1083663--3/31/2006--I/OMAGIC

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{customer, product, revenue}

{product, market, service}

{stock, price, share}

{property, intellectual, protect}

{stock, price, operating}

{product, liability, claim}

{gas, price, oil}

{system, service, information}

{cost, operation, labor}

{operation, natural, condition}

{control, financial, internal}

{provision, law, control}

{capital, credit, financial}

If we continue to sustain losses, we will be in violation of our financial covenant to GMAC Commercial Finance and we may be unable to borrow funds to purchase inventory, to sustain or expand our current sales volume and to fund our day-to-day operations. We have incurred significant losses in the past, and we may continue to incur significant losses in the future. If we continue to incur losses, we will experience negative cash flow which may hamper current operations and may prevent us from sustaining or expanding our business. We have identified material weaknesses in our disclosure controls and procedures. Our business and stock price may be adversely affected if we do not remediate these material weaknesses or if we have other material weaknesses in our disclosure controls and procedures. We depend on a small number of retailers for the vast majority of our sales. A reduction in business from any of these retailers could cause a significant decline in our sales and profitability. Our lack of long-term purchase orders and commitments could lead to a rapid decline in our sales and profitability. One or more of our largest retailers may directly import or private label products that are identical or very similar to our products. This could cause a significant decline in our sales and profitability. Historically, a substantial portion of our assets have been comprised of accounts receivable representing amounts owed by a small number of retailers. We expect this to continue in the future. If any of these retailers fails to timely pay us amounts owed, we could suffer a significant decline in cash flow and liquidity which, in turn, could cause us to be unable pay our liabilities and purchase an adequate amount of inventory to sustain or expand our current sales volume. We rely heavily on our Chief Executive Officer, Tony Shahbaz. The loss of his services could adversely affect our ability to source products from our key suppliers and our ability to sell our products to our retailers. The high concentration of our sales within the data storage industry could result in a significant reduction in net sales and negatively affect our earnings if demand for those products declines. If we fail to accurately forecast the costs of our product rebate or other promotional programs, we may experience a significant decline in cash flow and our brand image may be adversely affected resulting in reduced sales and profitability. Our two principal subcontract manufacturers and suppliers provide us with significantly preferential trade credit terms. If either of these manufacturers does not continue to offer us substantially the same preferential credit terms, our sales and profitability would decline significantly. The data storage industry is extremely competitive. All of our significant competitors have greater financial and other resources than we do, and one or more of these competitors could use their greater resources to gain market share at our expense. Data storage products are subject to rapid technological changes. If we fail to accurately anticipate and adapt to these changes, the products we sell will become obsolete, causing a decline in our sales and profitability. If we fail to select high turnover products for our consignment sales channels, our financing costs may exceed targeted levels, we may be unable to fund additional purchases of inventory and we may be forced to reduce prices and accept lower margins to sell consigned products, which would cause our sales, profitability and financial resources to decline. Our indemnification obligations to our retailers for product defects could require us to pay substantial damages, which could have a significant negative impact on our profitability and financial resources. If we are subjected to one or more intellectual property infringement claims, our sales, earnings and financial resources may be adversely affected. If we fail to successfully manage the expansion of our business, our sales may not increase commensurately with our investments, which would cause our profitability to decline. A significant product defect or product recall could materially and adversely affect our brand image, causing a decline in our sales, and could reduce or deplete our financial resources. If our products are not among the first-to-market, or if consumers do not respond favorably to either our new or enhanced products, our sales and earnings will decline. A labor strike or congestion at a shipping port at which our products are shipped or received could prevent us from taking timely delivery of inventory, which could cause our sales and profitability to decline. Failure to adequately protect our trademark rights could cause us to lose market share and cause our sales to decline. Consumer acceptance of alternative sales channels may increase. If we are unable to adapt to these alternative sales channels, sales of our products may decline. Our operations are vulnerable because we have limited redundancy and backup systems. Our stock price is highly volatile, which could result in substantial losses for investors purchasing shares of our common stock and in litigation against us. Our common stock has a small public float and shares of our common stock eligible for public sale could cause the market price of our stock to drop, even if our business is doing well. If the ownership of our common stock continues to be highly concentrated, it may prevent you and other stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause our stock price to decline. Our articles of incorporation, our bylaws and Nevada law each contain provisions that could discourage transactions resulting in a change in control of I/OMagic, which may negatively affect the market price of our common stock. We cannot assure you that an active market for our shares of common stock will develop or, if it does develop, will be maintained in the future. If an active market does not develop, you may not be able to readily sell your shares of our common stock. Because we are subject to penny stock rules, the level of trading activity in our common stock may be reduced. If the level of trading activity is reduced, you may not be able to readily sell your shares of our common stock.

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1083663--3/31/2006--I/OMAGIC_CORP