As the U.S. economy began to wobble earlier this year, it seemed the technology sector would hold up better than most. Major tech companies tend to have plenty of cash and minimal debt—and most make products that help companies save money or boost productivity. But recently, the optimism has evaporated. Since the financial crisis worsened a month ago, the tech-heavy Nasdaq has dropped 12%, twice as much as the Dow Jones industrial average. "The mood has definitely deteriorated in the last few weeks," says Daniel J. Warmenhoven, chief executive of storage company NetApp. (NTAP)

Few have felt the change as much as Sun Microsystems (JAVA). The company’s stock has dropped 15% over the last month, and 56% for the year. The hit at Sun reflects the concern over the prospects for tech players that rely heavily on the troubled finance sector. Analysts estimate Sun, which makes high-powered servers that help run corporate tech networks, gets nearly 20% of its sales from financial companies.

Sun may be particularly vulnerable. Consolidation on Wall Street means fewer customers to go around, and the company is at a disadvantage if it has to compete in a price war against rivals like Hewlett-Packard (HPQ) and IBM (IBM). Although Sun has laid off 6,500 workers since Jonathan I. Schwartz became CEO two years ago, the computer maker still spends far more on research, development, and administrative costs as a percentage of sales than does HP or IBM. Schwartz has made bold moves, including giving away the company’s software to spur server sales, but growth is sluggish. Sales fell last quarter and are expected to rise less than 2% through mid-2010. "Sun has excellent technology, but do they last as a stand-alone company?" asks analyst Sushil Wagle at J. & W. Seligman. "My gut tells me that at some point, they’ll be part of something else." Read more...

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