q3200710q.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549


FORM 10-Q
                                                                           (Mark One)
                                                                           [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007

OR
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ………… to……………

COMMISSION FILE NUMBER 1-12333

 
 
Iomega Corporation
(Exact name of registrant as specified in its charter)

Delaware
86-0385884
(State or other jurisdiction
of incorporation or organization)
(IRS employer identification number)

10955 Vista Sorrento Parkway, San Diego, CA 92130
 (Address of principal executive offices)

(858) 314-7000
 (Registrant’s telephone number, including area code)

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 o

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 Rule #12b-2 of the Exchange Act. (Check one):

Large accelerated filer o                                     Accelerated filer x                              Non-accelerated filer o 

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of October 31, 2007.

Common Stock, par value $0.03 1/3
54,763,820
(Title of each class)
(Number of shares)

IOMEGA CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
 
Page
                                                      
Note Regarding Forward-Looking Statements.......................................................................................................................
     
2
 

PART I - FINANCIAL STATEMENTS

Item 1.      Financial Statements (Unaudited)

  Condensed Consolidated Balance Sheets at September 30, 2007
                      and December 31, 2006.........................................................................................................................................
     
3
 

 
                      Ended September 30, 2007 and October 1, 2006................................................................................................
     
4
 

 
                      Ended September 30, 2007 and October 1, 2006...............................................................................................
     
5
 

 
                      Ended September 30, 2007 and October 1, 2006...............................................................................................
     
6
 

                  Notes to Condensed Consolidated Financial Statements..................................................................................
     
7
 

 
                     Condition and Results of Operations.................................................................................................................
     
25
 

Item 3.      Quantitative and Qualitative Disclosures About Market Risk..........................................................................
   
41
 

Item 4.      Controls and Procedures.........................................................................................................................................
     
41
 

PART II - OTHER INFORMATION

Item 1.      Legal Proceedings....................................................................................................................................................
     
42
 

Item 1A.  Risk Factors...............................................................................................................................................................
     
42
 

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds...........................................................................
   
49
 

Item 6.     Exhibits........................................................................................................................................................................
     
49
 

Signatures.................................................................................................................................................................................
     
50
 

Exhibit Index................................................................................................................................................................................
     
51
 
 
__________________________________
 
Copyright© 2007 Iomega Corporation.  All rights reserved.  Iomega, Zip, REV, StorCenter, iStorage, OfficeScreen and Jaz are either registered trademarks or trademarks of Iomega Corporation in the United States and/or other countries.  Certain other product names, brand names and company names may be trademarks or designations of their respective owners.
 
1

IOMEGA CORPORATION AND SUBSIDIARIES
NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Forward-Looking Statements
 
This document contains forward-looking statements within the meaning of the federal securities laws. Any statements that do not relate to historical or current facts or matters are forward-looking statements. You can identify some of the forward-looking statements by the use of forward-looking words, such as “may,” “will,” “could,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “continue,” “potential,” “contingency(ies),” “plans,” “forecasts,” “reserves,” goals,” “objectives” and other similar expressions, or the use of future tense. Statements concerning current conditions may also be forward-looking if they imply a continuation of current conditions. These forward-looking statements include, but are not limited to, statements concerning:

·  
Our goals for 2007, which are: (1) to continue to grow and deliver sustained profitability; (2) to further increase the size of our HDD business; (3) to continue to penetrate the high-growth NAS market; (4) to ramp REV® 70GB products and push for broad market adoption; (5) to grow our managed services business domestically and abroad; and (6) to continue to evaluate new opportunities where we can leverage our brand and channel assets;
·  
Our goal of increasing cash flow from operations;
·  
Our goal to achieve 2007 full year profitability and positive cash flow from operations through containing operating expense spending, growing HDD sales, maintaining or improving the gross margins of HDD and growing REV product sales;
·  
References to the ongoing efforts to complete our transition to a new distribution and logistics supplier;
·  
References to our fourth quarter being seasonally strong, or our summer months being seasonally slow in Europe due to holidays;
·  
Expected future taxes including taxes on repatriation of cash from Europe to the U.S.;
·  
References to expected volatility, expected term and value of stock options;
·  
The Section below entitled “Risk Factors”, including all discussions therein concerning things that could happen to Iomega®, its products, employees, profits or other aspects of the business in the future;
·  
All references to our focus or intended focus for our sales efforts and
·  
The belief that our balance of cash, cash equivalents and temporary investments, together with cash flows from future operations, will be sufficient to fund anticipated working capital requirements, funding of restructuring actions, capital expenditures and cash required for other activities for at least one year.

There are numerous 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 Items 2 and 3 of Part I and “Risk Factors” included in Item 1A of Part II of this Quarterly Report on Form 10-Q.  In addition, any forward-looking statements represent our estimates only as of the day this Quarterly Report was first filed with the SEC and undue reliance should not be placed on these statements.  Our forward looking statements do not include the potential impact of any mergers, acquisitions or divestitures that may be announced after the date hereof.  We specifically disclaim any obligation to update forward-looking statements, even if our estimates change.
 
2

IOMEGA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except per share data)

   
Sept. 30, 2007
   
Dec. 31, 2006
 
   
(Unaudited)
       
Current Assets:
           
Cash and cash equivalents
  $
53,356
    $
56,617
 
Restricted cash
   
92
     
88
 
Temporary investments
   
15,919
     
11,443
 
Trade receivables, less allowance for doubtful accounts of
$1,627 at Sept. 30, 2007 and $1,535 at Dec. 31, 2006
   
48,016
     
30,418
 
Inventories
   
68,183
     
42,593
 
Deferred income taxes
   
1,997
     
2,747
 
Other current assets
   
2,729
     
3,401
 
Total Current Assets
   
190,292
     
147,307
 
                 
Property and Equipment, at Cost
   
70,705
     
84,845
 
Accumulated Depreciation
    (66,247 )     (78,292 )
Net Property and Equipment
   
4,458
     
6,553
 
                 
Goodwill
   
9,818
     
12,451
 
Other Intangibles, Net
   
891
     
1,043
 
Other Assets
   
10
     
60
 
Total Assets
  $
205,469
    $
167,414
 
   
Current Liabilities:
               
Accounts payable
  $
72,145
    $
35,105
 
Other current liabilities
   
26,182
     
32,475
 
Income taxes payable
   
1,830
     
454
 
Total Current Liabilities
   
100,157
     
68,034
 
                 
Deferred Income Taxes
   
7,829
     
9,573
 
Other Liabilities
   
3,064
     
-
 
                 
Commitments and Contingencies (Notes 4 and 5)
               
                 
Stockholders’ Equity:
               
Common Stock, $0.03 1/3 par value - authorized 400,000,000
shares, issued 55,337,770 shares at September 30, 2007 and
55,307,270 shares at December 31, 2006
   
1,847
     
1,846
 
Additional paid-in capital
   
60,713
     
59,635
 
Less: 575,200 Common Stock treasury shares, at cost, at
September 30, 2007 and December 31, 2006
    (5,662 )     (5,662 )
Retained earnings
   
37,521
     
33,988
 
Total Stockholders’ Equity
   
94,419
     
89,807
 
Total Liabilities and Stockholders’ Equity
  $
205,469
    $
167,414
 

The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.

3

IOMEGA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

   
For the Three Months Ended
 
   
Sept. 30,
 2007
   
Oct. 1,
 2006
 
   
(Unaudited)
 
Sales
  $
80,667
    $
53,595
 
Cost of sales
   
67,714
     
41,379
 
Gross Margin
   
12,953
     
12,216
 
                 
Operating Expenses:
               
Selling, general and administrative
   
9,452
     
8,216
 
Research and development
   
1,872
     
1,904
 
Restructuring reversals
    (153 )     (211 )
Goodwill impairment charge
   
-
     
2,513
 
Bad debt expense
   
668
     
441
 
Total Operating Expenses
   
11,839
     
12,863
 
Operating income (loss)
   
1,114
      (647 )
                 
Interest income
   
792
     
722
 
Interest expense and other income (expense), net
    (64 )    
987
 
Income before income taxes
   
1,842
     
1,062
 
                 
Provision for income taxes
    (549 )     (209 )
Net Income
  $
1,293
    $
853
 
                 
Net Income Per Basic Share
  $
0.02
    $
0.02
 
Net Income Per Diluted Common Share
  $
0.02
    $
0.02
 
                 
Weighted Average Common Shares Outstanding
   
54,754
     
53,382
 
Weighted Average Common Shares Outstanding - Assuming Dilution
   
55,518
     
53,389
 


The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
4


IOMEGA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

   
For the Nine Months Ended
 
   
Sept. 30,
 2007
   
Oct. 1,
 2006
 
   
(Unaudited)
 
Sales
  $
215,970
    $
153,328
 
Cost of sales
   
176,575
     
122,518
 
Gross Margin
   
39,395
     
30,810
 
                 
Operating Expenses:
               
Selling, general and administrative
   
30,233
     
31,308
 
Research and development
   
5,395
     
6,946
 
Restructuring charges (reversals)
    (235 )    
4,358
 
Goodwill impairment charges
   
2,963
     
7,935
 
License and patent fee income
    (452 )     (1,085 )
Bad debt expense
   
302
     
166
 
Total Operating Expenses
   
38,206
     
49,628
 
Operating income (loss)
   
1,189
      (18,818 )
                 
Interest income
   
2,066
     
2,261
 
Interest expense and other income (expense), net
    (171 )    
852
 
Income (loss) before income taxes
   
3,084
      (15,705 )
                 
Benefit for income taxes
   
449
     
1,990
 
Net Income (Loss)
  $
3,533
    $ (13,715 )
                 
Net Income (Loss) Per Basic Share
  $
0.06
    $ (0.26 )
Net Income (Loss) Per Diluted Common Share
  $
0.06
    $ (0.26 )
                 
Weighted Average Common Shares Outstanding
   
54,741
     
52,230
 
Weighted Average Common Shares Outstanding - Assuming Dilution
   
55,093
     
52,230
 


The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
5

 
 IOMEGA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

   
For the Nine Months Ended
 
   
Sept. 30,
 2007
   
Oct. 1,
 2006
 
   
(Unaudited)
 
Cash Flows from Operating Activities:
           
Net income (loss)
  $
3,533
    $ (13,715 )
Adjustments to Reconcile Net Income (Loss) to Cash Flows from Operations:
               
Depreciation and amortization
   
2,445
     
3,538
 
Deferred income tax benefit
    (994 )     (3,978 )
Tax contingency releases
    (1,259 )    
-
 
Stock-related compensation expense
   
770
     
503
 
Goodwill impairment charges
   
2,963
     
7,935
 
Non-cash inventory write-offs (reversals)
   
691
      (780 )
Bad debt expense
   
302
     
166
 
Other
    (197 )     (541 )
Changes in Assets and Liabilities (net of effects of 2006 acquisition):
               
Restricted cash
    (4 )    
169
 
Trade receivables
    (17,900 )    
359
 
Inventories
    (26,281 )     (6,405 )
Other current assets
   
672
     
1,124
 
Accounts payable
   
37,040
      (4,119 )
Other current liabilities
    (207 )     (4,967 )
Accrued restructuring
    (1,763 )     (874 )
Income taxes
   
1,376
     
522
 
Net cash provided by (used in) operating activities
   
1,187
      (21,063 )
                 
Cash Flows from Investing Activities:
               
Purchases of property and equipment
    (301 )     (1,558 )
Proceeds from sales of assets
   
136
     
173
 
Purchases of temporary investments
    (20,206 )     (13,425 )
Sales of temporary investments
   
15,894
     
24,161
 
Payments associated with CSCI, Inc. acquisition
    (120 )     (4,339 )
Net change in other assets and other liabilities
   
50
     
7
 
Net cash provided by (used in) investing activities
    (4,547 )    
5,019
 
                 
Cash Flows from Financing Activities:
               
Proceeds from sales of Common Stock
   
99
     
416
 
Net cash provided by financing activities
   
99
     
416
 
Net Decrease in Total Cash and Cash Equivalents
    (3,261 )     (15,628 )
Total Cash and Cash Equivalents at Beginning of Period
   
56,617
     
70,943
 
Total Cash and Cash Equivalents at End of Period
  $
53,356
    $
55,315
 
                 
Non-Cash Investing and Financing Activities:
               
Issuance of treasury stock in CSCI, Inc. acquisition
  $
-
    $
7,000
 
Adjustment of CSCI, Inc. acquisition
  $
210
    $
-
 
                 

The accompanying notes to condensed consolidated financial statements are an
integral part of these statements
 
6

IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
(1)  Operations and Significant Accounting Policies

In management’s opinion, the accompanying condensed consolidated financial statements reflect all adjustments of a normal recurring nature which are necessary to present fairly our financial position as of September 30, 2007 and December 31, 2006, the results of operations for the quarter and nine months ended September 30, 2007 and October 1, 2006 and cash flows for the nine months ended September 30, 2007 and October 1, 2006.

The results of operations for the quarter and nine months ended September 30, 2007 are not necessarily indicative of the results to be expected for the entire year or for any future period.

The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our latest Annual Report on Form 10-K.

Reclassifications

Certain reclassifications have been made to the prior period’s notes to the condensed consolidated financial statements to conform to the current period’s presentation.

Inventories

Inventories include material costs and inventory related overhead costs and are recorded at the lower of cost (first-in, first-out) or market and consist of the following:

   
Sept. 30,
   
Dec. 31,
 
   
2007
   
2006
 
   
(In thousands)
 
             
Raw materials
  $
32,247
    $
16,475
 
Finished goods
   
35,936
     
26,118
 
    $
68,183
    $
42,593
 

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 through a charge to cost of sales.  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.
 
7

IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)
 
(1)  Operations and Significant Accounting Policies (Continued)

Net Income (Loss) Per Common Share

Basic net income (loss) per common share (“Basic EPS”) excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period.  Diluted net income (loss) per common share (“Diluted EPS”) reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into Common Stock.  The computation of Diluted EPS assumes no exercise or conversion of securities that would have an anti-dilutive effect on net income per common share.  In periods where losses are recorded, common stock equivalents would decrease the loss per share and therefore are not added to the weighted average shares outstanding.  Losses have been recorded for the nine months ended October 1, 2006, thus there was no dilution, as all outstanding options were considered anti-dilutive for this period.

The following is a reconciliation of the numerator and denominator of Basic EPS to the numerator and denominator of Diluted EPS for all periods presented.

   
Net Income (Loss) (Numerator)
   
Shares
(Denominator)
   
Per Share Amount
 
   
(In thousands, except per share data)
 
                   
For the Three Months Ended:
                 
September 30, 2007:
                 
Basic EPS
  $
1,293
     
54,754
    $
0.02
 
Effect of options
   
-
     
764
     
-
 
Diluted EPS
  $
1,293
     
55,518
    $
0.02
 
                         
October 1, 2006:
                       
Basic EPS
  $
853
     
53,382
    $
0.02
 
Effect of options
   
-
     
7
     
-
 
Diluted EPS
  $
853
     
53,389
    $
0.02
 
                         
For the Nine Months Ended:
                       
September 30, 2007:
                       
Basic EPS
  $
3,533
     
54,741
    $
0.06
 
Effect of options
   
-
     
352
     
-
 
Diluted EPS
  $
3,533
     
55,093
    $
0.06
 
                         
October 1, 2006:
                       
Basic EPS
  $ (13,715 )    
52,230
    $ (0.26 )
Effect of options
   
-
     
-
     
-
 
Diluted EPS
  $ (13,715 )    
52,230
    $ (0.26 )

8

IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)
 
(1)  Operations and Significant Accounting Policies (Continued)

Net Income (Loss) Per Common Share (Continued)

The table below shows the number of outstanding options that had an exercise price greater than the average market price of the common shares (out of the money options) for the respective period and are excluded from the calculation, as they are antidilutive.  The average market price of our Common Stock was $5.28 for the three months ended September 30, 2007 and $2.67 for the three months ended October 1, 2006.  The average market price of our Common Stock was $4.37 for the nine months ended September 30, 2007 and $2.88 for the nine months ended October 1, 2006.

   
For the Three Months Ended
   
For the Nine Months Ended
 
   
Sept. 30,
   
Oct. 1,
   
Sept. 30,
   
Oct. 1,
 
   
2007
   
2006
   
2007
   
2006
 
                         
Out of the money options
   
231,492
     
2,674,578
     
677,392
     
1,764,578
 

Stock Compensation Expense

Effective January 1, 2006, we adopted SFAS No. 123r, “Share-Based Payment”, (“SFAS 123r”) using the modified prospective transition method.  Because we elected to use the modified prospective transition method, results for prior periods have not been restated.

Our condensed consolidated statements of operations included $0.2 million of compensation expense related to stock-based compensation plans for the three months ended September 30, 2007 and $0.3 million for the three months ended October 1, 2006.

Our condensed consolidated statements of operations included $0.8 million of compensation expense related to stock-based compensation plans for the nine months ended September 30, 2007 and $0.5 million for the nine months ended October 1, 2006.

During the first quarter of 2006, we reduced our stock based compensation by $0.1 million due to a change in the estimated forfeiture rate as required by SFAS 123r.

Valuation and Amortization.  We use the Black-Scholes option-pricing model to estimate the fair value of each option grant on the date of grant or modification.  We amortize the fair value on an accelerated method for recognizing stock compensation expense over the vesting period of the option.
 
9

IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)
 
(1)  Operations and Significant Accounting Policies (Continued)

Stock Compensation Expense (Continued)

Expected Term.  The expected term is the period of time that granted options are expected to be outstanding.  We estimate the expected term based on historical patterns of option exercises, which we believe reflect future exercise behavior.  We examined patterns in our historical data in order to ascertain if there were any discernable patterns of exercises for demographic characteristics (such as geographic, job level, plan and significantly out of the money exercise prices).

Expected Volatility.  We calculate volatility by using the historical stock prices going back over the estimated life of the option.

Risk-Free Interest Rate.  We base the risk-free interest rate used in the Black-Scholes option-valuation model on the market yield in effect at the time of option grant provided from the Federal Reserve Board’s Statistical Releases and Historical Publications from the Treasury constant maturities rates for the equivalent remaining terms.

Dividends.  We have no plans to pay cash dividends in the future.  Therefore, we use an expected dividend yield of zero in the Black-Scholes option-valuation model.

Forfeitures.  SFAS 123r requires us to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates.  We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest.  In calculating the forfeiture rates we have excluded options that were significantly out of the money, primarily because they relate to older, fully vested awards.

We used the following assumptions to estimate the fair value of options granted for the three and nine months ended September 30, 2007 and October 1, 2006:

 
 For the Three Months Ended   
  For the Nine Months Ended   
               Assumption               
Sept. 30,
    2007    
Oct. 1,
    2006    
Sept. 30,
    2007    
Oct. 1,
    2006    
 
(In thousands)
         
Average expected term (in years)
5.2
3.9
5.2
3.9
Expected stock price volatility
39%
47%
39%
56%
Risk-free interest rate (range)
4.1 – 5.0%
4.6 – 4.9%
4.1 – 5.1%
4.3 - 5.1%
Expected dividends
Zero
Zero
Zero
Zero
 
10

IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)
 
(1)  Operations and Significant Accounting Policies (Continued)

Accrued Warranty

We accrue for warranty costs based on estimated warranty return rates and estimated costs to repair.  We use a statistical-based model to estimate warranty accrual requirements.  The statistical model, used to project future returns, is based upon a rolling monthly calculation that computes the number of units required in the warranty reserve and is based upon monthly sales, actual returns and projected return rates.  Actual warranty costs are charged against the warranty reserve.  Factors that affect our warranty liability include the number of units sold, historical and anticipated rates of warranty returns and repair cost.  We review the adequacy of our recorded warranty liability on a quarterly basis and record the necessary adjustments to the warranty liability.

Changes in our warranty liability during all periods presented were as follows:

   
For the Three Months Ended
   
For the Nine Months Ended
 
   
Sept. 30 ,
   
Oct. 1,
   
Sept. 30,
   
Oct. 1,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
                         
Balance at beginning of period
  $
4,989
    $
4,077
    $
4,576
    $
4,973
 
Accruals/additions
   
1,341
     
1,372
     
4,612
     
3,009
 
Claims
    (1,163 )     (1,261 )     (4,021 )     (3,794 )
Balance at end of period
  $
5,167
    $
4,188
    $
5,167
    $
4,188
 
 
Recent Accounting Pronouncements

In September of 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS Statement No. 157, “Fair Value Measurements” (“SFAS 157”).  This statement provides enhanced guidance for using fair value to measure assets and liabilities.  This statement also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings.  SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value.  SFAS 157 does not expand the use of fair value in any new circumstances.  This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007.  We do not expect our adoption of this new standard to have a material impact on our financial position, results of operations or cash flows.

In February of 2007, the FASB issued SFAS Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”).  SFAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value.  Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings.  SFAS 159 is effective for fiscal years beginning after November 15, 2007.  We are currently assessing the impact of SFAS 159 on our financial results.
 
11

IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)
 
(2)  Income Taxes

We adopted the provisions of FASB Interpretation Number 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”) on January 1, 2007.  As a result of the implementation of FIN 48, we recognized no material adjustment in the liability for unrecognized income tax benefits.  At the adoption date of January 1, 2007, we had $8.2 million of unrecognized tax benefits, $4.0 million of which would affect our effective tax rate if recognized.  Consistent with the provisions of FIN 48, we reclassified $4.0 million of income tax liabilities from current to non-current liabilities because payment of cash is not anticipated within one year of the balance sheet date.

As a result of the expiration of the statute of limitations on certain foreign income tax returns without notification of review by the taxing authorities during the second quarter of 2007, as described below, the total amount of unrecognized tax benefits was reduced by $1.4 million. During the third quarter of 2007, the total amount of unrecognized tax benefits was increased by $0.2 million as a result of preliminary findings of the Italian tax authorities.  At September 30, 2007, we have $4.6 million of unrecognized tax benefits, $2.8 million of which would affect our effective tax rate if recognized.

We recognize interest and penalties related to uncertain tax positions in income tax expense.  As of the date of adoption of FIN 48, we had accrued $0.3 million for the payment of interest and penalties relating to unrecognized tax benefits.  This amount was increased during the first quarter of 2007 by $0.1 million for additional accruals of interest and penalties, reduced during the second quarter of 2007 by $0.2 million for the release of accruals related to the expiration of the statute of limitations on certain foreign income tax returns without notification of review by the taxing authorities and was increased during the third quarter of 2007 by $0.1 million for the accrual of interest and penalties.  As of September 30, 2007, we have approximately $0.3 million of accrued interest related to uncertain tax positions, which was also reclassified from current to non-current liabilities upon adoption of FIN 48.

The tax years 2002-2006 remain open to examination by the Internal Revenue Service (“IRS”).  We are no longer subject to examination by the IRS for periods prior to 2002, although carryforward attributes that were generated prior to 2002 may still be adjusted upon examination by the IRS if they either have been or will be used in a future period.  Various state and foreign income tax returns are under examination by taxing authorities.  We do not believe that the outcome of any examination will have a material impact on our financial statements.

For the quarter ended September 30, 2007, we recorded a net income tax provision of $0.5 million on pre-tax income of $1.8 million.  This tax provision was primarily comprised of taxes provided on foreign earnings, foreign and domestic capital taxes and an increase in the deferred tax liability related to tax amortization of CSCI goodwill.

For the quarter ended October 1, 2006, we recorded a net income tax provision of $0.2 million on pre-tax income of $1.1 million.  This tax provision was primarily comprised of taxes provided on foreign earnings and foreign capital taxes, partially offset by a release of the deferred tax liability resulting from the goodwill impairment charge recognized.
 
12

IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)
 
(2)  Income Taxes (Continued)

For the nine months ended September 30, 2007, we recorded a net income tax benefit of $0.4 million on pre-tax income of $3.1 million.  This net tax benefit was primarily comprised of a $1.6 million release of a contingency reserve related to a foreign tax exposure for which the statute of limitations expired in the second quarter of 2007 and releases of $1.2 million of deferred tax liabilities resulting from the goodwill impairment charges recognized, partially offset by taxes provided on foreign earnings, foreign and domestic capital taxes and an increase in deferred tax liabilities related to tax amortization on CSCI goodwill.

For the nine months ended October 1, 2006, we recorded an income tax benefit of $2.0 million on a pre-tax loss of $15.7 million.  This tax benefit was primarily comprised of a release of a deferred tax liability resulting from the goodwill impairment charges recognized and minor adjustments to the estimated foreign income taxes due to the filing of actual tax returns, partially offset by the accrual of foreign income and capital taxes.

(3)  Business Segment Information

We have six reportable segments, which are organized into three business categories as follows:

              Business Categories              
                    Reportable Segments                   
   
Consumer Products
1.  Consumer Storage Solutions
 
2.  Zip® Products
   
Business Products
3.  REV® Products
 
4.  Network Storage Systems
 
5.  Services
   
Other Products
6.  Other Products

Consumer Products

Our Consumer Products category is comprised of the Consumer Storage Solutions (“CSS”) segment and the Zip Products segment.

Our CSS segment involves the worldwide distribution and sale of various storage devices including external hard disk drives (“HDD”), CD-RW drives, DVD rewritable drives and external floppy disk drives.  HDD products account for the majority of this segment.

The Zip Products segment involves the distribution and sale of Zip drives and disks to retailers, distributors, resellers and OEMs.  We have ceased selling Zip drives to distributors or resellers in the European Union (“EU”) as of July 1, 2006, in the wake of the Restriction of Hazardous Substances (“RoHS”) lead free initiative.  Sales of Zip disks continue worldwide, including the European Union.
 
13

IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)
 
(3)  Business Segment Information (Continued)

Business Products

Our Business Products category is comprised of the REV Products, the Network Storage Systems (“NSS”) and the Services segments.

Our REV Products segment involves the development, distribution and sale of REV drives and disks to retailers, distributors, OEMs and resellers throughout the world

Our NSS segment involves the development, distribution and sale of Network Attached Storage servers and Network HDD drives (which were previously reported under the CSS segment in the Consumer Products category) in the entry-level and low-end Network Attached Storage market.

Our Services segment consists of the operations of CSCI, Inc. (“CSCI”), including OfficeScreen® solutions and system integration, resale of email security from a third party and Iomega services such as iStorageTM.  We acquired CSCI in August of 2006; CSCI’s OfficeScreen managed security services include managing firewalls, VPNs and providing remote access for small businesses.  The Iomega services were previously reflected in the Other Products segment.

Other Products

Our Other Products segment consists of license and patent fee income (when not assigned to specific products) and products that have been discontinued or are otherwise immaterial, including Jaz, Iomega software products such as Iomega Automatic Backup software and other miscellaneous products.  iStorage and other services that were previously reflected in this segment have been reclassified to the Services segment under the Business Products category.

Product Operating Income (Loss)

Product operating income is defined as sales and other income related to a segment’s operations, less both fixed and variable product costs, and direct and allocated operating expenses.  Operating expenses are charged to the product segments primarily as a percentage of sales and on a direct method to a lesser extent.  When such costs and expenses exceed sales and other income, this is referred to as a product operating loss.  The accounting policies of the product segments are the same as those described in Note 1.  Intersegment sales, eliminated in consolidation, are not material.  Non-allocated operating expenses include restructuring charges and certain extraordinary expenses.

14

IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)
 
(3)  Business Segment Information (Continued)

The information in the following table was derived directly from our internal segments’ financial information used for corporate management purposes.

Reportable Operating Segment Information:

   
For the Quarter Ended
   
For the Nine Months Ended
 
   
Sept. 30,
 2007  
   
Oct. 1,
 2006  
   
Sept. 30,
 2007  
   
Oct. 1,
 2006  
 
   
(In thousands)
 
Sales:
                       
Consumer Products:
                       
Consumer Storage Solutions
  $
60,685
    $
30,317
    $
153,262
    $
81,999
 
Zip Products
   
3,816
     
6,245
     
13,097
     
25,681
 
Total Consumer Products
   
64,501
     
36,562
     
166,359
     
107,680
 
Business Products:
                               
REV Products
   
8,981
     
11,201
     
29,388
     
30,869
 
Network Storage Systems
   
5,523
     
4,473
     
15,077
     
12,724
 
Services
   
1,653
     
1,254
     
4,898
     
1,515
 
Total Business Products
   
16,157
     
16,928
     
49,363
     
45,108
 
Other Products
   
9
     
105
     
248
     
540
 
Total Sales
  $
80,667
    $
53,595
    $
215,970
    $
153,328
 
                                 
Product Operating Income (Loss):
                               
Consumer Products:
                               
Consumer Storage Solutions
  $ (545 )   $ (1,744 )   $ (141 )   $ (11,666 )
Zip Products
   
1,224
     
767
     
1,804
     
1,874
 
Total Consumer Products
   
679
      (977 )    
1,663
      (9,792 )
Business Products:
                               
REV Products
   
204
      (367 )    
234
      (5,742 )
Network Storage Systems
   
566
     
464
     
211
     
884
 
Services
    (349 )     (53 )     (1,404 )    
174
 
Total Business Products
   
421
     
44
      (959 )     (4,684 )
Other Products
    (139 )    
75
     
250
     
1,011
 
Non-restructuring charge
   
-
     
     
-
      (995 )
Restructuring (charges) reversals
   
153
     
211
     
235
      (4,358 )
Total Operating Income (Loss)
  $
1,114
    $ (647 )   $
1,189
    $ (18,818 )

15

IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)
 
(4)  Restructuring Charges/Reversals

We currently have restructuring reserves under two different restructuring actions: the 2005 restructuring actions and the 2004 restructuring actions.  The following table summarizes the reserve balances related to each of these restructuring actions:

   
Sept. 30,
   
Dec. 31,
 
   
2007
   
2006
 
   
(In thousands)
 
             
Other Current Liabilities:
           
Third Quarter 2001 restructuring actions
  $
-
    $
1,366
 
2003 restructuring actions
   
-
     
6
 
2004 restructuring actions
   
45
     
77
 
2005 restructuring actions
   
65
     
219
 
2006 restructuring actions
   
-
     
205
 
Total
  $
110
    $
1,873
 
                 
Fixed Asset Reserves:
               
2003 restructuring actions
  $
-
    $
114
 
2005 restructuring actions
   
38
     
131
 
Total
  $
38
    $
245
 

During each of the first, second and third quarters of 2007, we recorded a net restructuring release of approximately $0.1 million.

During the first quarter of 2006, we recorded restructuring charges of $0.3 million related to the 2006 restructuring actions.

During the second quarter of 2006, we recorded net restructuring charges of $4.3 million of which $1.5 million related to the 2001 restructuring actions; a $0.1 million release related to the 2004 restructuring actions and $2.9 million related to the 2006 restructuring actions.

During the third quarter of 2006, we recorded a restructuring benefit of $0.2 million related to the 2006 and 2005 restructuring actions.
 
16

IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)
 
(4)  Restructuring Charges/Reversals (Continued)

These charges are described below under their respective caption.

2006 Restructuring Actions

During 2006, we recorded $3.0 million of net restructuring charges for the 2006 restructuring actions.  These charges included $2.7 million of cash charges for severance and benefits for approximately 90 personnel worldwide who were notified during the first and second quarters of 2006 that their positions were being eliminated, $0.2 million of cash charges for miscellaneous contract and lease cancellations and $0.1 million of non-cash charges related to excess furniture, leasehold improvements and other miscellaneous assets.  The $3.0 million was shown as restructuring expenses as a component of operating expenses.  None of these restructuring charges was allocated to any of our business segments.  The restructuring actions were part of an effort to align our cost structure with our expected future revenue levels and to reorganize our Company from a focus on autonomous geographic regions and products to a simplified functional organization.

During the first quarter of 2007, we recorded a restructuring benefit of less than $0.1 million related to severance and benefits because of lower than expected benefits.

During the second quarter of 2007, we recorded a restructuring benefit of less than $0.1 million related to international facilities.  Due to recent organization changes, we began utilizing a portion of the floor space that we had subleased to another company. During the third quarter of 2007, we recorded a restructuring benefit of approximately $0.1 million related to US facilities due to higher than expected sublease income.  As of September 30, 2007, we have made $2.7 million in cumulative cash payments related to the 2006 restructuring charges.

There are no remaining restructuring reserves at September 30, 2007.  Utilization of and other activity related to the 2006 restructuring reserves during the quarter ended September 30, 2007 are summarized below:

   
Balance
         
 Utilized 
   
Foreign
Currency
   
Balance
 
   
7/2/07
   
Reversals
   
Cash
   
Non-Cash
   
Changes
   
9/30/07
 
   
(In thousands)
 
2006 Restructuring Actions:
                                   
Lease termination costs (a)
  $
6
    $
-
    $ (6 )   $
    $
-
    $
-
 
Miscellaneous liabilities (a)
   
12
      (12 )    
-
     
-
     
     
-
 
    $
18
    $ (12 )   $ (6 )   $
-
    $
-
    $
-
 
                                                 
Balance Sheet Breakout:
                                               
Accrued restructuring charges (a)
  $
18
    $ (12 )   $ (6 )   $
-
    $
-
    $
-
 

(a)  
Amounts represent primarily cash charges.

17

IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)
 
(4)  Restructuring Charges/Reversals (Continued)

2006 Restructuring Actions (Continued)

Utilization of and other activity related to the 2006 restructuring reserves during the nine months ended September 30, 2007 are summarized below:

   
Balance
         
 Utilized 
   
Foreign
Currency
   
Balance
 
   
12/31/06
   
Reversals
   
Cash
   
Non-Cash
   
Changes
   
9/30/07
 
   
(In thousands)
 
2006 Restructuring Actions:
                                   
Severance and benefits (a)
  $
133
    $ (39 )   $ (95 )   $
    $
1
    $
-
 
Lease termination costs (a)
   
58
      (19 )     (39 )    
     
-
     
-
 
Miscellaneous liabilities (a)
   
14
      (13 )     (1 )    
-
     
     
-
 
    $
205
    $ (71 )   $ (135 )   $
-
    $
1
    $
-
 
                                                 
Balance Sheet Breakout:
                                               
Accrued restructuring charges (a)
  $
205
    $ (71 )   $ (135 )   $
-
    $
1
    $
-
 

(a)  
 Amounts represent primarily cash charges.

2005 Restructuring Actions

During 2005, we recorded $5.7 million of restructuring charges for the 2005 restructuring actions.  These charges included $4.0 million of cash charges for severance and benefits for approximately 120 personnel worldwide who were notified during the third quarter of 2005 that their positions were being eliminated, $0.7 million of cash charges for miscellaneous contract cancellations, $0.5 million of cash charges for lease termination costs and $0.4 million of non-cash charges related to excess furniture, leasehold improvements and other miscellaneous assets.  The $5.7 million was shown as restructuring expenses as a component of operating expenses.  None of these restructuring charges was allocated to any of our business segments.  The restructuring actions were part of an effort to align our cost structure with our expected future revenue levels.

During 2006, we recorded $0.2 million of restructuring charges for the 2005 restructuring actions for lease cancellation due to our inability to sublease a facility in Texas.  This was more than offset by a $0.3 million release of restructuring reserves associated with miscellaneous contract obligations due to negotiating lower settlement amounts and excess severance and benefits.

During both the first and third quarters of 2007, we recorded a restructuring benefit of $0.1 million due to higher than expected sublease income.

We have made $5.0 million in cumulative cash payments related to the 2005 restructuring actions, of which less than $0.2 million was disbursed during 2007.
 
18

IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)
 
(4)  Restructuring Charges/Reversals (Continued)

2005 Restructuring Actions (Continued)

Remaining restructuring reserves of less than $0.1 million are included in our accrued restructuring charges and less than $0.1 million are included in our fixed asset reserves at September 30, 2007.  Utilization of and other activity related to the 2005 restructuring reserves during the three months ended September 30, 2007 are summarized below:

   
Balance
         
Net Utilized 
   
Balance
 
   
7/2/07
   
Reversals
   
Cash
   
Non-Cash
   
9/30/07
 
   
(In thousands)
 
2005 Restructuring Actions:
                             
Lease termination costs (a)
  $
84
    $ (66 )   $
47
    $
    $
65
 
Lease related assets (b)
   
64
     
     
      (26 )    
38
 
    $
148
    $ (66 )   $
47
    $ (26 )   $
103
 
                                         
Balance Sheet Breakout:
                                       
Accrued restructuring charges (a)
  $
84
    $ (66 )   $
47
    $
    $
65
 
Fixed asset reserves (b)
   
64
     
     
      (26 )    
38
 
    $
148
    $ (66 )   $
47
    $ (26 )   $
103
 

(a)  
Amounts represent primarily cash charges.
    (b)  Amounts represent primarily non-cash charges.

Utilization of and other activity related to the 2005 restructuring reserves during the nine months ended September 30, 2007 are summarized below:

   
Balance
         
Utilized 
   
Balance
 
   
12/31/06
   
Reversals
   
Cash
   
Non-Cash
   
9/30/07
 
   
(In thousands)
 
2005 Restructuring Actions:
                             
Lease termination costs (a)
  $
219
    $ (147 )   $ (7 )   $
    $
65
 
Lease related assets (b)
   
131
     
     
      (93 )    
38
 
    $
350
    $ (147 )   $ 7 )   $ (93 )   $
103
 
                                         
Balance Sheet Breakout:
                                       
Accrued restructuring charges (a)
  $
219
    $ (147 )   $ (7 )   $
    $
65
 
Fixed asset reserves (b)
   
131
     
     
      (93 )    
38
 
    $
350
    $ (147 )   $ (7 )   $ (93 )   $
103
 

(a)  
Amounts represent primarily cash charges.
    (b)  Amounts represent primarily non-cash charges.

At September 30, 2007, lease payments are being made on a continuous monthly basis and this  lease expires in July of 2008.  We have entered into a sublease agreement on the leased facility and the lease related assets are being utilized by the tenant who is subleasing the facility.

19

IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)
 
(4)  Restructuring Charges/Reversals (Continued)

2004 Restructuring Actions

During 2004, we recorded $3.7 million of restructuring charges for the 2004 restructuring actions, including $2.6 million of cash charges for severance and benefits for 108 regular and temporary personnel worldwide (approximately 19% of our worldwide workforce) who were notified by September 26, 2004 that their positions were being eliminated, $0.7 million of cash charges for lease termination costs and $0.4 million of non-cash charges related to excess furniture.  All of the $3.7 million of restructuring charges recorded during 2004 were shown as restructuring expenses as a component of operating expenses.  None of these restructuring charges was allocated to any of the business segments.

During 2006, we recorded $0.2 million of restructuring releases for the 2004 restructuring actions, including $0.1 million for lease termination costs and $0.1 million for furniture due to higher than estimated sales proceeds.

During the first quarter of 2007, we recorded an additional $0.1 million for lease termination costs related to increases in landlord maintenance costs.

During the second quarter of 2007, we released less than $0.1 million associated with lease termination costs for a building which lease expired and the facility was turned back to the landlord.

During the third quarter of 2007, we released less than $0.1 million due to a subtenant reimbursing us for the landlord maintenance cost increases.

As of September 30, 2007, we have made $3.7 million in cumulative cash payments related to the 2004 restructuring actions, of which less than $0.1 million was disbursed during 2007.

Remaining restructuring reserves of less than $0.1 million are included in our accrued restructuring charges as of September 30, 2007.  Utilization of and other activity related to the 2004 restructuring reserves during the three months ended September 30, 2007 are summarized below:

   
Balance
               
Net Utilized 
   
Balance
 
   
7/2/07
   
Additions
   
Reversals
   
Cash
   
Non-Cash
   
9/30/07
 
   
(In thousands)
 
2004 Restructuring Actions:
                                   
Lease termination costs (a)
  $
111
    $
-
    $ (75 )   $
9
    $
    $
45
 
                                                 
Balance Sheet Breakout:
                                               
Accrued restructuring charges (a)
  $
111
    $
-
    $ (75 )   $
9
    $
    $
45
 

(a)  
Amounts represent cash charges.

20

IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)
 
(4)  Restructuring Charges/Reversals (Continued)

2004 Restructuring Actions (Continued)

Utilization of and other activity relating to the 2004 restructuring charges during the nine months ended September 30, 2007 are summarized below:

   
Balance
               
Utilized 
   
Balance
 
   
12/31/07
   
Additions
   
Reversals
   
Cash
   
Non-Cash
   
9/30/07
 
   
(In thousands)
 
2004 Restructuring Actions:
                                   
Lease termination costs (a)
  $
77
    $
81
    $ (81 )   $ (32 )   $
    $
45
 
                                                 
Balance Sheet Breakout:
                                               
Accrued restructuring charges (a)
  $
77
    $
81
    $ (81 )   $ (32 )   $
    $
45
 

(a)  
 Amounts represent cash charges.

Lease payments are being made on a continuous monthly basis, and the lease expires in 2008.  The facility has been subleased.

2003 Restructuring Actions

During the second quarter of 2007, we released less than $0.1 million associated with lease termination costs for a building lease which expired and the facility was turned back to the landlord.

Third Quarter 2001 Restructuring Actions

During 2006, we recorded an additional net $0.9 million for U.S. lease termination costs since we were not able to locate a subtenant in the timeframe originally anticipated.  In January of 2007, we finalized an agreement to assist a company to purchase the building we were leasing and we have been released from our remaining lease obligations.  This resulted in an overall $0.6 million cash savings.

(5)  Commitments and Contingencies

Litigation

There are no material legal proceedings to which we are a party.  We are involved in lawsuits and claims generally incidental to our business, none of which are expected to have a material impact on our results of operations, business or financial condition. 
 
21

IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)
 
(6)  Stockholders’ Equity

Share-Based Compensation Plans

Stock Option Plans

We had a 1997 Stock Incentive Plan (the “1997 Plan”).  Our 1997 Plan provided for the grant of incentive stock options (“ISOs”) intended to qualify under Section 422 of the Internal Revenue Code, nonstatutory stock options (“NSOs”) and restricted stock awards.  The 1997 Plan expired in January of 2007 and no other options have been granted under this plan after its expiration date; however, all outstanding, un-expired options under the 1997 Plan remain in effect.

We had a 1995 Director Stock Option Plan (the “1995 Director Plan”), and a 2005 Director Stock Option Plan (the “2005 Director Plan”).  The 1995 Director Plan expired on July 25, 2005 and no further options have been granted under this plan after its expiration date; however, all outstanding, un-expired options under the 1995 Director Plan remain in effect.  The 2005 Director Plan was terminated on May 23, 2007, as a result of the shareholder approval of the new 2007 Stock Incentive Plan, described below, and no further options have been granted under this plan after its termination date; however, all outstanding, un-expired options under the 2005 Director Plan remain in effect.

We have a 2007 Stock Incentive Plan (the “2007 Plan”).  Our 2007 Plan was approved by the Shareholders on May 23, 2007, following an earlier Board vote to recommend this Plan.  The 2007 Plan provides for the grant of various awards including incentive stock options (as defined in Section 422 of the Internal Revenue Code), nonqualified options, restricted shares, performance awards, and other stock based awards, as determined at the time of grant.  Under the 2007 Plan, we can grant options or awards for up to 5,500,000 shares of Common Stock to our employees, officers, directors, consultants and advisors.  The exercise price for all options granted under the plan will be the closing price of our Common Stock on the date of grant.  Each option shall be exercisable at such times and subject to such terms and conditions as the Board may specify in the applicable option agreement.  The duration of options awarded under this plan cannot exceed ten years from the date of grant, except as may be required under laws of other countries.  The Board may award restricted shares of our Common Stock, which shares may be subject to risk of forfeiture or restrictions as may be imposed by the Board.  The total of all shares subject to awards other than stock options may not exceed 33% of the authorized shares under the 2007 Plan.
 
22

IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)
 
(6)  Stockholders’ Equity (Continued)

Stock Option Activity and Weighted Average Prices

The following table presents the aggregate options granted, exercised and forfeited under all stock option plans at September 30, 2007 and their respective weighted average exercise prices:

         
Weighted
 
   
             Shares
   
Average
 
      (000’s )  
Exercise Price
 
               
Outstanding at beginning of year
   
3,060
    $
3.90
 
Granted
   
166
     
4.18
 
Exercised
    (31 )    
3.28
 
Forfeited / Cancelled / Expired
    (124 )    
4.50
 
Outstanding at September 30, 2007
   
3,071
     
3.90
 
Options exercisable at September 30, 2007
   
1,305
     
4.96
 

(7)  Other Matters

Other Intangible Assets

At September 30, 2007, we had $0.9 million in net intangible assets, all of which are subject to amortization.  Our intangible assets include the OfficeScreen trade name and technology, and customer and vendor relationships obtained through the CSCI acquisition.  Intangible assets are amortized using the straight-line method, our best estimate of the pattern of economic benefit, over the estimated useful life of the asset, subject to periodic review for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.  Amortization expense was less than $0.1 million for quarter ended September 30, 2007 and $0.2 million for the nine months ended September 30, 2007.  Amortization expense for each of the next five fiscal years is anticipated to be $0.1 million for the remainder of 2007, approximately $0.2 million each year from 2008 through 2010, $0.1 million in 2011 and $0.1 million thereafter.  At September 30, 2007, the weighted average useful life of our intangible assets was approximately 5 years.

The following table presents the other intangible assets and associated accumulated amortization for all periods presented:
 
   
Sept. 30,
 2007
   
Dec. 31,
 2006
 
   
(In thousands)
 
Other Intangible Assets:
           
Gross value
  $
1,127
    $
1,127
 
Accumulated amortization
    (236 )     (84 )
Net intangible assets
  $
891
    $
1,043
 
 
23

IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)
 
(7)  Other Matters(Continued)

Goodwill Impairment

There is no remaining goodwill related to Zip specific products as of July 1, 2007, as it has now been fully written off.  The goodwill related to the CSCI acquisition is not subject to impairment testing yet under FASB Statement No. 142, “Goodwill and Other Intangible Assets”.  The goodwill related to the CSCI acquisition will be tested for impairment in the fourth quarter of 2007, as part of our annual impairment testing.

24

IOMEGA CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
Overview

We design and market products and provide services that help our customers store and protect their valuable digital information.  Our six reportable segments are based primarily on the nature of our products and include Consumer Storage Solutions (“CSS”) Products, Zip® Products, REV®  Products, Network Storage Systems (“NSS”) Products, Services and Other Products.

The CSS Products segment involves the worldwide distribution and sale of various storage devices including external hard disk drives (“HDD”), CD-RW drives, DVD rewritable drives and external floppy disk drives.  The Zip Products segment involves the distribution and sale of Zip drives and disks to retailers, distributors and resellers.  The REV Products segment involves the development, distribution and sale of REV drives and disks 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 and Network HDD drives (previously included in the CSS Products segment) in the entry-level and low-end network attached storage market.  The Services segment consists of the operations of CSCI, Inc. (“CSCI”), including OfficeScreen® solutions, systems integration, resale of email security from a third party and Iomega services such as iStorageTM (previously included in the Other Products segment).  We acquired CSCI in August of 2006.  CSCI’s OfficeScreen managed security services include managing firewalls, virtual private networks (“VPNs”) and providing remote access for small businesses.  The Other Products segment consists of license and patent fee income (not assigned to specific products) and products that have been discontinued or are otherwise immaterial.

From 1996 through 2006 and also in the third quarter of 2007, the Zip Products segment was the largest contributor to our product operating income.  As the Zip business has approached the end of its product lifecycle, 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 the first and second generation REV products.  Sales of REV products have exceeded Zip product sales for the past several quarters.  However, REV products have been unprofitable every quarter until 2007 from which point the product line has been slightly profitable.

In other efforts to replace the declining Zip business, we have launched and attempted to expand our CSS and NSS businesses.  CSS business segment product sales (primarily HDD) significantly exceed Zip product sales.  Our CSS business segment achieved operating profitability in the fourth quarter of 2006 and is near breakeven for the nine months ended September 30, 2007.  The NSS segment product sales have also been steadily increasing with moderate profits in most periods.  We are continuing to develop our NAS product line, targeting the home office and small and mid-size business segments.

We also acquired CSCI, Inc. (“CSCI”) and have signed a reseller agreement with a provider or email security to expand our brand name into the services segment for small- to mid-sized companies.  Although this segment has lost money due to marketing and other start-up costs, we continue to look for opportunities to grow this segment.  Additionally, this business is an annuity business whereby income is earned on a monthly basis over the term of the contract and therefore, the impact on the results of operations in not fully reflected immediately.
 
25

IOMEGA CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Overview (Continued)

During the past 15 months, we have taken several steps to return our Company to profitability such as a restructuring plan to reduce costs and simplify our organizational structure, the release of new HDD products and changes to our HDD product supply chain to reduce the cost of these products to allow us to be more competitive in the market place.  Primarily as a result of the above actions, at September 30, 2007, we have recorded our fifth consecutive quarter of net income and fourth consecutive quarter of year-over-year revenue growth.  The revenue growth is primarily a result of the HDD business, which remains extremely competitive.

Our goals for 2007 remain: (1) to continue to grow and deliver sustained profitability; (2) to further increase the size of our HDD business; (3) to continue to penetrate the high-growth NAS market; (4) to ramp REV 70GB products and push for broad market adoption; (5) to grow our managed services business domestically and abroad and (6) to continue to evaluate new opportunities where we can leverage our brand and channel assets.  Notwithstanding our recent accomplishments, there can be no assurance that we will achieve these goals.

Application of Critical Accounting Policies

Areas where significant judgments occur include, but are not limited to: revenue recognition, price protection and rebate reserves, inventory valuation reserves and tax valuation allowances.  Actual results could differ materially from these estimates.  For a more detailed explanation of the judgments included in these areas, refer to our Annual Report on Form 10-K for the year ended December 31, 2006.  Our critical accounting policies have not changed materially since December 31, 2006.

Seasonality

Our CSS business is typically strongest during the fourth quarter.  Our European sales, which comprise approximately two-thirds of our total sales, are typically weakest during the summer months due to holidays.  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 periods.

Results of Operations

Our net income for the quarter ended September 30, 2007 was $1.3 million, or $0.02 per diluted share, compared with net income of $0.9 million, or $0.02 per share, for the quarter ended October 1, 2006.

Our net income for the nine months ended September 30, 2007 was $3.5 million, or $0.06 per diluted share, compared with a net loss of $13.7 million, or $(0.26) per share, for the nine months ended October 1, 2006.

26

IOMEGA CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Sales

As shown in the table below, total sales for the quarter ended September 30, 2007 increased 51% over the same period in the prior year primarily due to the market acceptance of our new HDD products.
 
   
For the Three Months Ended
 
   
Sept. 30,
   
Oct. 1,
             
   
2007
   
2006
   
$ Change
   
% Change
 
   
(In thousands, except %)
 
Sales:
                       
Consumer Products:
                       
Consumer Storage Solutions
  $
60,685
    $
30,317
    $
30,368
      100 %
Zip Products
   
3,816
     
6,245
      (2,429 )     (39 )
Total Consumer Products
   
64,501
     
36,562
     
27,939
     
76
 
Business Products:
                               
REV Products
   
8,981
     
11,201
      (2,220 )     (20 )
Network Storage Systems
   
5,523
     
4,473
     
1,050
     
23
 
Services
   
1,653
     
1,254
     
399
     
32
 
Total Business Products
   
16,157
     
16,928
      (771 )     (5 )
Other Products
   
9
     
105
      (96 )     (91 )
Total Sales
  $
80,667
    $
53,595
    $
27,072
      51 %

The $30.4 million higher CSS sales resulted from $31.4 million of higher HDD drives, partially offset by $0.6 million of lower Optical product, $0.2 million of lower Mini USB flash drive and $0.2 million of lower floppy external drive sales.  The sales decreases for Optical, Mini USB flash and floppy external drives were primarily as a result of our prior decision to discontinue certain unprofitable SKUs in these product lines and to focus our efforts on HDD products.  Zip product sales continued their expected decline for the quarter ended September 30, 2007, in terms of both units and sales dollars.

Our sales by region for the three months ended September 30, 2007 and October 1, 2006 are shown in the table below:

   
For the Three Months Ended
 
   
Sept. 30,
   
Oct. 1,
             
   
2007
   
2006
   
$ Change
   
% Change
 
   
(In thousands, except %)
 
Sales Dollars:
                       
Europe
  $
53,072
    $
26,697
    $
26,375
      99 %
Americas (includes Latin America)
   
25,500
     
24,282
     
1,218
     
5
 
Asia Pacific
   
2,095
     
2,616
      (521 )     (20 )
Total
  $
80,667
    $
53,595
    $
27,072
      51 %
                                 
Percent of Total Sales:
                               
Europe
    66 %     50 %                
Americas (includes Latin America)
   
32
     
45
                 
Asia Pacific
   
2
     
5
                 
Total
    100 %     100 %                

27

IOMEGA CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Sales (Continued)

The increase in sales dollars in Europe was primarily due to higher CSS product sales of HDD.  Sales dollars in the Americas and Asia Pacific region remained relatively flat period over period.

The sales growth in Europe has been primarily due to the introduction of lower cost, competitive HDD products in mid-2006 and strong retail distribution throughout Europe.  The Americas retail environment is more challenging than the environment we face in Europe and is generally promotional and discount driven.  We currently focus on gross margin generation and other sales channels where we believe we can profitably sell our products and intend to continue this focus in the future. As a result of our focus on profitable sales, we have purposely reduced our Americas retail sales.

As shown in the table below, total sales for the nine months ended September 30, 2007 increased over the prior year primarily due to the introduction and market acceptance of our new HDD products, partially offset by the expected decrease in Zip product sales.