateral. 6. Further Assurances. (a) Additional Instruments. Debtor agrees that at any time and from time to time, at Debtor's expense, Debtor will promptly execute and deliver all further instruments and documents, including without limitation all additional Pledged Shares, and take all further action, that may be necessary or desirable, or that Secured Party may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. (b) Margin Regulations. In the event that the credit extended pursuant to this Pledge Agreement and the Promissory Note is now or later classified as "purpose credit" as such term is defined under Regulation U of the Board of Governors of the Federal Reserve System ("Regulation U") and Secured Party is classified as a "lender" within the meaning of Regulation U, Debtor agrees to cooperate with Secured Party in making any amendments to the Promissory Note or providing any additional collateral as may be necessary to comply with such regulations. 7. Voting Rights; Dividends; Etc. (a) Rights Prior to an Event of Default. So long as no Event of Default shall have occurred and be continuing: (i) Debtor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Shares or any part thereof for any purpose not inconsistent with the terms of this Pledge Agreement. (ii) Debtor shall be entitled to receive and retain free and clear of the security interest of Secured Party hereunder any and all dividends and interest paid in respect of the Pledged Shares, provided, however, that any and all (A) dividends and interest paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for any Pledged Shares, (B) dividends and other distributions paid or payable in cash in respect of any Pledged Shares in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus, and (C) cash paid, payable or otherwise distributed in respect of principal of, or in redemption of, or in exchange for, any Pledged Shares, shall be, and shall be forthwith delivered to Secured Party to hold as, Pledged Collateral and shall, if received by Debtor, be received in trust for the benefit of Secured Party, be segregated from the other property or funds of Debtor and be forthwith delivered to Secured Party as Pledged 4 Collateral in the same form as so received (with any necessary endorsement) to be held as part of the Pledged Collateral. (b) Rights Following an Event of Default. Upon the occurrence and during the continuance of an Event of Default: (i) All rights of Debtor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 7(a)(i) and to receive the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to Section 7(a)(ii) shall cease and all such rights shall thereupon become vested in Secured Party which shall thereupon have the sole right, but not the obligation, to exercise such voting and other consensual rights and to receive and hold as Pledged Collateral such dividends and interest payments. (ii) All dividends and interest payments which are received by Debtor contrary to the provisions of subparagraph (i) of this Section 7(b) shall be received in trust for the benefit of Secured Party, shall be segregated from other funds of Debtor and shall be forthwith delivered to Secured Party as Pledged Collateral in the same form as so received (with any necessary endorsement). 8. Events of Default. (a) Event of Default. An "Event of Default" shall mean the occurrence of one or more of the following described events and the continuance of such event for a period of ten days following the occurrence thereof: (i) Debtor shall default in the payment of principal or interest on the Promissory Note when the same is due, or default in the payment of any expense or other amount payable under the Promissory Note or under this Pledge Agreement; or (ii) Debtor shall breach the provisions of Section 5(d) of this Pledge Agreement; or (iii) Debtor shall default in the performance or any covenant, agreement or obligation (other than a covenant, agreement or obligation referred to in Section 8(a)(i) or Section 8(a)(ii) of this Pledge Agreement) contained in the Promissory Note, the Subscription Agreement or this Pledge Agreement and Debtor shall fail to cure such default within ten (10) days after written notice thereof from Secured Party. (b) Rights Under the UCC. In addition to all other rights granted hereby, by the Promissory Note and by law, Secured Party shall have, with respect to the Pledged Collateral, the rights and obligations of a secured party under the UCC. (c) Notice, Etc. In any case where notice of sale is required, ten (10) days' notice shall be deemed reasonable notice. Secured Party may have resort to the Pledged Collateral or any portion thereof with no requirement on the part of Secured Party to proceed first against any other Person or property. (d) Other Remedies. Upon the occurrence and during the continuance of an Event of Default, (i) at the request of Secured Party, Debtor shall assemble and make available to Secured Party all records relating to the Pledged Shares at any place or places specified by Secured Party, together with such other information as Secured Party shall request concerning Debtor's ownership of the Pledged Shares and relationship to Issuer; and (ii) Secured Party or its nominee shall have the right, but shall not be obligated, to vote or give consent with respect to the Pledged Shares or any part thereof. 9. Secured Party Appointed Attorney-in-Fact. Debtor hereby appoints Secured Party as Debtor's attorney-in-fact, with full authority in the place and stead of Debtor and in the name of Debtor or otherwise, from time to time in Secured Party's discretion and to the full extent permitted by law to take any action and to execute any instrument which Secured Party may deem reasonably necessary or advisable to accomplish the purposes of this Pledge Agreement in accordance with the 5 terms and provisions hereof, including without limitation, to receive, endorse and collect all instruments made payable to Debtor representing any dividend, interest payment or other distribution in respect of the Pledged Collateral or any part thereof and to give full discharge for the same. Debtor hereby ratifies all reasonable actions that said attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. The powers conferred on Secured Party hereunder are solely to protect its interests in the Pledged Collateral and shall not impose any duty upon Secured Party to exercise any such powers. Secured Party shall be accountable only for amounts that it actually receives as a result of the exercise of such powers and in no event shall Secured Party or any of its officers, directors, employees or agents be responsible to Debtor for any act or failure to act, except for gross negligence or willful misconduct. 10. Miscellaneous. (a) Notices. Except as otherwise provided herein, all notices, requests, demands, consents, instructions or other communications to or upon Secured Party or Debtor under this Pledge Agreement shall be in writing and telecopied, mailed or delivered to each party at its telecopier number or address set forth on the signature page of this Pledge Agreement (or to such other telecopier number or address for any party as indicated in any notice given by that party to the other party). All such notices and communications shall be effective (a) when sent by Federal Express or other overnight service of recognized standing, on the business day following the deposit with such service; (b) when mailed by registered or certified mail, first class postage prepaid and addressed as aforesaid through the United States Postal Service, upon receipt; (c) when delivered by hand, upon delivery; and (d) when telecopied, upon confirmation of receipt. (b) Nonwaiver. No failure or delay on Secured Party's part in exercising any right hereunder shall operate as a waiver thereof or of any other right nor shall any single or partial exercise of any such right preclude any other further exercise thereof or of any other right. (c) Amendments and Waivers. This Pledge Agreement may not be amended or modified, nor may any of its terms be waived, except by written instruments signed by Debtor and Secured Party. Each waiver or consent under any provision hereof shall be effective only in the specific instances for the purpose for which given. (d) Assignments. This Pledge Agreement shall be binding upon and inure to the benefit of Secured Party and Debtor and their respective successors and assigns. (e) Cumulative Rights, etc. The rights, powers and remedies of Secured Party under this Pledge Agreement shall be in addition to all rights, powers and remedies given to Secured Party by virtue of any applicable law, rule or regulation of any governmental authority, the Promissory Note or any other agreement, all of which rights, powers, and remedies shall be cumulative and may be exercised successively or concurrently without impairing Secured Party's rights hereunder. Debtor waives any right to require Secured Party to proceed against any Person or to exhaust any Pledged Collateral or to pursue any remedy in Secured Party's power. (f) Partial Invalidity. If any time any provision of this Pledge Agreement is or becomes illegal, invalid or unenforceable in any respect under the law or any jurisdiction, neither the legality, validity or enforceability of the remaining provisions of this Pledge Agreement nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall in any way be affected or impaired thereby. (g) Expenses. Each of Debtor and Secured Party shall bear its own costs in connection with the preparation, execution and delivery of, and the exercise of its duties under, this Pledge Agreement. (h) Governing Law. This Pledge Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without reference to conflicts of law rules (except to the extent governed by the UCC). 6 (i) Jury Trial. EACH OF DEBTOR AND SECURED PARTY, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY AS TO ANY ISSUE RELATING HERETO IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS PLEDGE AGREEMENT. [Remainder of page intentionally left blank.] 7 IN WITNESS WHEREOF, Debtor has caused this Pledge Agreement to be executed as of the day and year first above written. Masood Jabbar /S/ Masood Jabbar ADDRESS: _________________________________ _________________________________ Telephone:_______________________ Facsimile:_______________________ ACKNOWLEDGED: SUN MICROSYSTEMS, INC. By:______________________________ Name:____________________________ Title:___________________________ ADDRESS: _________________________________ _________________________________ Telephone: ______________________ Facsimile:_______________________ 8 SCHEDULE A TO PLEDGE AGREEMENT SHARES

Issuer Certificate Number Certificate Date Registered Holder Number of Shares ------ ------------------ ---------------- ----------------- ---------------- Sun Microsystems,Inc. Book Entry 11/7/01 13,727

9 STOCK POWER AND ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Stock Pledge Agreement dated as of ______________, the undersigned hereby sells, assigns and transfers unto _______________________________, ______________________ (______) shares of Common Stock of Sun Microsystems, Inc., a Delaware corporation, standing in the undersigned's name on the books of said corporation represented by certificate number _______ delivered herewith, and does hereby irrevocably constitute and appoint ________________________ as attorney-in-fact, with full power of substitution, to transfer said stock on the books of said corporation. Dated: _________________________________ (Signature) _________________________________ (Please Print Name) _________________________________ (Spouse's Signature, if any) _________________________________ (Please Print Name) This Assignment Separate From Certificate was executed in conjunction with the terms of a Stock Pledge Agreement between the above assignor and Sun Microsystems, Inc., dated as of [DATE] __, 200_. INSTRUCTION: PLEASE DO NOT FILL IN ANY BLANKS OTHER THAN THE SIGNATURE AND NAME LINES. 10 EXHIBIT B SUN MICROSYSTEMS, INC. STOCK OPTION EXERCISE NOTICE AND IRREVOCABLE SUBSCRIPTION AGREEMENT Attn: Stock Administrator Ladies and Gentlemen: I, Masood Jabbar, irrevocably elect to exercise my option to purchase an aggregate of 17,696 shares of common stock at an exercise price of $.7422 per share (the "Shares") of Sun Microsystems, Inc. (the "Company") under and pursuant to the Nonstatutory Stock Option Agreement(s) attached as Exhibit A hereto and incorporated herein by this reference (the "Option Agreements") granted to me by the Company pursuant to the Company's 1990 Long Term Equity Incentive Plan. I agree to make full payment of the option exercise price for the Shares within the fifteen day period following the date on which the Company's General Counsel notifies me, together with the other directors and/or executive officers of the Company subject to Section 16 of the Securities Exchange Act of 1934, that the trading window governed by the Company's insider trading policy is open. I further agree that payment of the exercise price shall be (1) in cash, (2) by tender of stock of the Company having a fair market value not less than the option exercise price and held by me for at least six (6) months prior to the their tender, or (3) by such other consideration as may have been approved by the Board of Directors of the Company at the time these options were granted as specified in the applicable Option Agreement. In addition, I will make adequate provision for federal and state income tax withholding obligations of the Company, if any, which arise by virtue of my exercise, in whole or in part, of these options. I represent and agree that the Shares are being acquired by me in accordance with and subject to the terms, provisions and conditions of the Option Agreements, to all of which I hereby expressly assent. In addition, I acknowledge that my obligations hereunder are secured pursuant to the terms of that certain Security Agreement executed simultaneously herewith. These agreements shall bind and inure to the benefit of my heirs, legal representatives, successors and assigns. I UNDERSTAND THAT THIS EXERCISE NOTICE AND IRREVOCABLE SUBSCRIPTION AGREEMENT MAY NOT BE REVOKED, ALTERED, AMENDED OR TERMINATED. I FURTHER ACKNOWLEDGE THAT THE MARKET VALUE OF THE SHARES RECEIVED ON EXERCISE OF THE OPTIONS MAY DECREASE IN VALUE, AND REGARDLESS OF ANY SUCH DECREASE I WILL BE LIABLE 11 UNDER ALL CIRCUMSTANCES FOR PAYMENT OF THE FULL EXERCISE PRICE, WITHOUT EXCEPTION. I HAVE ALSO BEEN ADVISED TO CONSULT MY TAX ADVISOR CONCERNING THE EXERCISE OF THE SUBJECT OPTIONS AND THE ADVISABILITY OF ENTERING INTO ANY TAX OR OTHER ELECTIONS IN CONNECTION THEREWITH. My address of record is: ___________________________________ ___________________________________ ___________________________________ and my Social Security Number is: ___________________________________ Very truly yours, /s/ Masood Jabbar ___________________________________ The undersigned, being the spouse of the optionee exercising the options set forth above, does hereby acknowledge that the undersigned has read and is familiar with the provisions of the above Stock Option Exercise Notice and Irrevocable Subscription Agreement and the Option Agreements, and the undersigned hereby agrees to such Agreements and joins in them to the extent, if any, that the agreement and joinder of the undersigned may be necessary. Date:_____________________ Receipt of the above is hereby acknowledged. By:__________________________________ Dated:________________________________ 12 -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.84

                                                                   Exhibit 10.84


                             SUN MICROSYSTEMS, INC.
                  U.S. NON-QUALIFIED DEFERRED COMPENSATION PLAN
                           AMENDED AS OF JUNE 30, 2002


                                       1

                                TABLE OF CONTENTS
                                                                            Page
                                                                            ----
1.    Purpose ............................................................     4

2.    Definitions ........................................................     4

3.    Eligibility ........................................................     6

4.    Election to Participate in Plan ....................................     6

5.    Accounts ...........................................................     7

6.    Deferral Increments and Growth .....................................     7

7.    Earnings or Losses on Accounts .....................................     7

8.    Certain In-Service Account Distributions ...........................     8

9.    Statements .........................................................     8

10.   Form and Time of Payment of Accounts ...............................     8

11.   Effect of Death of Participant .....................................     9

12.   General Duties of Trustee ..........................................    10

13.   Withholding Taxes ..................................................    10

14.   Participant's Unsecured Rights .....................................    10

15.   Non-assignability of Interests .....................................    11

16.   Limitation of Rights ...............................................    11

17.   Administration of the Plan .........................................    11

18.   Amendment or Termination of the Plan ...............................    11

19.   Choice of Law and Claims Procedure .................................    12

20.   Execution and Signature ............................................    12


                                       2

                             SUN MICROSYSTEMS, INC.
                  U.S. NON-QUALIFIED DEFERRED COMPENSATION PLAN
                           AMENDED AS OF JUNE 30, 2002


         Sun Microsystems, Inc. (the "Company"), acting on behalf of itself and
its U.S. subsidiaries, initially adopted the Sun Microsystems, Inc. U.S.
Non-Qualified Deferred Compensation Plan (the "Plan"), effective July 1, 1995

                                    RECITALS

         1. The Company maintains the Plan, a deferred compensation plan for the
benefit of a select group of management or highly compensated employees of the
Company as well as members of the Company's Board of Directors.

         2. Under the Plan, the Company is obligated to pay vested accrued
benefits to Plan Participants and their Beneficiary or Beneficiaries from the
Company's general assets.

         3. The Company intends to enter into an agreement (the "Trust
Agreement") with a person or persons, including an entity, who shall serve as
trustee (the "Trustee") under an irrevocable trust, to be used in connection
with the Plan (the "Trust").

         4. The Company intends to make contributions to the Trust so that such
contributions will be held by the Trust and invested, reinvested and
distributed, all in accordance with this Plan and the Trust Agreement.

         5. The Company intends that amounts contributed to the Trust and the
earnings thereon shall be used by the Trustee to satisfy the liabilities of the
Company under the Plan with respect to each Plan Participant for whom an Account
has been established and such utilization shall be in accordance with the
procedures set forth herein.

         6. The Company intends that the Trust be a "grantor trust" with the
principal and income of the Trust treated as assets and income of the Company
for federal and state income tax purposes.

         7. The Company intends that the assets of the Trust shall at all times
be subject to the claims of the general creditors of the Company as provided in
the Trust Agreement.

         8. The Company intends that the existence of the Trust shall not alter
the characterization of the Plan as "unfunded" for purposes of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and shall not be
construed to provide income to Plan Participants under the Plan prior to actual
payment of the vested accrued benefits hereunder.

         NOW THEREFORE, the Company does hereby adopt this amended and restated
Plan as follows and does also hereby agree that the Plan shall be structured,
held and disposed of as follows:


                                       3

         1. Purpose: The Plan provides Participants an opportunity to defer
payment of a portion of:

            - Employee salary and incentive bonus/commissions (for Sales Vice
              Presidents and Directors);

            - Employee annual bonus awards; and

            - Board of Directors retainer payments.

         2. Definitions:

            (a)Account means a bookkeeping account established pursuant to
Section 5(a) for Compensation that is subject to a Participant's deferral
election.

            (b)Beneficiary means the person or persons designated by the
Participant or by the Plan under Section 11(b) to receive payment of the
Participant's Account in the event of the Participant's death.

            (c) Board means the Board of Directors of the Company, as
constituted from time to time.

            (d) Committee means the Benefits Plan Committee, appointed by the
Board from time to time.

            (e) Company means Sun Microsystems, Inc. and its U.S. subsidiaries.

            (f) Compensation means:

                (i) The amount of the Eligible Employee's base salary paid by

the Company or one of its U.S. subsidiaries; and

                (ii) The amount paid by the Company or one of its U.S.
subsidiaries to an Eligible Employee as an annual corporate bonus award and any
other bonus/incentive award that is approved by the Committee as earnings that
can be deferred under the Plan (some incentive/bonus awards will not be eligible
for deferral); and

                (iii) For Sales Vice Presidents and Directors, incentive
bonus/commissions; and

                (iv) In the case of an Eligible Board Member, the amount of his
or her director's fees from the Company, which includes only retainer payments.
Compensation does not include directors' expense reimbursements or meeting fees.

            For purposes of the foregoing, Compensation as described in clauses
(i), (ii) and (iii) shall be eligible for deferral only to the extent such
amounts are otherwise subject to U.S. payroll reporting and withholding.

            (g) Election Period means:


                                       4

                (i) Generally June of each year; and

                (ii) For newly hired vice presidents, at the sole discretion of
the Benefits Plan Committee, may be eligible to enroll within thirty (30) days
of hire.

                (iii) With respect to the Plan Restatement, September, 1997.

            (h) Eligible Board Member means a member of the Board (other than a
member who is also an Eligible Employee).

            (i) Eligible Employee means an officer of the Company or other
common-law employee of the Company or one of its U.S. subsidiaries.

            (j) Participant means an Eligible Board Member or an Eligible
Employee who has elected to defer Compensation.

            (k) Plan means this Sun Microsystems, Inc. U.S. Non-Qualified
Deferred Compensation Plan, as amended from time to time.

            (l) Plan Restatement means the amendment and restatement of the Plan
as approved by the Board on August 13, 1997.

            (m) Plan Restatement Effective Date means October 1, 1997.

            (n) Retirement Date means the last day of the month coinciding with
or following the Participant's termination of employment following the earlier
of his or her:

                (i) 55th birthday, if the Participant's full years of Service
with the Company added to Participant's age (in full years) equals or exceeds
65; or

                (ii) 20th year anniversary of Service.

            (o) Service means:

                (i) Employment as a common-law employee of the Company or one of
its subsidiaries; or

                (ii) Period served as an elected Board Member.

            A Participant's Service shall be determined by the Committee in its
sole discretion.

            (p) Total Disability has the same meaning as "Disability" under Sun
Microsystems, Inc. Comprehensive Welfare Plan.

            (q) Unforeseeable Emergency means a severe financial hardship to the
Participant resulting from:


                                       5

                (i) Sudden or unexpected illness or accident of either the
Participant or dependent of same; or

                (ii) Loss of the Participant's property due to casualty or other
extraordinary and unforeseeable circumstances beyond the control of the
Participant.

            Hardship shall not constitute an unforeseeable Emergency under the
Plan to the extent that it is, or may be, relieved by:

                (i) Reimbursement or compensation, by insurance or otherwise; or

                (ii) Liquidation of the Participant's assets to the extent that
the liquidation of such assets would not itself cause severe financial hardship.
Such assets shall include but not be limited to stock options, company stock,
and 401(k) plan balances.

            An Unforeseeable Emergency under the Plan does not include:

                (i) Sending a child to college; or

                (ii) Purchasing a home, per Rev. Proc. 95-64.

            (r) Year means the Company's fiscal year unless otherwise noted.

         3. Eligibility: Participation in the Plan is limited to Eligible Board
Members, and Eligible Employees, who are eligible to participate in the Plan if:

            (a) He or she is subject to U.S. income and social security taxes
and not covered under a non-U.S. retirement plan;

            (b) He or she is an officer, or his or her position is approved as a
director level, or higher; or

            (c) He or she has been designated expressly as an Eligible Employee
by the Committee.

            If a Participant receives a distribution described in Section 10(c),
the Participant shall be ineligible to participate in the Plan for the balance
of the Plan Year in which the distribution occurs and the following Plan Year.

         4. Election to Participate in Plan:

            (a) Deferral Election. A Participant may elect to participate in the
Plan by submitting an election in such forms as the Company may specify during
any Election Period.

            (b) Election Form. All deferral elections under this Section 4 shall
be made in a manner prescribed for this purpose by the Committee.


                                       6

         5. Accounts:

            (a) Establishment of Account. The Company shall establish an Account
for the terms of the Deferred Compensation Election.

            (b) Credits to Account. A Participant's Account shall be credited
with an amount equal to the percentage of each Compensation payment which would
have been payable currently to the Participant but for the terms of the Deferred
Compensation Election Form. Deferred Compensation for Participants shall be
credited to the Participant's Account as of the first day of the month in which
such deferred amounts would otherwise be paid to the Participant.

            (c) Vesting. Participants shall at all times be 100% vested in their
deferrals under the Plan and all earnings or losses allocable thereto.

         6. Deferral Increments and Growth:

            (a) The minimum deferral per year will be determined by the
Committee.

            (b) The Participant who is an Eligible Employee may elect to defer
(less any withholding requirements).

                (i) Up to 100% of any eligible annual bonus award; and

                (ii) Up to 60% of base salary and incentive awards/commissions.

            (c) The Participant who is an Eligible Board Member may elect to
defer (less any withholding requirements), up to 100% of their retainer payments
(to be credited to the account quarterly).

         7. Earnings or Losses on Accounts:

            (a) General Rule. Subject to Section 7(c) below, the amount in a
Participant's Account shall be adjusted for gain or loss based on the
performance of the investment options selected by the Participant in accordance
with Section 7(b). Gain or loss shall be computed as of the last day of the
month, using the closing price on the last business day of the month. All
distributions from the Account will be withdrawn at the end of the last day of
the month.

            (b) Designation of Investment Indices by the Committee. The
Committee shall specify two or more investment funds that shall serve as
benchmarks for the investment performance of amounts credited to the Accounts.
Accounts shall be adjusted to reflect the gain or loss, net of any allocable
costs or expenses, such accounts would experience had they actually been
invested in the specified funds at the relevant times. The Committee may vary
the available investment funds from time to time, but not more frequently than
quarterly. Effective July 1, 2000, a Participant may select his or her
investment options for new deferrals and contributions, or for amounts already
credited to his or her Account, once per calendar month effective as of the end
of the last day of the month and in such manner as the Committee may specify.


                                       7

         8.  Certain In-Service Account Distributions.

             (a) After Completion of Two Years of Plan Participation. Each
Participant may elect in his or her Deferred Compensation Election Form to have
one or more distributions of a specified percentage or dollar amount of his or
her Account, not more frequently than once in a Plan Year, commencing in his or
her third year of participation, provided that the Participant has not
terminated his or her Service with the Company. A Participant may delay once or
cancel such distribution at any time prior to the date which is one year prior
to the calendar year in which the originally scheduled distribution would take
place, but such election is otherwise irrevocable.

             (b) Previously Scheduled In-Service Distributions. Elections in
effect prior to the Plan Restatement Date for in-service distributions prior to
January 1, 2000 shall remain in full force and effect.

         9.  Statements: Quarterly, and/or at intervals determined by the
Committee, the Company shall prepare and deliver to each Participant a statement
listing the amount credited to such Account as of the applicable date.

         10. Form and Time of Payment of Accounts:

             (a) Timing and Method of Distribution of Accounts. In the event of
a Participant's termination of Service on or after his or her Retirement Date,
distribution of the value of the Participant's Account balance shall be made as
soon as practicable after such termination consistent with the form of
distribution specified on the Participant's election. Available forms shall
include either a lump sum payment or a series of installments. Accounts subject
to installment payouts shall continue to be adjusted for gains or losses in the
same manner as active Accounts. Notwithstanding the foregoing, the Participant
who is receiving an installment payout on or after his or her Retirement Date
may request a lump sum distribution of such Participant's Account. Any such lump
sum distribution shall be at the sole discretion of the Committee, and shall be
reduced by a penalty equal to ten percent (10%) of the amount otherwise
distributable, which penalty shall be forfeited to the Company. A Participant
may modify his or her elected form of distribution (i.e., lump sum or
installments) at any time prior to the date that is three years before his or
her retirement date. If a Participant modifies his or her elected form of
distribution but his or her retirement date is less than three years following
the date of the modification election, his or her prior elected form of
distribution shall apply.

             If the Participant terminates his or her service with the Company
prior to his or her Retirement Date, (other than on account of death), he or she
shall receive the value of his or her Account in one lump sum payment as soon as
practicable after such termination. The account balance is determined as of the
last day of the month in which he or she terminates his or her employment, based
on the indexed value of his or her investment options.

             If a Participant elects a distribution date prior to termination of
Service, the distribution will be paid as soon as reasonably practicable in a
lump sum after such distribution date.


                                       8

             (b) Disability or Emergency. In the event of Participant's Total
Disability or Unforeseeable Emergency, and upon application by such Participant,
the Committee may determine at its sole discretion that payment of all, or part,
of such Participant's Account shall be made in a different manner, or on an
earlier date than the time or times specified in Subsection (a) above. Payments
due to Participant's Total Disability or Unforeseeable Emergency shall be
permitted only to the extent reasonably required to satisfy the Participant's
need. The Participant's account will be valued on the last day of the month in
which the distribution request is approved.

             (c) Early Distribution Penalty. Upon application by a Participant,
the Committee may determine at its sole discretion that payments from such
Participant's Account shall be made in a different manner, or on an earlier date
than the time or times specified in Subsection (a) above. The Participant may
request the distribution only once a year and the minimum amount of distribution
is 50% of the Participant's account balance. All distributions under this
Subsection (c) shall be reduced by a penalty equal to 10 percent (10%) of the
amount otherwise distributable. The penalty is forfeited to the Company. A
Participant who receives a distribution under this Subsection (c) is ineligible
to participate in the Plan for the balance of the Plan Year in which the
distribution occurs and the following Plan Year.

         11. Effect of Death of Participant:

             (a) Distributions. In the event of a Participant's death while an
Eligible Employee or Eligible Board Member (except in the case of a
Participant's suicide during the first two years of their participation in the
Plan), the Participant's Account balance, together with an amount equal to two
times the sum of (i) the Participant's actual deferrals under the Plan after the
Plan Restatement Effective Date (exclusive of earnings), plus (ii) the
Participant's actual deferrals under the Plan before the Plan Restatement
Effective Date (exclusive of earnings) to the extent such deferrals are
scheduled to be distributed on or after January 1, 2000, shall be distributed to
the Participant's Beneficiary. Notwithstanding the foregoing, the amount to be
determined pursuant to this paragraph (a), shall not exceed Three Million
Dollars ($3,000,000). In the event of (i) a Participant's death while no longer
an Eligible Employee or Eligible Board Member (as applicable), or (ii) a
Participant's suicide during the first two years of their participation in the
Plan, the Account balance, if any, shall be distributed to the Participant's
Beneficiary. Any distributions pursuant to this paragraph shall be made to the
Beneficiary in three annual installments or, at the request of the Beneficiary
and subject to the Committee's approval, in a single lump sum, commencing in
either case as soon as reasonably practicable after the Participant's death. If
installment payments are made, the remaining account balance (during the period
of the installment payouts) shall cease to be credited with earnings on the
investment chosen by the deceased Participant, and instead shall be credited
with earnings based on a fixed rate of interest determined by the Committee in
its discretion from time to time.

             (b) Beneficiary Designation. Upon enrollment in the Plan, each
Participant shall file a prescribed form with the Company naming a person or
persons as the Beneficiary who will receive distributions payable under the Plan
in the event of the Participant's death. If the Participant does not name a
Beneficiary, or if none of the named Beneficiaries is living at the time payment
is due, then the Beneficiary shall be:


                                       9

                 (i) The spouse of the deceased Participant; or

                 (ii) The living children of the deceased Participant, in equal
shares, if no spouse of the Participant is living; or

                 (iii) The estate of the Participant if neither spouse nor
children of Participant are living.

             The Participant may change the designation of a Beneficiary at any
time in accordance with procedures established by the Committee. Designations of
a Beneficiary, or an amendment or revocation thereof, shall be effective only if
made in the prescribed manner and received by the Company prior to the
Participant's death.

         12. General Duties of Trustee:

             (a) Trustee Duties. The Trustee shall manage, invest and reinvest
the Trust Fund as provided in the Trust Agreement. The Trustee shall collect the
income on the Trust Fund, and make distributions therefrom, all as provided in
this Plan and in the Trust Agreement.

             (b) Company Contributions. While the Plan remains in effect, the
Company shall make contributions to the Trust Fund at least once each year. As
soon as practicable after the close of each Plan Year, the Company shall make an
additional contribution to the Trust Fund to the extent that previous
contributions to the Trust Fund for the current Plan Year are less than total
future liabilities (other than death benefits) created with respect to
Participants' Accounts as of the close of the current Plan Year. Contributions
to the Trust Fund are based on liabilities created with respect to Participants'
Accounts on and after the Plan Restatement Effective Date. The Trustee shall not
be liable for any failure by the Company to provide contributions sufficient to
pay all accrued benefits under the Plan in accordance with the terms of this
Plan.

         13. Withholding Taxes: All distributions under the Plan shall be
subject to reduction in order to reflect withholding tax obligations imposed by
law.

         14. Participant's Unsecured Rights: The Account of any Participant, and
such Participant's right to receive distributions from his or her Account, shall
be considered an unsecured claim against the general assists of the Company;
such Accounts are unfunded bookkeeping entries. The Company considers the Plan
to be unfunded for tax purposes and for purposes of Title I of ERISA. No
Participant shall have an interest in, or make claim against, any specified
asset of the Company pursuant to the Plan.

         15. Non-assignability of Interests: The interest of a Participant under
the Plan is not subject to option nor assignable by either voluntary or
involuntary assignment or by operation of law, including without limitation to:
bankruptcy, garnishment, attachment or other creditor's process. Any act in
violation of this Section 15 shall make the Plan void.

         16. Limitation of Rights:

             (a) Bonuses. Nothing in this Plan shall be construed to give any
Eligible


                                       10

Employee any right to be granted a bonus award.

             (b) Employment Rights. Neither the Plan nor deferral of any
Compensation, nor any other action taken pursuant to the Plan, shall constitute,
or be evidence of, any agreement or understanding, express or implied, that the
Company or any of its subsidiaries will employ an Eligible Employee for any
period of time, in any position at any particular rate of compensation. The
Company and its subsidiaries reserve the right to terminate an Eligible
Employee's Service at any time for any reason, except as otherwise expressly
provided in a written employment agreement.

         17. Administration of the Plan: The Plan shall be administered by the
Committee. The Committee shall have full power and authority to administer,
interpret, establish procedures for administering the Plan, prescribe forms, and
take any and all necessary actions in connection with the Plan. The Committee's
interpretation and construction of the Plan shall be conclusive and binding on
all persons. The Committee may appoint a plan administrator or any other agent
and delegate to them such powers and duties in connection with the
administration of the Plan as the Committee may from time to time prescribe. In
the event that any Participants are found to be ineligible, that is, not members
of a select group of management or highly compensated employees, according to a
determination made by the U.S. Department of Labor, the Committee shall take
whatever steps it deems necessary, in its sole discretion, to equitably protect
the interests of the affected Participants.

         18. Amendment or Termination of the Plan: The Board may amend, suspend,
or terminate the Plan at any time; provided, however, that no such action shall
reduce a Participant's Account under the Plan without the Participant's written
consent. In the event of termination of the Plan, the Accounts of Participants
shall continue to be credited with earnings until distributed pursuant to
Section 10, unless the Board prescribes an earlier time or different manner for
the payment of such Accounts. Without limiting the generality of the foregoing,
termination of the Plan following Change in Control shall constitute an event
giving rise to distribution of Accounts. In such event, the Company shall pay
all Account balances in a lump sum or in annual installments over three years
(with earnings), in its discretion, to Participants and Beneficiaries of
deceased Participants; and all deferrals and payment of benefits except as
provided above shall cease. For purposes of this Plan, the term "Change in
Control" shall mean the purchase or acquisition by any person, entity or group
of persons, within the meaning of Section 13(d) or 14(d) of the Securities
Exchange Act of 1934, as amended (the "Act"), or any comparable successor
provisions, of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Act) of 30% or more of either the outstanding shares of
common stock or the combined voting power of the Company's then outstanding
voting securities entitled to vote generally, where the approval by the
stockholders of the Company or a reorganization, merger or consolidation, in
each case with respect to which persons who are stockholders of the Company
immediately prior to such reorganization, merger or consolidation do not,
immediately thereafter, own more than 50% of the combined voting power entitled
to vote generally in the election of directors of the reorganized, merged or
consolidated Company's then outstanding securities, or a liquidation or
dissolution of the Company or of the sale of all or substantially all of the
Company's assets.

         19. Choice of Law and Claims Procedure:


                                       11

             (a) Choice of Law. The validity, interpretation, construction and
performance of the Plan shall be governed by ERISA, and, to the extent that they
are not preempted, by the laws of the State of California, excluding
California's choice-of-law provisions.

             (b) Claims and Review Procedure. In accordance with the regulations
of the U.S. Secretary of Labor, the Committee shall:

                 (i) Provide adequate notice in writing to any Participant or
Beneficiary whose claim for benefits under the Plan has been denied. Specific
reasons for such denial must be presented in a clear and precise manner intended
to be easily understood by such Participant or Beneficiary, and

                 (ii) Afford a reasonable opportunity for a full and fair review
before the Board to any Participant or Beneficiary whose claim for benefits has
been denied.

         20. Execution and Signature: To record the adoption of the Plan by the
Board, the Company has caused its duly authorized officer to affix the corporate
name hereto:

                                          SUN MICROSYSTEMS, INC.



                                          By: __________________________________
                                              Authorized Company Officer


                                       12

EX-10.94

                                                                   Exhibit 10.94
                            PAID AND CANCELLED 2/8/02

                                 PROMISSORY NOTE

         For value received, the undersigned, Robert L. Long (the "Maker")
promises to pay to Sun Microsystems, Inc., a Delaware corporation (the
"Company"), or order, in lawful money of the United States, the sum of Three
Hundred Forty-Three Thousand Six Hundred Thirty-Four dollars ($343,634), plus
interest on the outstanding principal amount of this Promissory Note, at a
simple interest rate of 2.73% per annum.

         Repayment of the principal amount of this Promissory Note, together
with interest accrued thereon, shall be made in full on or before the end of the
fifteenth (15th) day following the date on which the Maker is informed by the
proper officer of the Company that the Company's trading window applicable to
officers subject to Section 16 of the Securities Exchange Act of 1934, as
amended, is open (the "Maturity Date"). All money paid toward the satisfaction
of this Promissory Note shall be applied first to the payment of expenses and
then of interest as required hereunder and then to the retirement of principal.

         No waiver of any rights or remedies hereunder shall be effective unless
in writing and signed by the holder; a waiver on one occasion shall not be
construed as a bar to or waiver of any right or remedy on a further occasion.

         The Maker agrees to pay all expenses incurred in collection of this
Promissory Note including reasonable attorneys' fees.

         The Maker shall have the right to prepay this Promissory Note in full
or in part at any prior to the Maturity Date, without penalty.

         The Maker and all endorsers of this Promissory Note hereby waive
presentment, demand, protest, notice of nonpayment and protest and any and all
lack of diligence or delays that may occur in the collection of this Promissory
Note.

         This Promissory Note, including all rights and obligations hereunder,
shall be governed by, construed and interpreted in all respects in accordance
with laws of the State of Delaware.

         If payment in full is not made at the time set out above, the Maker
hereby authorizes and directs the Company to deduct the amounts owed hereunder,
as they become due, from the wages, salary and other benefits and remuneration
owed Robert L. Long, in accordance with applicable laws, rules and regulations
and in such amounts as the Company shall deem appropriate, until payment in full
has been made. The failure or inability of the Company to make any such
deduction shall not relieve the Maker of his obligations hereunder.

           The obligation of payment under this Promissory Note is secured by a
pledge of certain shares of the Company's Common Stock owned by the Maker, under
the terms of a Pledge Agreement dated as of the date hereof and entered into
between the Maker and the Company (the "Pledge Agreement"), a copy of which is
attached hereto as Exhibit A, and is subject to the provisions thereof.
Notwithstanding the foregoing, the holder of this Promissory Note shall have
full recourse against the Maker and shall not be required to proceed against the
collateral securing the Promissory Note in the event of the occurrence of a
default or Event of Default under this Promissory Note, the Pledge Agreement or
the Stock Option Exercise Notice and Irrevocable Subscription Agreement executed
by [Maker] and attached hereto as Exhibit B.

Maker(s)                                                        Date

/s/ Robert L. Long                                        November 12, 2001

- ---------------------------------                         ----------------------


                                       1

                            PAID AND CANCELLED 2/8/02


                                 PROMISSORY NOTE


         For value received, the undersigned, Robert L. Long (the "Maker")
promises to pay to Sun Microsystems, Inc., a Delaware corporation (the
"Company"), or order, in lawful money of the United States, the sum of Two
Hundred Fifty Thousand dollars ($250,000), plus interest on the outstanding
principal amount of this Promissory Note, at a simple interest rate of 2.73% per
annum.

         Repayment of the principal amount of this Promissory Note, together
with interest accrued thereon, shall be made in full on or before the end of the
fifteenth (15th) day following the date on which the Maker is informed by the
proper officer of the Company that the Company's trading window applicable to
officers subject to Section 16 of the Securities Exchange Act of 1934, as
amended, is open (the "Maturity Date"). All money paid toward the satisfaction
of this Promissory Note shall be applied first to the payment of expenses and
then of interest as required hereunder and then to the retirement of principal.

         No waiver of any rights or remedies hereunder shall be effective unless
in writing and signed by the holder; a waiver on one occasion shall not be
construed as a bar to or waiver of any right or remedy on a further occasion.

         The Maker agrees to pay all expenses incurred in collection of this
Promissory Note including reasonable attorneys' fees.

         The Maker shall have the right to prepay this Promissory Note in full
or in part at any prior to the Maturity Date, without penalty.

         The Maker and all endorsers of this Promissory Note hereby waive
presentment, demand, protest, notice of nonpayment and protest and any and all
lack of diligence or delays that may occur in the collection of this Promissory
Note.

         This Promissory Note, including all rights and obligations hereunder,
shall be governed by, construed and interpreted in all respects in accordance
with laws of the State of Delaware.

         If payment in full is not made at the time set out above, the Maker
hereby authorizes and directs the Company to deduct the amounts owed hereunder,
as they become due, from the wages, salary and other benefits and remuneration
owed Robert L. Long, in accordance with applicable laws, rules and regulations
and in such amounts as the Company shall deem appropriate, until payment in full
has been made. The failure or inability of the Company to make any such
deduction shall not relieve the Maker of his obligations hereunder.

         The obligation of payment under this Promissory Note is secured by a
pledge of certain shares of the Company's Common Stock owned by the Maker, under
the terms of a Pledge Agreement dated as of November 12, 2001 and entered into
between the Maker and the Company (the "Pledge Agreement"), a copy of which is
attached hereto as Exhibit A, and is subject to the provisions thereof.
Notwithstanding the foregoing, the holder of this Promissory Note shall have
full recourse against the Maker and shall not be required to proceed against the
collateral securing the Promissory Note in the event of the occurrence of a
default or Event of Default under this Promissory Note, the Pledge Agreement or
the Stock Option Exercise Notice and Irrevocable Subscription Agreement executed
by Maker and attached hereto as Exhibit B.

Maker(s)                                                            Date

/s/ Robert L. Long                                            January 10, 2002


                                       2

                                    EXHIBIT A

                             STOCK PLEDGE AGREEMENT

         This STOCK PLEDGE AGREEMENT, dated as of November 12, 2001 (this
"Pledge Agreement"), is executed by Robert L. Long, ("Debtor"), in favor of Sun
Microsystems, Inc., a Delaware corporation ("Secured Party").

                                    RECITALS

         A. Debtor and the Secured Party have entered into a Stock Option
            Exercise Notice and Irrevocable Subscription Agreement (the
            "Subscription Agreement"), dated the date hereof and Debtor has
            executed a Promissory Note, dated as of the date hereof (the " First
            Promissory Note"), in favor of the Secured Party in the principal
            amount of $343,634.

         B. Debtor and the Secured Party may enter into a second Promissory Note
            (the "Second Promissory Note") in the amount of taxes Debtor will
            owe in connection with the exercise of the stock options under the
            Subscription Agreement (collectively the First Promissory Note and
            the Second Promissory Note shall be referred to as the "Promissory
            Note").

         C. In order to induce the Secured Party to extend the credit evidenced
            by the Promissory Note, Debtor has agreed to enter into this Pledge
            Agreement and to pledge and grant to Secured Party the security
            interest in the Pledged Collateral described below.

                                PLEDGE AGREEMENT

           NOW, THEREFORE, in consideration of the above recitals and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Debtor hereby agrees with Secured Party as follows:

         1. Definitions and Interpretation. Unless otherwise defined herein, all
other capitalized terms used herein and defined in the Promissory Note shall
have the respective meanings given to those terms in the Promissory Note, and
all terms defined in the California Uniform Commercial Code (the "UCC") shall
have the respective meanings given to those terms in the UCC.

         2. The Pledge. To secure the Obligations as defined in Section 3
hereof, Debtor hereby pledges to Secured Party, and grants to Secured Party a
security interest in, all of Debtor's right, title and interest, whether now
existing or hereafter arising in all instruments, certificated and
uncertificated securities, money and general intangibles of, relating to or
arising from the following property (the "Pledged Collateral"):

             (a) The shares of stock of Sun Microsystems, Inc, a Delaware
corporation ("Issuer") more particularly described on Schedule A attached hereto
(the "Shares") and any additional shares of stock of Issuer hereafter acquired
by Debtor (collectively with the Shares, the "Pledged Shares");

             (b) All dividends (including cash dividends), other distributions
(including stock redemption proceeds), or other property, securities or
instruments in respect of or in exchange for the Pledged Shares, whether by way
of dividends, stock dividends, recapitalizations, mergers, consolidations,
split-ups, combinations or exchanges of shares or otherwise; and

             (c) All proceeds of the foregoing ("Proceeds").

         3. Security for Obligations. The obligations secured by this Pledge
Agreement (the "Obligations") shall mean and include all loans, advances, debts,
liabilities and obligations, howsoever arising, owed by Debtor to the Secured
Party of every kind and description (whether or not evidenced by any note or
instrument and whether or not for the payment of money), now existing or
hereafter arising under or pursuant to the terms of the Promissory Note,
including, all interest, fees, charges, expenses, attorneys' fees and costs and
accountants' fees and costs chargeable to and payable by Debtor hereunder and
thereunder, in each case, whether direct or indirect, absolute or contingent,
due or to become due, and whether or not arising after the commencement of a
proceeding


                                       3

under Title 11 of the United States Code (11 U.S.C. Section 101 et seq.), as
amended from time to time (including post-petition interest) and whether or not
allowed or allowable as a claim in any such proceeding.

         4. Delivery of Pledged Collateral. All certificates or instruments
representing or evidencing the Pledged Collateral shall be delivered to Secured
Party and shall be in suitable form for transfer by delivery, or shall be
accompanied by duly executed instruments of transfer or assignment in blank, all
in form and substance satisfactory to Secured Party.

         5. Representations and Covenants. Debtor hereby represents and warrants
as follows:

             (a) Issuance of Pledged Shares, Etc. The Pledged Shares are owned
by Debtor free and clear of any and all liens, pledges, encumbrances or charges
(other than the lien created in favor of Secured Party by this Pledge
Agreement), and Debtor has not optioned or otherwise agreed to sell,
hypothecate, pledge, or otherwise encumber or dispose of the Pledged Shares.

             (b) Security Interest. The pledge of the Pledged Collateral creates
a valid security interest in the Pledged Collateral, which security interest is
a perfected and first priority security interest, securing the payment of the
Obligations and the obligations hereunder.

             (c) Restatement of Representations and Warranties. On and as of the
date any property becomes Pledged Collateral, the foregoing representations and
warranties shall apply to such additional Pledged Collateral.

             (d) Liens on Pledged Collateral. Debtor agrees not to create,
incur, assume or suffer to exist any lien or security interest of any kind upon
the Pledged Collateral.

         6. Further Assurances.

             (a) Additional Instruments. Debtor agrees that at any time and from
time to time, at Debtor's expense, Debtor will promptly execute and deliver all
further instruments and documents, including without limitation all additional
Pledged Shares, and take all further action, that may be necessary or desirable,
or that Secured Party may reasonably request, in order to perfect and protect
any security interest granted or purported to be granted hereby or to enable
Secured Party to exercise and enforce its rights and remedies hereunder with
respect to any Pledged Collateral.

             (b) Margin Regulations. In the event that the credit extended
pursuant to this Pledge Agreement and the Promissory Note is now or later
classified as "purpose credit" as such term is defined under Regulation U of the
Board of Governors of the Federal Reserve System ("Regulation U") and Secured
Party is classified as a "lender" within the meaning of Regulation U, Debtor
agrees to cooperate with Secured Party in making any amendments to the
Promissory Note or providing any additional collateral as may be necessary to
comply with such regulations.

         7. Voting Rights; Dividends; Etc.

             (a) Rights Prior to an Event of Default. So long as no Event of
Default shall have occurred and be continuing:

                 (i) Debtor shall be entitled to exercise any and all voting and
other consensual rights pertaining to the Pledged Shares or any part thereof for
any purpose not inconsistent with the terms of this Pledge Agreement.

                 (ii) Debtor shall be entitled to receive and retain free and
clear of the security interest of Secured Party hereunder any and all dividends
and interest paid in respect of the Pledged Shares, provided, however, that any
and all (A) dividends and interest paid or payable other than in cash in respect
of, and instruments and other property received, receivable or otherwise
distributed in respect of, or in exchange for any Pledged Shares, (B) dividends
and other distributions paid or payable in cash in respect of any Pledged Shares
in


                                       4

connection with a partial or total liquidation or dissolution or in connection
with a reduction of capital, capital surplus or paid-in-surplus, and (C) cash
paid, payable or otherwise distributed in respect of principal of, or in
redemption of, or in exchange for, any Pledged Shares, shall be, and shall be
forthwith delivered to Secured Party to hold as, Pledged Collateral and shall,
if received by Debtor, be received in trust for the benefit of Secured Party, be
segregated from the other property or funds of Debtor and be forthwith delivered
to Secured Party as Pledged Collateral in the same form as so received (with any
necessary endorsement) to be held as part of the Pledged Collateral.

             (b) Rights Following an Event of Default. Upon the occurrence and
during the continuance of an Event of Default:

                 (i) All rights of Debtor to exercise the voting and other
consensual rights which it would otherwise be entitled to exercise pursuant to
Section 7(a)(i) and to receive the dividends and interest payments which it
would otherwise be authorized to receive and retain pursuant to Section 7(a)(ii)
shall cease and all such rights shall thereupon become vested in Secured Party
which shall thereupon have the sole right, but not the obligation, to exercise
such voting and other consensual rights and to receive and hold as Pledged
Collateral such dividends and interest payments.

                 (ii) All dividends and interest payments which are received by
Debtor contrary to the provisions of subparagraph (i) of this Section 7(b) shall
be received in trust for the benefit of Secured Party, shall be segregated from
other funds of Debtor and shall be forthwith delivered to Secured Party as
Pledged Collateral in the same form as so received (with any necessary
endorsement).

         8. Events of Default.

             (a) Event of Default. An "Event of Default" shall mean the
occurrence of one or more of the following described events and the continuance
of such event for a period of ten days following the occurrence thereof:

                 (i) Debtor shall default in the payment of principal or
interest on the Promissory Note when the same is due, or default in the payment
of any expense or other amount payable under the Promissory Note or under this
Pledge Agreement; or

                 (ii) Debtor shall breach the provisions of Section 5(d) of this
Pledge Agreement; or

                 (iii) Debtor shall default in the performance or any covenant,
agreement or obligation (other than a covenant, agreement or obligation referred
to in Section 8(a)(i) or Section 8(a)(ii) of this Pledge Agreement) contained in
the Promissory Note, the Subscription Agreement or this Pledge Agreement and
Debtor shall fail to cure such default within ten (10) days after written notice
thereof from Secured Party.

             (b) Rights Under the UCC. In addition to all other rights granted
hereby, by the Promissory Note and by law, Secured Party shall have, with
respect to the Pledged Collateral, the rights and obligations of a secured party
under the UCC.

             (c) Notice, Etc. In any case where notice of sale is required, ten
(10) days' notice shall be deemed reasonable notice. Secured Party may have
resort to the Pledged Collateral or any portion thereof with no requirement on
the part of Secured Party to proceed first against any other Person or property.

             (d) Other Remedies. Upon the occurrence and during the continuance
of an Event of Default, (i) at the request of Secured Party, Debtor shall
assemble and make available to Secured Party all records relating to the Pledged
Shares at any place or places specified by Secured Party, together with such
other information as Secured Party shall request concerning Debtor's ownership
of the Pledged Shares and relationship to Issuer; and (ii) Secured Party or its
nominee shall have the right, but shall not be obligated, to vote or give
consent with respect to the Pledged Shares or any part thereof.

         9. Secured Party Appointed Attorney-in-Fact.


                                       5

         Debtor hereby appoints Secured Party as Debtor's attorney-in-fact, with
full authority in the place and stead of Debtor and in the name of Debtor or
otherwise, from time to time in Secured Party's discretion and to the full
extent permitted by law to take any action and to execute any instrument which
Secured Party may deem reasonably necessary or advisable to accomplish the
purposes of this Pledge Agreement in accordance with the terms and provisions
hereof, including without limitation, to receive, endorse and collect all
instruments made payable to Debtor representing any dividend, interest payment
or other distribution in respect of the Pledged Collateral or any part thereof
and to give full discharge for the same.

         Debtor hereby ratifies all reasonable actions that said attorney shall
lawfully do or cause to be done by virtue hereof. This power of attorney is a
power coupled with an interest and shall be irrevocable. The powers conferred on
Secured Party hereunder are solely to protect its interests in the Pledged
Collateral and shall not impose any duty upon Secured Party to exercise any such
powers. Secured Party shall be accountable only for amounts that it actually
receives as a result of the exercise of such powers and in no event shall
Secured Party or any of its officers, directors, employees or agents be
responsible to Debtor for any act or failure to act, except for gross negligence
or willful misconduct.

         10. Miscellaneous.

             (a) Notices. Except as otherwise provided herein, all notices,
requests, demands, consents, instructions or other communications to or upon
Secured Party or Debtor under this Pledge Agreement shall be in writing and
telecopied, mailed or delivered to each party at its telecopier number or
address set forth on the signature page of this Pledge Agreement (or to such
other telecopier number or address for any party as indicated in any notice
given by that party to the other party). All such notices and communications
shall be effective (a) when sent by Federal Express or other overnight service
of recognized standing, on the business day following the deposit with such
service; (b) when mailed by registered or certified mail, first class postage
prepaid and addressed as aforesaid through the United States Postal Service,
upon receipt; (c) when delivered by hand, upon delivery; and (d) when
telecopied, upon confirmation of receipt.

             (b) Nonwaiver. No failure or delay on Secured Party's part in
exercising any right hereunder shall operate as a waiver thereof or of any other
right nor shall any single or partial exercise of any such right preclude any
other further exercise thereof or of any other right.

             (c) Amendments and Waivers. This Pledge Agreement may not be
amended or modified, nor may any of its terms be waived, except by written
instruments signed by Debtor and Secured Party. Each waiver or consent under any
provision hereof shall be effective only in the specific instances for the
purpose for which given.

             (d) Assignments. This Pledge Agreement shall be binding upon and
inure to the benefit of Secured Party and Debtor and their respective successors
and assigns.

             (e) Cumulative Rights, etc. The rights, powers and remedies of
Secured Party under this Pledge Agreement shall be in addition to all rights,
powers and remedies given to Secured Party by virtue of any applicable law, rule
or regulation of any governmental authority, the Promissory Note or any other
agreement, all of which rights, powers, and remedies shall be cumulative and may
be exercised successively or concurrently without impairing Secured Party's
rights hereunder. Debtor waives any right to require Secured Party to proceed
against any Person or to exhaust any Pledged Collateral or to pursue any remedy
in Secured Party's power.

             (f) Partial Invalidity. If any time any provision of this Pledge
Agreement is or becomes illegal, invalid or unenforceable in any respect under
the law or any jurisdiction, neither the legality, validity or enforceability of
the remaining provisions of this Pledge Agreement nor the legality, validity or
enforceability of such provision under the law of any other jurisdiction shall
in any way be affected or impaired thereby.

             (g) Expenses. Each of Debtor and Secured Party shall bear its own
costs in connection with the preparation, execution and delivery of, and the
exercise of its duties under, this Pledge Agreement.


                                       6

             (h) Governing Law. This Pledge Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without reference
to conflicts of law rules (except to the extent governed by the UCC).

             (i) Jury Trial. EACH OF DEBTOR AND SECURED PARTY, TO THE FULLEST
EXTENT PERMITTED BY APPLICABLE LAW, HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL
BY JURY AS TO ANY ISSUE RELATING HERETO IN ANY ACTION, PROCEEDING, OR
COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS PLEDGE AGREEMENT.

                  [Remainder of page intentionally left blank.]


                                       7

         IN WITNESS WHEREOF, Debtor has caused this Pledge Agreement to be
executed as of the day and year first above written.




                                            ROBERT L. LONG


                                            /s/ Robert L. Long


                                            ADDRESS:
                                            ____________________________________

                                            ____________________________________

                                            Telephone:__________________________

                                            Facsimile:__________________________

         ACKNOWLEDGED:

         SUN MICROSYSTEMS, INC.

         By:_______________________________

         Name:_____________________________

         Title:____________________________


         ADDRESS:
         __________________________________

         __________________________________

         Telephone:________________________

         Facsimile:________________________


                                       8

                                   SCHEDULE A

                               TO PLEDGE AGREEMENT

                                     SHARES



        Issuer           Certificate Number   Certificate Date    Registered Holder    Number of Shares
        ------           ------------------   ----------------    -----------------    ----------------
                                                                           
Sun Microsystems, Inc.       Book Entry                             Robert L. Long          93,364



                                      9


                           STOCK POWER AND ASSIGNMENT
                            SEPARATE FROM CERTIFICATE


         FOR VALUE RECEIVED and pursuant to that certain Stock Pledge Agreement
dated as of ______________, the undersigned hereby sells, assigns and transfers
unto _______________________________, ______________________ (______) shares of
Common Stock of Sun Microsystems, Inc., a Delaware corporation, standing in the
undersigned's name on the books of said corporation represented by certificate
number _______ delivered herewith, and does hereby irrevocably constitute and
appoint ________________________ as attorney-in-fact, with full power of
substitution, to transfer said stock on the books of said corporation.

Dated:

                                            ____________________________________
                                            (Signature)

                                            ____________________________________
                                            (Please Print Name)

                                            ____________________________________
                                            (Spouse's Signature, if any)

                                            ____________________________________
                                            (Please Print Name)

         This Assignment Separate From Certificate was executed in conjunction
with the terms of a Stock Pledge Agreement between the above assignor and Sun
Microsystems, Inc., dated as of [DATE] __, 200_.


INSTRUCTION: PLEASE DO NOT FILL IN ANY BLANKS OTHER THAN THE SIGNATURE AND NAME
LINES.


                                       10

                                    EXHIBIT B

                             SUN MICROSYSTEMS, INC.
                          STOCK OPTION EXERCISE NOTICE
                     AND IRREVOCABLE SUBSCRIPTION AGREEMENT




Attn: Stock Administrator


Ladies and Gentlemen:


         I, Robert L. Long, irrevocably elect to exercise my option to purchase
an aggregate of 95,000 shares of common stock at an exercise price of $3.6172
per share (the "Shares") of Sun Microsystems, Inc. (the "Company") under and
pursuant to the Nonstatutory Stock Option Agreement(s) attached as Exhibit A
hereto and incorporated herein by this reference (the "Option Agreements")
granted to me by the Company pursuant to the Company's 1988 Directors' Stock
Option Plan.

         I agree to make full payment of the option exercise price for the
Shares within the fifteen day period following the date on which the Company's
General Counsel notifies me, together with the other directors and/or executive
officers of the Company subject to Section 16 of the Securities Exchange Act of
1934, that the trading window governed by the Company's insider trading policy
is open. I further agree that payment of the exercise price shall be (1) in
cash, (2) by tender of stock of the Company having a fair market value not less
than the option exercise price and held by me for at least six (6) months prior
to the their tender, or (3) by such other consideration as may have been
approved by the Board of Directors of the Company at the time these options were
granted as specified in the applicable Option Agreement. In addition, I will
make adequate provision for federal and state income tax withholding obligations
of the Company, if any, which arise by virtue of my exercise, in whole or in
part, of these options.

         I represent and agree that the Shares are being acquired by me in
accordance with and subject to the terms, provisions and conditions of the
Option Agreements, to all of which I hereby expressly assent. In addition, I
acknowledge that my obligations hereunder are secured pursuant to the terms of
that certain Security Agreement executed simultaneously herewith. These
agreements shall bind and inure to the benefit of my heirs, legal
representatives, successors and assigns.

         I UNDERSTAND THAT THIS EXERCISE NOTICE AND IRREVOCABLE SUBSCRIPTION
AGREEMENT MAY NOT BE REVOKED, ALTERED, AMENDED OR TERMINATED. I FURTHER
ACKNOWLEDGE THAT THE MARKET VALUE OF THE SHARES RECEIVED ON EXERCISE OF THE
OPTIONS MAY DECREASE IN VALUE, AND REGARDLESS OF ANY SUCH DECREASE I WILL BE
LIABLE


                                       11

UNDER ALL CIRCUMSTANCES FOR PAYMENT OF THE FULL EXERCISE PRICE, WITHOUT
EXCEPTION. I HAVE ALSO BEEN ADVISED TO CONSULT MY TAX ADVISOR CONCERNING THE
EXERCISE OF THE SUBJECT OPTIONS AND THE ADVISABILITY OF ENTERING INTO ANY TAX OR
OTHER ELECTIONS IN CONNECTION THEREWITH.

My address of record is:

_________________________________

_________________________________

_________________________________

and my Social Security Number is:

_________________________________

                                             Very truly yours,

                                             /s/ Robert L. Long

           _________________________________


         The undersigned, being the spouse of the optionee exercising the
options set forth above, does hereby acknowledge that the undersigned has read
and is familiar with the provisions of the above Stock Option Exercise Notice
and Irrevocable Subscription Agreement and the Option Agreements, and the
undersigned hereby agrees to such Agreements and joins in them to the extent, if
any, that the agreement and joinder of the undersigned may be necessary.

Date:_____________________




Receipt of the above is hereby acknowledged.

By:________________________________

Dated:_____________________________


                                       12

EX-10.95

                                                                   Exhibit 10.95
                           PAID AND CANCELLED 2/08/02

                                 PROMISSORY NOTE

         For value received, the undersigned, Masood Jabbar (the "Maker")
promises to pay to Sun Microsystems, Inc., a Delaware corporation (the
"Company"), or order, in lawful money of the United States, the sum of
$13,133.97, plus interest on the outstanding principal amount of this Promissory
Note, at a simple interest rate of 2.73% per annum.

         Repayment of the principal amount of this Promissory Note, together
with interest accrued thereon, shall be made in full on or before the end of the
fifteenth (15th) day following the date on which the Maker is informed by the
proper officer of the Company that the Company's trading window applicable to
officers subject to Section 16 of the Securities Exchange Act of 1934, as
amended, is open (the "Maturity Date"). All money paid toward the satisfaction
of this Promissory Note shall be applied first to the payment of expenses and
then of interest as required hereunder and then to the retirement of principal.

         No waiver of any rights or remedies hereunder shall be effective unless
in writing and signed by the holder; a waiver on one occasion shall not be
construed as a bar to or waiver of any right or remedy on a further occasion.

         The Maker agrees to pay all expenses incurred in collection of this
Promissory Note including reasonable attorneys' fees.

         The Maker shall have the right to prepay this Promissory Note in full
or in part at any prior to the Maturity Date, without penalty.

         The Maker and all endorsers of this Promissory Note hereby waive
presentment, demand, protest, notice of nonpayment and protest and any and all
lack of diligence or delays that may occur in the collection of this Promissory
Note.

         This Promissory Note, including all rights and obligations hereunder,
shall be governed by, construed and interpreted in all respects in accordance
with laws of the State of Delaware.

         If payment in full is not made at the time set out above, the Maker
hereby authorizes and directs the Company to deduct the amounts owed hereunder,
as they become due, from the wages, salary and other benefits and remuneration
owed Masood Jabbar, in accordance with applicable laws, rules and regulations
and in such amounts as the Company shall deem appropriate, until payment in full
has been made. The failure or inability of the Company to make any such
deduction shall not relieve the Maker of his obligations hereunder.

         The obligation of payment under this Promissory Note is secured by a
pledge of certain shares of the Company's Common Stock owned by the Maker, under
the terms of a Pledge Agreement dated as of the date hereof and entered into
between the Maker and the Company (the "Pledge Agreement"), a copy of which is
attached hereto as Exhibit A, and is subject to the provisions thereof.
Notwithstanding the foregoing, the holder of this Promissory Note shall have
full recourse against the Maker and shall not be required to proceed against the
collateral securing the Promissory Note in the event of the occurrence of a
default or Event of Default under this Promissory Note, the Pledge Agreement or
the Stock Option Exercise Notice and Irrevocable Subscription Agreement executed
by [Maker] and attached hereto as Exhibit B.

Maker(s)                                                          Date

/s/ Masood Jabbar                                                11/7/01
- -----------------------------                             ----------------------

- -----------------------------                             ----------------------

                                       1

                           PAID AND CANCELLED 2/08/02

                                 PROMISSORY NOTE

         For value received, the undersigned, Masood Jabbar (the "Maker")
promises to pay to Sun Microsystems, Inc., a Delaware corporation (the
"Company"), or order, in lawful money of the United States, the sum of
$73,275.70, plus interest on the outstanding principal amount of this Promissory
Note, at a simple interest rate of 2.73% per annum.

         Repayment of the principal amount of this Promissory Note, together
with interest accrued thereon, shall be made in full on or before the end of the
fifteenth (15th) day following the date on which the Maker is informed by the
proper officer of the Company that the Company's trading window applicable to
officers subject to Section 16 of the Securities Exchange Act of 1934, as
amended, is open (the "Maturity Date"). All money paid toward the satisfaction
of this Promissory Note shall be applied first to the payment of expenses and
then of interest as required hereunder and then to the retirement of principal.

         No waiver of any rights or remedies hereunder shall be effective unless
in writing and signed by the holder; a waiver on one occasion shall not be
construed as a bar to or waiver of any right or remedy on a further occasion.

         The Maker agrees to pay all expenses incurred in collection of this
Promissory Note including reasonable attorneys' fees.

         The Maker shall have the right to prepay this Promissory Note in full
or in part at any prior to the Maturity Date, without penalty.

         The Maker and all endorsers of this Promissory Note hereby waive
presentment, demand, protest, notice of nonpayment and protest and any and all
lack of diligence or delays that may occur in the collection of this Promissory
Note.

         This Promissory Note, including all rights and obligations hereunder,
shall be governed by, construed and interpreted in all respects in accordance
with laws of the State of Delaware.

         If payment in full is not made at the time set out above, the Maker
hereby authorizes and directs the Company to deduct the amounts owed hereunder,
as they become due, from the wages, salary and other benefits and remuneration
owed Masood Jabbar, in accordance with applicable laws, rules and regulations
and in such amounts as the Company shall deem appropriate, until payment in full
has been made. The failure or inability of the Company to make any such
deduction shall not relieve the Maker of his obligations hereunder.

         The obligation of payment under this Promissory Note is secured by a
pledge of certain shares of the Company's Common Stock owned by the Maker, under
the terms of a Pledge Agreement dated as of the date hereof and entered into
between the Maker and the Company (the "Pledge Agreement"), a copy of which is
attached hereto as Exhibit A, and is subject to the provisions thereof.
Notwithstanding the foregoing, the holder of this Promissory Note shall have
full recourse against the Maker and shall not be required to proceed against the
collateral securing the Promissory Note in the event of the occurrence of a
default or Event of Default under this Promissory Note, the Pledge Agreement or
the Stock Option Exercise Notice and Irrevocable Subscription Agreement executed
by [Maker] and attached hereto as Exhibit B.

Maker(s)                                                        Date

      /s/ Masood Jabbar                                        11/7/01
- ---------------------------------                       ----------------------

- ---------------------------------                       ----------------------


                                       2

                                    EXHIBIT A

                             STOCK PLEDGE AGREEMENT

         This STOCK PLEDGE AGREEMENT, dated as of November 7, 2001 (this "Pledge
Agreement"), is executed by Masood Jabbar, ("Debtor"), in favor of Sun
Microsystems, Inc., a Delaware corporation ("Secured Party").

                                    RECITALS

         A. Debtor and the Secured Party have entered into a Stock Option
Exercise Notice and Irrevocable Subscription Agreement (the "Subscription
Agreement"), dated the date hereof and Debtor has executed two Promissory Notes,
dated as of the date hereof (collectively, the "Promissory Note"), in favor of
the Secured Party in the aggregate principal amount of $86,409.67.

         B. In order to induce the Secured Party to extend the credit evidenced
by the Promissory Note, Debtor has agreed to enter into this Pledge Agreement
and to pledge and grant to Secured Party the security interest in the Pledged
Collateral described below.

                                PLEDGE AGREEMENT

         NOW, THEREFORE, in consideration of the above recitals and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Debtor hereby agrees with Secured Party as follows:

         1. Definitions and Interpretation. Unless otherwise defined herein, all
other capitalized terms used herein and defined in the Promissory Note shall
have the respective meanings given to those terms in the Promissory Note, and
all terms defined in the California Uniform Commercial Code (the "UCC") shall
have the respective meanings given to those terms in the UCC.

         2. The Pledge. To secure the Obligations as defined in Section 3
hereof, Debtor hereby pledges to Secured Party, and grants to Secured Party a
security interest in, all of Debtor's right, title and interest, whether now
existing or hereafter arising in all instruments, certificated and
uncertificated securities, money and general intangibles of, relating to or
arising from the following property (the "Pledged Collateral"):

             (a) The shares of stock of Sun Microsystems, Inc, a Delaware
corporation ("Issuer") more particularly described on Schedule A attached hereto
(the "Shares") and any additional shares of stock of Issuer hereafter acquired
by Debtor (collectively with the Shares, the "Pledged Shares");

             (b) All dividends (including cash dividends), other distributions
(including stock redemption proceeds), or other property, securities or
instruments in respect of or in exchange for the Pledged Shares, whether by way
of dividends, stock dividends, recapitalizations, mergers, consolidations,
split-ups, combinations or exchanges of shares or otherwise; and

             (c) All proceeds of the foregoing ("Proceeds").

         3. Security for Obligations. The obligations secured by this Pledge
Agreement (the "Obligations") shall mean and include all loans, advances, debts,
liabilities and obligations, howsoever arising, owed by Debtor to the Secured
Party of every kind and description (whether or not evidenced by any note or
instrument and whether or not for the payment of money), now existing or
hereafter arising under or pursuant to the terms of the Promissory Note,
including, all interest, fees, charges, expenses, attorneys' fees and costs and
accountants' fees and costs chargeable to and payable by Debtor hereunder and
thereunder, in each case, whether direct or indirect, absolute or contingent,
due or to become due, and whether or not arising after the commencement of a
proceeding under Title 11 of the United States Code (11 U.S.C. Section 101 et
seq.), as amended from time to time (including post-petition interest) and
whether or not allowed or allowable as a claim in any such proceeding.

         4. Delivery of Pledged Collateral. All certificates or instruments
representing or evidencing the Pledged Collateral shall be delivered to Secured
Party and shall be in suitable form for transfer by delivery, or shall


                                       3

be accompanied by duly executed instruments of transfer or assignment in blank,
all in form and substance satisfactory to Secured Party.

         5. Representations and Covenants. Debtor hereby represents and warrants
as follows:

             (a) Issuance of Pledged Shares, Etc. The Pledged Shares are owned
by Debtor free and clear of any and all liens, pledges, encumbrances or charges
(other than the lien created in favor of Secured Party by this Pledge
Agreement), and Debtor has not optioned or otherwise agreed to sell,
hypothecate, pledge, or otherwise encumber or dispose of the Pledged Shares.

             (b) Security Interest. The pledge of the Pledged Collateral creates
a valid security interest in the Pledged Collateral, which security interest is
a perfected and first priority security interest, securing the payment of the
Obligations and the obligations hereunder.

             (c) Restatement of Representations and Warranties. On and as of the
date any property becomes Pledged Collateral, the foregoing representations and
warranties shall apply to such additional Pledged Collateral.

             (d) Liens on Pledged Collateral. Debtor agrees not to create,
incur, assume or suffer to exist any lien or security interest of any kind upon
the Pledged Collateral.

         6. Further Assurances.

             (a) Additional Instruments. Debtor agrees that at any time and from
time to time, at Debtor's expense, Debtor will promptly execute and deliver all
further instruments and documents, including without limitation all additional
Pledged Shares, and take all further action, that may be necessary or desirable,
or that Secured Party may reasonably request, in order to perfect and protect
any security interest granted or purported to be granted hereby or to enable
Secured Party to exercise and enforce its rights and remedies hereunder with
respect to any Pledged Collateral.

             (b) Margin Regulations. In the event that the credit extended
pursuant to this Pledge Agreement and the Promissory Note is now or later
classified as "purpose credit" as such term is defined under Regulation U of the
Board of Governors of the Federal Reserve System ("Regulation U") and Secured
Party is classified as a "lender" within the meaning of Regulation U, Debtor
agrees to cooperate with Secured Party in making any amendments to the
Promissory Note or providing any additional collateral as may be necessary to
comply with such regulations.

         7. Voting Rights; Dividends; Etc.

             (a) Rights Prior to an Event of Default. So long as no Event of
Default shall have occurred and be continuing:

                 (i) Debtor shall be entitled to exercise any and all voting and
other consensual rights pertaining to the Pledged Shares or any part thereof for
any purpose not inconsistent with the terms of this Pledge Agreement.

                 (ii) Debtor shall be entitled to receive and retain free and
clear of the security interest of Secured Party hereunder any and all dividends
and interest paid in respect of the Pledged Shares, provided, however, that any
and all (A) dividends and interest paid or payable other than in cash in respect
of, and instruments and other property received, receivable or otherwise
distributed in respect of, or in exchange for any Pledged Shares, (B) dividends
and other distributions paid or payable in cash in respect of any Pledged Shares
in connection with a partial or total liquidation or dissolution or in
connection with a reduction of capital, capital surplus or paid-in-surplus, and
(C) cash paid, payable or otherwise distributed in respect of principal of, or
in redemption of, or in exchange for, any Pledged Shares, shall be, and shall be
forthwith delivered to Secured Party to hold as, Pledged Collateral and shall,
if received by Debtor, be received in trust for the benefit of Secured Party, be
segregated from the other property or funds of Debtor and be forthwith delivered
to Secured Party as Pledged


                                       4

Collateral in the same form as so received (with any necessary endorsement) to
be held as part of the Pledged Collateral.

             (b) Rights Following an Event of Default. Upon the occurrence and
during the continuance of an Event of Default:

                 (i) All rights of Debtor to exercise the voting and other
consensual rights which it would otherwise be entitled to exercise pursuant to
Section 7(a)(i) and to receive the dividends and interest payments which it
would otherwise be authorized to receive and retain pursuant to Section 7(a)(ii)
shall cease and all such rights shall thereupon become vested in Secured Party
which shall thereupon have the sole right, but not the obligation, to exercise
such voting and other consensual rights and to receive and hold as Pledged
Collateral such dividends and interest payments.

                 (ii) All dividends and interest payments which are received by
Debtor contrary to the provisions of subparagraph (i) of this Section 7(b) shall
be received in trust for the benefit of Secured Party, shall be segregated from
other funds of Debtor and shall be forthwith delivered to Secured Party as
Pledged Collateral in the same form as so received (with any necessary
endorsement).

         8. Events of Default.

             (a) Event of Default. An "Event of Default" shall mean the
occurrence of one or more of the following described events and the continuance
of such event for a period of ten days following the occurrence thereof:

                 (i) Debtor shall default in the payment of principal or
interest on the Promissory Note when the same is due, or default in the payment
of any expense or other amount payable under the Promissory Note or under this
Pledge Agreement; or

                 (ii) Debtor shall breach the provisions of Section 5(d) of this
Pledge Agreement; or

                 (iii) Debtor shall default in the performance or any covenant,
agreement or obligation (other than a covenant, agreement or obligation referred
to in Section 8(a)(i) or Section 8(a)(ii) of this Pledge Agreement) contained in
the Promissory Note, the Subscription Agreement or this Pledge Agreement and
Debtor shall fail to cure such default within ten (10) days after written notice
thereof from Secured Party.

             (b) Rights Under the UCC. In addition to all other rights granted
hereby, by the Promissory Note and by law, Secured Party shall have, with
respect to the Pledged Collateral, the rights and obligations of a secured party
under the UCC.

             (c) Notice, Etc. In any case where notice of sale is required, ten
(10) days' notice shall be deemed reasonable notice. Secured Party may have
resort to the Pledged Collateral or any portion thereof with no requirement on
the part of Secured Party to proceed first against any other Person or property.

             (d) Other Remedies. Upon the occurrence and during the continuance
of an Event of Default, (i) at the request of Secured Party, Debtor shall
assemble and make available to Secured Party all records relating to the Pledged
Shares at any place or places specified by Secured Party, together with such
other information as Secured Party shall request concerning Debtor's ownership
of the Pledged Shares and relationship to Issuer; and (ii) Secured Party or its
nominee shall have the right, but shall not be obligated, to vote or give
consent with respect to the Pledged Shares or any part thereof.

         9. Secured Party Appointed Attorney-in-Fact.

         Debtor hereby appoints Secured Party as Debtor's attorney-in-fact, with
full authority in the place and stead of Debtor and in the name of Debtor or
otherwise, from time to time in Secured Party's discretion and to the full
extent permitted by law to take any action and to execute any instrument which
Secured Party may deem reasonably necessary or advisable to accomplish the
purposes of this Pledge Agreement in accordance with the


                                       5

terms and provisions hereof, including without limitation, to receive, endorse
and collect all instruments made payable to Debtor representing any dividend,
interest payment or other distribution in respect of the Pledged Collateral or
any part thereof and to give full discharge for the same.

         Debtor hereby ratifies all reasonable actions that said attorney shall
lawfully do or cause to be done by virtue hereof. This power of attorney is a
power coupled with an interest and shall be irrevocable. The powers conferred on
Secured Party hereunder are solely to protect its interests in the Pledged
Collateral and shall not impose any duty upon Secured Party to exercise any such
powers. Secured Party shall be accountable only for amounts that it actually
receives as a result of the exercise of such powers and in no event shall
Secured Party or any of its officers, directors, employees or agents be
responsible to Debtor for any act or failure to act, except for gross negligence
or willful misconduct.

         10. Miscellaneous.

             (a) Notices. Except as otherwise provided herein, all notices,
requests, demands, consents, instructions or other communications to or upon
Secured Party or Debtor under this Pledge Agreement shall be in writing and
telecopied, mailed or delivered to each party at its telecopier number or
address set forth on the signature page of this Pledge Agreement (or to such
other telecopier number or address for any party as indicated in any notice
given by that party to the other party). All such notices and communications
shall be effective (a) when sent by Federal Express or other overnight service
of recognized standing, on the business day following the deposit with such
service; (b) when mailed by registered or certified mail, first class postage
prepaid and addressed as aforesaid through the United States Postal Service,
upon receipt; (c) when delivered by hand, upon delivery; and (d) when
telecopied, upon confirmation of receipt.

             (b) Nonwaiver. No failure or delay on Secured Party's part in
exercising any right hereunder shall operate as a waiver thereof or of any other
right nor shall any single or partial exercise of any such right preclude any
other further exercise thereof or of any other right.

             (c) Amendments and Waivers. This Pledge Agreement may not be
amended or modified, nor may any of its terms be waived, except by written
instruments signed by Debtor and Secured Party. Each waiver or consent under any
provision hereof shall be effective only in the specific instances for the
purpose for which given.

             (d) Assignments. This Pledge Agreement shall be binding upon and
inure to the benefit of Secured Party and Debtor and their respective successors
and assigns.

             (e) Cumulative Rights, etc. The rights, powers and remedies of
Secured Party under this Pledge Agreement shall be in addition to all rights,
powers and remedies given to Secured Party by virtue of any applicable law, rule
or regulation of any governmental authority, the Promissory Note or any other
agreement, all of which rights, powers, and remedies shall be cumulative and may
be exercised successively or concurrently without impairing Secured Party's
rights hereunder. Debtor waives any right to require Secured Party to proceed
against any Person or to exhaust any Pledged Collateral or to pursue any remedy
in Secured Party's power.

             (f) Partial Invalidity. If any time any provision of this Pledge
Agreement is or becomes illegal, invalid or unenforceable in any respect under
the law or any jurisdiction, neither the legality, validity or enforceability of
the remaining provisions of this Pledge Agreement nor the legality, validity or
enforceability of such provision under the law of any other jurisdiction shall
in any way be affected or impaired thereby.

             (g) Expenses. Each of Debtor and Secured Party shall bear its own
costs in connection with the preparation, execution and delivery of, and the
exercise of its duties under, this Pledge Agreement.

             (h) Governing Law. This Pledge Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without reference
to conflicts of law rules (except to the extent governed by the UCC).


                                       6


             (i) Jury Trial. EACH OF DEBTOR AND SECURED PARTY, TO THE FULLEST
EXTENT PERMITTED BY APPLICABLE LAW, HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL
BY JURY AS TO ANY ISSUE RELATING HERETO IN ANY ACTION, PROCEEDING, OR
COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS PLEDGE AGREEMENT.

                  [Remainder of page intentionally left blank.]


                                       7

         IN WITNESS WHEREOF, Debtor has caused this Pledge Agreement to be
executed as of the day and year first above written.




                                               Masood Jabbar


                                               /S/ Masood Jabbar


                                               ADDRESS:

                                               _________________________________

                                               _________________________________


                                               Telephone:_______________________

                                               Facsimile:_______________________

           ACKNOWLEDGED:

           SUN MICROSYSTEMS, INC.

           By:______________________________

           Name:____________________________

           Title:___________________________


           ADDRESS:

           _________________________________

           _________________________________



           Telephone: ______________________

           Facsimile:_______________________


                                       8

                                   SCHEDULE A

                               TO PLEDGE AGREEMENT

                                     SHARES



       Issuer            Certificate Number     Certificate Date     Registered Holder      Number of Shares
       ------            ------------------     ----------------     -----------------      ----------------
                                                                                
Sun Microsystems,Inc.        Book Entry              11/7/01                                     13,727



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                           STOCK POWER AND ASSIGNMENT
                            SEPARATE FROM CERTIFICATE


           FOR VALUE RECEIVED and pursuant to that certain Stock Pledge
Agreement dated as of ______________, the undersigned hereby sells, assigns and
transfers unto _______________________________, ______________________ (______)
shares of Common Stock of Sun Microsystems, Inc., a Delaware corporation,
standing in the undersigned's name on the books of said corporation represented
by certificate number _______ delivered herewith, and does hereby irrevocably
constitute and appoint ________________________ as attorney-in-fact, with full
power of substitution, to transfer said stock on the books of said corporation.

Dated:

                                               _________________________________
                                               (Signature)

                                               _________________________________
                                               (Please Print Name)

                                               _________________________________
                                               (Spouse's Signature, if any)

                                               _________________________________
                                               (Please Print Name)

           This Assignment Separate From Certificate was executed in conjunction
with the terms of a Stock Pledge Agreement between the above assignor and Sun
Microsystems, Inc., dated as of [DATE] __, 200_.


INSTRUCTION: PLEASE DO NOT FILL IN ANY BLANKS OTHER THAN THE SIGNATURE AND NAME
LINES.

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                                   EXHIBIT B
                             SUN MICROSYSTEMS, INC.
                          STOCK OPTION EXERCISE NOTICE
                     AND IRREVOCABLE SUBSCRIPTION AGREEMENT





Attn: Stock Administrator


Ladies and Gentlemen:


         I, Masood Jabbar, irrevocably elect to exercise my option to purchase
an aggregate of 17,696 shares of common stock at an exercise price of $.7422 per
share (the "Shares") of Sun Microsystems, Inc. (the "Company") under and
pursuant to the Nonstatutory Stock Option Agreement(s) attached as Exhibit A
hereto and incorporated herein by this reference (the "Option Agreements")
granted to me by the Company pursuant to the Company's 1990 Long Term Equity
Incentive Plan.

         I agree to make full payment of the option exercise price for the
Shares within the fifteen day period following the date on which the Company's
General Counsel notifies me, together with the other directors and/or executive
officers of the Company subject to Section 16 of the Securities Exchange Act of
1934, that the trading window governed by the Company's insider trading policy
is open. I further agree that payment of the exercise price shall be (1) in
cash, (2) by tender of stock of the Company having a fair market value not less
than the option exercise price and held by me for at least six (6) months prior
to the their tender, or (3) by such other consideration as may have been
approved by the Board of Directors of the Company at the time these options were
granted as specified in the applicable Option Agreement. In addition, I will
make adequate provision for federal and state income tax withholding obligations
of the Company, if any, which arise by virtue of my exercise, in whole or in
part, of these options.

         I represent and agree that the Shares are being acquired by me in
accordance with and subject to the terms, provisions and conditions of the
Option Agreements, to all of which I hereby expressly assent. In addition, I
acknowledge that my obligations hereunder are secured pursuant to the terms of
that certain Security Agreement executed simultaneously herewith. These
agreements shall bind and inure to the benefit of my heirs, legal
representatives, successors and assigns.

         I UNDERSTAND THAT THIS EXERCISE NOTICE AND IRREVOCABLE SUBSCRIPTION
AGREEMENT MAY NOT BE REVOKED, ALTERED, AMENDED OR TERMINATED. I FURTHER
ACKNOWLEDGE THAT THE MARKET VALUE OF THE SHARES RECEIVED ON EXERCISE OF THE
OPTIONS MAY DECREASE IN VALUE, AND REGARDLESS OF ANY SUCH DECREASE I WILL BE
LIABLE


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UNDER ALL CIRCUMSTANCES FOR PAYMENT OF THE FULL EXERCISE PRICE, WITHOUT
EXCEPTION. I HAVE ALSO BEEN ADVISED TO CONSULT MY TAX ADVISOR CONCERNING THE
EXERCISE OF THE SUBJECT OPTIONS AND THE ADVISABILITY OF ENTERING INTO ANY TAX OR
OTHER ELECTIONS IN CONNECTION THEREWITH.

My address of record is:
___________________________________
___________________________________
___________________________________

and my Social Security Number is:

___________________________________

                                                  Very truly yours,

                                                  /s/ Masood Jabbar


         ___________________________________


         The undersigned, being the spouse of the optionee exercising the
options set forth above, does hereby acknowledge that the undersigned has read
and is familiar with the provisions of the above Stock Option Exercise Notice
and Irrevocable Subscription Agreement and the Option Agreements, and the
undersigned hereby agrees to such Agreements and joins in them to the extent, if
any, that the agreement and joinder of the undersigned may be necessary.

Date:_____________________




Receipt of the above is hereby acknowledged.

By:__________________________________

Dated:________________________________


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