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 March 31, 2004

                                       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 000-27267

                              I/OMAGIC CORPORATION
             (Exact Name of Registrant as Specified in Its Charter)

          Nevada                                        88-029062
 ------------------------------             -------------------------------
(State or Other Jurisdiction of            (IRS Employer Identification No.)
Incorporation  or  Organization)


     4  Marconi,  Irvine,  CA                            92618
     ------------------------                         -----------
(Address  of  Principal  Executive  Offices)          (Zip  Code)

                                 (949) 707-4800
              ----------------------------------------------------
              (Registrant's Telephone Number, Including Area Code)

                                 Not Applicable
               ----------------------------------------------------
              (Former name, former address and former fiscal year,
                          if changed since last report)

Indicate by check 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 whether the registrant is an accelerated filer (as defined in
Rule  12b-2  of  the  Exchange  Act).   Yes  [   ]    No  [ X ]

As  of  May  17,  2004, there were 4,529,672 shares of the issuer's common stock
issued  and  outstanding.

<PAGE>


                      I/OMAGIC CORPORATION AND SUBSIDIARIES

                                TABLE OF CONTENTS

                                                                        Page
                                                                        Number
                                                                        ------

PART I  - FINANCIAL  INFORMATION

Item 1.   Financial  Statements

          Consolidated Balance Sheets - December 31, 2003
          and March 31, 2004   (unaudited)                                  3

          Consolidated  Statements  of  Income  - For the three and
          months ended March 31, 2003 and 2004 (unaudited)                  5

          Consolidated Statements of Cash Flows - For the three months
          ended March 31, 2003 and 2004 (unaudited)                         6

          Notes  to  Consolidated  Financial  Statements                    7

Item 2.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations                                        12

Item 3.   Quantitative and Qualitative Disclosures About Market Risk       27

Item 4.   Controls  and  Procedures                                        27


PART II - OTHER  INFORMATION

Item 1.   Legal  Proceedings                                               28

Item 2.   Changes  in  Securities  and  Use  of  Proceeds                  29

Item 3.   Defaults  Upon  Senior  Securities                               29

Item 4.   Submission of Matters to a Vote of Security Holders              29

Item 5.   Other Information                                                29

Item 6.   Exhibits  and  Reports  on  Form  8-K                            29

SIGNATURES                                                                 29

EXHIBITS  FILED  WITH  THE  REPORT                                         30


                                        2
<PAGE>



                         PART I - FINANCIAL INFORMATION


ITEM  1.           FINANCIAL  STATEMENTS


                              I/OMAGIC CORPORATION
                                AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                DECEMBER 31, 2003 AND MARCH 31, 2004  (UNAUDITED)


<TABLE>
<CAPTION>

                                     ASSETS
                                                                  DECEMBER 31,    MARCH 31,
                                                                      2003          2004
                                                                  -----------    ------------
                                                                                 (unaudited)
<S>                                                               <C>           <C>
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . .  $  6,091,369  $ 5,422,934
Accounts receivable, net of allowance for doubtful
      accounts of $20,553 and $25,953 (unaudited). . . . . . . .    18,439,893   12,196,446
Inventory, net of allowance for obsolete inventory of 505,029
      and $479,075 (unaudited) . . . . . . . . . . . . . . . . .     9,706,708    8,286,613
Prepaid expenses and other current assets. . . . . . . . . . . .       407,260      823,151
                                                                  ------------  -----------
     Total current assets. . . . . . . . . . . . . . . . . . . .    34,645,230   26,729,144

PROPERTY AND EQUIPMENT, net. . . . . . . . . . . . . . . . . . .       539,943      488,747
TRADEMARK, net of accumulated amortization
      of $4,871,044 and $5,015,728 (unaudited) . . . . . . . . .     4,774,635    4,629,951
RESTRICTED CASH. . . . . . . . . . . . . . . . . . . . . . . . .       100,000      100,000
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . .        52,984       52,984
                                                                  ------------  -----------

     TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . .  $ 40,112,792  $32,000,826
                                                                  ============  ===========
</TABLE>

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


                                        3
<PAGE>
                              I/OMAGIC CORPORATION
                                AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                DECEMBER 31, 2003 AND MARCH 31, 2004 (UNAUDITED)

<TABLE>
<CAPTION>
                      LIABILITIES AND STOCKHOLDERS' EQUITY

                                                                        DECEMBER 31,     MARCH 31,
                                                                            2003           2004
                                                                        -------------  -------------
                                                                                        (unaudited)

<S>                                                                     <C>            <C>
CURRENT LIABILITIES
Line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $  5,938,705   $  5,931,125
 Accounts payable and accrued expenses . . . . . . . . . . . . . . . .     5,572,878      3,360,178
 Accounts payable - related parties. . . . . . . . . . . . . . . . . .    10,370,119      5,755,654
 Reserves for customer returns and price protection. . . . . . . . . .       853,373        318,905
 Current portion of settlement payable . . . . . . . . . . . . . . . .     1,000,000              -
                                                                        -------------  -------------
   Total current liabilities . . . . . . . . . . . . . . . . . . . . .    23,735,075     15,365,862
                                                                        -------------  -------------
STOCKHOLDERS' EQUITY
Preferred Stock
   10,000,000 shares authorized, $0.001 par value
  Series A, 1,000,000 shares authorized, 0 and 0 shares
   issued and outstanding. . . . . . . . . . . . . . . . . . . . . . .             -              -
  Series B, 1,000,000 shares authorized, 0 and 0 shares
   issued and outstanding. . . . . . . . . . . . . . . . . . . . . . .             -              -
Common stock, $0.001 par value
  100,000,000 shares authorized
  4,529,672 and 4,529,672 (unaudited) shares issued and outstanding. .         4,530          4,530
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . .    31,557,988     31,557,988
Treasury stock, 13,493 and 13,493 (unaudited) shares, at cost. . . . .      (126,014)      (126,014)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . .   (15,058,787)   (14,801,540)
                                                                        -------------  -------------
   Total stockholders' equity. . . . . . . . . . . . . . . . . . . . .    16,377,717     16,634,964
                                                                        -------------  -------------
     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. . . . . . . . . . . .  $ 40,112,792   $ 32,000,826
                                                                        =============  =============
</TABLE>

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

                                        4
<PAGE>

                              I/OMAGIC CORPORATION
                                AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                      FOR THE THREE MONTHS ENDED MARCH 31,
                                   (UNAUDITED)


<TABLE>
<CAPTION>


                                                                  THREE MONTHS ENDED MARCH 31,
                                                                   2004                   2003
                                                             ----------------       ---------------
                                                               (unaudited)            (unaudited)

<S>                                                       <C>                        <C>
NET SALES. . . . . . . . . . . . . . . . . . . . . . . .     $  15,654,220           $  17,064,203
COST OF SALES. . . . . . . . . . . . . . . . . . . . . .        12,992,415              14,627,397
                                                             -------------           -------------

GROSS PROFIT . . . . . . . . . . . . . . . . . . . . . .         2,661,805               2,436,806
                                                             -------------           -------------
OPERATING EXPENSES
  Selling, marketing, and advertising. . . . . . . . . .           774,113                 335,917
  General and administrative . . . . . . . . . . . . . .         1,366,359               1,456,839
  Depreciation and amortization. . . . . . . . . . . . .           209,271                 357,298
                                                             -------------           -------------
   Total operating expenses. . . . . . . . . . . . . . .         2,349,743               2,150,054
                                                             -------------           -------------
INCOME FROM OPERATIONS . . . . . . . . . . . . . . . . .           312,062                 286,752
                                                             -------------           -------------
OTHER INCOME (EXPENSE)
  Interest income. . . . . . . . . . . . . . . . . . . .                 -                     166
  Interest expense . . . . . . . . . . . . . . . . . . .           (43,915)               (103,567)
  Other income (expense) . . . . . . . . . . . . . . . .            (7,811)                 23,263
                                                             -------------           -------------

          Total other income (expense) . . . . . . . . .           (51,726)                (80,138)
                                                             -------------           -------------
INCOME BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES.           260,336                 206,614

PROVISION FOR (BENEFIT FROM) INCOME TAXES. . . . . . . .             3,088                  (2,654)
                                                             -------------           -------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . .     $     257,248           $     209,268
                                                             =============           =============
BASIC EARNINGS PER SHARE . . . . . . . . . . . . . . . .     $        0.06           $        0.05
                                                             =============           =============
DILUTED EARNINGS PER SHARE . . . . . . . . . . . . . . .     $        0.06           $        0.05
                                                             =============           =============
BASIC WEIGHTED-AVERAGE SHARES OUTSTANDING. . . . . . . .         4,529,672               4,529,672
                                                             -------------           -------------
DILUTED WEIGHTED-AVERAGE SHARES OUTSTANDING. . . . . . .         4,594,047               4,529,672
                                                             =============           =============
</TABLE>
      The accompanying notes are an integral part of these financial statements.

                                        5
<PAGE>
                              I/OMAGIC CORPORATION
                                AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      FOR THE THREE MONTHS ENDED MARCH 31,
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                  THREE MONTHS ENDED MARCH 31,
                                                                   2004                   2003
                                                             ----------------       ---------------
                                                               (unaudited)            (unaudited)

<S>                                                          <C>                    <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income. . . . . . . . . . . . . . . . . . . . . . . .  $     257,248           $     209,268
  Adjustments to reconcile net income to net cash
    provided by (used in) operating activities
      Depreciation and amortization . . . . . . . . . . . .         64,587                 212,614
      Amortization of trademarks. . . . . . . . . . . . . .        144,684                 144,684
      Allowance for doubtful accounts . . . . . . . . . . .          5,400                     611
      Reserve for customer returns and allowances . . . . .       (534,468)               (289,848)
      Reserve for obsolete inventory. . . . . . . . . . . .        (25,954)                      -
      (Increase) decrease in
         Accounts receivable . . . . . . . . . . . . . . . .     6,238,047               2,323,425
         Inventory . . . . . . . . . . . . . . . . . . . . .     1,446,050              (2,781,088)
         Inventory in transit. . . . . . . . . . . . . . . .             -                 675,000
         Prepaid expenses and other current assets . . . . .      (415,892)               (137,119)
      Increase (decrease) in
         Accounts payable and accrued expenses . . . . . . .    (2,212,701)             (1,054,765)
         Accounts payable - related parties. . . . . . . . .    (4,614,465)              4,685,683
         Settlement payable. . . . . . . . . . . . . . . . .    (1,000,000)             (3,000,000)
                                                             -------------           -------------

  Net cash provided by (used in) operating activities .           (647,464)                988,465
                                                             -------------           -------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of property and equipment . . . . . . . .               (13,391)                (25,217)
                                                             -------------           -------------

   Net cash used in investing activities. . . . . . .              (13,391)                (25,217)
                                                             -------------           -------------
CASH FLOWS FROM FINANCING ACTIVITIES
   Net borrowings (payments) on line of credit . . . . .            (7,580)             (2,595,000)
   Purchase of treasury shares . . . . . . . . . . . . .                 -                 (83,684)
                                                             -------------           -------------
Net cash used in financing activities . . . . . . . .              ( 7,580)             (2,678,684)
                                                             -------------           -------------

Net increase (decrease) in cash and cash equivalents.             (668,435)             (1,715,436)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD. . . .            6,091,369               7,320,143
                                                             -------------           -------------

CASH AND CASH EQUIVALENTS, END OF PERIOD. . . . . . .        $   5,422,934           $   5,604,707
                                                             =============           =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  INTEREST PAID. . . . . . . . . . . . . . . . . . . .       $      42,682           $     111,352
                                                             =============           =============
  INCOME TAXES PAID (REFUNDED) . . . . . . . . . . . .       $       3,088           $      (2,654)
                                                             =============           =============
</TABLE>

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

                                        6
<PAGE>
                              I/OMAGIC CORPORATION
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE  1  -  ORGANIZATION  AND  BUSINESS

I/OMagic  Corporation  ("I/OMagic"),  a Nevada corporation, and its subsidiaries
(collectively,  the  "Company")  develop,  manufacture  through  subcontractors,
market,  and  distribute data storage and digital entertainment products for the
consumer  electronics  markets.

NOTE  2  -  SUMMARY  OF  SIGNIFICANT  ACCOUNTING  POLICIES

BASIS  OF  PRESENTATION

The  accompanying unaudited consolidated financial statements have been prepared
in  accordance  with  the  rules  and regulations of the Securities and Exchange
Commission  and,  therefore,  do not include all information and notes necessary
for  a  fair presentation of financial position, results of operations, and cash
flows  in  conformity  with  generally  accepted  accounting  principles.  The
unaudited consolidated financial statements include the accounts of I/OMagic and
its  subsidiaries.  The  operating results for interim periods are unaudited and
are  not  necessarily  an  indication of the results to be expected for the full
fiscal year. In the opinion of management, the results of operations as reported
for  the  interim periods reflect all adjustments which are necessary for a fair
presentation of operating results.  These financial statements should be read in
conjunction  with  the Company's Form 10-K for the year ended December 31, 2003.

USE  OF  ESTIMATES

The  preparation  of  financial statements requires management 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 revenue and expenses during the reporting
period.  Actual  results  could  differ  from  those  estimates.

STOCK  BASED  COMPENSATION

Statement  of  Financial  Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based  Compensation," establishes and encourages the use of the fair value
based method of accounting for stock-based compensation arrangements under which
compensation cost is determined using the fair value of stock-based compensation
determined  as  of the date of grant and is recognized over the periods in which
the related services are rendered. The statement also permits companies to elect
to  continue  using  the  current intrinsic value accounting method specified in
Accounting  Principles  Bulletin  ("APB")  Opinion No. 25, "Accounting for Stock
Issued  to  Employees,"  to  account  for  stock-based  compensation  issued  to
employees.  The  Company  has  elected to use the intrinsic value method and has
disclosed  the  pro forma effect of using the fair value based method to account
for  its  stock-based  compensation.  For  stock-based  compensation  issued  to
non-employees,  the  Company  uses the fair value method of accounting under the
provisions  of  SFAS  No.  123.


                                        7
<PAGE>
EARNINGS  PER  SHARE

The  Company  calculates  earnings  per  share  in accordance with SFAS No. 128,
"Earnings  Per  Share."  SFAS  No.  128 replaced the presentation of primary and
fully  diluted  earnings  per  share  with the presentation of basic and diluted
earnings  per  share.  Basic  earnings  per  share  excludes  dilution  and  is
calculated  by  dividing  income  available  to  common  stockholders  by  the
weighted-average  number  of  common shares outstanding for the period.  Diluted
earnings  per  share includes the potential dilutive effects that could occur if
securities  or other contracts to issue common stock were exercised or converted
into  common  stock  ("potential  common  stock")  that  would then share in the
earnings  of  the  Company.

As  of March 31, 2003 (unaudited) and March 31, 2004 (unaudited) the Company had
potential  common  stock  as  follows:


                                                           2003          2004
                                                        ----------    ----------

 Weighted  average  common  shares
   outstanding  during  the  period                      4,529,672    4,529,672

 Incremental  shares  assumed  to  be  outstanding
   since  the  beginning  of  the  period  related
   to stock options and warrants outstanding (unaudited)         -       64,375

 Fully diluted weighted average common shares and
   potential  common  stock                              4,529,672    4,594,047

The following potential common shares have been excluded from the computation of
diluted  earnings  per  share as of March 31, 2003 and March 31, 2004 due to the
exercise price being greater than the Company's weighted average stock price for
the  period.

                                                           2003          2004
                                                        ----------    ----------
Stock  Options                                            146,167      188,167
Warrants                                                        -       20,004
                                                        ----------    ----------
                                                          146,167      208,171
                                                        ----------    ----------

NOTE  3  -  ACCOUNTS  PAYABLE  AND  ACCRUED  EXPENSES

Accounts  payable  and  accrued  liabilities  consisted  of  the  following:

                                                         March 31,  December 31,
                                                           2004         2003
                                                       -----------  ------------
                                                       (unaudited)

Accounts  payable                                      $ 1,017,685 $  2,525,508
Accrued  rebates  and  marketing                         1,850,111    2,369,544
Accrued compensation and related benefits                  217,277      192,002
Other                                                      275,105      485,824
                                                       -----------  -----------

TOTAL                                                  $ 3,360,178 $  5,572,878
                                                       =========== ============


                                        8
<PAGE>

NOTE  4  -  INVENTORY

Inventory  consisted  of  the  following:

                                                         March 31,  December 31,
                                                           2004         2003
                                                       -----------  ------------
                                                       (unaudited)

Component  parts                                       $ 2,864,477  $ 3,658,140
Finished  goods  -  warehouse                            2,952,994    2,317,765
Finished  goods  -  consigned                            2,948,217    4,235,832
Reserves for obsolete and slow moving inventory           (479,075)    (505,029)
                                                       -----------  -----------
TOTAL                                                  $ 8,286,613  $ 9,706,708
                                                       ===========  ===========
NOTE  5  -  LINE  OF  CREDIT

On  August  15,  2003,  the Company entered into an agreement for an asset-based
line  of  credit with United National Bank, effective August 18, 2003.  The line
allows  the Company to borrow up to a maximum of $6,000,000.  The line of credit
expires September 1, 2004 and is secured by a UCC filing on substantially all of
the  Company's  assets.  Advances  on  the  line  bear  interest at the floating
commercial  loan  rate  equal  to  the prime rate as reported in the Wall Street
Journal  plus  0.75%.  As  of  March 31, 2004, the interest rate was 4.75%.  The
agreement  also calls for the Company to be in compliance with certain financial
covenants  which  the  Company  was  in  compliance with at March 31, 2004.  The
outstanding  balance  with  United  National  Bank  as  of  March  31,  2004 was
$5,931,125.  The  amount  available to the Company for borrowing as of March 31,
2004  was  $68,875.

NOTE  6  -  CREDIT  FACILITIES  FROM  RELATED  PARTIES

In January 2003, the Company entered into a trade credit facility with a related
party,  whereby  the related party has agreed to purchase inventory on behalf of
the  Company.  The  agreement  allows the Company to purchase up to $10,000,000,
with  payment  terms of 120 days following the date of invoice.  The third party
will  charge  the  Company a 5% handling fee on the supplier's unit price.  A 2%
discount  to  the handling fee will be applied if the Company reaches an average
running  monthly  purchasing  volume  of  $750,000 a month.  Returns made by the
Company,  which  are  agreed  by  the  supplier,  will result in a credit to the
Company  for  the  handling  charge.  As  security  for  the trade facility, the
Company  paid  the  related  party  a  security  deposit of $1,500,000, of which
$750,000  may  be  applied  against outstanding accounts payables to the related
party  after six months. As of March 31, 2004, $750,000 has been applied against
outstanding  accounts  payables  to  the  related party.  The remaining $750,000
deposit  has  been  offset  against  Accounts  Payables - Related Parties in the
accompanying  financial  statements.  The agreement is for 12 months, at the end
of  which either party may terminate the agreement upon 30 days' written notice.
Otherwise,  the  agreement  will  remain  continuously valid without effecting a
newly  signed  agreement.  As  of  March  31, 2004, there were $308,275 in trade
payables net of the deposit still outstanding ($750,000) under this arrangement.

In  February  2003,  the Company entered into an agreement with a related party,
whereby the related party will supply and store at the Company's warehouse up to
$10,000,000  of  inventory  on  a  consignment  basis.  Under the agreement, the
Company  will  insure the consignment inventory, store the consignment inventory
for  no  charge, and furnish the related party with weekly statements indicating
all products received and sold and the current consignment inventory level.  The
agreement  may  be  terminated by either party with 60 days' written notice.  In
addition,  this  agreement  provides  for  a  trade  line  of  credit  of  up to
$10,000,000  with  payment  terms  of  net 60 days, non-interest bearing.  As of
March  31,  2004, there were $5,447,379 in trade payables outstanding under this
arrangement.


                                        9
<PAGE>

NOTE  7  -  COMMITMENTS  AND  CONTINGENCIES

LEASES

The  Company  leases  its facilities and certain equipment under non-cancelable,
operating  lease  agreements,  expiring  through  August  2006.

Rent  expense  was  $90,870  (unaudited)  and  $96,290 (unaudited) for the three
months  ended  March 31, 2004 and 2003, respectively, and is included in general
and  administrative  expenses  in  the  accompanying  statements  of  income.

SERVICE  AGREEMENTS

Periodically, the Company enters into various agreements for services including,
but  not  limited  to, public relations, financial consulting, and manufacturing
consulting.  The  agreements  generally  are  ongoing  until  such time they are
terminated,  as  defined.  Compensation  for  services is paid either on a fixed
monthly  rate  or  based  on  a  percentage, as specified, and may be payable in
shares  of  the Company's common stock.  During the three months ended March 31,
2004 and 2003, the Company incurred expenses of $127,177 (unaudited) and $78,538
(unaudited), respectively, in connection with such arrangements.  These expenses
are  included  in  general  and  administrative  expenses  in  the  accompanying
statements  of  operations.

EMPLOYMENT  AGREEMENT

The  Company  entered  into  an employment agreement with one of its officers on
October  15,  2002,  which expires on October 15, 2007.  The agreement, which is
effective  as  of  January 1, 2002, calls for an initial salary of $198,500, and
provides  for  certain  expense allowances.  In addition, the agreement provides
for  a  quarterly  bonus equal to 7% of the Company's quarterly net income.  For
the  three months ended March 31, 2004 and 2003, bonuses totaling $0 (unaudited)
and  $0  (unaudited), respectively, were paid under the terms of this agreement.
As  of  March  31, 2004 and December 31, the accrued bonuses were $0 (unaudited)
and  $0  (unaudited),  respectively.

The  Company  and  the  officer  are  presently  in the process of negotiating a
revised  employment  agreement.

RETAIL  AGREEMENTS

In  connection with certain retail agreements, the Company has agreed to pay for
certain  marketing  development  and  advertising  costs  on  an  ongoing basis.
Marketing  development  and  advertising  costs are generally agreed upon at the
time  of  the  event.  The  Company also records a liability for co-op marketing
based  on  management's evaluation of historical experience and current industry
and  Company  trends. During the three months ended March 31, 2004 and 2003, the
Company  incurred  $452,416  (unaudited) and $724,827 (unaudited), respectively,
related  to these agreements.  These amounts are netted against sales revenue in
the  accompanying  statements  of  income.


                                       10
<PAGE>

LITIGATION

Effective  on or about March 28, 2003, the Company, among others, entered into a
Settlement  Agreement  and  Release  with Mark Vakili, Mitra Vakili, Hi-Val, and
others,  in connection with a complaint filed in the Superior Court of the State
of California for the County of Orange (Case No. 01CC09894).  Under the terms of
that  agreement,  (i) the Company paid the plaintiffs an aggregate of $3,000,000
on March 31, 2003, (ii) the Company agreed to pay to the plaintiffs an aggregate
$1,000,000  on  March 15, 2004, (iii) Mr. Shahbaz and Mr. Su, each a director of
the  Company,  relinquished any claims held by either of them to any interest in
Alex  Properties,  (iv)  the  Company entered into a new written lease agreement
with  Alex  Properties  relating  to the real property in Santa Ana, California,
which  the  Company had already physically occupied, and (v) Mr. Shahbaz and Mr.
Su  transferred,  to  parties  designated  by  Mark  Vakili and Mitra Vakili, an
aggregate  of  13,333  post-split  shares of the Company's common stock from the
aggregate  66,667 post-split shares of the Company's common stock being returned
by  Mark Vakili and Mitra Vakili to Mr. Shahbaz and Mr. Su.  Mr. Shahbaz and Mr.
Su  had  previously  transferred the 66,667 post-split shares to Mark Vakili and
Mitra  Vakili.  On  September  30,  2003,  pursuant  to  the  terms of the lease
agreement,  the  Company  vacated  the  real  property  in  Santa  Ana.

Thereafter,  Mark  Vakili,  Mitra Vakili and Alex Properties alleged claims that
the  Company  had  improperly  caused damage to the Santa Ana facility (the "New
Lease  Claims").  The Company denied, and continues to deny all of the New Lease
Claims,  and  denied,  and continues to deny that any such New Lease Claims have
any  merit.  In  early  February  2004,  all  parties to the original Settlement
Agreement  and  Release  executed  a First Amendment to Settlement Agreement and
Release,  releasing all defendants from all of the New Lease Claims in the event
the  Company  paid  the  above-mentioned $1,000,000 by February 17, 2004 (rather
than  March  15,  2004).  The  Company paid the $1,000,000 on February 17, 2004,
thereby  effectuating  the  release of all of the New Lease Claims on such date,
and  directly  causing  the  filing of a dismissal of the Vakili action with the
court  on  March  8,  2004.

On  May  30,  2003,  an action for breach of contract and legal malpractice, IOM
Holdings,  Inc. and I/OMagic Corporation v. Lawrence W. Horwitz, Gregory B.Beam,
Horwitz  &  Beam,  Lawrence  M.  Cron,  Horwitz  & Cron, Kevin J. Senn, and Senn
Palumbo  Meulemans,  LLP,  was filed by the Company and IOM Holdings against its
former  attorneys  and  their  law  firms  in the Superior Court of the State of
California  for  the  County  of Orange (Case no. 03CC07383). The claims alleged
arose out of the defendant's representation of the Company and its subsidiaries.
A  claim  of  $15 million in damages has been alleged against the defendants. On
November  6,  2003,  the  Company  filed its First Amended Complaint against all
defendants.  Defendants  have responded to the Company's First Amended Complaint
denying  its  allegations.  Defendants  Horwitz  and  Cron  have  also  filed  a
Cross-Complaint  against  the  Company  for  attorneys'  fees  in  the amount of
$78,971.15 that they claim are owed to them for their work done in the matter in
which  the Company is suing them in. The Company has denied their allegations in
the  Cross-Complaint  based on the fact that Defendants are not entitled to such
fees.  As of the date of this report, discovery on all parties has commenced and
responses  are  now  being  prepared.  The  outcome  of this action is presently
uncertain.

In  addition,  the  Company  is involved in certain legal proceedings and claims
which  arise in the normal course of business.  Management does not believe that
the  outcome  of  these  matters  will  have  a material effect on the Company's
financial  position  or  results  of  operations.

NOTE  8  -  RELATED  PARTY  TRANSACTIONS

During  the  three  months  ended  March  31,  2004  and  2003, the Company made
purchases from related parties totaling approximately $7,307,338 (unaudited) and
$8,039,904  (unaudited),  respectively.

During  the  three  months  ended March 31, 2004 and 2003, the Company had trade
payables  to  related  parties totaling approximately $5,755,654 (unaudited) and
$7,292,961  (unaudited),  respectively.


                                       11
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF  OPERATIONS

     You should read the following discussion together with our consolidated
financial statements and related notes appearing elsewhere in this report. This
discussion contains forward-looking statements regarding the data storage and
digital entertainment industries and our expectations regarding our future
performance, liquidity and capital resources. Our actual results could differ
materially from those expressed in these forward-looking statements.

     We are a leading provider of data storage products. We also sell digital
entertainment products. Our data storage products consist of a range of products
that store traditional personal computer, or PC, data as well as music, photos,
movies, games and other multi-media. These products are designed principally for
general data storage purposes. Our digital entertainment products consist of a
range of products that focus on digital music, photos and movies. These products
are designed principally for entertainment purposes. We sell our products
through computer, consumer electronics and office supply superstores and other
retailers who collectively operate retail locations throughout North America.
Our network of retailers enables us to offer products to consumers across North
America, including every major metropolitan market in the United States. Our
largest retailers include Best Buy, Circuit City, CompUSA, Office Depot,
RadioShack, and Staples. We employ a three-brand approach to achieve our goal of
product differentiation among various sales channels and price points. Our three
brands are I/OMagic, Digital Research Technologies and Hi-Val.

     Prior to 2003, we also emphasized the sale of other PC-related and consumer
electronics products including, media, keyboards, mice, cameras, audio and
graphic cards and flat panel television monitors. During the latter part of 2002
and the early part of 2003, we made a strategic decision to de-emphasize these
additional product offerings in order to focus our management and financial
resources on the manufacture and sale of our data storage and digital
entertainment products, especially the manufacture and sale of dual-format
digital video or digital versatile disc, or DVD, recordable devices that we
introduced in July 2003. Because of our planned introduction of these devices in
the third quarter of 2003, we reduced our promotional activities, such as
rebates and point-of-sale discounts, for our CD-based products. This reduction
in promotional activities, combined with our transition out of certain product
offerings and other factors discussed below, resulted in an 8.3% decline in net
sales for the first quarter of 2004 as compared to the first quarter of 2003.
Despite this reduction in net sales for 2004, we increased our net income 22.9%
from $209,000 for the first quarter of 2003 to $257,000 for the first quarter of
2004. We believe that this improvement in our operating results is due, in large
part, to the following factors:

-     Focus on Smaller Number of Product Offerings. Our decision to reduce the
      number of product offerings in order to focus our attention on our data
      storage and digital entertainment products has had the benefit of
      eliminating or reducing product offerings that were not very profitable.

-     More Efficient Receipt of Goods From Vendors.  We have worked with some of
      our vendors in the shipment of inventory in which the vendors have agreed
      to absorb some of the freight costs to us.

-     Elimination of Accelerated Leasehold Amortization.  In fiscal 2003, we
      accelerated the amortization on our prior facility due to our decision to
      relocate  later  in  the  year.  Our  amortization  of  new  leasehold
      improvements in fiscal 2004 is expected to be under normal life of lease
      policy.

                                       12
<PAGE>

-     More Efficient Management Reporting. We expanded our review and management
      of operating expenses in order to reduce costs.  In doing so, we
      instituted improved financial controls and procedures to better monitor
      personnel, legal and accounting costs.  We spent more time and effort
      tracking consigned inventory that resides at our retailers.  In doing so,
      we believe that we can better control overstocking of our products, which
      in turn allows us to better control price reductions and marketing
      programs in our efforts to sell inventory.  We also spent additional time
      and effort in managing the shipment of products to our retailers to ensure
      that deliveries to these retailers were made on time in order to avoid
      penalties which many retailers assess on late shipments.

RETAILERS

     Historically, a limited number of retailers have accounted for a
significant percentage of our net sales. For the three months ended March 31,
2004 and 2003, our four largest retailers accounted for approximately 39%, 19%,
11% and 10% of our net sales, respectively. We expect that sales of our products
to a limited number of retailers will continue to account for a majority of our
sales in the foreseeable future. We do not have long-term purchase agreements
with any of our retailers. If we were to lose any of our major retailers or
experience any material reduction in orders from any of them, it could have a
material adverse effect on our business and results of operations.

SEASONALITY

     Our data storage and digital entertainment products have historically been
affected by seasonal purchasing patterns. Our products tend to have higher unit
sales in the fourth quarter. These sales generally follow seasonal purchasing
patterns of our end-user customers who purchase most of our products through
retailers. Generally, our second quarter is the weakest.  The impact of
seasonality on our future results will be affected by our product mix, which
will vary from quarter to quarter.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments 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 amount of net sales and expenses for
each period.  The following represents a summary of our critical accounting
policies, defined as those policies that we believe are the most important to
the portrayal of our financial condition and results of operations and that
require management's most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effects of matters that are
inherently uncertain.

     Revenue Recognition

     Currently, the majority of our net sales are non-consignment and are
recognized upon shipment to retailers. A growing percentage of our net sales are
consignment sales.  Consignment sales are recognized when our retailers sell our
products to the consumers.  All of our sales include limited rights to return
unsold inventory. We provide for estimated future returns of inventory based on
historical experience. However, if certain returns in excess of our estimates
occur, those amounts are accrued at the time we become aware of them, which may
not be in the same period in which we book the initial sale. In addition, some
retailers have limited price protection rights for inventories of our products
held by them. If we reduce the list price of these previously purchased
products, these retailers may be entitled to receive credits from us. We accrue
for estimated cost for these limited price protection arrangements when the
customer is authorized to make the price change. We also offer to both consumers
and retailers certain rebate arrangements. We accrue for the estimated cost of
these rebate arrangements using actual sell-through data supplied by our
retailers and historical redemption percentages. Our net sales are defined as
our gross sales less these estimated future returns, limited price protection
arrangements, rebate arrangements and marketing development fund/cooperative
arrangements.

                                       13
<PAGE>

     Advertising  and  Market  Development  Costs

     Advertising and market development costs are charged to operations or
offset against gross sales in accordance with Emerging Issues Task Force Issue
No. 01-9. For the three months ended March 31, 2004, our advertising and market
development costs were $1.9 million, of which $1.7 million was offset against
gross sales.  For the three months ended March 31, 2003, our advertising and
market development costs were $2.6 million, all of which was offset against
gross sales.  Consideration generally given by us to a retailer is presumed to
be a reduction of selling price, and therefore, a reduction of gross sales.
However, if we receive an identifiable benefit that is sufficiently separable
from our sales to that retailer, such that we could have paid an independent
company to receive that benefit and we can reasonably estimate the fair value of
that benefit, then the consideration is characterized as an expense. We estimate
the fair value of the benefits we receive by tracking the advertising done by
our retailers on our behalf and calculating the value of that advertising using
a comparable rate for similar publications.

     Inventory  Obsolescence  Allowance

     We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.  These
write-downs result in a charge to cost of sales.  These write-downs relate
directly to the amount of slow-moving or obsolete inventory which we have in our
warehouse.  This inventory usually is the result of returns by retailers at the
end of a product's life cycle.  We plan to make a concerted effort in 2004 to
sell this inventory more quickly than in prior years and thus reduce our
write-downs.

     Allowance  for  Doubtful  Accounts

     We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our retailers to make required payments. Our current
retailers consist of either large national or regional retailers with good
payment histories with us.  Since we have not experienced any previous payment
defaults with any of our current retailers, our allowance for doubtful accounts
is minimal.  We perform periodic credit evaluations of our retailers.  If the
financial condition of our retailers were to deteriorate, resulting in the
impairment of their ability to make payments, additional allowances may be
required.  New retailers are evaluated through Dunn & Bradstreet before terms
are established.  Although we expect to collect all amounts due, actual
collections may differ.

     Product Returns

     Our policy is to allow return of product from consumers upon proper request
by them and authorization by us.  We have no time limit on product returns from
consumers; however, our retailers generally have terms with their customers
which range from fourteen to thirty days from date of purchase.  This time
period will generally flow through to us.  We also include estimated time of
product on the shelf and time to return product to us.  Actual returns are
recorded as reductions to gross sales for the period in which they are received.
In addition, we maintain an allowance for sales returns for estimated future
returns for products currently or previously sold for which we estimate we have
not yet received.  We use historical data and estimates based on observations to
determine the allowance for each period.  We estimate that sales for two months,
the current and the prior, will be returned in future months.  We use the actual
return rate of the prior year to estimate what percent of the two months will be
returned.  Sales are adjusted by the estimated returns, while cost of sales are
adjusted by the estimated cost of sales and the allowance is adjusted for the


                                       14
<PAGE>

estimated gross margin.  In periods in which sales are higher, such as normally
our fourth quarter, the allowance is increased as we expect more returns.  In
periods in which sales are lower, such as normally our second quarter, the
allowance is decreased as we expect less returns than we have already reserved
for.

RESULTS  OF  OPERATIONS

     The tables presented below, which compare our results of operations from
one period to another, present the results for each period, the change in those
results from one period to another in both dollars and percentage change and the
results for each period as a percentage of net sales. The columns present the
following:

-     The first two data columns in each table show the absolute results for
      each period presented.

-     The columns entitled "Dollar Variance" and "Percentage Variance" show the
      change in results, both in dollars and percentages. These two columns show
      favorable changes as a positive and unfavorable changes as negative. For
      example, when our net sales increase from one period to the next, that
      change is shown as a positive number in both columns. Conversely, when
      expenses increase from one period to the next, that change is shown as a
      negative in both columns.

-     The last two columns in each table show the results for each period as a
      percentage of net sales.

THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003

<TABLE>
<CAPTION>

                                                                                       RESULTS AS A PERCENTAGE
                                                                                        OF NET SALES FOR THE
                                   THREE MONTHS ENDED       DOLLAR       PERCENTAGE      THREE MONTHS ENDED
                                        MARCH 31,          VARIANCE       VARIANCE            MARCH 31,
                                ------------------------  -----------  --------------   -------------------
                                                           FAVORABLE     FAVORABLE
                                  2004          2003     (UNFAVORABLE) (UNFAVORABLE)        2004    2003
                                ---------    -----------  -----------  --------------      ------  ------
                                            (IN THOUSANDS)
<S>                             <C>          <C>          <C>           <C>                  <C>     <C>
Net sales. . . . . . . . . . .  $   15,654   $   17,064   $    (1,410)      (8.3%)         100.0%  100.0%
Cost of sales. . . . . . . . .      12,992       14,627         1,635       11.2            83.0    85.7
                                ----------   ----------   -----------    --------          ------  ------
Gross profit . . . . . . . . .       2,662        2,437           225        9.2            17.0    14.3
Selling, marketing and
 advertising expenses. . . . .         774          336          (438)    (130.4)            4.9     2.0
General and administrative
  expenses . . . . . . . . . .       1,367        1,457            90        6.2             8.8     8.5
Depreciation and amortization.         209          357           148       41.5             1.3     2.1
                                ----------   ----------   -----------    --------          ------  ------
Operating income . . . . . . .         312          287            25        8.7             2.0     1.7
Net interest expense . . . . .         (44)        (103)           59       57.3            (0.3)   (0.6)
Other income (expense) . . . .          (8)          23           (31)    (134.8)              -     0.1
                                -----------  ----------   -----------    --------          ------  ------
Income from operations
  before provision for
  income taxes . . . . . . . .         260          207            53       25.6             1.7     1.2
Income tax provision (benefit)           3           (2)           (5)    (250.0)              -       -
                                ----------   ----------   -----------    --------          ------  ------
Net income . . . . . . . . . .  $      257   $      209   $        48       23.0%            1.7%    1.2%
                                ==========   ==========   ===========    ========          =======  =====
</TABLE>

     Net Sales.  The decrease of $1.4 million in net sales from $17.1 million
for the three months ended March 31, 2003 to $15.7 million for the three months
ended March 31, 2004 is primarily due to our strategic decision to de-emphasize
the sale of certain products and to reduce sales of our CD-based products,
partially offset by a large increase in the sales of our DVD-based products.
The principal reason for the reduction in CD-based product sales was reduced


                                       15
<PAGE>

promotional activities, such as rebates and point-of-sale discounts, for these
products because of our concentration in the production and sale of our new
dual-format DVD recordable devices which we introduced in July 2003.  As a
result, we experienced a decline of $7.6 million in the sales of CD-based
products from $11.2 million for the first quarter of 2003 as compared to $3.6
million for the same quarterly period in 2004.  In addition, sales of our
de-emphasized products declined by approximately $4.8 million to $54,000 for the
first quarter 2004.  Partially offsetting this decrease in first quarter 2004
sales was an increase in sales of DVD-based products of $10.2 million from $1.0
million during the first quarter 2003 to $11.2 million for the first quarter
2004.  In addition, a change in the allowance for sales returns resulted in a
$900,000 adjustment increase to sales for the first quarter 2004 as compared to
a $300,000 adjustment increase to sales for the first quarter 2003, resulting in
a $600,000 increase in sales in the first quarter 2004 compared to the first
quarter 2003.  Also, net sales to OfficeMax declined by $5.8 million, or 100%,
during the three months ended March 31, 2004, while we placed OfficeMax on
shipment hold due to unresolved business issues.  Sales to OfficeMax during the
three months ended March 31, 2003 consisted primarily of CD-based products and
those products we have de-emphasized.  We hope to resolve our business issues
with OfficeMax and recommence sales later in 2004, but there can be no assurance
that these sales will resume.  The decrease in sales to OfficeMax in the first
quarter of 2004 have been replaced by an increase in sales to our other
customers in the first quarter of 2004.

     Gross Profit. The increase in gross profit of $225,000 from $2.4 million
for the three months ended March 31, 2003 to $2.6 million for the three months
ended March 31, 2004, is primarily due to a reduction in cost of sales from
$14.6 million during the first quarter of 2003 to $13.0 million for the first
quarter of 2004. This was primarily due to a reduction in the direct costs of
products and related freight from $14.6 million during the first quarter of 2003
to $12.8 million during the first quarter of 2004. The increase as a percentage
of net sales was due to no sales during the first quarter of 2004 of certain
products, such as media, which had a low margin percentage during the first
quarter of 2003 and reduced the blended margin percentage.

  The improvement of our gross profit during the first quarter of 2004 as
compared to the first quarter of 2003 was partially offset by an increase in
inventory adjustments from $0 during the first quarter of 2003 to $69,000 during
the first quarter of 2004 and an increase in our inventory obsolescence charges
from $0 during the first quarter of 2003 to $100,000 during the first quarter of
2003.  Due to the short life cycle of many of our products, we expect to
continue to experience inventory obsolescence charges in the future. However, we
can not predict with any certainty the future level of these write-downs.

     Selling, Marketing and Advertising Expenses. Selling, marketing and
advertising expenses increased by $438,000 in 2004. This increase was primarily
due to an increase in advertising costs and slotting fees of $525,000. These
increases were partially offset by lower commissions due to reduced sales volume
and reduced payroll and related expenses due to less personnel.

     General and Administrative Expenses. The decrease in general and
administrative expenses is primarily due to a reduction in audit expenses of
$90,000 and a $79,000 reduction in product design, partially offset by a $62,000
increase in bad debt expenses ($63,000 during the first quarter of 2004 as
compared to $1,000 during the first quarter of 2003).

     Depreciation and Amortization Expenses. The decrease in depreciation and
amortization expenses is due to accelerated amortization during the first
quarter of 2003 on our prior Santa Ana facility which was originally to be
leased through 2010. At the beginning of 2003, we decided to move to another
facility by the end of September 2003 and thus, we accelerated our amortization
by $133,000 during the first quarter of 2003.

     Other Income (Expense). Other income (expense) decreased by $28,000 as
compared to the first quarter of 2003. During the first quarter of 2004,
interest expense decreased by $59,000 to $44,000 due to reduced borrowings under
our line of credit. This was offset by a $31,000 increase in expense related to
currency transactions in connection with our sales in Canada.

                                       16
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     Our principal sources of liquidity have been cash provided by operations
and borrowings under our bank credit facility and trade credit facilities.  Our
principal uses of cash have been to finance working capital, capital
expenditures and debt service requirements.  We anticipate these uses will
continue to be our principal uses of cash in the future.  As of March 31, 2004,
we had working capital of $11.4 million, an accumulated deficit of $14.8
million, $5.4 million in cash and cash equivalents and $12.2 million in net
accounts receivable.

     Cash used by our operating activities totaled $647,000 during the first
quarter of 2004 as compared to cash provided by our operating activities of
$988,000 during the first quarter of 2003. This increase in cash used by
operations during the first quarter of 2004 primarily resulted from a $4.6
million decrease in cash from the use of our trade credit facilities with
related parties, a $2.2 million decrease in accounts payable and accrued
expenses, a $1.0 million decrease in settlements payable, a $534,000 decrease in
reserve for customer returns and allowances, and a $416,000 increase in prepaid
expenses. These decreases were offset by a $6.2 million decrease in accounts
receivable, a $1.4 million decrease in inventory, net income of $257,000, and
$145,000 for trademark amortization.

     Cash used in our investing activities totaled $13,000 during the first
quarter of 2004 as compared to $25,000 for the first quarter of 2003. Our
investing activities in the first quarter of 2004 consisted of leasehold
improvements, furniture and computer equipment.

     Cash used in our financing activities totaled $8,000 during the first
quarter of 2004 as compared to $2.7 million for the first quarter of 2003. Our
financing activities during the first quarter of 2003 consisted of a $2.6
million payment on our line of credit with our prior lender and $83,000 in the
repurchase of shares of our common stock.

     On August 15, 2003, we entered into an asset-based business loan agreement
with United National Bank. The credit facility with United National Bank
provides for a revolving loan of up to $6,000,000 secured by substantially all
of our assets and expires September 1, 2004. Advances up to 65% of eligible
accounts receivable bear interest at the floating commercial loan rate equal to
the prime rate of interest as reported in the Wall Street Journal plus 0.75%. As
of March 31, 2004, the interest rate was 4.75%. The business loan agreement
provides that if United National Bank calls the loan because of a default under
the terms of the loan agreement, other than a payment default, we can repay the
loan in six equal monthly installments unless we obtain a replacement credit
facility in which case, all amounts would be due and payable. The business loan
agreement also contains a number of restrictive financial covenants. We were in
compliance with these covenants at March 31, 2004. As of March 31, 2004, the
outstanding balance with United National Bank was $5.9 million and we had
available to us $69,000 of additional borrowings. Our credit facility with
United National Bank expires on September 1, 2004.

     In January 2003, we entered into a trade credit facility with Lung Hwa
Electronics Co., Ltd. Lung Hwa Electronics is a shareholder and subcontract
manufacturer of I/OMagic. Under the terms of the facility, Lung Hwa Electronics
has agreed to purchase inventory on our behalf. We can purchase up to
$10,000,000 of inventory, with payment terms of 120 days following the date of
invoice by Lung Hwa Electronics. Lung Hwa Electronics charges us a 5% handling
fee on a supplier's unit price. A 2% discount of the handling fee is applied if
we reach an average running monthly purchasing volume of $750,000. Returns made
by us, which are agreed to by a supplier, result in a credit to us for the
handling charge. As security for the trade credit facility, we paid Lung Hwa
Electronics a $1.5 million security deposit during 2003. As of March 31, 2004,
$750,000 of this deposit had been applied against outstanding trade payables as
the agreement allowed us to apply the security deposit against our outstanding
trade payables. This trade credit facility is for an indefinite term, however,
either party has the right to terminate the facility upon 30 days' written
notice to the other party after the initial 12 months of the agreement. As of
March 31, 2004, we owed Lung Hwa Electronics $308,000 in trade payables net of
the remaining $750,000 deposit.


                                       17
<PAGE>

     In February 2003, we entered into a Warehouse Services and Bailment
Agreement with Behavior Tech Computer (USA) Corp., or BTC USA. Under the terms
of the agreement, BTC USA has agreed to supply and store at our warehouse up to
$10,000,000 of inventory on a consignment basis. We are responsible for insuring
the consigned inventory, storing the consigned inventory for no charge; and
furnishing BTC USA with weekly statements indicating all products received and
sold and the current level of consigned inventory. The agreement also provides
us with a trade line of credit of up to $10,000,000 with payment terms of net 60
days, without interest. The agreement may be terminated by either party upon 60
days' prior written notice to the other party. As of March 31, 2004, we owed BTC
USA $5.4 million under this arrangement. BTC USA is a subsidiary of Behavior
Tech Computer Corp., one of our significant shareholders. Mr. Steel Su, a
director of I/OMagic, is the Chief Executive Officer of Behavior Tech Computer
Corp.

     We believe current and future available capital resources, revenues
generated from operations, and other existing sources of liquidity, including
our trade credit facilities with Lung Hwa Electronics and BTC USA and our credit
facility with United National Bank, will be sufficient to fund our anticipated
working capital and capital expenditure requirements for at least the next
twelve months. If, however, our capital requirements or cash flow vary
materially from our current projections or if unforeseen circumstances occur, we
may require additional financing. For example, if the level of consignment sales
to our retailers were to increase substantially from current levels, our current
credit facility with United National Bank, which is a receivables-based line of
credit, may not meet all of our financing needs since the length of time between
delivery of product and the creation of an account receivable that may be
financed is longer for consignment sales as compared to non-consignment sales.
Accordingly, we would need to obtain other financing, including possibly an
inventory-based line of credit, to meet all of our liquidity needs. Our failure
to raise capital, if needed, could restrict our growth, limit our development of
new products or hinder our ability to compete.
BACKLOG

     Our backlog at March 31, 2004 was $3.6 million as compared to a backlog at
March 31, 2003 of $3.2 million.  Based on historical trends, we anticipate that
our March 31, 2004 backlog may be reduced by approximately 10%, or $360,000, to
a net amount of $3.2 million as a result of returns and reclassification of
certain expenses as reductions to net sales.  Our backlog may not be indicative
of our actual sales beyond a rotating six-week cycle.  The amount of backlog
orders represents revenue that we anticipate recognizing in the future, as
evidenced by purchase orders and other purchase commitments received from
retailers.  The shipment of these orders for non-consigned retailers or the
sell-through of our products by consigned retailers causes recognition of the
purchase commitments as revenue.  However, there can be no assurance that we
will be successful in fulfilling such orders and commitments in a timely manner,
that retailers will not cancel purchase orders, or that we will ultimately
recognize as revenue the amounts reflected as backlog based upon industry
trends, historical sales information, returns and price protections.

                                  RISK FACTORS
                                  ------------
     An investment in our common stock involves a high degree of risk. In
addition to the other information in this Quarterly Report and in our other
filings with the Securities and Exchange Commission, including our subsequent
reports on Forms 10-Q, 10-K,  and 8-K, you should carefully consider the
following risk factors before deciding to invest in shares of our common stock
or to maintain or increase your investment in shares of our common stock. The
risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also affect our business, financial condition and
operating results.  If any of the following risks, or any other risks not
described below, actually occur, it is likely that our business, financial
condition and operating results could be seriously harmed. As a result, the
trading price of our common stock could decline, and you could lose part or all
of your investment.


                                       18
<PAGE>

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, OUR BUSINESS
WILL BE ADVERSELY AFFECTED.

We have incurred net losses in each year since the year ended December 31, 1999.
As of March 31, 2004, we had an accumulated deficit of approximately
$14,800,000. During the years ended December 31, 2003, 2002 and 2001, we
incurred net losses in the amounts of approximately $265,000, $8,350,000, and
$5,550,000, respectively. Historically, we have relied upon cash from operations
and financing activities to fund all of the cash requirements of our business.
An extended period of net losses would result in negative cash flow and may
prevent us from operating or expanding our business. We cannot assure you that
we will be able to attain, sustain or increase profitability on a quarterly or
annual basis in the future. If we are not able to achieve, sustain or increase
profitability, our business will be adversely affected and our stock price may
decline.

WE CURRENTLY DEPEND ON A SMALL NUMBER OF MAJOR RETAILERS FOR THE VAST MAJORITY
OF OUR NET SALES. A REDUCTION IN BUSINESS FROM ANY OF THESE RETAILERS, OR THE
FAILURE BY ANY OF THESE RETAILERS TO TIMELY PAY AMOUNTS OWED TO US, COULD
ADVERSELY AFFECT OUR NET SALES AND COULD SERIOUSLY HARM OUR BUSINESS AND
FINANCIAL CONDITION.

During the three months ended March 31, 2004, net sales to our four largest
retailers represented approximately 39%, 19%, 11% and 10%, respectively, of our
total net sales. We expect that we will continue to be dependent upon these
retailers for a significant majority of our revenues for the foreseeable future.

Our agreements with these retailers do not require them to purchase any
specified number of products or dollar amount of sales. Therefore, we cannot
assure you that our net sales generated from these retailers, individually or in
the aggregate, will reach or exceed historical levels in any future period. A
cessation or reduction of business from, or a decrease in prices of products
sold to, any of these retailers has significantly reduced our net sales for one
or more reporting periods in the past and could, in the future, harm our
business and financial condition. We cannot assure you that, if sales to any of
these retailers cease or decline, we will be able to replace these sales with
sales to either existing or new retailers in a timely manner, or at all. If we
could not replace these sales, our business and financial condition would be
adversely affected. Further, should one or more of these retailers fail to pay
us amounts owed in a timely manner, we could suffer a substantial decline in our
profitability, which would have a material adverse affect on our business,
financial condition and results of operations.

IF WE ARE UNABLE TO RENEW OR REPLACE OUR BUSINESS LOAN AGREEMENT WITH UNITED
NATIONAL BANK PRIOR TO ITS SEPTEMBER 1, 2004 EXPIRATION DATE, OUR ABILITY TO
PURCHASE ADDITIONAL INVENTORY AND TO EXPAND OR SUSTAIN OUR CURRENT SALES VOLUME
WOULD BE ADVERSELY AFFECTED. IN ADDITION, WE MAY BE UNABLE TO FUND OUR
DAY-TO-DAY OPERATIONS.

Our business loan agreement with United National Bank expires on September 1,
2004. This agreement provides that if United National Bank calls the loan
because of a default under the terms of the agreement, other than a payment
default, we can repay the loan in six equal monthly installments unless we
obtain a replacement credit facility, in which case all amounts would be due and
payable. If we are unable to renew or replace this agreement, or if United
National Bank calls the loan due in advance of its expiration as a result of a
default by us, we may lack the funds to acquire sufficient amounts of inventory
and our ability to expand or sustain our current sales volume will be adversely
affected. In addition, we may be unable to fund our day-to-day operations.

ONE OR MORE OF OUR RETAILERS MAY DIRECTLY IMPORT OR PRIVATE LABEL PRODUCTS THAT
ARE IDENTICAL, OR VERY SIMILAR, TO OUR PRODUCTS. THIS COULD CAUSE A DECLINE IN
OUR SALES AND COULD HAVE AN ADVERSE IMPACT ON OUR BUSINESS, FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.


                                       19
<PAGE>

Optical data storage products and digital entertainment products are widely
available from manufacturers and other suppliers around the world. Our major
retailers include Best Buy, Circuit City, CompUSA, Office Depot, RadioShack, and
Staples. Collectively, these six retailers accounted for 86% of our net sales
for the three months ended March 31, 2004. Each of these retailers has
substantially greater resources than we do, and has the ability to directly
import or private label, data storage and digital entertainment products from
manufacturers and other suppliers around the world, including from some of our
own subcontract manufacturers. Our retailers may believe that higher profit
margins can be achieved if they implement a direct import or private label
program, excluding us from the sales channel. Accordingly, one or more of our
retailers may stop buying products from us in favor of a direct import or
private label program. As a consequence, our sales and profitability would be
adversely affected, which could have an adverse impact on our business,
financial condition and results of operations.

WE RELY HEAVILY ON OUR CHIEF EXECUTIVE OFFICER, AND THE LOSS OF HIS SERVICES
COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.

Our success depends, to a significant extent, upon the continued services of
Tony Shahbaz, who is our Chairman of the Board, President, Chief Executive
Officer and Secretary. For example, Mr. Shahbaz has developed key personal
relationships with our suppliers and retail customers, including with our
subcontract manufacturers, upon which we greatly rely in connection with our
operations and the execution of our business strategies. Although we have
entered into an employment agreement with Mr. Shahbaz, that agreement is of
limited duration and is subject to early termination by Mr. Shahbaz under
certain circumstances. In addition, we do not maintain "key person" life
insurance covering Mr. Shahbaz or any other executive officer. The loss of Mr.
Shahbaz could significantly delay or prevent the achievement of our business
objectives. Consequently, the loss of Mr. Shahbaz could adversely affect our
business, financial condition and results of operations.

THE HIGH CONCENTRATION OF OUR SALES WITHIN THE DATA STORAGE INDUSTRY COULD HAVE
A MATERIAL ADVERSE AFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS IF DEMAND FOR THOSE PRODUCTS DECLINES OR IF COMPETITION WITHIN THE
INDUSTRY INTENSIFIES.

Sales of our data storage products for the three months ended March 31, 2004
accounted for approximately 99% of our net sales. Except for our digital
entertainment products, which accounted for only a small fraction of our net
sales in the three months ended March 31, 2004, we have not diversified our
product categories, and all of these product categories are within the data
storage industry. We expect data storage products to continue to account for the
vast majority of our sales for the foreseeable future. As a result, our
business, financial condition and results of operations would be significantly
and adversely impacted by a downturn in the market for data storage products.

IF WE FAIL TO ACCURATELY FORECAST THE COSTS OF OUR PRODUCT REBATE OR OTHER
PROMOTIONAL PROGRAMS, OUR BRAND IMAGE, AND OUR BUSINESS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED.

We rely heavily on product rebates and other promotional programs to maintain
and increase sales of our products. If we fail to accurately forecast the costs
of these rebate or other promotional programs, we may fail to allocate
sufficient resources to these programs. For example, we may fail to keep
sufficient funds available for mail-in product rebates. If we are unable to
satisfy our promotional obligations, such as providing cash rebates to
consumers, our brand image and goodwill with those consumers and our retailers
would be harmed, which may adversely affect our business, financial condition
and results of operations.

COMPETITION WITHIN THE DATA STORAGE AND DIGITAL ENTERTAINMENT INDUSTRIES IS
INTENSE. ALL OF OUR SIGNIFICANT COMPETITORS HAVE GREATER RESOURCES THAN WE DO
AND COULD USE THESE RESOURCES TO GAIN MARKET SHARE AND CAUSE US TO LOSE SALES
AND MARKET SHARE.


                                       20
<PAGE>

The data storage and digital entertainment industries are extremely competitive.
All of our significant competitors have substantially greater production,
financial, research and development, and marketing resources than we do. As a
result, these companies may be able to compete more aggressively over a longer
period of time than we can. In addition, our lack of resources relative to all
of our significant competitors may cause us to fail to anticipate or respond
adequately to technological developments and changing consumer demands and
preferences, or may cause us to experience significant delays in developing or
introducing new or enhanced products. These failures or delays could reduce our
competitiveness and cause a decline in our market share and sales.

DATA STORAGE AND DIGITAL ENTERTAINMENT PRODUCTS ARE SUBJECT TO RAPID
TECHNOLOGICAL CHANGES. IF WE FAIL TO ACCURATELY ANTICIPATE AND ADAPT TO THESE
RAPID TECHNOLOGICAL CHANGES, THE PRODUCTS WE SELL WILL BECOME OBSOLETE, AND OUR
BUSINESS, SALES, FINANCIAL CONDITION AND RESULTS OF OPERATIONS WILL BE ADVERSELY
AFFECTED.

The data storage and digital entertainment industries are extremely competitive
and subject to rapid technological changes which cause product obsolescence.
Companies within the data storage and digital entertainment industries are
continuously developing new products with heightened performance and
functionality. This puts pricing pressure on, and constantly threatens the
obsolescence of, existing products. Our typical product life cycle is extremely
short and ranges from only three to twelve months, generating lower average
selling prices as the cycle matures. If we fail to accurately anticipate the
introduction of new technologies, we may end up holding significant amounts of
obsolete inventory that can only be sold at substantially lower prices and
profit margins than we expected. In addition, if we fail to accurately
anticipate the introduction of new technologies, we may be unable to compete
effectively due to our failure to offer products most demanded by the
marketplace. If any of these failures occur, our business, sales, financial
condition and results of operations will be adversely affected.

OUR INDEMNIFICATION OBLIGATIONS TO OUR RETAILERS FOR PRODUCT DEFECTS COULD
REQUIRE US TO PAY SUBSTANTIAL DAMAGES, RESULTING IN AN ADVERSE AFFECT ON OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

A number of our agreements with our retailers provide that we will defend,
indemnify and hold them, and their customers, harmless from damages and costs
that arise from product warranty claims or from claims for injury or damage
resulting from defects in our products. If such claims are asserted against us,
our insurance coverage may not be adequate to cover the costs associated with
our defense of those claims or the cost of any resulting liability we would
incur if those claims are successful. A successful claim brought against us for
product defects that is in excess of, or excluded from, our insurance coverage
could have an adverse affect on our business, financial condition and results of
operations.

IF WE ARE SUBJECTED TO ONE OR MORE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS,
OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS MAY BE ADVERSELY
AFFECTED.

Our products rely on intellectual property developed, owned or licensed by third
parties. From time to time in the past, intellectual property infringement
claims have been asserted against us. We expect to continue to be subjected to
such claims in the future. Intellectual property infringement claims may also be
asserted against our retailers as a result of selling our products. As a
consequence, our retailers could assert indemnification claims against us. If
any third party is successful in asserting an infringement claim against us, we
could be required to acquire licenses, which may not be available on
commercially reasonable terms, if at all, to discontinue selling certain
products to pay substantial monetary damages or to develop non-infringing
technologies, none of which may be feasible. Both infringement and
indemnification claims could be time-consuming and costly to defend or settle
and would divert management's attention and our resources away from our
business. Because we are a small company and may not have sufficient litigation
defense resources, any one of these developments could place substantial
financial and administrative burdens on us and our business, financial condition
and results of operations could be adversely affected.


                                       21
<PAGE>

WE ARE SUBJECT TO PENALTIES FOR BOTH EARLY AND LATE PRODUCT DELIVERIES, WHICH
MAY ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.

Our future operating results are dependent upon our ability to deliver products
to our retailers in a timely manner. Often, the purchase orders placed by our
retailers require us to deliver products on a specific date. Many of our
retailers impose penalties for both early and late product deliveries, which
could result in significant additional costs to us. Our failure to timely
deliver products to our retailers could result in significant losses which would
adversely affect our business, financial condition and results of operations.

OUR FAILURE TO SUCCESSFULLY MANAGE OUR PLANNED PRODUCT EXPANSION AND OUR PLANNED
EXPANSION INTO NEW SALES CHANNELS COULD HAVE A MATERIAL ADVERSE AFFECT ON OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

We plan to offer new data storage and digital entertainment products in the
future. In particular, we plan to offer additional DVD-based products, including
digital video recorders, or DVRs, and to offer products with heightened
performance and added functionality. We also plan to offer a next-generation
DVD-based product, such as Blu-ray  DVD or HD-DVD, depending on which of these
competing formats we believe is most likely to prevail in the marketplace. These
planned product offerings will require significant investments of capital and
management's close attention. In offering new digital entertainment products,
our resources and personnel are likely to be strained because we have little
experience in the digital entertainment industry.

We also plan to expand our sales of new and existing products into additional
sales channels, such as corporate and government procurers, value-added
resellers and value-added distributors. In addition, we plan to further develop
our product offerings over the Internet at our company websites located at
http://www.iomagic.com, http://www.dr-tech.com and http://www.hival.com. These
planned expansions will require significant resources, including for improvement
of our information systems and accounting controls, management of product data,
expansion of the capabilities of our administrative and operational personnel,
and attracting, training, managing and retaining additional qualified personnel.

Our failure to successfully manage any of the above tasks associated with our
planned product expansion and our expansion into new sales channels could have a
material adverse affect on our business, financial condition and results of
operations.

A SIGNIFICANT PRODUCT DEFECT OR PRODUCT RECALL COULD HAVE A MATERIAL ADVERSE
AFFECT ON OUR BRAND IMAGE AND OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.

A significant product defect could materially harm our brand image and could
force us to conduct a product recall. This could result in damage to our
relationships with our retailers and loss of consumer loyalty. Because we are a
small company, a product recall would be particularly harmful to us because we
have limited financial and administrative resources to effectively manage a
product recall and it would detract management's attention from implementing our
core business strategies. As a result, a significant product defect or product
recall could materially and adversely affect our brand image and our business,
financial condition and results of operations.

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 PROFITS
WOULD DECLINE AND OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COULD BE ADVERSELY AFFECTED.

One of our core strategies is to be among the first-to-market with new and
enhanced product offerings based on established technologies. We believe that
our I/OMagic , Digital Research Technologies  and Hi-Val  brands are perceived
by the retailers and end-users of our products as among the leaders in the data
storage industry. We also believe that the retailers and end-users of our
products view products offered under our brands as embodying newly established
technologies or technological enhancements. For instance, in introducing new and
enhanced optical data storage products, we seek to be among the first-to-market,
offering heightened product performance such as faster data recordation and


                                       22
<PAGE>

access speeds. If our products are not among the first-to-market, our
competitors may be able to bring products to market more rapidly than we do and
therefore may gain market share at our expense, harming our sales and profits.

As a consequence of this core strategy, we are exposed to consumer rejection of
our new and enhanced product offerings to a greater degree than if we offered
products later in their industry life cycle. For example, our anticipated future
sales are largely dependent on future consumer demand for DVD-based products
displacing current consumer demand for CD-based products. Accordingly, future
sales and any future profits from DVD-based products are substantially dependent
upon widespread consumer acceptance of DVD-based products. If this widespread
consumer acceptance of DVD-based products does not occur, or is delayed, our
business, financial condition and results of operations will be adversely
affected.

FAILURE TO ADEQUATELY PROTECT OUR TRADEMARK RIGHTS COULD HARM OUR BUSINESS AND
CAUSE US TO LOSE MARKET SHARE AND SALES.

We sell our products under three brand names, I/OMagic , Digital Research
Technologies  and Hi-Val . Each of these trademarks has been registered by us
with the United States Patent & Trademark Office. We also sell products under
various product names such as "MediaStation," "DataStation," Digital Photo
Library , EasyPrint  and Sound Assault . One of our key business strategies is
to use our brand names and product names to successfully compete in the data
storage and digital entertainment industries. We have expended significant
resources promoting our brand names and our product names. We cannot assure you
that the registration of our brand name trademarks, or our other actions to
protect our non-registered product names, will deter or prevent their
unauthorized use by others. We also cannot assure you that other companies,
including our competitors, will not use our product names. If other companies,
including our competitors, use our brand names or product names, consumer
confusion could result, meaning that consumers may not recognize us as the
source of our products. This would reduce the value of goodwill associated with
these trademarks. This consumer confusion and the resulting reduction in
goodwill could cause us to lose market share and cause our sales to decline.

OUR USE OF A CONSIGNMENT SALES MODEL IS INCREASING, WHICH REQUIRES US TO CARRY
AND FINANCE GREATER AMOUNTS OF INVENTORY. IF WE ARE UNABLE TO CARRY AND FINANCE
GREATER AMOUNTS OF INVENTORY, SALES OF OUR PRODUCTS WILL BE REDUCED.

We are increasingly using a consignment sales model, which requires us to carry
and finance greater amounts of inventory. Our existing financing sources may be
inadequate to fund inventory levels required by our increasing use of a
consignment sales model. If we are unable to obtain additional financing, we may
be unable to finance sufficient inventory levels and we may be unable to fill
orders in a timely manner, or at all, which would cause reduced sales of our
products and would adversely affect our business, financial condition and
results of operations.

CONSUMER ACCEPTANCE OF ALTERNATIVE SALES CHANNELS MAY INCREASE. IF WE ARE UNABLE
TO ADAPT TO THESE ALTERNATIVE SALES CHANNELS, THIS MAY RESULT IN REDUCED SALES
OF OUR PRODUCTS.

We are accustomed to conducting business through traditional retail sales
channels. Consumers purchase our products predominantly through six retailers,
who collectively accounted for approximately 86% of our net sales for the three
months ended March 31, 2004. We currently generate a small number of direct
sales of our products over the Internet, through our websites. We believe that
many of our target consumers are knowledgeable about technology and comfortable
with the use of the Internet for product purchases. Consumers may increasingly
prefer alternative sales channels, such as direct mail order or direct purchase
from manufacturers. In addition, Internet commerce, or direct purchase via the
Internet, is becoming increasingly accepted by consumers as a convenient, secure
and cost-effective method of purchasing data storage and digital entertainment
products. The migration of consumer purchasing habits from traditional retailers
to Internet retailers could have a significant impact on our ability to sell our
products. We cannot assure you that we will be able to predict and respond to
increasing consumer preference of alternative sales channels such as Internet
commerce.


                                       23
<PAGE>

IF OUR PRODUCTS FAIL TO COMPLY WITH EXISTING AND EVOLVING GOVERNMENT REGULATIONS
AND INDUSTRY STANDARDS, WE MAY HAVE DIFFICULTY SELLING OUR PRODUCTS AND COULD BE
SUBJECTED TO LIABILITY FOR SELLING PRODUCTS THAT DO NOT COMPLY WITH APPLICABLE
REGULATIONS.

Our products are designed to comply with industry standards and government
regulations, some of which are evolving as new technologies are deployed. In the
United States, our products must comply with regulations imposed by the United
States Federal Communications Commission, or FCC, and Underwriters Laboratories,
as well as numerous industry standards such as technological standards related
to CD- or DVD-based products. We also must comply with numerous import/export
regulations. In particular, our data communications devices in our data storage
and digital entertainment product categories are subject to numerous FCC
regulations. The failure of our products to comply, or delays in compliance,
with the various existing and evolving regulations or standards could negatively
impact our ability to sell our products and could result in liability on our
part for selling products that fail to comply with applicable regulations.

A LABOR STRIKE AT A SHIPPING PORT AT WHICH OUR PRODUCTS ARE SHIPPED OR RECEIVED
WOULD PREVENT US FROM TAKING TIMELY DELIVERY OF INVENTORY, WHICH WOULD CAUSE OUR
SALES TO DECLINE AND COULD HARM OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.

From time to time, shipping ports experience labor strikes or work stoppages
which prevent the delivery of products shipped internationally via ocean
freight. The shipping port located in Long Beach, California, through which we
receive most of our products shipped by our subcontract manufacturers in Asia,
experienced a labor strike in September 2002 which lasted for nearly two weeks.
As a result, there was a significant disruption in our ability to deliver
products to our retailers, which caused our sales to decline. Any future labor
strike or work stoppage at a shipping port at which our products are received
would prevent us from taking timely delivery of inventory and cause our sales to
decline. In addition, many of our retailers impose penalties for both early and
late product deliveries, which could result in significant additional costs to
us. To meet our obligations to our retailers, we may be required to arrange for
alternative means of product shipment, such as air freight, which could add
significantly to our product costs. We would typically be unable to pass these
extra costs along to either our retailers or to consumers. Also, because the
average selling prices of our products decline during their short product life
cycle, delayed delivery of products could yield significantly less sales or
profits than planned, adversely affecting our business, financial condition and
results of operations.

OUR LACK OF LONG-TERM PURCHASE ORDERS AND COMMITMENTS MAY ADVERSELY AFFECT OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

All of our significant retailers issue purchase orders solely in their own
discretion, often only one to two weeks before the requested date of shipment.
Our retailers are generally able to cancel orders or delay the delivery of
products on short notice. Accordingly, we cannot assure you that any of these
retailers will continue to purchase our products in the future. In addition, we
cannot rely on long-term purchase orders or commitments to protect us from the
negative financial effects of a decline in demand for our products. The limited
certainty of product orders can make it difficult for us to forecast our sales
and allocate our resources accordingly. Moreover, our expense levels are based
in part on our expectations of future sales and, should our expectations
regarding future product orders and sales be inaccurate, we may be unable to
reduce costs in a timely manner to adjust for sales shortfalls. As a result, our
lack of long-term purchase orders and purchase commitments may adversely affect
our business, financial condition and results of operations.


                                       24
<PAGE>

OUR OPERATIONS ARE VULNERABLE BECAUSE WE HAVE LIMITED REDUNDANCY AND BACKUP
SYSTEMS.

Our internal order and product data management system is an electronic system
through which our retailers place orders for our products and through which we
manage product pricing, shipment, return and other matters. This system's
continued and uninterrupted performance is critical to our daily business
operations. Despite precautions that we have taken, unanticipated interruptions
in our computer and telecommunications systems have, in the past, caused
problems or stoppages in this electronic system. These interruptions could occur
in the future. We have limited ability and personnel to process purchase orders
and manage product pricing and other matters in any manner other than through
this electronic system. Our business, financial condition and results of
operations could be adversely affected by any damage or failure that interrupts
or delays this electronic system.

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.

The market price of our common stock has fluctuated significantly in the past
and may continue to fluctuate significantly in the future. During the year ended
December 31, 2003, the high and low closing bid prices of a share of our common
stock were $8.50 and $3.50, respectively.  Additionally, during the quarter
ended March 31, 2004, the high and low closing bid prices of a share of our
common stock were $4.20 and $3.00, respectively.   The market price of our
common stock may continue to fluctuate in response to one or more of the
following factors, many of which are beyond our control:

     -     changes in market valuations of similar companies;

     -     stock market price and volume fluctuations generally;

-     economic conditions specific to the data storage and digital
      entertainment products industries;

     -     announcements by us or our competitors of new or enhanced products or
           technologies or of significant contracts, acquisitions, strategic
           relationships, joint ventures or capital commitments;

     -     the loss of one or more of our top six retailers or the cancellation
or postponement of orders from any of those retailers;

     -     delays or problems in our introduction of new products or
technological innovations;

     -     disputes or litigation concerning our rights to use third parties'
           intellectual property;

     -     changes in our pricing policies or the pricing policies of our
           competitors;

     -     changes in foreign currency exchange rates affecting our product
           costs and pricing;

     -     regulatory developments or enforcement;

     -     fluctuations in our quarterly or annual operating results;

     -     additions or departures of key personnel; and

     -     future sales of our common stock or other securities.

The price at which you purchase shares of our common stock in this offering may
not be indicative of the price that will prevail in the trading market. You may
be unable to sell your shares of common stock at or above your purchase price,
which may result in substantial losses to you. Moreover, in the past, securities
class action litigation has often been brought against a company following
periods of stock price volatility. We may be the target of similar litigation in
the future. Securities litigation could result in substantial costs and divert
management's attention and our resources from our business. Any of the risks
described above could have an adverse effect on our business, financial
condition and results of operations.


                                       25
<PAGE>

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.

As a group, our executive officers, directors, 10% stockholders beneficially own
or control approximately 80% of our outstanding shares of common stock (after
giving effect to the exercise of all outstanding vested options exercisable
within 60 days from May 3, 2004). As a result, our executive officers,
directors, and 10% stockholders, acting as a group, have substantial control
over the outcome of corporate actions requiring stockholder approval, including
the election of directors, any merger, consolidation or sale of all or
substantially all of our assets, or any other significant corporate transaction.
Some of these controlling stockholders may have interests different than yours.
For example, these stockholders may delay or prevent a change of control of
I/OMagic, even one that would benefit our stockholders, or pursue strategies
that are different from the wishes of other investors. The significant
concentration of stock ownership may adversely affect the trading price of our
common stock due to investors' perception that conflicts of interest may exist
or arise.

OUR AMENDED AND RESTATED ARTICLES OF INCORPORATION, AMENDED AND RESTATED BYLAWS
AND NEVADA LAW 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.

Our articles of incorporation and our bylaws contain provisions that may enable
our management or our board of directors to discourage, delay or prevent a
change in the ownership of I/OMagic or in our management. In addition, these
provisions could limit the price that investors would be willing to pay in the
future for shares of our common stock. These provisions include the following:

our board of directors is authorized, without prior stockholder
           approval, to create and issue preferred stock, commonly referred to
           as "blank check" preferred stock, with rights senior to those of our
           common stock;

stockholders are permitted to remove members of our board of
directors only upon the vote of at east two-thirds of the outstanding
shares of stock entitled to vote at a meeting called for such purpose
or by written consent; and

our board of directors are expressly authorized to make, alter or
repeal our bylaws.

We may be subject to the restrictions contained in Sections 78.378 through
78.3793 of the Nevada Revised Statutes which provide, subject to certain
exceptions and conditions, that if a person acquires a "controlling interest,"
which is equal to one-fifth, one-third, or one-half or more of the voting power
of a corporation, that person is an "interested stockholder" and may not vote
that person's shares. The effect of these restrictions may be to discourage,
delay or prevent a change in control of I/OMagic.

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.

On March 25, 1996, our common stock commenced trading on the OTC Bulletin Board.
Since that time, there has been limited trading in our shares, at widely varying
prices, and the trading to date has not created an active market for our shares.
We cannot assure you that an active market for our shares will be established or
maintained in the future. If an active market is not established or maintained,
you may not be able to readily sell your shares of our common stock.

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<PAGE>

BECAUSE WE ARE SUBJECT TO "PENNY STOCK" RULES, THE LEVEL OF TRADING ACTIVITY IN
OUR COMMON STOCK MAY BE REDUCED.

Broker-dealer practices in connection with transactions in "penny stocks" are
regulated by penny stock rules adopted by the Securities and Exchange
Commission. Penny stocks, are, generally, equity securities with a price of less
than $5.00 (other than securities registered on some national securities
exchanges or quoted on Nasdaq). The penny stock rules require a broker-dealer,
prior to a transaction in a penny stock not otherwise exempt from the rules, to
deliver a standardized risk disclosure document that provides information about
penny stocks and the nature and level of risks in investing in the penny stock
market. The broker-dealer also must provide the prospective investor with
current bid and offer quotations for the stock and the compensation to be paid
to the broker-dealer and its salespeople in the transaction. Furthermore, if the
broker-dealer is the sole market maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market, and must provide
each holder of penny stock with a monthly account statement showing the market
value of each penny stock held in the customer's account. In addition,
broker-dealers who sell penny stocks to persons other than established customers
and "accredited investors" must make a special written determination that the
penny stock is a suitable investment for the prospective investor and receive
the purchaser's written agreement to the transaction. These requirements may
have the effect of reducing the level of trading activity in a penny stock, such
as our common stock, and investors in our common stock may find it difficult to
sell their shares.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our operations were not subject to commodity price risk during the three
months ended March 31, 2004.  Our sales to a foreign country (Canada) were less
than 2% of our total sales, and thus we experienced negligible foreign currency
exchange rate risk.  We have entered into a line of credit with United National
Bank, effective August 18, 2003.  The line of credit provides for an interest
rate equal to the prime lending rate as reported in the Wall Street Journal plus
three quarters of one percent.  This interest rate is adjustable upon each
movement in the prime lending rate.  If the prime lending rate increases, our
interest rate expense will increase on an annualized basis by the amount of the
increase multiplied by the principal amount outstanding under the United
National Bank line of credit.

ITEM 4.  CONTROLS AND PROCEDURES

     Our Chief Executive Officer and Chief Financial Officer (our principal
executive officer and principal financial officer, respectively) have concluded,
based on their evaluation as of March 31, 2004, that the design and operation of
our "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended ("Exchange Act")) are effective to
ensure that information required to be disclosed by us in the reports filed or
submitted by us under the Exchange Act is accumulated, recorded, processed,
summarized and reported to our management, including our principal  executive
officer and our principal financial officer, as appropriate to allow timely
decisions regarding whether or not disclosure is required.
During the quarter ended March 31, 2004, there were no changes in our "internal
controls over financial reporting" (as defined in Rule 13a - 15(f) under the
Exchange Act) that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.


                                       27
<PAGE>

                           PART II - OTHER INFORMATION

ITEM  1.  LEGAL  PROCEEDINGS

     On August 2, 2001, Mark and Mitra Vakili filed a complaint in the Superior
Court of the State of California for the County of Orange against Tony Shahbaz,
our Chairman, President, Chief Executive Officer and Secretary. This complaint
was later amended to add Alex Properties and Hi-Val, Inc. as plaintiffs, and
I/OMagic, IOM Holdings, Inc., Steel Su, a director of I/OMagic, and Meilin Hsu,
an officer of Behavior Tech. Computer Corp., as defendants. On or about March
28, 2003, all parties to the action entered into a Settlement Agreement and
Release which settled this action. As part of the Settlement Agreement and
Release, we entered into a new written lease agreement with Alex Properties
relating to the real property in Santa Ana, California, which we physically
occupied. On September 30, 2003, pursuant to the terms of the lease agreement,
we vacated this real property. During the latter part of 2003 and continuing
into the first quarter of 2004, counsel for Mark and Mitra Vakili and Alex
Properties alleged, on their behalf, that we had improperly caused damage to the
Santa Ana facility. On or about February 15, 2004, all parties to the original
Settlement Agreement and Release executed a First Amendment to Settlement
Agreement and Release, releasing all defendants from all of these new claims
conditioned upon the making of the final $1,000,000 payment under the Settlement
Agreement and Release by February 17, 2004, rather than on the original due date
of March 15, 2004. We made this payment, and a dismissal of the case was filed
with the court on March 8, 2004.

     On May 30, 2003, I/OMagic and IOM Holdings, Inc. filed a complaint for
breach of contract and legal malpractice against our former attorneys and their
respective law firms in the Superior Court of the State of California for the
County of Orange. The complaint seeks damages of $15 million arising out of the
defendants' representation of I/OMagic and IOM Holdings, Inc. in an acquisition
transaction and in a separate arbitration matter. On November 6, 2003, we filed
our First Amended Complaint against all defendants. Defendants have responded to
our First Amended Complaint denying our allegations. Defendants Lawrence W.
Horwitz and Lawrence M. Cron have also filed a Cross-Complaint against us for
attorneys' fees in the approximate amount of $79,000. We have denied their
allegations in the Cross-Complaint. As of the date of this report, discovery has
commenced. The outcome of this action is presently uncertain. However, we
believe that all of our claims are meritorious.

     On March 15, 2004, Magnequench International, Inc., or plaintiff, filed an
Amended Complaint for Patent Infringement in the United States District Court of
the District of Delaware against, among others, I/OMagic, Sony Corp., Acer Inc.,
Asustek Computer, Inc., Iomega Corporation, LG Electronics, Inc., Lite-On
Technology Corporation and Memorex Products, Inc., or defendants. The complaint
seeks to permanently enjoin defendants from, among other things, selling
products that allegedly infringe one or more claims of plaintiff's patents. The
complaint also seeks damages of an unspecified amount, and treble damages based
on defendants' alleged willful infringement. In addition, the complaint seeks
reimbursement of plaintiff's costs as well as reasonable attorney's fees, and a
recall of all existing products of defendants that infringe one or more claims
of plaintiff's patents that are within the control of defendants or their
wholesalers and retailers. Finally, the complaint seeks destruction (or
reconfiguration to non-infringing embodiments) of all existing products in the
possession of defendants that infringe one or more claims of plaintiff's
patents. We are presently evaluating the merits of this complaint and, as of the
date of this report, have responded by denying the plaintiff's allegations in
the complaint. The outcome of this action is presently uncertain.  However, at
this time, we do not expect the defense or outcome of this action to have a
material adverse affect on our business, financial condition or results of
operations.

     In  addition, we are involved in certain legal proceedings and claims which
arise  in  the  normal course of business.  Management does not believe that the
outcome  of  these matters will have a material effect on our financial position
or  results  of  operations.


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<PAGE>

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

     On March 9, 2004, we issued warrants to purchase 10,000 shares of common
stock at an exercise price of $4.00 per share, and 10,000 shares of common stock
at an exercise price of $6.00 per share, subject to adjustment.  The warrants
expire eighteen months from the date of issuance.

ITEM  3.  DEFAULTS  UPON  SENIOR  SECURITIES

None

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

None.

ITEM  5.  OTHER  INFORMATION

None.

ITEM  6.  EXHIBITS  AND  REPORTS  ON  FORM  8-K

(a)     Exhibits:

        Number   Description
        ------   -----------

Certifications Required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.

        32.1     Certifications of Chief Executive Officer and Chief Financial
                 Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
                 to Section 906 of the Sarbanes-Oxley Act of 2002.

(b)     Reports  on  Form  8-K:
        ----------------------

        We filed a Form 8-K on January 27, 2004, which contained an Item 12
        Disclosure in accordance with SEC Release Nos. 33-8216 and 34-47226 in
        connection with our press release issued on January 27, 2004 reporting
        selected financial results for the fourth quarter 2003.


                                   SIGNATURES

     Pursuant  to  the  requirements of the Securities Exchange Act of 1934, the
registrant  has  duly  caused  this  report  to  be  signed on its behalf by the
undersigned  thereunto,  duly  authorized.

                                  I/OMAGIC  CORPORATION

DATED:   May  17,  2004           By:     /s/  Tony  Shahbaz
                                          -------------------------------------
                                          Tony  Shahbaz,  President  and  Chief
                                          Executive  Officer  (principal
                                          executive officer)

                                  By:     /s/  Steve  Gillings
                                         --------------------------------------
                                          Steve  Gillings,  Chief  Financial
                                          Officer (principal financial and
                                          accounting  officer)


                                       29
<PAGE>

EXHIBITS  FILED  WITH  THIS  REPORT

Exhibit
Number     Description
------     -----------
31.1       Certifications Required by Rule 13a-14(a) of the Securities Exchange
           Act of 1934, as amended, as Adopted Pursuant to Section 302 of the
           Sarbanes-Oxley Act of 2002.

32.1       Certifications of Chief Executive Officer and Chief Financial Officer
           pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
           906 of the Sarbanes-Oxley Act of 2002.

                                       30
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