Sun Microsystems (NASDAQ:JAVA) provides network computing solutions, including computer systems, data management products, and other services. Server and workstation sales, and accompanying support and educational services, constitute the bulk of the company's revenue. Although Sun now offers systems in all segments of the market, it has traditionally provided high-end to mid-range servers for a premium. The industry shift toward less expensive and also less profitable low-end servers, along with fierce competition from IBM, HP, and Dell, may negatively impact Sun's profit margins.

Sun is a major proponent of open source software. It has open-sourced both Solaris, the leading Unix operating system, and Java, a popular development platform. Sun has also bought open source database software company MySQL for $1 billion in February, 2008. By giving away its software for free, Sun hopes that increased user adoption will lead to increased hardware sales and accompanying service revenue. Nevertheless, it is currently unclear how effective this open-source model will be in increasing profitability.

The company spends significantly more as a percentage of revenue on research and development than competitors. Although research may provide future benefits, increased costs have forced the company to take significant measures to to return to profitability; in 2006 the company posted an operating loss of $870 million, but in 2007 returned to profitability with an operating income of $309 million. Sun has announced plans to reduce its workforce by 5,000, or 13%, in order to save $500 million annually. This reduction in workforce comes at the tail end of a years long restructuring. The company has also seen 11% growth in the revenues the revenues derived from its China division. If Sun's 2007 profit of $473MM is any indication, the company's fortunes seem to be taking a turn for the better. The question that any investor must ask is whether Sun's continuing focus on innovation and cost-cutting will be enough to offset the continuing pricing pressure in the company's core markets.

(Read more at Wikinvest )