updated 11/1/2005 5:53:25 PM ET 2005-11-01T22:53:25

Sun Microsystems Inc. said Tuesday that its first-quarter loss narrowed slightly and sales grew 3.7 percent as the server and software maker benefited from a revamped product line.

The Santa Clara-based company lost $123 million, or 4 cents per share, compared with a loss of $133 million, or 4 cents a share in the first quarter of fiscal 2005. Fiscal 2006 includes a $50 million expense related to stock options.

Excluding special items, Sun lost $68 million, or 2 cents per share, compared with a profit of $27 million, or a penny per share, in the same period last year. Excluding the stock charge, Sun would have lost $18 million, or 1 cent per share, in the most recent quarter.

Revenue grew to $2.73 billion from $2.63 billion in the first quarter of 2005. The 2006 quarter is the first to include results from Sun’s recent acquisitions of SeeBeyond Technology Corp. and Storage Technology Corp.

Analysts were expecting Sun to post a penny-per-share loss on sales of $2.9 billion, according to a survey by Thomson Financial.

Sun has been struggling to achieve and maintain profitability since the tech collapse of 2000 and its customers looked to less expensive equipment to handle business computing tasks.

In recent quarters, Sun has revamped its product line and made several acquisitions to expand its presence in storage and business-integration software.

In a break with its practice of supplying both the hardware and software of its systems, it’s now selling servers based on Advanced Micro Devices Inc.’s Opteron chip that can run software from companies other than Sun.

“We are confident in our product strategy, and as momentum behind our execution builds, we are beginning to fire on all cylinders,” said Scott McNealy, Sun’s chairman and chief executive officer.

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