NEW YORK (CNN/Money) - It wasn't long ago that Sun Microsystems used to crow about being "the 'dot' in dot-com," but lately it hasn't had a whole lot to brag about.

Sun, the leading supplier of UNIX servers -- large computer systems used for everything from hosting Web sites to executing bank transactions -- was one of the highest flyers during the Internet craze, supplying much of the hardware used to build out the Internet infrastructure in the late 1990s.

It also has been among the hardest hit by the dot-com collapse and the recent economic downturn which resulted in the dissolution of scores of dot-com companies and brought about a substantial slowdown in spending by the telecom service providers that had been beefing up their networks largely with Sun's gear.

To say the past year has been difficult for Sun (SUNW: Research, Estimates) would be understating the case. Revenue has fallen by nearly half, the stock price by more than half, and the company laid off employees for the first time in its 20-year history.

In spite of all that, executives of the Palo Alto, Calif.-based company remain upbeat, convinced that they will prove the naysayers, who have been there since its inception in 1982, wrong once again.

"In a sense, the past year has been refreshing," said Jonathan Schwartz, Sun's chief strategy officer.

"We've stopped being in the mode of just taking purchase orders and really have gotten back to nuts and bolts, product delivery, innovation, changing the game and making sure we're prepped for the uptick," Schwartz said.

Still, Sun has been losing money for the past two quarters, and analysts generally expect it to report a loss of 2 cents per share in the quarter ending this month.

Current expectations are for Sun to return to profitability in the June quarter. But even then its earnings are expected to be less than half what they were in the same period a year earlier.

"The 'dot' in dot-com was great when dot-com companies were growing and buying a lot of gear," said Steve Josselyn, an analyst at high-tech research firm International Data Corp.

"It isn't good when those companies stop spending, and that's basically what happened in the latter part of 2000 and into 2001," Josselyn said.

While it currently is one of the most widely recognized companies in the high-tech industry, Sun's rise to dominance in the UNIX server market really only took hold in the mid 1990s, when it started optimizing its servers and its version of the UNIX operating system, called Solaris, for Web functions.

Sun's systems also are distinguished by their proprietary "UltraSPARC" microprocessors, which handle data 64 bits at a time, making them ideal for working with large amounts of data.

For a time, that was a winning formula, and Sun enjoyed a wide lead, in both market share and technology, over its nearest competitors. During its heyday, Sun regularly posted quarterly revenue-growth rates of 25 percent or more, and its stock was among the brightest stars on Wall Street.

How quickly things can change.

In addition to the dot-com bust, Sun has been wrangling with relentless competition from the likes of IBM (IBM: Research, Estimates) on the high-end and Dell Computer (DELL: Research, Estimates) on the low end, and the company suddenly finds itself on a much more level field than the one to which it had become accustomed.

"They certainly had a leadership position previously because of the product set that they had. And at least technologically, I would say that IBM has caught up to them, and maybe passed them slightly," said IDC's Josselyn.

Indeed, IBM has emerged as one of Sun's fiercest competitors, its battle cries clearly heard from the upper echelon of senior management through the rank and file of its public relations organization, whose media alerts and other contacts with the press are thick with anti-Sun rhetoric.

"We have been far more aggressive than we were before in terms of telling our story, not just from the PR point of view but from the sales and marketing point of view," said Tim Dougherty, director of IBM's eServer group.

"We've been very public about winning back customers from Sun and winning back partners from Sun," Dougherty said.

Both companies are aiming their products at one of the few remaining bright spots in the industry: the so-called "data centers" of large corporations. These are the technological nerve centers where companies manage everything from their manufacturing operations, supply-chain management and sales transactions to employee and customer information.

IBM is pushing the virtues of its recently introduced eServer p690, also known as "Regatta," which features Big Blue's newest server processors, called Power 4, and borrows some of the technology from the company's mainframe computers that help improve their reliability and reduce the amount of power they consume.

For its part, Sun is aiming its new "Starcat" servers -- built on Sun's latest processor, the UltraSPARC III, and running the latest version of Solaris -- squarely toward the lucrative data center market.

Executives at IBM claim that their systems beat out Sun's systems in both price and performance, and they frequently point to benchmark tests that they claim proves that theirs are technologically superior.

While acknowledging the increased competition from Microsoft, Schwartz said the real threat is more in IBM's ability to leverage its existing global services business, currently the world's largest, to grow the installed base of IBM server hardware.

"The single biggest threat that IBM represents to Sun is its capacity to subsidize its hardware businesses with global services -- its ability to walk into an account and say 'Hey, we'll give you the hardware for free, so long as you give us $1 billion in outsourcing." he said. "That's the biggest threat, not the technology."

The two companies also have been battling it out in the market for mid-priced UNIX servers, Sun's traditional stronghold. And while Sun remains the overall market leader in UNIX, it has become clear that the company will need to fight much harder to maintain that distinction.

"They are at risk of being overtaken by IBM," said Martin Reynolds, a technology analyst at Gartner Dataquest.

At the same time, companies such as Dell and others have become more of a threat on the low-end as more cost-conscious customers opt for cheaper, Intel-based servers running server software from Microsoft or the increasingly popular Linux operating system.

Linux is an "open source" operating system, meaning it is open to modifications and freely distributed among developers. Although it originally had a cult following of technically sophisticated users, it has been making substantial headway into the mainstream of corporate computing because of its low cost and the flexibility it offers IT managers.

While Sun had dabbled in Linux with its purchase of Cobalt Networks in December 2000, until recently it had held fast to its proprietary hardware and software.

But earlier this month, Sun made what amounted to a wholesale endorsement of Linux, promising to begin selling its own Intel-based and SPARC-based hardware that is capable of running Solaris, Linux, or even Microsoft's Windows.

That was enough to convince Merrill Lynch's Steve Milunovich that Sun had taken a step in the right direction. He upgraded his long-term rating on the company's shares shortly afterward to a "buy."

"While the endorsement made some investors more negative because it highlighted a threat, our view was more optimistic because Sun took off its blinders," Milunovich said in a report on Sun last week.

Schwartz called Linux a "huge competitive weapon for Sun," especially with respect to its fight against Microsoft (MSFT: Research, Estimates).

"Microsoft, on average, costs its corporate customers between $300 and $400 per user year," he said. "Imagine if we could ship something that was $30 to $40 per user year. Something tells me there's an economic opportunity there, and we may avail ourselves of it."

Sun also has turned its focus onto areas outside its core server business such as data-storage systems and application server software, trying to gain share in other segments of the computer industry by leveraging its existing technology.

"To a large extent, servers, their core business, were an experiment from years back," said Dataquest's Reynolds. "They were focused on workstations, then they moved into servers and then all of a sudden they found this huge UNIX-based server business."

"There's nothing right now that jumps out and says, 'Hey, this is going to be the next big thing.' But Sun is most certainly a company that does not sit still," Reynolds said.

One area of business that may well turn out to be the next big thing is "Web services," a catch-all phrase used to describe an industry-wide shift toward a new generation of Internet-enabled software.

Although still in its nascent stage, there is a general consensus that Web services represent a potentially lucrative area for whichever company comes up with the best solution.

Here, Microsoft, with its ".NET" Web services initiative, is Sun's arch nemesis, and Sun already has come out slugging, starting in the courtroom.

Earlier this month, Sun filed a private antitrust lawsuit against Microsoft, arguing that it had used its monopoly in the PC operating system market to undermine Sun's "Java" software, a key component of its Sun One Web services initiative.

Java is a programming language developed by Sun that works on a variety of computers, regardless of the underlying operating system.

Although the rhetoric surrounding it is technically complex and somewhat arcane, Sun's basic argument is that it is trying to create an open standard for Web services while Microsoft is trying to make such services available using only products made or approved by Microsoft.

In the marketplace, Sun last October rolled out its Web services under the banner Sun Open Net Environment, or Sun ONE, which the company describes as its "standards-based software vision, architecture, platform and expertise for building and deploying services on demand."

It also is spearheading an industry group called the Liberty Alliance, comprised mostly of Microsoft competitors, who are working together to develop a technology standard by which to manage the "digital identities" of computer network users.

So far, most of Sun's efforts in Web services are conceptual as it jockeys for a position in what is expected to become a vibrant market.

"But we'll see all kinds of distributed technologies that fit into the Web services domain from Sun," Dataquest's Reynolds said. "That's one place where they really need to go fishing."