STEC

STEC, Inc.

STEC, Inc. (including our subsidiaries, referred to collectively in this Report as “STEC”, “we”, “our” and “us”) is a leading global provider of enterprise-class Flash solid-state drives (“SSDs”) that are designed to increase the performance of enterprise-storage systems and servers that companies use to retain and access their critical data. Our products are designed specifically for storage systems and servers that run applications requiring a high level of input/output operations per second (“IOPS”) performance, capacity, reliability and low latency.

We design and develop our SSD controllers, enhance them with proprietary firmware and combine them with third-party Flash memory to form high-performance SSDs which provide a level of IOPS performance not currently possible with traditional hard disk drives (“HDDs”). We sell our SSDs to leading global storage and server original equipment manufacturers (“OEMs”) which integrate them into storage systems and servers used by enterprises in a variety of industries including financial services, government, transportation, defense and aerospace and transaction processing. We also manufacture small form factor Flash SSDs, cards and modules, as well as custom high density dynamic random access memory (“DRAM”) modules for networking, communications and industrial applications. We are headquartered in Santa Ana, California and have operations in Penang, Malaysia.

We market our products to OEMs, leveraging our comprehensive design capabilities to offer custom storage solutions to address their specific needs.

We are focusing on several revenue growth initiatives, including:

•Continuing to develop and qualify customized Flash-based SSDs, including our ZeusIOPS and MACH-class of products; and

•Exploring new market opportunities that leverage our core SSD expertise.

Over the past several years, we have expanded our custom design capabilities of Flash products for OEM applications. We have invested significantly in the design and development of customized Flash controllers, firmware and hardware and made strategic acquisitions that have expanded our Flash controller design capabilities and enhanced our capabilities to use third-party controllers. Flash product revenue increased 36% from $110.2 million in 2007 to $150.3 million in 2008 and increased 105% from $150.3 million in 2008 to $308.2 million in 2009. Sales of Flash products represented 87%, 66% and 58% of our total revenues in 2009, 2008 and 2007, respectively. We expect to continue to make investments in Flash custom design capabilities and controller development.

A major area of our Flash-based product investment has been applied to SSD technology. We believe the advantages of SSD technology are currently being defined in several distinct market segments including: a) enterprise-storage applications, b) enterprise-server applications, and c) military and industrial applications. We see opportunities to leverage our SSD expertise across each of these markets where we believe our technology can outperform existing HDD solutions. In the long term, we expect Flash component pricing to decline, which will serve to improve the comparative economics of Flash-based SSDs versus HDDs in both new and existing storage applications.

Although the enterprise Flash-based SSD market is new, evolving and difficult to predict, we are encouraged by the variety of applications that our SSDs are able to support. As more of our customers and end-users experience the benefits of SSD technology, we believe that adoption will continue to expand. Accordingly, we have introduced certain marketing programs and sales initiatives with our customers, in order to help accelerate the adoption of our SSD products.

In 2008, we entered the mobile computer market with our ultra-mobile SSDs. While we have qualified and sold this product into a leading personal computer (“PC”) OEM in this market segment during 2008 and 2009, we believe that our technology and SSD product offerings will be primarily focused on other market segments for SSD technology—enterprise-storage and enterprise-server—and we expect our revenues in this market segment to decline.

We also offer both monolithic DRAM modules and DRAM modules based on our proprietary stacking technology. We derived $71.0 million in revenues in each of 2008 and 2007 from the sale of DRAM products, which represented 31% and 38% of our total revenues, respectively. In 2009, we derived $38.8 million in revenues from the sale of DRAM products which represented 11% of our total revenues. The decrease in sales of DRAM products in absolute dollars and as a percentage of our total revenues was due primarily to a focus on growing SSD based product sales which resulted in a change in the composition of our product mix in 2009 reflecting a greater percentage of SSD revenues and a decrease in DRAM revenues.

We have been granted a fifteen-year tax holiday for our operations in Malaysia subject to meeting certain conditions. This tax holiday in Malaysia is effective through September 30, 2022. The impact of the Malaysia tax holiday decreased the provision for income taxes by $3.2 million or $0.06 per share and $1.8 million or $0.04 per share in 2009 and 2008, respectively.

Historically, a limited number of customers have accounted for a significant percentage of our revenues and our level of customer concentration continued to increase in 2009. Our ten largest customers accounted for an aggregate of 86.9% of our revenues in 2009, compared to 77.2% of our total revenues in 2008, and 74.1% of our revenues in 2007. We expect that sales of our products to a limited number of customers will continue to account for a majority of our revenues in the foreseeable future.

Our Solutions

STEC designs, manufactures and markets enterprise-class SSDs for use in high-performance storage and server systems, and high-density DRAM modules for networking, communications and industrial applications. We are a global design and manufacturing company focused on customized storage solutions for a broad spectrum of system platforms, with most sales based on a cooperative design effort with our customers. We offer our customers a comprehensive technology solution from concept to design to the creation of prototypes through volume production and testing.

Seasonality

In the past, we have frequently experienced some seasonality in our business resulting in higher sales generally in the fourth quarter of each year. Furthermore, in 2008 and 2009, these historical seasonal buying patterns were also impacted by adverse macro-economic conditions.

Employees

As of December 31, 2009, we had 767 full-time employees, consisting of 368 in manufacturing (including test, quality assurance and material management), 84 in sales and marketing, 98 in general and administration and 217 in design and product development. Our employees are not represented by any collective bargaining agreements and we have never experienced a work stoppage. Management believes that relations with our employees are satisfactory.

During the first quarter of 2009, we commenced a reduction of our workforce primarily at our Santa Ana, California headquarters as part of the transition of certain of our operations to our facility in Penang, Malaysia. This reduction of our workforce was substantially complete as of December 31, 2009