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Iomega Corp – ‘10-K’ for 12/31/05

On:  Wednesday, 3/15/06, at 2:55pm ET   ·   For:  12/31/05   ·   Accession #:  1193125-6-54873   ·   File #:  1-12333

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 3/15/06  Iomega Corp                       10-K       12/31/05    9:2.3M                                   RR Donnelley/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                       HTML   2.05M 
 2: EX-10.26    Base Salaries of Executive Officers of the Company  HTML      9K 
 3: EX-10.27    Iomega 2006 Incentive Bonus Plan                    HTML     17K 
 4: EX-10.28    Executive Agreement Dated November 15, 2005         HTML     18K 
 5: EX-21.1     Subsidiaries of the Company                         HTML      9K 
 6: EX-31.1     Section 302 CEO Certification                       HTML     14K 
 7: EX-31.2     Section 302 CFO Certification                       HTML     14K 
 8: EX-32.1     Section 906 CEO Certification                       HTML      9K 
 9: EX-32.2     Section 906 CFO Certification                       HTML      9K 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

1-12333

(Commission file number)

Iomega Corporation

(Exact name of registrant as specified in its charter)

10955 Vista Sorrento Parkway, San Diego, CA 92130

(Address of principal executive offices)

(858) 314-7000

(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No   x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)    Yes  ¨    No  x

The aggregate market value of Common Stock held by non-affiliates of the registrant at July 3, 2005 was $136,644,051 based upon the last reported sales price of the Common Stock as reported by the New York Stock Exchange.

The number of shares of the registrant’s Common Stock outstanding at March 4, 2006 was 51,648,198.

Documents incorporated by reference:

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IOMEGA CORPORATION AND SUBSIDIARIES

FORM 10-K

For The Fiscal Year Ended December 31, 2005

INDEX

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IOMEGA CORPORATION AND SUBSIDIARIES

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains a number of forward-looking statements, including, without limitation, statements referring to:

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IOMEGA CORPORATION AND SUBSIDIARIES

NOTE REGARDING FORWARD-LOOKING STATEMENTS (Continued)

Any other statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. The words “believes,” “anticipates,” “plans,” “expects,” “intends” and similar expressions, including but not limited to expressions of our goals, are intended to identify forward-looking statements, although not all forward-looking statements contain these words. There are a number of important factors that could cause actual events or our actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth under the captions “Application of Critical Accounting Policies,” “Liquidity and Capital Resources,” and “Quantitative and Qualitative Disclosures About Market Risk” included in 7 and 7A of Part II and “Risk Factors” included in Item 1A of Part I of this Annual Report on Form 10-K. In addition, any forward-looking statements represent our estimates only as of the day this Annual Report was first filed with the SEC and we specifically disclaim any obligation to update forward-looking statements, even if our estimates change.

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IOMEGA CORPORATION AND SUBSIDIARIES

PART I

ITEM 1. BUSINESS:

We design and market products that help our customers protect, secure, capture and share their valuable digital information. We have organized our products into three business categories: a) Consumer Products, b) Business Products and c) Other Products.

We were incorporated in Delaware in 1980. Our executive offices are located at 10955 Vista Sorrento Parkway, San Diego, CA 92130 and our telephone number is (858) 314-7000. The terms “Iomega”, “we” and “us” refer to Iomega Corporation and our wholly owned subsidiaries, unless the context otherwise specifies. We provide our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, free of charge, in the Investor Relations section of our website at www.iomega.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The Company’s Internet site and the information contained therein is not incorporated by reference into this Form 10-K.

Product Categories

Our Consumer Products include the following:

Our Business Products include the following:

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IOMEGA CORPORATION AND SUBSIDIARIES

BUSINESS (Continued)

Product Categories (Continued)

The Other Products segment consists of iStorage™ services, license and patent fee income and products that have been discontinued or are otherwise immaterial, including Jaz® and PocketZip disks, Peerless drive systems and other miscellaneous products. The Other Products segment included the research and development of the Digital Capture Technology (“DCT”) development program, which was cancelled in the second half of 2004.

Regarding all capacity references contained in this filing, one-megabyte (or “MB”) equals 1 million bytes, one gigabyte (or “GB”) equals 1 billion bytes and one terabyte (or “TB”) equals 1 trillion bytes.

Availability

Iomega products are generally available worldwide from retailers, catalogs, distributors, OEMs, online vendors, value-added resellers (“VARs”) and system integrators. We also sell our products through our www.iomega.com website.

Consumer Products

Zip Products

Zip Drives. We introduced the Zip drive in March 1995. The Zip drive is an affordable portable storage product for personal computer users, which allow users to easily store, transport and secure data on removable disks. Zip drives range in capacities of 100MB, 250MB and 750MB and are available in internal and external configurations with USB 2.0, ATAPI or Firewire. Zip drives are compatible with leading operating systems for personal computers and workstations (both PC and Mac^®). Zip drives use our proprietary Zip disks.

Zip Disks. Zip disks are available in 100MB, 250MB and 750MB capacities.

Consumer Storage Solutions Products

Iomega HDD Drives

Iomega Desktop HDD Drives. Iomega desktop HDD drives (3.5-inch form factor) include Iomega Automatic Backup software and certain third-party software packages, are available in capacities ranging from 80GB to 1TB and are compatible with both PC and Mac^® operating systems.

Iomega Mini and Portable HDD Drives. Iomega mini and portable HDD drives (1.8- and 2.5-inch form factors) are available in capacities ranging from 20GB to 120GB, ship with Iomega Automatic Backup software and certain third-party software packages, are host powered, so they can be used without requiring a separate power supply and are compatible with both PC and Mac^® operating systems.

Iomega Micro Mini Hard Drives. Iomega Micro Mini Hard drives (1.8-inch form factor) are ultra-compact external hard drives with capacities ranging from 4GB to 8GB and are also host powered and compatible with both PC and Mac^® operating systems.

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IOMEGA CORPORATION AND SUBSIDIARIES

BUSINESS (Continued)

Consumer Products (Continued)

Iomega StorCenter Network Hard Drives. Iomega StorCenter is available in either 160GB or 250GB capacities and is compatible with PC, Mac^® and Linux operating systems. With the StorCenter network hard drive, multiple users can store and share files from any standard or wireless computer connected to that network. For backup applications, Iomega Automatic Backup software is included along with password protection and data management.

Iomega ScreenPlay^™ Hard Drives. Iomega Screenplay hard drives are 60GB, 200GB and 300GB Multimedia drives used for entertainment purposes. These small, compact drives allow the user to play stored video, movies or music and view photos directly on a television.

Optical Drives

Iomega CD-RW Drives. Iomega CD-RW drives are used for creating customized music CDs, archiving and distributing photos, and other digital data files. Currently, there are two CD-RW drives shipping; the external CD-RW drives and the combination CD-RW/DVD. All current Iomega CD-RW drives are compatible with USB 2.0 interfaces, come with Iomega’s HotBurn® Pro CD/DVD writer software, Iomega Automatic Backup software and certain third-party software packages and are compatible with both PC and Mac® operating systems.

Iomega DVD Rewritable Drives. Iomega DVD rewritable drives are used for the same purposes as CD-RW drives and for transferring and storing video content on DVD discs. Iomega’s Super DVD Writer supports all DVD formats (except for DVD-RAM); reads, writes and rewrites to CD-RW disks and is compatible with both PC and Mac^® operating systems. As of November 2005, all DVD drives support 8x dual layer formatted media and ship with HotBurn Pro DVD burning software, Iomega Automatic Backup software and certain third-party software packages.

Iomega Mini and Micro Mini^TM USB Flash Drives

The Iomega Mini and Micro Mini USB flash drives are portable, easy-to-use, secure devices for transporting and sharing data. Each drive plugs into any computer’s USB port, is compatible with both PC and Mac^® operating systems, and has capacities ranging from 256MB to 2GB.

Iomega Floppy USB Drives

The Iomega Floppy USB drive is a host-powered external floppy drive that reads and writes to all formatted floppy disks and is compatible with both PC and Mac^® operating systems. The Iomega Floppy Plus 7-in-1 card reader has these same features and allows users to read and retrieve data from a variety of flash media devices.

Business Products

REV Products

REV Drives and Disks. In April 2004, we began shipping the first products in our REV product family. The REV drives and disks consist of a drive (in external USB 2.0, Firewire and SCSI and internal ATAPI, SCSI and SATA interfaces) and removable disks with a native capacity of 35GB and up to 90GB compressed. REV products are designed for backup and high-capacity portable storage for small- and medium-sized businesses and enterprise workgroups. Potential markets include traditional tape backup/archiving, video surveillance,

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IOMEGA CORPORATION AND SUBSIDIARIES

BUSINESS (Continued)

Business Products (Continued)

professional audio/video, medical imaging data storage and high-end workstation support applications. Compared to DDS/DAT and Travan-based tape systems, REV drives and disks are faster, more durable, easier to maintain, provide random access to data and the drives are less expensive.

REV-Based Autoloaders. During the fourth quarter of 2004, we launched a REV-based Autoloader, which has one drive but holds ten 35GB removable disks.

Iomega Network Attached Storage Products

We ship NAS servers with capacities ranging from 160GB to 1.6TB. We market our NAS offerings toward small- and medium-sized businesses and enterprise workgroups. All of our NAS servers use a Microsoft® Windows®-based operating system. Aftermarket service plans for Iomega NAS servers are available either separately or bundled with NAS servers depending upon the NAS server model.

Other Products

The Other Products segment consists of iStorage™ services, license and patent fee income, and products that have been discontinued or are otherwise immaterial, including Jaz and PocketZip disks; Peerless drive systems; Iomega software products described below and other miscellaneous products. Jaz, PocketZip and Peerless drives were discontinued in 2002, though we continue to sell the Jaz and PocketZip disks to support the installed drive base of these products.

Product Development

Research and development expenses were $14.1 million, or 5% of sales, for 2005, $24.4 million, or 7% of sales, for 2004 and $31.6 million, or 8% of sales, for 2003. These expenses were incurred primarily for the research and development of REV products, DCT technology (incurred in 2004 and 2003 only) and, to a lesser extent, network storage devices. Development expenses were also incurred for software enhancements as well as in the sourcing, qualification and testing of certain products, including external HDD products, CD-RW and DVD rewritable drives, and other products.

Although overall research and development costs are anticipated to be lower in 2006 as compared to 2005, we anticipate continued significant development costs. Such costs will be associated with follow-on and next generation REV products, network storage products, software enhancements and sourcing, qualification and testing of Consumer Products and other products.

We operate in an industry that is subject to both rapid technological change and rapid change in consumer demands. Our future success will depend, in significant part, on our ability to continually develop and introduce, in a timely manner, new storage products with improved features and to develop and source those new products within a cost structure that enables us to sell such products through effective channels at competitive prices. We can provide no assurance that we will be successful in this regard.

Marketing

Our worldwide marketing objective is to build awareness of and generate demand for our products and services. Our marketing efforts are focused on the positioning and messaging of our products, software and services to enhance the value of the Iomega brand.

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IOMEGA CORPORATION AND SUBSIDIARIES

BUSINESS (Continued)

Marketing (Continued)

We deliver brand and product-specific messages to a variety of segments including consumers, business decision makers and Information Technology (“IT”) professionals through public relations efforts, tradeshows and events, direct marketing, internet marketing and the www.iomega.com website. These awareness-generating activities are enhanced with demand stimulus programs and promotions, such as in-store, direct mail or e-mail offers, through the distribution, reseller and retail channel partners.

In addition, to enhance our ability to serve the small- to medium-sized businesses segment, we continue to actively recruit qualified VAR partners to sell our REV and NAS products. These VAR partners are supported through our ioLink initiatives with marketing programs, training and sales materials.

Sales

We sell our products primarily through computer product and consumer electronic distributors, retailers, catalogs, VARs, and on our own website. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II and Note 15 to the notes to consolidated financial statements for financial information about our business segments as well as a description of the markets served by our respective products.

Our Consumer Products business is typically strongest during the fourth quarter. Our European sales are typically weakest during the third quarter due to summer holidays. Given the continued expected decline of the Zip business, we are unable to estimate or forecast any Zip product seasonality in future quarters with any degree of confidence. There can be no assurance that any historic sales patterns will continue and as a result, sales for any prior quarter are not necessarily indicative of the sales to be expected in any future quarter.

Retail Sales

Retail outlets for our products include computer superstores, consumer electronic superstores, mail order catalogs, office supply superstores, specialty computer stores and other retail outlets. We sell our products to retail channels directly as well as indirectly through distributors. In Europe, Asia and Latin America, we sell our products to the retail channel indirectly through distributors. Certain of our products are sold at a retail level by most of the leading retailers of computer products in the United States. Retailers to whom we sold directly as of December 31, 2005 in the United States included BH Photo, CompUSA, Datavision, Fry’s Electronics, J&R Music World, MicroCenter, Office Depot, Office Max, Quill Corporation and Staples.

Distributors

Distributors as of December 31, 2005 included D&H Distributors, Inc., Ingram Micro, Inc., Synnex, Tech Data and United Stationers in the U.S.; Actebis, Banque Magnetique, CMS Peripherals, Datamatic S.P.A., Dexxon Data Media S.A., E&K Data, Esprinet S.P.A., Tech Data International S.A.R.L. and Ingram Micro Europe in Europe; Ingram Micro, Neoteric Informatique Pvt. Ltd. and Tech Pacific in Asia and ControleNet Tecnologia Ltd., Grupo Deltran, Ingram Micro Mexico, Intcomex, Microglobal and Stylus S.A. in Latin America.

Direct catalog partners as of December 31, 2005 included CDW, Insight, PC Connection and PC Mall.

For the year ended December 31, 2005, sales to Ingram Micro, Inc. accounted for 25% of our consolidated sales and sales to Tech Data Corporation accounted for 18% of our consolidated sales. The loss of either of these customers would have a material adverse effect on us.

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IOMEGA CORPORATION AND SUBSIDIARIES

BUSINESS (Continued)

Sales (Continued)

Company Website

We offer our products, including various promotional items, through our www.iomega.com website.

International Sales

We sell our products in Europe, Asia and South America through international and local distributors. We have sales and marketing organizations in several locations in Western Europe and Asia. The majority of sales to European customers are denominated in Euro. All sales to Latin American and Asian customers are denominated in U.S. dollars. In total, sales outside of the United States were 55% for 2005, 50% for 2004 and 42% for 2003. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II and Note 15 of the notes to consolidated financial statements for more information on international sales.

OEMs, Licensees and Private Label Customers

In addition to sales through retail and distribution channels, we have entered into a number of agreements with a variety of OEMs within the computer industry. We have arrangements with several major PC manufacturers to incorporate Zip drives into their computer systems as optional features; however, these arrangements are winding down as Zip products are reaching the end of their product life cycle. We have also entered into agreements with several OEMs regarding REV internal drives. We have a private-branding arrangement with Fuji covering the sale of Zip disks globally, but this arrangement is winding down as well.

During the fourth quarter of 2004, we entered into a definitive license agreement regarding our DCT intellectual property. The license agreement terms included an upfront cash payment of $10.5 million to us and an additional $3.5 million cash payment to us at a later date based upon the licensee’s commercialization date of the technology, but no later than November 2007. Further, the license agreement calls for potential royalties to be paid on any future products utilizing the technology up to $11.0 million; we believe that work on certain products was recently suspended that would utilize the DCT technology, so potential royalties from that transaction are unlikely. The $10.5 million was reflected in the operating expenses section of the consolidated statement of operations under the caption, “license and patent fee income”, as the cash had been received and we have fulfilled all of our obligations related to that payment. We will not recognize the $3.5 million in our financial statements until the related cash payment is received. There is no guarantee that we will receive any future payments from this transaction.

During 2004, we entered into a separate license agreement regarding certain disk controller technology. The license terms included the payment of $1.0 million to us. This license agreement calls for royalties to be paid on future products.

During 2005, we entered into another patent agreement, whereby we received $0.4 million and the possibility of future additional royalties. There is no guarantee of future payments.

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IOMEGA CORPORATION AND SUBSIDIARIES

BUSINESS (Continued)

Supply Chain

We outsource all manufacturing and supply chain operations. In the first half of 2005, we transferred the distribution and logistics operations for Asia to the same logistics partner used in our other regions to consolidate logistic vendors. For the remainder of 2005, our supply chain model remained stable and unchanged with significant focus placed on optimization of the existing supply chain model to gain operational efficiencies, particularly in the area of regional assembly of Consumer Products. Much of the supplier base remained intact in 2005, at the same time new supplier relationships have been established to best support the market and cost objectives of our hard drive based products.

In 2006, we will continue placing substantial focus on our supply chain and supply base to best support business objectives. These changes may include changes to the supply chain model and the supply base.

As the Zip product line reaches its expected end of life, we have been making last time purchases for many of the product components and are winding down component production operations at various suppliers. The third-party manufacturing of Zip drives is expected to continue in 2006 and cartridge production is expected to continue beyond 2006. During 2005, we entered into a last-time-buy agreement with our supplier for the flexible magnetic media used to make Zip disks, and the Zip magnetic media production line has since closed down.

Although we believe we are positioned to obtain an adequate supply of our products in the future, we may encounter future difficulties in achieving desired levels of product; in managing relationships with our suppliers or in locating suppliers able to meet our quality, quantity, pricing and other requirements for manufactured products.

Distribution

In recent years, we have outsourced our distribution and logistics centers to various suppliers. During 2004, we entered into separate agreements with a global provider of distribution and logistics services and a global provider of reverse logistics services to consolidate our distribution, logistics and reverse logistics requirements. These relationships remained in place during 2005. We anticipate transferring our reverse logistics services to our distribution and logistics provider in 2006.

Components and Sourced Products

Although we have outsourced our manufacturing capabilities, we have retained responsibility for the supply of certain key components for our Zip, REV and hard drive based products. See the caption entitled “Company Operations, Components Supplies and Inventory” in the section entitled “Risk Factors” in Item 1A of Part I of this Annual Report on Form 10-K for more details concerning components and sourced products.

Backlog

We had relatively immaterial order backlogs at the end of December 2005 and December 2004. The entire December 31, 2005 order backlog is expected to be filled during 2006; however, the purchase agreements or purchase orders pursuant to which orders are made generally allow the customer to cancel orders without penalty.

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IOMEGA CORPORATION AND SUBSIDIARIES

BUSINESS (Continued)

Competition

Consumer Products

Our Consumer Products compete with a broad variety of data storage devices. In many cases, these competing devices are similar to our products. For example, we sell CD-RW drives, DVD rewritable drives, external hard disk drives, floppy drives and flash USB drives. A number of manufacturers (including our suppliers) and competitors make and sell products that are, for all practical purposes, identical to our products in these areas. We compete with these manufacturers and resellers on several factors such as price, performance, brand recognition, quality, customer support, channel presence, support and software/accessories included with the drives. Given these competitive factors, we are subject to significant supply risk and situations where the manufacturer under-prices us in the market. We attempt to differentiate our non-Zip Consumer Products with compelling software, interface, usability and other features, but can provide no assurance that we will be able to successfully do so.

By contrast, we are not aware of any product that shares the specific characteristics of our Zip drives and disks (affordable, removable, flexible, magnetic media with capacities ranging up to 750MB). Nevertheless, all of the substitute products identified above compete with our Zip products in areas identified above. Other products competing with our Consumer Products include internal hard drives, magnetic cartridge disk drives (that use either floppy or rigid media), magnetic tape drive, and magneto optical drives. Given the wide variety of competing personal storage products in the market, we expect that Zip sales will continue to decline and will be significantly less in 2006 as compared to 2005.

To the extent that our Consumer Products are used for incremental primary storage capacity, they compete with non-removable media storage devices such as conventional hard disk drives, which continue to offer increasing capacity and reliability at reduced prices. In addition, one of the key features offered by our Consumer Products, the ability to transport electronic data, is increasingly fulfilled by various internet applications. Thus, our Consumer Products compete with a variety of internet applications with respect to moving and sharing files.

Business Products

REV products face significant competition from a variety of technologies, including the following: entry-level and low-end magnetic tape drives; optical-based products incorporating either recordable or rewritable CD or DVD technology, including new products based on Blu-Ray and similar high-capacity optical storage technologies; magneto-optical technologies and external hard disk drives.

Network Storage Solutions products compete with other NAS products as well as traditional methods for increasing storage on network servers, such as additional hard drives, tape drives/tapes, storage area network (“SAN”), general-purpose servers (“GPS”) and direct attached storage (“DAS”) that are connected to the system. We believe that NAS products offer a more compelling product solution than DAS or the purchase of an incremental server by being less costly per GB, more efficiently enabling workgroup file sharing, being fast and easy to deploy and having a lower total cost of ownership because there are no applications running on the device.

We compete primarily in the entry-level and low-end of the market. The key competitors in these two categories include Dell, Snap Appliance, Buffalo Technology, Linksys and Hewlett-Packard (“HP”). We intend to compete by providing small- to medium-sized businesses relevant features, competitive pricing, brand recognition, strong relationships in the VAR and catalog channels, quality, customer support and strong sourcing relationships. Given that we are sourcing substantially complete products from a limited number of sources, we are subject to significant supply risks.

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BUSINESS (Continued)

Competition (Continued)

Conclusion

We believe that in order to compete successfully, we must continually reduce our product costs and other costs of doing business. As a result, we have undergone several restructuring actions in the past few years, including 2005, 2004, 2003 and 2001 with the intent of reducing ongoing operational costs. See the caption entitled “Restructuring Charges/Reversals” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II of this Annual Report on Form 10-K or Note 5 of the notes to the consolidated financial statements in Part IV of this Annual Report on Form 10-K for more details concerning these restructuring actions. During 2005, we continued our efforts to optimize the supply chain to gain cost efficiencies and better serve our customers. Through these and other actions, we are continuing to focus on reducing the costs of our products by reducing the cost of parts and components used in our products through improved procurement processes and inventory management, product design modifications and by taking advantage of industry-wide reductions in costs and decreasing defect rates. We continually evaluate our prices and, based on continuous competition, expect to reduce product prices or offer rebates in the future. Reductions in the prices at which we sell our products or any rebates offered by us would adversely affect gross margins to the extent such reductions or rebates are not offset by reductions in the cost of such products.

We believe that in order to compete successfully, we will also need to differentiate our products from the competition through effective marketing and advertising portraying the benefits of our products and embedded software.

We believe that most consumers distinguish among competitive data storage products on the basis of some or all of the following criteria: price (cost per unit and cost per MB of storage capacity), performance (speed and capacity), functionality (reliability, product size, removability and transportability), broad adoption and standardization of the technology across many devices, ease of installation and use, brand, perceived functionality and utility and security of data. Additional competitive considerations, particularly in the OEM market, are the size (form factor) of the drive and the interface type with which the drive is compatible. The most common form factor for floppy drives is 3.5-inch. We currently offer 3.5-inch Zip drives and 2.5-inch REV drives.

The data storage industry is highly competitive and we expect that the industry will remain highly competitive in the future. In addition, the data storage industry is characterized by rapid technological development. We compete with many companies that have greater financial, manufacturing and marketing resources than we do. The availability of competitive products with superior performance, functionality, ease of use, security or substantially lower prices could adversely affect our business.

Proprietary Rights

We rely on a combination of patents, copyrights, trademarks, trade secrets and contractual provisions to protect our technology. We have pending approximately 100 U.S. and foreign patent applications relating to our Zip and REV drives and disks, Optical drives, flexible media technology and various software applications, although there can be no assurance that such patents will be issued. We hold approximately 500 individually or jointly owned issued or pending U.S. and foreign patents relating to our Zip and REV drives and disks, Optical drives, flexible media technology, software applications and other technologies. Some of these patents and patent applications are subject to license agreements with third parties. There can be no assurance that any patents or other intellectual property rights obtained or held by us will provide substantial value or protection to us, that they will prevent or impede a third party from developing competing products or that their validity will not be challenged or that affirmative defenses to infringement will not be asserted.

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BUSINESS (Continued)

Proprietary Rights (Continued)

We have various registered trademarks in the United States, several of which are also registered trademarks in other countries.

Due to the rapid technological change that characterizes our industry, we believe that the success of our products will also depend on the technical competence and creative skill of our personnel in addition to legal protections afforded our existing drive and disk technology.

As is typical in the data storage industry, we are regularly notified of alleged claims that we may be infringing certain patents, trademarks and other intellectual property rights of third parties. It is not possible to predict the cost of litigation, potential damages or outcome of such claims and there can be no assurance that such claims will be resolved in our favor. An unfavorable resolution of one or more of such claims could have a material adverse effect on our business or financial results.

Certain technology used in our products is licensed on a royalty-bearing basis from third parties, including certain patent rights relating to our Zip products. The termination of a license arrangement could have a material adverse effect on our business and financial results.

Employees

As of December 31, 2005, we employed 291 individuals worldwide. Three of our employees in Italy are subject to a collective bargaining agreement.

Government Contracts

No material portion of our business is subject to renegotiation of profits or termination of contracts at the election of the United States government.

Environmental Matters

Compliance with federal, state and local environmental protection laws had no material effect on us in 2005 and is not expected to have a material effect in 2006. We expect to cease selling Zip drives to distributors or resellers in the European Union starting July 1, 2006, in the wake of the Restriction of Hazardous Substances (“RoHS”) initiative. Notwithstanding RoHS, our distributors and resellers are permitted and expected to continue to sell Zip products from their inventories after the July 1 date.

Certifications

Our Chief Executive Officer and Chief Financial Officer have provided the certifications required by Rule 13a-14(a) under the Exchange Act, copies of which are filed as exhibits to this Form 10-K. In addition, an annual Chief Executive Officer certification was submitted by our Chief Executive Officer to the New York Stock Exchange on June 10, 2005 in accordance with the New York Stock Exchange’s listing requirements.

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ITEM 1A. RISK FACTORS:

Demand for Our Products and Operating Efficiencies

Our future operating results will depend upon our ability to develop or acquire new products and to operate profitably in an industry characterized by intense competition, rapid technological advances and low margins. This, in turn, will depend on a number of factors, including:

These factors are difficult to manage, satisfy, and influence. In spite of considerable efforts, we have been unable to operate profitably on an annual basis since 2002, and we cannot provide any assurance that we will be able to operate profitably in the future.

Zip Drives and Disks

Zip products have accounted for the vast majority of our sales and PPM since 1997 and have provided our only meaningful source of PPM for the past several years. However, Zip product sales have declined consistently and significantly on a year-over-year basis since peaking in 1999. These declines are expected to continue through the end of the Zip product life cycle, due to the general obsolescence of Zip technology and the emergence of alternate storage solutions. Given this continuing decline, we can offer no assurance that we will be able to maintain profitable operations on our Zip business in any subsequent quarter or year. Further, we will not be viable unless we generate significant PPM from products other than Zip products. We have been unable to do this for several years and can provide no assurance that we will be able to do so in the future.

As Zip product segment sales and profits continue to decline, $11.7 million of goodwill associated with the Zip product segment will become impaired and those non-cash impairment charges will become necessary starting in the first half of 2006, potentially the first quarter. This will not impact cash flow, but will have a significant adverse impact on Zip operating profitability. Additionally, we expect to cease selling Zip drives to distributors or resellers in the European Union starting July 1, 2006, in the wake of the Restriction of Hazardous Substances (“RoHS”) initiative. Notwithstanding RoHS, our distributors and resellers are permitted and expected to continue to sell Zip products from their inventories after the July 1 date.

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RISK FACTORS (Continued)

REV Products

Future results of our REV products entail numerous risks relating to factors such as:

It is unlikely that we will be able to operate profitably unless and until REV products generate significant revenue, including OEM adoption and positive PPM. We can offer no assurance that we will be able to successfully resolve any of these challenges or that we will be able to generate significant PPM from our REV business.

Consumer Storage Solutions Products (“CSS”)

Through the second quarter of 2005, our CSS segment was comprised of optical (CD-RW and DVD rewritable) drives, external hard drives, USB flash drives, and external floppy drives. During the second half of 2005, we eliminated certain unprofitable optical and flash drive products and began to focus our efforts primarily in this segment on external hard-disk drive related products.

Virtually all of our CSS products are commodity-type products, which are functionally equivalent to many other widely available products. These competing products are marketed by both name-brand manufacturers and generic competitors. Moreover, besides our trademarks, we own limited intellectual property relating to our consumer products. Consequently, this segment is characterized by intense competition, the frequent introduction of new products and upgrades for existing products, supply fluctuations, and frequent end user price reductions. In order to successfully compete, we must accurately forecast demand, closely monitor inventory levels, secure quality products, meet aggressive product price and performance targets, create market demand for our brand and hold sufficient, but not excess, inventory. Historically, we have failed to accomplish these objectives and this business has never achieved full year profitability. In addition, the recently announced merger of our competitors, Seagate and Maxtor, could potentially reduce price competition among our hard drive suppliers, and could possibly drive up our inbound supply costs for hard drives. In light of these challenges, we can offer no assurance that we will achieve sustainable profitability on this segment.

Network Storage Systems

We focus on the entry-level and low-end Network Attached Storage markets, where we attempt to leverage our small- to medium-sized business customer base and channel customers, including existing resellers already focused on these customers. Notwithstanding, this advantage of existing channels, this business has never achieved full year profitability and we can offer no assurance that we will achieve sustainable profitability on this segment.

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RISK FACTORS (Continued)

Development and Introduction of New Products and New Revenue Streams

We believe that we must continually either develop or acquire the right to profitably sell new products in order to remain viable in the data storage industry. However, our efforts in this regard have frequently been unsuccessful. Since 1999, we have developed and/or acquired the right to market a variety of new products, but we have been unable to maintain consistent materially profitable operations on any of them.

We are spending significant resources attempting to develop new products, including next-generation REV products. We may spend additional resources attempting to acquire the rights to new technologies, to fund development of such technologies, or to otherwise differentiate existing products. We can provide no assurance that any of these expenditures will yield profits.

Restructuring, Other Cost Reduction Activities and Retention of Key Personnel

As discussed in Note 5 of the notes to consolidated financial statements, in the third quarter of 2005, we announced a restructuring plan in conjunction with our ongoing goals to simplify our business, align our cost structure with expected revenue streams and return to profitability. Other restructuring actions may be necessary in the future. As a result, we face risks of losing key institutional knowledge and internal controls as a result of workforce reductions and changes within the executive management team. In addition, our ability to retain key employees may be adversely affected because of restructuring activities, our recent financial performance, increased workloads resulting from the restructuring and recent improvements in the U.S. and European economies.

In addition, we recently hired a new Chief Executive Officer and are hiring a new a Chief Financial Officer. The changes in senior leadership could impact employee stability as well. We can offer no assurance that we will achieve projected cost savings or return to profitability because of our restructuring efforts, or that we will be able to retain key management, employees and know-how.

Internal Control Reporting Compliance Efforts

Under Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in each Annual Report a report on internal control over financial reporting.

We are always at risk that any future failure of our own internal controls or the internal control at any of our outsourcing partners could result in additional reported material weaknesses. The 2005 restructuring actions and reduced headcount (see Note 5 of the notes to consolidated financial statements) increased the risk of a process breakdown and possible internal control deficiencies. We have many employees performing tasks they did not perform until recently, which could streamline operations or could result in errors or lost knowledge. Although we continue to invest resources in Section 404 compliance activities, we can provide no assurance that we will be successful in these efforts to avoid reporting a future material weakness of internal control. Any such reported material weakness could have a material impact on our market capitalization, financial statements or have other adverse consequences.

Product Manufacturing and Procurement

We have fully outsourced all manufacturing and have no direct control over the manufacturing processes of our products. This lack of control may increase quality or reliability risks and could limit our ability to quickly increase or decrease production rates.

Zip and REV products are each manufactured by single manufacturers, which creates risks of disruption in the event of labor, quality or other problems at Zip or REV product manufacturers. In addition, product manufacturing costs may increase if we fail to achieve anticipated volumes. There can be no assurance that we will be able to successfully manage these risks.

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RISK FACTORS (Continued)

Outsourced Distribution and Logistics

Because we have outsourced our distribution and logistics centers, we rely upon the computer systems, business processes, and internal controls of our distribution and logistics services providers. These systems may develop communication, compatibility, control or reliability problems. In addition, we face risks of operational interruptions, missed or delayed shipment, unexpected price increases and inventory management risks. Since the first quarter 2004 transition to the current distribution and logistics service providers, we have experienced operational disruptions and have reported a material weakness (subsequently remediated) in internal control over financial reporting due to some of these factors. We hope to realize cost savings and operational efficiencies as a result of outsourcing distribution and logistics, but success is uncertain.

Reporting of Channel Inventory and Product Sales by Channel Partners

We defer recognition of sales on estimated excess inventory in the distribution, retail and catalog channels. For this purpose, excess inventory is the amount of inventory that exceeds the channels’ four-week requirements as estimated by management. We rely on reports from our distributors and resellers to make these estimations. Although we have processes and systems checks in place to help reasonably ensure the accuracy of the reports, we cannot guarantee that the third-party data, as reported, will be accurate.

Concentration of Credit Risk

We market our products primarily through computer product distributors, retailers and OEMs. Accordingly, as we grant credit to our customers, a substantial portion of outstanding trade receivables are due from computer product distributors, certain large retailers and OEMs. If any one or a group of these customers’ receivable balances should be deemed uncollectible, it would have a material adverse effect on our results of operations and financial condition.

Company Operations, Component Supplies and Inventory

In light of our declining revenues and recent operating losses, it is becoming increasingly difficult to negotiate or maintain favorable pricing, supply, business, or credit terms with our vendors, suppliers, and service providers; in some cases existing vendors, suppliers and service providers have begun imposing more stringent terms or even eliminating credit altogether. We anticipate continued challenges in this area for the foreseeable future.

Although we have fully outsourced our manufacturing, we have retained responsibility for the supply of certain key components. It can be difficult to obtain a sufficient supply of key components on a timely and cost effective basis. Many components that we use are available only from “single source” or from a limited number of suppliers and are purchased without guaranteed supply arrangements. Should REV product volumes fail to ramp significantly, we may experience component cost increases and other component availability challenges.

As suppliers upgrade their components, they regularly “end of life” older components. As we become aware of an end of life situation, we attempt to make purchases to cover all future requirements or find a suitable substitute component. In such cases, we may not be successful in obtaining sufficient numbers of components or in finding a substitute. In summary, we can offer no assurance that we will be able to obtain a sufficient supply of components on a timely and cost effective basis. Our failure to do so would lead to a material adverse impact on our business.

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RISK FACTORS (Continued)

Purchase orders for components or finished products are based on forecasted future sales requirements. It is difficult to estimate future product demand for new products or products with declining sales. Further, our customers frequently adjust their ordering patterns in response to factors such as inventory on hand, new product introductions; seasonal fluctuations; promotions; market demand; and other factors. As a result, our estimates, when inaccurate, can result in excess purchase commitments. We have recorded significant charges in the past relating to excess purchase commitments and inventory reserves and these charges can adversely affect our financial results. We may be required to take similar charges attributable to forecasting inaccuracies in the future.

Intellectual Property Risks

Patent, copyright, trademark or other intellectual property infringement claims have been and may continue to be asserted against us at any time. Such claims could have a number of adverse consequences, including an injunction against current or future product shipments, liability for damages and royalties, indemnification obligations and significant legal expenses. We try to protect our intellectual property rights through a variety of means, including seeking and obtaining patents, trademarks and copyrights, and through license, nondisclosure and other agreements. Any failure or inability to adequately protect our intellectual property rights could have material adverse consequences.

Legal Risks

We have entered into multiple agreements, including license, service, supply, resale, distribution, development and other agreements in multiple jurisdictions throughout the world. We are also subject to an array of regulatory and compliance requirements, including foreign legal requirements and a complex worldwide tax structure. In addition, we employ approximately three hundred individuals throughout the world. Although we attempt to fulfill all of our obligations, enforce all of our rights, and comply with all applicable laws and regulations under these agreements and relationships, our organization is complex and errors may occur. We have been sued and may be sued, under numerous legal theories, including breach of contract, tort, product liability, intellectual property infringement, and other theories. Such litigation, regardless of outcome, may have an adverse effect upon our profitability or public perception. In addition, although we seek to manage the credit granted to our customers, certain trade receivable balances from one or more customers could become uncollectible; this could adversely affect our financial results.

Other Risk Factors

We are subject to risks associated with general economic conditions and consumer confidence. Any disruption in consumer confidence or general economic conditions including those caused by acts of war, natural disasters affecting key suppliers or key facilities, terrorism or other factors could affect our operating results. Significant portions of our sales are generated in Europe and, to a lesser extent, Asia. We invoice the majority of our European customers in Euros and invoice our remaining customers in U.S. dollars. Fluctuations in the value of foreign currencies relative to the U.S. dollar that are not sufficiently hedged by international customers invoiced in U.S. dollars could result in lower sales and have an adverse effect on future operating results.

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ITEM 1B. UNRESOLVED STAFF COMMENTS:

None.

ITEM 2. PROPERTIES:

Our executive offices and corporate headquarters are located in leased offices in San Diego, California. A portion of our research and development, operations, facilities and other administrative functions are located in leased offices in Roy, Utah. In addition, we lease office space in various locations throughout North America for local sales, marketing and technical support personnel, as well as other locations used for research and development activities.

Outside North America, we lease office space in Geneva, Switzerland for use as our International headquarters. We lease office space in Singapore for our Asia Pacific sales and marketing activities. There are market development organizations in several locations in Western Europe and Asia. We consider our properties to be in good operating condition and suitable for their intended purposes. We own substantially all equipment used in our facilities. See Note 6 of the notes to consolidated financial statements for the future lease payment amounts by year.

ITEM 3. LEGAL PROCEEDINGS:

There are no material legal proceedings to which we or any of our subsidiaries are a party or to which any of our property is subject. We are involved in lawsuits and claims generally incidental to our business, none of which are expected to have a material adverse effect on our business, financial condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:

No matters were submitted to a vote of the Company’s security holders during the quarter ended December 31, 2005.

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Executive Officers of the Company

The executive officers of the Company as of March 15, 2006 were as follows:

Mr. Huberman was appointed Vice Chairman and Chief Executive Officer of Iomega in February 2006. Prior to accepting this position, he was managing director of aAd Capital Management, LP (that he co-founded) from January 2005 to February 2006. aAd Capital Management, LP is a long/short equity hedge fund that invests primarily in small- and mid-cap U.S. public equities. From August 1995 through September 2004, Mr. Huberman was a general partner at Idanta Partners, Ltd., a private venture capital partnership investing in public and private enterprises. Mr. Huberman served on Iomega’s Board of Directors from November 1999 to May 2004 and again from November 2004 to the present. Prior to Idanta, Mr. Huberman was a case leader with the Boston Consulting Group, a strategic management consulting firm, where he focused on the high technology and consumer products industries and advised clients on a range of issues, such as corporate and business unit strategy, marketing strategy, new product development and reengineering.

Thomas D. Kampfer joined the Company in July 2001 and served as Vice President, General Counsel and Secretary until October 2005. Mr. Kampfer also served as Executive Vice President, Business Solutions from November 2004 to October 2005. During February 2006, Mr. Kampfer was appointed Chief Operating Officer and then promoted to President. Since November 2005, Mr. Kampfer has also been serving as Interim Chief Financial Officer and he also served as Interim Chief Financial Officer from June 2004 to February 2005. From February 2001 to July 2001, he served as General Counsel and Secretary and Vice President, Corporate Development of Entropia, Inc., a developer of distributed computing technology. From January 1995 to January 2001, Mr. Kampfer was with Proxima, a manufacturer of multimedia display projectors, where he served in several capacities including General Counsel and Secretary and Vice President, Business Development. Prior to Proxima, Mr. Kampfer spent ten years at IBM Corporation, a global manufacturer of computer products and services, where he held a variety of engineering and legal positions.

Anna L. Aguirre joined the Company in July 2001 as Vice President, Human Resources and Facilities. Prior to joining the Company, Ms. Aguirre spent nine years at Proxima where she served as Director of Human Resources. As a member of the executive team, she provided strategic guidance and set policy in the areas of change management, organizational development, human resources planning and facilities management.

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Executive Officers of the Company (Continued)

Ronald J. Gillies joined Iomega in April 2005 as Vice President, Sales and Business Development. Mr. Gillies was promoted to Vice President and General Manager, Americas in August 2005. Prior to joining Iomega, Mr. Gillies served from February 2003 to April 2005 as Senior Vice President and General Manager for the Visual Systems Division of NEC Solutions America, Inc., a seller of projectors and plasma displays. Between May 2002 and January 2003, he served as Senior Director of Sales and Marketing for Think Outside, Inc., a designer of PDA and Smartphone input devices. He also spent 15 years with Proxima Corporation, where he held a variety of sales, marketing and distribution management roles. He also served as Vice President, Value Added Channels & Latin America for InFocus Corporation, which acquired Proxima Corporation in 2000.

Ulrike Tegtmeier assumed the role of Vice President, Managing Director, International Sales in September 2005. From January 2001 to September 2005, Ms. Tegtmeier served as Vice President, Managing Director, Iomega International S.A. She joined Iomega in April 1998 as Director of Zip Aftermarket, bringing more than 14 years of experience in sales and management in the European technology market. From October 1990 to December 1997, Ms.Tegtmeier worked at Philips GmbH Germany, a provider of business and information products, consumer electronics, domestic appliances, lighting, semiconductors and medical systems, and served in several capacities including Managing Director of Business and Information Products where she was responsible for creating and implementing product, marketing and sales strategy for six different business units and later responsible for implementing all European-wide activities. From July 1987 to September 1990, she served at Deutsche Mailbox, one of the first start-up email providers in Germany, where she was responsible for the sales and marketing. From April 1984 to June 1987, Ms. Tegtmeier served at Ericsson Information Systems, a provider of terminals, printers, and telecommunications, where she built the account manager training programs for the sales division.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES:

Securities

Iomega Common Stock is traded on the New York Stock Exchange under the symbol IOM. As of December 31, 2005, there were 4,928 holders of record of Common Stock. We have not historically paid regular recurring cash dividends on our Common Stock. However, during the third quarter of 2003, our Board of Directors declared a one-time cash dividend of $5.00 per share, which was paid on October 1, 2003 to stockholders of record on September 15, 2003. We have no plan to pay cash dividends in the future. The following table reflects the high and low sales prices of our Common Stock as reported by the New York Stock Exchange for 2005 and 2004.

Price Range of Common Stock

Unregistered Sales of Equity Securities

We did not sell any equity securities during the fourth quarter of 2005 that were not registered under the Securities Act of 1933.

Issuer Purchases of Equity Securities

During the fourth quarter of 2005, we did not repurchase any shares of our Common Stock. As of December 31, 2005, approximately $122.3 million remained available for future repurchases under the $150 million stock repurchase plan authorized by our Board of Directors on September 8, 2000. The repurchase plan does not have a fixed termination date.

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ITEM 6. SELECTED FINANCIAL DATA:

The following tables indicate the trends in certain components of our consolidated statements of operations, balance sheets and other information for each of the last five years. The information for 2001 has been reclassified to show the effects of Emerging Issues Task Force Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products” (“EITF 01-09”) which requires, retroactively, certain consumer and trade sales promotion expenses to be shown as a reduction of sales. The amount of this reclassification resulted in a reduction to sales and a corresponding decrease in selling, general and administrative expenses of $3.2 million for 2001. The EITF 01-09 reclassification did not impact operating income.

The following selected financial data should be read in conjunction with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this Annual Report on Form 10-K.

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SELECTED FINACIAL DATA (Continued)

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:

Overview

Iomega designs and markets products that help our customers protect, secure, capture and share their valuable digital information. Our reportable segments are based primarily on the nature of our products and include Zip Products, Consumer Storage Solutions (“CSS”) Products, REV Products, Network Storage Systems (“NSS”) Products and Other Products.

The Zip Products segment involves the distribution and sale of Zip drives and disks to retailers, distributors, resellers and OEMs throughout the world. The Consumer Storage Solutions Products segment involves the worldwide distribution of various storage devices including external hard drives (“HDD”), CD-RW drives, DVD rewritable drives, USB flash drives and external floppy disk drives. The REV Products segment involves the development, distribution and sale of REV products to retailers, distributors, OEMs and resellers throughout the world. The NSS Products segment consists primarily of the development, distribution and sale of network attached storage servers in the entry-level and low-end network attached storage market. The Other Products segment consists of license and patent fee income and products that have been discontinued or are otherwise immaterial, including Jaz and PocketZip disks, Peerless drive systems, Iomega software products such as Iomega Automatic Backup software and other miscellaneous products.

Since 1996, the Zip Products segment has been the largest contributor to our product profit margin (“PPM”). As the Zip business has approached the end of its product life cycle, we have been trying to find other profitable sources of revenue to replace the declining high gross margin Zip revenue. In recent years, we have invested significant efforts and dollars on the development of REV products, which were launched in the second quarter of 2004. The REV Products segment has yet to be profitable at the PPM level due primarily to development costs, including for next generation REV products, significant marketing expenses to generate market awareness and under-absorbed fixed overhead expenses at the current sales volumes. However, the REV Products segment approached break-even at the PPM level in the fourth quarter of 2005.

In other efforts to replace the declining Zip business, we have launched and attempted to expand our CSS and NSS businesses. Sales of the CSS business segment now exceed Zip product sales. However, our CSS business segment has not generated significant gross margins and is not profitable. The NSS business has also incurred losses during each year of its existence including the year ended December 31, 2005.

As part of an ongoing effort to return to profitability, we announced restructuring actions in July of 2005, which were substantially completed during the third quarter of 2005. The restructuring actions are part of an effort to align our cost structure with our expected future revenue levels. We anticipate $38 million to $42 million in annual savings from these restructuring actions.

For 2006, our primary goals are to: (1) focus on growing our REV product sales through system integrator programs to generate awareness, server OEM transactions and adoption in targeted vertical markets such as the professional audio/video market, (2) diversify our REV product assortment in the market through the introduction of new REV products of varying capacities, (3) improve HDD product gross margins through channel mix, product mix and cost reductions and (4) evaluate other strategic opportunities in the small business market segment to facilitate long term growth. We believe that we must make significant progress in these four areas in order to achieve our goal to return the Company to profitability. While we are focused on this goal, there can be no assurance that we will be able to achieve our goal.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Overview (Continued)

At December 31, 2005, our total cash, cash equivalents, restricted cash and temporary investments were $96.0 million (see the “Liquidity and Capital Resources” discussion for more detail on the tax impacts of repatriating foreign cash). We believe our total cash is sufficient to operate the business for at least one year.

Application of Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting periods. Areas where significant judgments occur include, but are not limited to, revenue recognition, price protection and rebate reserves, inventory valuation reserves, accrued excess purchase commitments, tax valuation allowances and impairment of goodwill. Actual results could differ materially from these estimates.

We have discussed the development and selection of the following critical accounting policies with the Audit Committee of our Board of Directors (“Audit Committee”) and the Audit Committee has reviewed these disclosures.

Revenue Recognition

We defer recognition of sales on estimated excess inventory in the distribution, retail and catalog channels. For this purpose, excess inventory is the amount of inventory that exceeds our channels’ four-week requirements as estimated by us. Original Equipment Manufacturers (“OEMs”) and value-added resellers (“VARs”) customers are not considered to have excess inventory, as they usually do not carry more than four weeks of inventory. We estimate the distribution, retail and catalog channels’ four-week requirements based on inventory and sell-through amounts reported to us by our key customers, who make up the substantial majority of our sales in these channels. No adjustment is made for those customers that do not report inventory and sell-through information. This inventory and sell-through information is reported to us at the stock keeping unit (“SKU”) level. However, for purposes of our excess inventory calculation, this information is accumulated at the major product level (i.e. Zip 100MB drive, Zip 250MB drive, etc.). We use the last 13 weeks of reported sell-through information to calculate a weekly average, which is then used to estimate the channels’ four-week requirements. This estimate may not be indicative of four weeks of future sell-through. We defer sales and cost of sales associated with estimated excess channel inventory in our consolidated statements of operations, with the resulting offset being reflected in our consolidated balance sheets in margin on deferred revenue.

The table below shows the related revenue and cost of sales deferrals associated with the estimated excess channel inventory.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Application of Critical Accounting Policies (Continued)

The decrease in margin on estimated channel inventory during 2005 reflects lower levels of channel inventory and product mix changes away from high margin Zip products to lower margin products.

We believe that the accounting estimates related to excess channel inventory are “critical accounting estimates” because: (1) the reserve is highly susceptible to change from period to period due to the variability of the different inputs to the calculation of the reserve such as changes in the level of channel inventory and channel sell-through rates and (2) the material impact that changes in these inputs can have on sales, cost of sales and margin on deferred revenue. Excess channel inventory is a critical estimate for all segments of our business.

Since we have no material debt and adequate cash balances, we believe that changes in excess channel inventory accruals would not impact our liquidity.

Price Protection and Rebate Reserves

We have agreements with some of our direct and indirect customers which, in the event of a price decrease, allow those customers (subject to certain limitations) a credit equal to the difference between the price originally paid and the new decreased price on units in the customer’s inventory on the date of the price decrease not to exceed the number of units shipped to the customer for a specified time period prior to the price decrease. When a price decrease is anticipated, we establish reserves against gross trade receivables with the corresponding reduction in sales for estimated amounts to be reimbursed to qualifying customers. In addition, we record reserves at the time of shipment for estimated volume rebates and other estimated rebates given to consumers at the time of purchase from channel partners for which sales have been recognized. Estimates for rebates are based on a number of variable factors that depend on the specific program or product. These variables include the anticipated redemption rate of rebates, anticipated sales volumes in the channel, the perceived consumer value of the rebate and historical experience. Changes in any of these variables would have a direct impact on the amount of the recorded reserves. We use price protection and rebate programs in all of our segments and record the charges in our statement of operations against their respective segment.

We believe that the accounting estimates related to price protection and rebate programs are “critical accounting estimates” because: (1) the reserve is highly susceptible to change from period to period due to the assumptions made concerning redemption rates and other variables and (2) changes in this reserve can have a material impact on sales and trade receivables.

Price protection and rebate reserves have fluctuated in the past. For example, during 2005, $3.0 million of price protection and rebate reserves that were recorded in prior periods were released, as they were not claimed as originally estimated.

Reserves for volume and other rebates and price protection totaled $11.4 million at December 31, 2005 and $16.0 million at December 31, 2004 and are netted against trade receivables in our consolidated balance sheets. The decrease in this reserve for 2005 was primarily a reflection of lower rebate and price protection programs during 2005 relative to the lower sales in 2005. We believe that the use of rebates will continue to be a significant part of our business strategy.

Since we have no material debt and adequate cash balances, we believe that changes in price protection and rebate accruals would not impact our liquidity.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Application of Critical Accounting Policies (Continued)

Inventory Valuation Reserves

We evaluate the carrying value of inventory on a quarterly basis to determine if the carrying value is recoverable at estimated selling prices (including known future price decreases). We include product costs and direct selling expenses in our analysis of inventory realization. To the extent that estimated selling prices do not exceed such costs and expenses, valuation reserves are established against inventories. In addition, we generally consider inventory that is not expected to be sold within established timelines, as forecasted by our material requirements planning system, as excess and thus appropriate inventory reserves are established through a charge to cost of sales.

We believe that the accounting estimates related to inventory valuation reserves are “critical accounting estimates” because: (1) the reserve is highly susceptible to change from period to period due primarily to estimating future sales volumes of products and future sales prices, (2) the competitive nature of the technology industry which can quickly change the price of our products in the market place or the overall demand for our products and (3) changes in the value of inventory can have a material impact on cost of sales and inventory valuation reserves.

Inventory valuation reserve adjustments are necessitated primarily from changes in estimating future sales volumes and from changes in the estimates made of future sales prices. Estimating future sales volumes is particularly difficult for new products and end-of-life (“EOL”) products. Estimating future sales price is particularly difficult on CSS products due to price competition and short product cycles.

Zip products have shown a long market life compared to our other products. In light of their high margins, its inventory carrying value has been recoverable at estimated selling prices. Consequently, Zip products have not, until recently, been as susceptible to inventory valuation reserve adjustments as some of our other products. Now, as Zip products reach the end of their product life cycle, Zip products and components have become susceptible to excess and obsolete inventory reserves. If Zip volumes decline at a quicker rate or in greater volumes than forecasted, the risk associated with inventory valuation reserves will increase.

During 2005, we recorded a net decrease in inventory valuation reserves of $1.1 million. The $1.1 million decrease was comprised of additions of $1.4 million less utilization of $2.5 million as reserved product was scrapped or sold. The $1.4 million of additions to inventory valuation reserves were comprised of $0.7 million for CSS products, $0.3 million for Zip products, $0.2 million for REV products, $0.1 million for NSS products, with the remaining $0.1 million for other various products. The $0.7 million of CSS products charges related primarily to write downs of inventory to market costs and excess inventory on certain HDD products that were not selling as originally expected. The $2.5 million inventory reserve utilizations were comprised of $1.8 million for Zip products, $0.2 million for CSS products, $0.2 million for NSS products, and $0.3 million for other various products as products were sold or scrapped. The Zip products utilization related primarily to Zip product assemblies scrapped in the second quarter of 2005.

During 2004, we recorded a net decrease in inventory valuation reserves of $1.1 million. The $1.1 million decrease was comprised of additions of $4.9 million less utilization of $6.0 million as reserved product was scrapped or sold. The $4.9 million additions to inventory valuation reserves were comprised of $2.9 million for Zip products, $0.9 million for CSS products and $0.6 million for NSS products, with the remaining $0.5 million for other various products. The $2.9 million Zip charges resulted primarily from purchased EOL components, which exceeded the EOL volume forecast. The $0.9 million CSS products charges resulted primarily from product priced below cost in order to move the inventory. The $0.6 million of NSS product

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Application of Critical Accounting Policies (Continued)

charges resulted primarily from additional NAS and Tape product write-offs in early 2004 related to the announcement in late 2003 regarding the discontinuance of the high-end of the market NAS servers and Tape products. The $6.0 million inventory reserve utilizations were primarily for Zip, CSS and NAS products as product was sold or scrapped.

At December 31, 2005, we had inventory valuation reserves of $6.2 million, which compares to inventory valuation reserves of $7.3 million at December 31, 2004. The decrease of $1.1 million in inventory valuation reserves during 2005 was primarily attributable to decreases in reserves as described above.

Adjustments to inventory reserves are non-cash adjustments and would not affect our liquidity.

Accrued Excess Purchase Commitments

The purchase orders under which we buy many of our products generally extend one to three quarters in the future. The quantities on the purchase orders are based on forecasted future sales requirements. It is difficult to estimate future product demand for new products or products with declining sales. Such estimates may result in excess purchase commitments, where we make commitments for purchases that we do not ultimately utilize. The accrual for excess purchase commitments also includes liabilities such as cancellation charges or handling fees incurred because of excess supplier inventory or equipment.

With the continuing decline of Zip volumes, this has become an area of particular risk for us. Suppliers of certain critical components of both Zip drives and disks have stopped producing, or EOL’d such components and other suppliers are planning to do so. In such cases, we attempt to make an EOL purchase of the required component(s) based on our estimates of all future requirements. With respect to estimating excess purchase commitments, we are at risk that we will order insufficient or excess quantities of key components or that certain suppliers may produce excess inventory of key components in the absence of firm orders from us, leading to potential disputes regarding payment obligations.

We believe that the accounting estimates related to accrued excess purchase commitments are “critical accounting estimates” because: (1) the reserve is highly susceptible to change from period to period due primarily to estimating future sales volumes of products, (2) the inherit difficulty of estimating future requirements or final build-out of components that have been EOL’d by the supplier and (3) decisions to discontinue projects with suppliers.

During 2005, we recorded a net increase in excess purchase commitment reserves of $0.6 million. This increase was comprised of $2.4 million of additions less utilizations of $1.8 million. The additions of $2.4 million increase resulted from $1.1 million for CSS products (primarily HDD products), $0.7 million for Zip products and $0.6 million for REV products. The $1.8 million of utilizations resulted primarily from $0.6 million for Zip products, $0.5 million for CSS products, $0.3 million for REV products, and the remaining $0.4 million for other various products.

During 2004, we recorded a net decrease in excess purchase commitment reserves of $2.0 million. This decrease was comprised of $2.3 million of additions less utilization of $4.3 million. The majority of the $2.3 million increase resulted from Zip product exposures at our manufacturing suppliers because of decreases in the EOL forecast. The $4.3 million of utilizations resulted primarily from Zip and CSS products as much of what was utilized came from prior reserves and was primarily paid to suppliers, product was moved into inventory or reserves reduced due to increases in forecast demand.

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Application of Critical Accounting Policies (Continued)

The accrual for excess purchase commitments totaled $3.4 million at December 31, 2005 and $2.8 million at December 31, 2004.

Since we have no material debt and adequate cash balances, we believe that changes in accrued excess purchase commitments would not impact our liquidity.

Income Taxes

Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes” (“SFAS 109”) requires that a valuation allowance be established when management determines that it is more likely than not that all or a portion of a deferred tax asset will not be realized. We evaluate the realizability of our net deferred tax assets on a quarterly basis and valuation allowances are provided or released, as necessary. During this evaluation, we review our forecasts of income in conjunction with other positive and negative evidence surrounding the realizability of our deferred tax assets to determine if a valuation allowance is required. Adjustments to the valuation allowance will increase or decrease our tax provision or benefit.

We believe that the accounting estimates related to deferred tax valuation allowances are “critical accounting estimates” because: (1) the need for valuation allowance is highly susceptible to change from period to period due to changes in deferred tax asset and deferred tax liability balances, (2) the need for valuation allowance is susceptible to actual operating results and (3) changes in the tax valuation allowance can have a material impact on the tax provision/benefit in the consolidated statements of operations and on deferred income taxes in the consolidated balance sheet.

For example, during 2005, we recorded an $8.3 million increase in the valuation allowance resulting primarily from new foreign tax credits and decreases in deferred tax liabilities. Included in the $8.3 million increase in the valuation allowance was a $16.7 million increased valuation allowance resulting from a decrease in the deferred tax liability because of a decrease in the pool of unrepatriated foreign earnings.

Additionally during 2004, we recorded a $21.2 million increase in the valuation allowance resulting primarily from new foreign tax credits and decreases in deferred tax liabilities. Included in the $21.2 million increase in the valuation allowance was an $8.0 million increased valuation allowance resulting from new foreign tax credits created by deemed Swiss withholding taxes on foreign earnings. The recording of the new foreign tax credits was the result of a change in our intention to repatriate foreign cash to the U.S. in the form of dividends in the future. The valuation allowance was also increased as the result of a decrease in the deferred tax liability of $22.3 million resulting from a decrease in the pool of unrepatriated foreign earnings.

Adjustments to deferred tax valuation allowances are non-cash adjustments and do not affect our cash flows.

Impairment of Goodwill

We have $11.7 million of goodwill, all of which is associated with the Zip Products segment. We expect to experience non-cash impairment charges as Zip sales and profits continue to decline. We will be required to take these charges in 2006 and we expect that the charges could begin as early as the first quarter. We perform our annual impairment test required under SFAS No. 142, “Accounting for Goodwill and Intangible Assets” (“SFAS 142”) in the first quarter of each year. This test compares our Zip specific assets (intangibles and inventory) to the estimated future, discounted cash flows to determine if these cash flows will cover the assets. Each quarter, we compare how actual quarterly Zip profits are tracking with the projected Zip profits/cash

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Application of Critical Accounting Policies (Continued)

flows that were used in the annual impairment test to make sure that there has not been a significant adverse change in business climate or that an unforeseen trend has developed. As part of this quarterly review, we also look for any other indicators of impairment, such as any significant adverse changes in legal factors, adverse regulatory assessments or loss of key personnel. Although there were indicators of impairment during 2005, the estimated discounted future cash flows were adequate to cover the carrying value of the Zip goodwill as of December 31, 2005.

We believe that the accounting estimates related to assessing potential impairment of our goodwill are “critical accounting estimates” because: (1) the subjectivity inherent in determining the fair value of the Zip Products segment and (2) the impact that future impairment charges will have on the consolidated statements of operations and the consolidated balance sheet.

Future Zip goodwill impairment charges will be non-cash charges and will not affect our cash flows.

Results of Operations

The following table sets forth certain financial data as a percentage of sales for the years ended December 31, 2005, 2004 and 2003.

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Results of Operations (Continued)

Our net loss for the year ended December 31, 2005 was $22.8 million, or $0.44 per share, compared with a net loss of $36.7 million, or $0.71 per share, for the year ended December 31, 2004. The 2005 net loss included:

The 2004 net loss included:

Seasonality

Our Consumer Products business is typically strongest during the fourth quarter. Our European sales are typically weakest during the third quarter due to summer holidays. Given the continued expected decline of the Zip business, we are unable to estimate or forecast any Zip product seasonality in future quarters with any degree of confidence. There can be no assurance that any historic sales patterns will continue and, as a result, sales for any prior quarter are not necessarily indicative of the sales to be expected in any future quarter.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

ByteTaxi, Inc. Termination Agreement, Gain on Sale and Losses from Discontinued Operations

In the first quarter of 2005, we acquired a 10% ownership interest in ByteTaxi, Inc., a start-up software development company, with an option to purchase up to 29% of the company. Under the agreement, we received exclusive license rights to certain products, including ByteTaxi’s FolderShare^TM software. Because we were the primary beneficiary of ByteTaxi’s operations, we were required to consolidate ByteTaxi’s operations under FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). While consolidated under FIN 46, ByteTaxi, Inc. was reported under the CSS segment.

During the fourth quarter of 2005, we reached an agreement to sell our investment in ByteTaxi, Inc. Specifically, on October 28, 2005, Iomega, ByteTaxi, Inc., and certain major shareholders of ByteTaxi, Inc. entered into a Termination Agreement, under which we would receive a total of $2.9 million (payable as described below) in return for the sale of our equity ownership of ByteTaxi, Inc. and termination of our distribution rights to FolderShare^TM software. This Agreement was part of a larger series of transactions whereby Microsoft Corporation purchased all of the stock of ByteTaxi, Inc. We received a cash payment of $2.4 million on October 28, 2005 and the remaining funds (approximately $0.5 million) are to be paid during the fourth quarter of 2006, subject to the satisfaction of certain escrow and indemnity terms. The escrow and indemnity provisions relate to customary representations and warranties by selling shareholders relating to title, intellectual property issues, tax liabilities or other post-closing adjustments.

Upon the sale of our ownership interest in ByteTaxi, Inc., we ceased to be the primary beneficiary of ByteTaxi’s operations. Consequently, ByteTaxi, Inc. has been deconsolidated at December 31, 2005, as per FIN 46. Under FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FASB 144”), the sale of ByteTaxi, Inc. was treated as a discontinued operation. Therefore, the losses from discontinued operations of ByteTaxi, Inc. for the nine months ended October 2, 2005 and the gain relating to the sale of ByteTaxi, Inc. have been reported under the discontinued operations section of our consolidated statement of operations. The potential $0.5 million gain related to the future payment that is subject to certain escrow terms has been deferred and will be recognized when the amount of the payment is known.

A breakdown of the ByteTaxi, Inc. losses from discontinued operations and related taxes are presented as follows: