**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

**FORM 10-K**

x                               **ANNUAL REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the Fiscal Year Ended June 30, 2006**

**Commission File Number:  001-14059**

**IOMED, Inc.**

(Exact name ofregistrant as specified in its charter)
| **Utah**                                                        |   | **87-0441272**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |

 

Address ofprincipal executive offices, including zip code: **2441 South3850 West, Salt Lake, Utah 84120**

Registrant’s telephone number, including area code:**(801) 975-1191**

Securitiesregistered pursuant to Section 12(b) of the Exchange Act:

| Title of Each Class             | ** ** | **Name of Each Exchange on Which Registered** |
|---------------------------------|------------|-----------------------------------------------|
| **Common  Stock, no par value** |       | **American  Stock Exchange**                  |

 

Indicate by check mark if registrant is a well-known seasoned issuer(as defined in Exchange Act Rule 405).

oYes x No

Indicate by check mark ifregistrant is not required to file reports pursuant to Section 13 or Section15(d) of the Act. o Yes xNo

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. x Yes oNo.

Indicate by check ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.o

Indicate by check mark whether registrant is a large accelerated filer,an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 ofthe Exchange Act).

o Largeaccelerated filer o Acceleratedfiler x Non-accelerated filer

Indicate by check whetherregistrant is a shell company (defined in Exchange Act Rule 12b-2). oYes x No

The aggregate marketvalue of Registrant’s voting stock held by non-affiliates based upon theclosing price of the common stock as quoted on the American Stock Exchange onDecember 31, 2005, was $13,830,000.  Thenumber of shares of Registrant’s common stock outstanding on August 31, 2006,was 7,600,356.

**DOCUMENTSINCORPORATED BY REFERENCE**

Certaininformation is incorporated into Part III of this Report on Form 10-K byreference to the Registrant’s Proxy Statement for its 2006 Annual Meeting ofShareholders.

 

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**TABLE OFCONTENTS**
| **Part I**     |   |   |   |                                                                                        |   |
|----------------|--------|--------|--------|---------------------------------------------------------------------------------------------|--------|
| Item 1         |   | — |   | Business                                                                                    |   |
|           |   |   |   |                                                                                        |   |
| Item 1A        |   | — |   | Risk  Factors                                                                               |   |
|           |   |   |   |                                                                                        |   |
| Item 1B        |   | — |   | Unresolved Staff  Comments                                                                  |   |
|           |   |   |   |                                                                                        |   |
| Item 2         |   | — |   | Properties                                                                                  |   |
|           |   |   |   |                                                                                        |   |
| Item 3         |   | — |   | Legal Proceedings                                                                           |   |
|           |   |   |   |                                                                                        |   |
| Item 4         |   | — |   | Submission of  Matters to a Vote of Security Holders                                        |   |
|           |   |   |   |                                                                                        |   |
| **Part II**    |   |   |   |                                                                                        |   |
| Item 5         |   | — |   | Market for  Registrant’s Common Equity and Related Stockholder Matters                 |   |
|           |   |   |   |                                                                                        |   |
| Item 6         |   | — |   | Selected  Consolidated Financial Data                                                       |   |
|           |   |   |   |                                                                                        |   |
| Item 7         |   | — |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|           |   |   |   |                                                                                        |   |
| Item 7a        |   | — |   | Quantitative  and Qualitative Information about Market Risk                                 |   |
|           |   |   |   |                                                                                        |   |
| Item 8         |   | — |   | Financial  Statements and Supplementary Data                                                |   |
|           |   |   |   | — Audited  Financial Statements                                                        |   |
|           |   |   |   |                                                                                        |   |
| Item 9         |   | — |   | Changes and  Disagreements with Accountants on Accounting and Financial Disclosure          |   |
|           |   |   |   |                                                                                        |   |
| Item 9A        |   | — |   | Controls and  Procedures                                                                    |   |
|           |   |   |   |                                                                                        |   |
| Item 9B        |   | — |   | Other Information                                                                           |   |
|           |   |   |   |                                                                                        |   |
| **Part III**   |   |   |   |                                                                                        |   |
| Item 10        |   | — |   | Directors and  Executive Officers of the Company                                            |   |
|           |   |   |   |                                                                                        |   |
| Item 11        |   | — |   | Executive  Compensation                                                                     |   |
|           |   |   |   |                                                                                        |   |
| Item 12        |   | — |   | Security  Ownership of Certain Beneficial Owners and Management                             |   |
| Item 13        |   | — |   | Certain  Relationships and Related Transactions                                             |   |
|           |   |   |   |                                                                                        |   |
| Item 14        |   | — |   | Principal  Accountant Fees and Services                                                     |   |
|           |   |   |   |                                                                                        |   |
| **Part IV**    |   |   |   |                                                                                        |   |
| Item 15        |   | — |   | Exhibits,  Financial Statement Schedules, and Reports on Form 8-K                           |   |
|           |   |   |   |                                                                                        |   |
| **Signatures** |   |

 

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**PART I**

**Item 1.****          Business**

**Forward-LookingStatements**

Certain statementscontained in this report on Form 10-K (the “Report”) are “forward-lookingstatements” within the meaning of Section 21E of the Securities Exchange Act of1934, as amended.  Such forward-lookingstatements may be identified by the use of terminology such as “may,” “will,” “expect,”“anticipate,” “intend,” “designed,” “estimate,” “should,” or “continue” or thenegatives thereof or other variations thereon or comparable terminology.  Such forward-looking statements involve knownand unknown risks, uncertainties and other factors which may cause the actualresults, performance or achievements of IOMED, Inc. (the “company,” “we,” “our,”or “us”), or industry results, to be materially different from any futureresults, performance or achievements expressed or implied by suchforward-looking statements.  These risks,uncertainties and other factors include, among other things, the following:  the uncertainties related to continuingprofitability; the uncertainties related to our product development programs;the uncertainties related to our ability to attract collaborative developmentpartners; our reliance on third party distribution; the risks associated withobtaining governmental approval of our products; the highly competitiveindustry in which we operate and the rapid pace of technological change withinthat industry; the uncertainty of patented and proprietary technologyprotection and our reliance on such patented and proprietary technology (includingreliance on technology licensed from third parties); defense of ourintellectual property rights and claims that we have infringed the intellectualproperty rights of third parties; the uncertainties surrounding our explorationof strategic alternatives and the possibility that no transaction may occur;changes in or failure to comply with governmental regulation; the uncertaintyof third party reimbursement for our products; our dependence on key employees;general economic and business conditions and other factors discussed in thisReport and the Company’s other Securities and Exchange Commission (“SEC”)filings.  We undertake no obligation toupdate publicly any forward-looking statements for any reason, even if newinformation becomes available or other events or circumstances occur in thefuture.

**Introduction**

The Company wasincorporated in Utah in 1974 as Motion Control, Inc.  In 1987, the Company merged with JMWAcquisition Corporation, and the name of the merged entity was changed toIOMED, Inc.  We are a leader indeveloping, manufacturing and marketing active drug delivery systems usedprimarily to treat acute local inflammation in the physical and occupationaltherapy and sports medicine markets.  Weare pursuing opportunities to advance our position as a provider of quality,innovative medical products that improve patient healthcare.  In addition, we are seeking collaborativeopportunities to develop our non-invasive drug delivery technology to satisfyunmet medical needs.  We have proprietaryiontophoresis technology in various stages of research and product developmentfor transdermal drug delivery and for the treatment of ophthalmic disease.

**Strategic Assessment Update**

On September 15,2005, we announced that our Board of Directors decided to explore variousstrategic alternatives for the Company to maximize shareholder value.  In connection with this process, we retainedSeven Hills Partners LLC to act as our financial advisor.  We are engaged in discussions with variousparties regarding potential transactions. At the present time, the assessment of strategic alternatives isongoing.  We are uncertain whether anytransaction will result from this process and if a transaction does result fromthat process what form it will take.

### **Commercial Business**

We are in thebusiness of developing, manufacturing, and marketing proprietary products usedin the site-specific, non-invasive administration of soluble salts or otherdrugs into the body for medical purposes. Our active drug delivery systems employ iontophoresis (explained morefully below) as a non-invasive method of enhancing and controlling thetransport of water-soluble ionic drugs into and through the skin and other bodytissues using a low-level electrical current. We currently market iontophoretic products used to deliver various drugcompounds.  The primary drug compoundscurrently used with our products are potent corticosteroids for the treatmentof acute local inflammatory conditions. In addition,

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Iontocaine®, our brand of lidocaine HCl 2%and epinephrine 1:100,000 topical solution, has been approved by the Food andDrug Administration (“FDA”) under a New Drug Application (“NDA”) for theadministration of local dermal anesthesia, but is not currently marketed.  Our products are used in situations when itis advisable to avoid the pain that may accompany needle insertion and druginjection, to minimize the infiltration of carrier fluids, and/or to avoid thedamage caused by needle insertion when tissue is traumatized.

Our proprietary,patented iontophoresis system (the “Phoresorâsystem” or “Phoresor”) is designed for clinical use and is comprised of areusable dose controller and single use, disposable active transdermal patchkits (“patch kits”).  The dose controllerincorporates an advanced microprocessor to precisely control drug dosagethrough our proprietary single-use, disposable patch kits, including our IOGEL®, TransQâ, and OptimATM patch kits.  We also market a self-contained iontophoresissystem, the Companion 80TM, thatprovides a Mobile SolutionTM allowing the patient to resume daily activityand the clinician to optimize the use of patient time in the clinic.

Using our products,medical professionals are able to deliver dexamethasone, a potent and effectivecorticosteroid, to treat local inflammatory conditions.  Our proprietary products, combined withdexamethasone, have the potential to address a significant unmet medical needby offering patients the benefits of the anti-inflammatory effects ofdexamethasone while avoiding all of the gastrointestinal (GI) and othersystemic side effects of oral drugs, such as non-steroidal anti-inflammatorydrugs (NSAIDs), including Cox-II inhibitors. Because of the negative side effects often associated with the oral orinjectable administration of corticosteroids, dexamethasone is used only as asecond- or third-line therapy.  However,using our technology, the administration of this drug without the occurrence ofthese negative side effects is possible. Our products are used for site-specific corticosteroid therapy inclinics nationwide to treat a variety of conditions, including those sufferedby top professional, collegiate, and Olympic athletes.

Our products arealso used by clinicians to deliver a wide-range of other water-soluble ionicmedicaments for treatment of a variety of conditions.  These conditions include providingnon-invasive, local dermal anesthesia with rapid onset that can be used priorto needle sticks, IV starts, lumbar punctures, PICC insertions, fine needle andskin biopsies, and other minor dermatological surgeries.

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### **Business Strategy**

The majority ofour revenues are generated through the sale of the Phoresor system, whichconsists of a reusable dose controller and single-use disposable patchkits.  We are continuously seekingopportunities to improve the quality of our existing products and to market ordevelop new products to support this “razor-razor blade” business model.

We intend topromote growth in our core business by:

·                  *Strengthen Product Lines*– Leverageexisting distributor networks and health care provider relationships and enterinto new agreements to broaden and strengthen access to our served markets.

·                  *Develop New Products*– Apply technologicalexpertise on focused product development activities to provide value to ourcustomers and to improve the competitive position of our products and ourdistributors.

·                  *Seek New Product and Market Opportunities* –Expandproduct offerings, identify new products and enter new markets bothindependently and through acquisition or collaborative relationships.

**Currentand Future Products**

The followingtable lists the therapeutic applications of our principal products developedand future products pending development. The application of our technology as an approved pharmaceutical productfor the treatment of ophthalmic disease is in the early stage pre-clinicalresearch phase and the Company is not currently engaged in any significantdevelopment activity.  This table isqualified in its entirety by reference to such detailed descriptions thatfollow.  There can be no assurance thatany future products will be developed successfully or approved in a timelymanner, if at all, or even if developed or approved, be successfullymanufactured or marketed.  In addition,the status of development indicated below does not necessarily indicate theorder in which the products shown may be submitted to or approved by the FDA.
| **Application**          | ** ** | **Therapeutic Agent**           | ** ** | **Product Status**                   |
|--------------------------|------------|---------------------------------|------------|--------------------------------------|
| ** **               | ** ** | ** **                      | ** ** | ** **                           |
| General                  |       | Water soluble ionic medicaments |       | Currently marketed (1) (2)           |
| Acute local inflammation |       | None specified                  |       | Currently marketed (1)               |
| Dermal anesthesia        |       | Iontocaine                      |       | FDA approved, no longer marketed (3) |
| Ophthalmic diseases      |       | None specified                  |       | Pre-clinical (4)                     |

 

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| (1) |   | Currently marketed under 510(k) clearance for use  with “ions of soluble salts or other drugs.”                                                                                                                                                                                                                                                                                                                                                                                                    |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | We continue to pursue additional research &  development opportunities for our technology that may lead to new products or  therapeutic applications of our existing products.                                                                                                                                                                                                                                                                                                                           |
| (3) |   | Iontocaine is approved by the FDA under a NDA, but  is not currently marketed due to low historic revenues generated from product  sales relative to product costs and FDA fees associated with this product.                                                                                                                                                                                                                                                                                                |
| (4) |   | All major development activity related to this  program has been suspended. We continue to file, prosecute, maintain, and  defend our intellectual property position in this area, conduct feasibility studies  with collaborative partners, and to conduct business development activities.  Any significant development efforts toward the clinical evaluation and  commercial development of this technology application will likely only occur  with the substantial support of a collaborative partner. |

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***AcuteLocal Inflammation***

Acute localinflammatory conditions resulting from exercise, sports injuries, trauma orrepetitive motion disorders are among the leading types of injuries occurringin the workplace and among physically active adults.  The most common of these injuries includetendonitis, bursitis, carpal tunnel syndrome and epicondylitis (tenniselbow).  We believe the electro-transportof corticosteroids may provide significant advantages over other current treatmentregimens for acute local inflammation.

*CommercialProducts*.  We pioneeredthe commercial introduction of our active transdermal drug delivery systems in1979.  These products are usedprincipally by physical therapists (under a doctor’s prescription) and havebeen clinically administered in over 28 million patient treatments for thedelivery of corticosteroids and other drugs. More than 26 million of these treatments have occurred since 1990, whenadvancements we made in our patch technology led to the introduction of ourpresent range of hydrogel patches for use with our microprocessor controlleddose controllers.  Our products are alsoused by athletic trainers and physical therapists serving a number of professional,collegiate, and Olympic athletes and teams, including golfers, tennis players,men’s and women’s Olympic ski teams, as well as by football, basketball,baseball and hockey teams.  We believethat our active transdermal drug delivery systems have been accepted in therehabilitation marketplace due to their ease of use, non-invasiveness,recognized efficacy and lack of significant side effects.

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*ProductsUnder Development*.  Wecontinue to seek to develop and market “next generation” products for use intreating acute local inflammatory conditions. Enhancements to our dose controllers and electrode patches, as well asthe developing, manufacturing, and marketing of new products are part of ourefforts to provide customers the most advanced iontophoresis technologycommercially available.

IontoDexäis a miniaturized, integrated version of our active drug transport systemdesigned for patient in-home use to treat acute local inflammation.  This proprietary active drug transportsystem, combined with dexamethasone, has the potential to address a significantunmet medical need by offering patients the benefits of the anti-inflammatoryeffects of dexamethasone while avoiding all of the gastrointestinal (GI) andother systemic side effects of oral drugs, such as non-steroidal anti-inflammatorydrugs (NSAIDs), including Cox-II inhibitors.

During fiscal2001, we completed both a pivotal Phase III and a confirmatory Phase IIIclinical study for the delivery of dexamethasone to treat acute localinflammation.  The confirmatory studyfailed to meet primary clinical endpoints. The study showed a positive response in patients treated with the drug;however, increased benefit in the study’s placebo group prevented thestatistical separation between the two patient groups necessary to achieve thedesired conclusions.  Due to these studyresults and to financial and other resource constraints, we suspended all majorinternal development efforts and may seek corporate development partners orother strategic funding sources prior to any substantial continuation of thisdevelopment program.

***DermalAnesthesia***

Healthcareprofessionals recognize the importance of managing pain associated withinvasive medical procedures, such as needle injections, placement of accessdevices (including phlebotomies, IV catheters, lumbar punctures, epidurals,etc), dermatological procedures (biopsies, wart and mole removal, Mohsprocedures, etc), as well as gynecological and urological procedures(vasectomies, etc).  In 2001, two newstandards were instituted that are relevant to our product offerings.  The Occupational Safety and HealthAdministration (OSHA) revised their Bloodborne Pathogen Standard, requiringemployers to use safer medical devices wherever feasible in order to reduce therisk of injury from sharps.  The Joint Commissionon Accredited Healthcare Organizations (JCAHO) also passed their new PainManagement Standards requiring healthcare professionals to inform patients ofmethods available to minimize pain prior to, during, and after medicalprocedures.  These two standards favorthe type of non-invasive drug delivery systems that we offer and certainproduct modifications under consideration could enhance the use of our productsin the dermal anesthesia market.

*CommercialProducts*.  We receivedapproval by the FDA under a NDA for Iontocaine, which is specifically labeledfor use with our Phoresor system and our proprietary, single use, disposableactive transdermal patch kits.  However,we do not currently sell Iontocaine due to low historical revenues generated fromproduct sales relative to product costs and FDA fees.

Our products arecurrently sold into the pediatric, adult vascular access, and dermatologymarkets for use in inducing dermal anesthesia prior to invasive procedures andfor use in other applications.  Webelieve our products are more effective than the leading topical product.  However, to date, revenues generated fromthese markets have not been significant.

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***Ophthalmic Diseases***

We believe that our unique active drug transportsystem presents a significant opportunity in the ophthalmic pharmaceuticalmarketplace due to large patient populations with sight threatening medicalneeds that are unmet.  Age-relatedmacular degeneration (“AMD”) and diabetic retinopathy (“DR”) are the majorcauses of visual impairment in the United States and Europe. Both AMD and DRare conditions caused by angiogenesis (unwanted blood vessel growth) resultingin neovascularization that damages the retina and ultimately causesblindness.  Posterior uveitis andretinitis secondary to glaucoma also contribute considerably to loss of sightworldwide.  A common characteristic amongall of these conditions is their occurrence at the back of the eye, where drugtreatment is difficult to administer.  Webelieve that our proprietary drug delivery technology may offer a significantimprovement to the current treatments available and for unmet medical needs inthis area.

A leading obstaclein the advancement of new therapies to treat serious ophthalmic disease is theinability to both safely and effectively deliver drugs to diseased cells in theback of the eye.  Current drug deliverymethods, which include intravenous, oral, topical (eye drops), intraocularinjections and surgical implants, all have limitations that potentially affect theirtechnical as well as their commercial viability in the treatment of thesediseases.  Furthermore, the complexphysiology of the human eye presents unique problems for drug delivery, whichare not optimally addressed by current ocular drug delivery methods.

*DevelopmentStage Products. *Usingour proprietary technology, we have developed an ocular drug delivery systemthat seeks to address the safe and effective administration of therapeutics tothe back of the eye. Our delivery system, trademarked OcuPhorä,allows for the site-specific administration of a pharmacologic agent withoutthe collateral tissue damage associated with surgery, lasers, needle injectionsor implants.  OcuPhor has been designedas a platform technology to deliver drug compounds non-invasively andsite-specifically to posterior segments of the eye.  Through both collaborations and internalresearch efforts, we have made significant advancements with the OcuPhorSystem.  Feasibility studies confirmedOcuPhor’s ability to deliver an anti-angiogenic drug to the back of the eye.Preliminary clinical studies in human volunteers have shown that the OcuPhorSystem is safe and well tolerated using both positive and negative polaritycurrents and does not produce any ophthalmic changes as measured by a series ofstandard tests.  Additionally, wedemonstrated *in-vivo*that theOcuPhor System is capable of delivering antiangiogenic, anti-inflammatory,antibiotic, and antiviral drugs.  Webelieve that OcuPhor’s transport capabilities are within the theoreticaltherapeutic range of a variety of drugs, including small molecules as well assome macromolecules and small proteins. We are evaluating strategies to capitalize on this technology, includinglicense agreements and collaborative partnerships to identify specific drugswhich will be able to take advantage of the OcuPhor System and thereafter moveit beyond the preclinical stage and advance its commercial development.

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### **General Iontophoretic Drug Delivery Technology and ItsAdvantages**

Iontophoretic drugdelivery systems are designed to overcome many of the limitations associatedwith other drug delivery methods. Iontophoresis is an active method of drug delivery in whichwater-soluble, ionized (electrically charged) drugs are transported through theskin or other body tissues for local or systemic therapeutic applications byapplying a low-level electrical current. The amount of drug delivered is proportional to the total electricalcharge applied (which is a function of time and current).  Therefore, it is possible to program thesystem’s electrical current levels to control more precisely the desired drugdose, delivery rate and the pattern of delivery.

Among the manydrug delivery methods available today, we believe the advantages of iontophoreticdrug delivery are many and include the following:

·                  Non-invasive, needle-free

·                  Site-specific drug deliveryeliminates systemic side effects

·                  Rapid onset and cessation kinetics

·                  Controlled, programmable andtitratable drug delivery capabilities

·                  Single delivery system providessmooth, variable or bolus plasma levels, singly or in combination

·                  Enhanced delivery of a broad range ofcompounds

·                  Minimal variability in the deliveryprofiles among patients and body sites

·                  Potential for enhanced patientcompliance and control

·                  Meets OSHA pain management standardsfor healthcare industry

·                  Compliancewith Needle Stick Prevention Act of 2001.

Although thefundamentals of iontophoresis have been understood for decades, the method onlybecame commercially practicable as a means of delivering drugs as a result ofadvances in electronics, materials science and electrochemistry.  These advances led to the development of moreefficient and adaptable drug patches and more reliable, compact andprogrammable dose controllers.  We haveused our portfolio of intellectual property to develop iontophoretic systemswith unique and enhanced performance characteristics, which we believe areadaptable to a number of clinical settings and therapeutic applications.

**Patentsand Proprietary Rights**

Our proprietarytechnology includes patents, trademarks, trade secrets and other proprietaryknow-how.  These technologies are used invarious combinations in the testing, evaluation and formulation of optimalionic drug solutions and in the research, development, design and manufactureof microprocessor controlled power supplies and active transdermal patcheswhich are specifically designed and constructed for particular therapeuticapplications.

We haveimplemented a policy of actively patenting and maintaining as trade secrets andproprietary information all inventions and technologies that we believe areimportant to our business operations.  Wegenerally seek patent protection for our key proprietary technologies in theUnited States and other major markets. We also rely on trade secrets, know-how, continuous technologicalinnovations and licensing opportunities to develop and maintain a competitiveposition.  We seek protection of ourtrade secrets and

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proprietaryknow-how, in part, through confidentiality agreements.  Employees, consultants, advisors,collaborators, and other individuals and entities are required to executeconfidentiality agreements upon the start of employment or other contractualrelationships.

In 1997, we acquiredexclusive worldwide rights to Elan Corporation, plc’s (“Elan”) broad base ofUnited States and foreign patents, in vitro drug transport data and in vivoanimal and human clinical data, in addition to other proprietary know-how iniontophoretic drug delivery and electro-transport fields.

As of June 30,2006, we held or had rights to utilize approximately 73 United States patentsand 77 foreign patents and have (or have the rights to utilize) 8 pendingpatent applications in the United States and 23 pending patent applications inforeign countries.  During fiscal 2006,we filed 6 new patent applications and purchase a fully paid-up, non-exclusive,worldwide, royalty-free license and other rights under certain patents andpatents pending.

We also own orhave licensed rights to issued and pending United States patents governing thedesign and manufacture of certain myoelectric prosthetic devices, which we havesublicensed to a third party in connection with the sale of our Motion Controldivision in December 1996.

**CollaborativeRelationships and Licenses**

We may enter intonew collaborative relationships.  Thepotential collaborative partners may provide proprietary drugs, technology,financial resources, research and pharmaceutical manufacturing capabilities ormarketing infrastructure to aid in the development and commercialization of ourcurrent and future products.  Dependingon the availability of financial, marketing and scientific resources and otherfactors, we may also sell, license, or cross-license our technology or productsto others and retain profit sharing, royalty, manufacturing, co-marketing,co-promotion or similar rights.  Any sucharrangements could limit our flexibility in pursuing alternatives for thedevelopment or commercialization of our products.

Our licensearrangements and prior collaborative relationships include the following:

*Elan*.  In March 1997, we acquired exclusiveworld-wide licenses to certain iontophoretic drug delivery technologies,including rights to Elan’s broad base of United States and foreign patents, invitro drug transport data and in vivo animal and human clinical data, inaddition to other proprietary know-how in iontophoretic drug delivery andelectro-transport fields.  Under theterms of the license, we are obligated to pay Elan a royalty on net revenues,as defined in the agreement.

*Alza*.  In 1993, we entered into a cross-licenseagreement with Alza Corporation, a division of Johnson & Johnson, (“Alza”).  Under the agreement, non-exclusive, royaltyfree rights to certain patented technologies were exchanged.

*Universityof Utah*.  In 1974, weentered into a licensing agreement with the University of Utah ResearchFoundation (“University”).  Under theagreement, as amended, we obtained an exclusive license to certainiontophoretic drug delivery technologies developed at the University.  Under the terms of the amended license, weare obligated to pay the University a royalty on certain sales of ouriontophoretic drug delivery products through the year 2007, at which time wewill have a fully paid-up license.

**Manufacturing**

All of ourproducts are inspected, labeled and prepared for shipment at our manufacturingfacility in Salt Lake City, Utah.  Atthis facility, we also manufacture the patch kits and other electrode productsusing several proprietary materials, components, processes and productiontechnologies developed by the Company in conjunction with our equipment andmaterials suppliers.  We havemanufactured all of the drug electrode patches we have sold, and believe ourelectrode manufacturing capacity can be expanded to meet our needs for theforeseeable future.

We outsource themanufacture and assembly of our Phoresor dose controllers, which employ avariety of sub-assemblies and components that are designed or specified byus.  These components and subassembliesare manufactured by third parties, and are then shipped to a contractmanufacturer for final assembly.  Our

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manufacturingactivities for the Phoresor are limited to design, labeling, inspection and packaging.  We do not manufacture or repackage any drugsor compounds used in our delivery systems.

We and certain ofour suppliers are required to comply with FDA regulations governingmanufacturing practices, including the Quality System Regulations, whichmandate controls for product design, control and quality.  We believe we are in compliance with currentQuality System Regulations.  We are alsocertified to European quality systems regulation ISO 13485, which is similar toISO 9001 and includes additional elements specifically for medical devicemanufacturers.  Additionally, we haveearned the right, through continued compliance to European regulations, toplace the CE mark on our products, allowing us to market them in the Europeancommunity.  We have Good ManufacturingPractices (“GMP”) audits conducted on a regular basis.

**Sales andDistribution**

We currently sellthe majority of our products into the physical and occupational therapy, sportsmedicine and other healthcare markets. To leverage our internal sales and marketing resources, we employ anationwide network of medical supply dealers, independent salesrepresentatives, and national distribution partners to sell and distribute ourproducts in those markets.  Thisdistribution network is supported by regional business managers and internalcustomer service representatives who are our employees.  In addition to our domestic sales anddistribution efforts in the United States, we maintain marketing and sales activitiesin international markets.  These salesare made through independent distributors operating in those countries.

Two distributorscombined to account for approximately 43%, 40% and 32% of our total productsales for the fiscal years ended June 30, 2006, 2005 and 2004.  One of these distributors has elected toterminate their distribution agreement with us, as discussed below.  Although each of our distributors is valuedand important to us,  in the event of aloss of any distributor, we believe that we could continue to reach asubstantial portion of the end user customers through alternative distributionchannels.  Less than 10% of product salesare to foreign customers.

We were party to adistribution agreement with Compex Technologies, Inc. (formerly Rehabilicare,Inc.) that was terminated effective July 1, 2006.   Compex was our second largest customer andaccounted for over 16% of our total product sales during each of the past threefiscal years.  Compex elected toterminate the Distribution Agreement (the “Agreement”) between Iomed, Inc. andRehabilicare following their acquisition by Encore Medical Corporation, theparent company of our primary competitor, Empi, Inc.  These events will likely have a negativeeffect on our future sales and operating results.  Nevertheless, we believe that userpreference, the strength of our alternative distribution channels and our owninternal sales and marketing efforts provide us with an opportunity to retain asubstantial portion of the revenue generated by the end user customers formerlyserviced by Compex.  The Agreementprovided us with certain provisions to protect our business interests followingsuch termination.  Under the Agreement,Compex is subject to a twelve month non-compete provision and we were providedaccess to end user customer data.  Weintend to exercise our rights under the Agreement and to utilize alternativedistribution channels to service former Compex accounts.  Due to certain factors, including variousmarket dynamics, limited resources, and our limited access to the end useraccount information of our distributors; it will be difficult for the Companyto precisely measure its success in retaining these accounts.

**GovernmentRegulation**

Both drugs andmedical devices, including our iontophoretic drug delivery systems, are subjectto extensive regulation by the FDA in the United States and by comparableauthorities in other foreign countries.

Our iontophoreticdrug delivery products involve a medical device component, thereby subjectingsuch products to compliance with the FDA’s regulations governing medicaldevices.  Where such medical devices arelabeled for use with a specific pharmaceutical product for a specifictherapeutic indication, they are subject to the FDA’s regulations governingboth medical devices and pharmaceutical products.  The Company’s future iontophoretic drugdelivery systems may involve a pharmaceutical component or specific labelingfor use with a pharmaceutical product.

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Products regulatedas medical devices may not be commercially distributed in the United Statesunless they have been cleared or approved by the FDA.  Currently, there are two methods forobtaining FDA clearance or approval of medical devices.  Devices deemed to pose less risk are placedin class I (general controls) or class II (general and special controls) andqualify for 510(k) notification, a procedure under section 510(k) of theFederal Food, Drug, and Cosmetic Act.  Amedical device that does not qualify for the 510(k) clearance is placed inclass III, which is reserved for devices deemed by the FDA to pose the greatestrisk. A preamendment class III device is one that was on the market before May28, 1976.  This status means that thedevice at present can be marketed through a 510(k) clearance, but it remainssubject to a call for a Pre-Market Approval (“PMA”) application under section515 of the Drug Act.  A PMA applicationgenerally requires a more complex submission than a 510(k) notification.  Typically, it requires showing that thedevice is safe and effective based on extensive and costly preclinical andclinical tests, as well as information about the device and its componentsregarding, among other things, manufacturing, labeling and promotion.

The regulatorystatus of iontophoretic devices is complex. The FDA has classified them as class II devices eligible for marketingthrough 510(k) premarket clearance when intended for use with a drug whoselabeling bears adequate directions for the device’s use with that drug.  However, if an iontophoretic device isintended for use with a drug that is not labeled for use with the device, theFDA considers the iontophoresis device to be a preamendment class III device.

Our Phoresorreceived 510(k) clearance as a preamendment class III device labeled for usewith ions of soluble salts or other drugs. In 1995, the FDA approved an NDA for Iontocaine to be used as a localanesthetic and delivered iontophoretically by the Phoresor, which effectivelymoved the Phoresor into class II for this intended use.  Unlike Iontocaine, dexamethasone does not havean NDA approval allowing it to be labeled for iontophoretic delivery.  Thus, at the present time, our Phoresor is apreamendment class III device when used with dexamethasone (or any drug otherthan Iontocaine).  We are not currentlyseeking, and give no assurance that we will ever obtain, an approved NDA forthe iontophoretic delivery of any drug other than Iontocaine.

In August 2000,the FDA published a proposed rule to amend the physical medical deviceregulations to remove the class III iontophoresis device identification.  Because our products are all approved asclass II devices, we do not believe that the proposed regulation would have anyeffect on our ability to continue the manufacturing and selling of our currentproducts.

A lengthy andcomplex regulatory framework also applies to the labeling and marketing ofspecific drugs.  Generally thesepharmaceutical products require the submission of an NDA.  The NDA approval process generally entails:(i) conducting preclinical laboratory and animal testing to enable FDAauthorization of an Investigational New Drug (“IND”) application, (ii) initialIND clinical studies to define safety and dose parameters, (iii) wellcontrolled IND clinical trials to demonstrate product safety and efficacy, and(iv) submission to the FDA of an NDA. Preclinical studies involve laboratory evaluation of productcharacteristics and animal studies to assess the efficacy and safety of thedrug.  Human clinical trials aretypically conducted in three sequential phases. Phase I trials normally consist of testing the product in a small numberof healthy volunteers for safety and pharmacokinetic parameters using singleand multiple dosing regimens.  In PhaseII trials, the manufacturer evaluates safety, initial efficacy, and doseranging of the product for specific indications in a somewhat larger patientpopulation.  Phase III trials typicallyinvolve expanded testing for safety and clinical efficacy in a broad patientpopulation at multiple clinical testing centers.  The FDA, under Good Laboratory Practiceregulations, regulates the preclinical and clinical studies.  Results of the studies must be submitted tothe FDA for review.  The FDA may grantmarketing approval, require additional testing and/or information, or deny theapplication.  The process of obtainingFDA approval for a new product through this process may take several years andtypically involves substantial risks and the expenditure of substantialresources.

The FDA regulatesour quality control and manufacturing procedures by requiring us and certain ofour contract suppliers to comply with certain standards, including compliancewith the Quality System Regulations (for devices) and current GMP regulations(for drugs).

We may be subjectto certain fees that the FDA is authorized to collect, including user feesauthorized under the Public Health Security and Bioterrorism Preparedness andResponse Act of 2002, which include the reauthorization of user fees under thePrescription Drug User Fee Amendments of 2002 (PDUFA III).

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Agencies similarto the FDA regulate medical devices and pharmaceutical products in most foreigncountries. The International Standards Organization (ISO) has establishedregulations for medical devices in the European Union. Currently, we are incompliance with these regulations and our products are CE Marked. We will berequired to meet the regulations of any foreign country where we market ourproducts. In addition, various aspects of our business and operations are alsoregulated by a number of other governmental agencies, including the DrugEnforcement Agency, U.S. Department of Agriculture, the EnvironmentalProtection Agency, the Occupational Safety and Health Administration as well asby other federal, state and local authorities.

Noncompliance withthese various government regulatory requirements could result in enforcementactions that could include fines, plant closure, and a recall of our productsor other civil or criminal sanctions. Noncompliance as well as unanticipatedchanges in existing regulatory requirements or adoption of new requirementscould have a material adverse effect on the Company.

**Competition**

The drug delivery,pharmaceutical and biotechnology industries are highly competitive and rapidlyevolving, with significant developments expected to continue at a rapidpace.  Our success depends uponmaintaining a competitive position and developing products and technologies forefficient and cost effective drug delivery. Our products compete with other drugs and drug delivery systems, includingother iontophoretic delivery systems.  Webelieve our products compete on the basis of quality, efficacy, cost,convenience, safety and patient compliance.

We are aware ofmany other competitors in the general field of drug delivery, including, amongothers, competitors developing injectable or implantable drug delivery systems,oral drug delivery technologies, passive transdermal systems, oral transmucosalsystems and intranasal and inhalation systems. We are also aware of other companies that have developed or arecurrently developing iontophoretic and other active transdermal drug deliverysystems.

Alza, Vyteris,Inc., Travanti, Inc., and Empi, Inc. are the principal competitors engaged inthe development and/or marketing of iontophoretic devices.  Alza, a licensee of the Company, isundertaking the development of iontophoretic drug delivery systems, but doesnot currently market an iontophoretic product. In May 2006, Alza received FDA approval for a combination product, whichemploys iontophoresis technology, for the delivery of fentanyl for acute postoperative pain control.  Vyteris isengaged in the development of iontophoretic drug delivery systems and currentlysells an iontophoretic product for the inducement of dermal anesthesia.  Empi, our primary competitor, and Travanticurrently sell iontophoretic systems for the treatment of acute localinflammation in the physical therapy market. We estimate that Empi controls a majority of that market.  In addition, Encore Medical, the parentcompany of Empi, acquired Compex Technologies, a former distributor of ours, infiscal 2006 (see further discussion on page 11).

Our iontophoreticsystem for the inducement of dermal anesthesia primarily competes withtraditional methods of delivering dermal anesthetics by needle injection or isused in circumstances where either no anesthesia is used, due to the painassociated with needle injection (including needle injections themselves), orwhere topical anesthetic creams are used. The most effective and widely used topical anesthetic cream, EMLA, ismanufactured and sold by AstraZeneca International, a large internationalpharmaceutical company.  There can be noassurance that we can effectively compete with these products or any other drugdelivery system.

**Employees**

As of June 30,2006, the Company had 48 full-time employees, 8 of whom hold either an advancedbusiness or technical degree.  Of ourfull-time employees on that date, 6 were engaged in engineering and productdevelopment, 26 in manufacturing and quality control, and ­­16 in sales,marketing and general administration. None of our employees are represented by a labor union.  We have not experienced any employee relatedwork stoppages and consider our relations with employees to be good.

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**Item 1A.****                                  RISKFACTORS**

Our business issubject to certain risks and uncertainties, each of which could materiallyadversely affect our business, financial condition, cash flows and results ofoperations.  You should carefullyconsider the following risks prior to investing in us.  You should also keep in mind that thefollowing risks are not the only risks we face. The risks described below are the risks that we currently believe arematerial to our business.    Additionalrisks we are unaware of or risks that we currently believe are not materialalso may impair us.  If we are adverselyaffected by such risks, then the trading price of our common stock coulddecline, and you could lose all or part of your investment.  You should also refer to the otherinformation set forth in this Annual Report on Form 10-K, including thediscussions set forth in “Business” and “Management’s Discussion and Analysisof Financial Condition and Results of Operations” as well as our financialstatements and the related notes.

***Theprice of our stock is volatile.***

The market pricefor the securities of drug delivery, pharmaceutical, biotechnology, medicaldevice and other high technology companies has been highly volatile.  This volatility has significantly affectedthe market prices for these securities for reasons frequently unrelated to theoperating performance of the specific company. These broad market fluctuations may adversely affect the market price ofour common shares.  The market price forour common shares has fluctuated significantly since public trading commencedand it is likely that it will continue to fluctuate in future.  In the two years ended June 30, 2006, ourstock price has ranged from $1.36 to $3.27 per share.  Events and factors that may have asignificant impact on our business and on the market price of our common sharesinclude the following:

·                  fluctuations orvolatility in operating results compared to market expectations;

·                  announcement ofthe outcome, if any, of our exploration of strategic alternatives;

·                  our entry intoor discontinuance of a collaborative relationship;

·                  announcements byus or our competitors of technological innovations, clinical trial results, newproduct development initiatives, or new commercial product introductions;

·                  regulatorydevelopments in the United Sates or foreign countries;

·                  changes in thecurrent structure of health care financing and payment systems;

·                  developments inor disputes regarding patent or other proprietary rights;

·                  commencement orthe results of any litigation; and

·                  generalmarket and economic conditions.

These and otherfactors may cause the market price and demand for our common stock to fluctuatesubstantially, which may limit or prevent investors from readily selling ourcommon shares and otherwise negatively effect the liquidity for our commonshares.  In addition, sales ofsubstantial amounts of our common shares, including shares issued upon theexercise of stock options, could adversely affect the market price of our commonshares.  Such sales could also make itmore difficult for us to sell equity securities or equity-related securities inthe future at a time and price that we deem appropriate.

***Wemay not be able to sustain profitability.***

Our ability tosustain profitability will depend on a number of factors including:

·                  our ability tomaintain and successfully expand market acceptance and sales of existingproducts;

·                  our ability tosuccessfully complete the development of, receive regulatory approvals for andsuccessfully manufacture and market new products;

·                  the nature andtiming of any new product introductions relative to our competitors; and

·                  ourability to efficiently manage and resolve current litigation matters.

With limitedexception, prior to fiscal 2003, we sustained losses in each fiscal year.  We had an accumulated deficit of $31.1 millionas of June 30, 2006.

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***Werely on a limited number of independent third party distributors to sell ourproducts, one of whom recently terminated their distribution agreement with us.***

We market ourproducts through a nationwide network of independent third party distributorsand manufacturing sales representatives, which provide us indirect access tothe clinicians that use our products to administer patient treatments.  Limited access to end user customers may resultin reduced future sales and market penetration of current and futureproducts.  Our sales growth is dependenton our ability to broaden distribution and market penetration of our currentand future products, which may require an expanded marketing presence throughdirect sales and marketing or co-marketing of products with collaborativepartners or distributors that have national or market-specific marketingcapabilities.  We may not be able tomaintain existing, or establish new, marketing arrangements on favorable terms,if at all.

Two distributorscombined to account for approximately 43%, 40% and 32% of our total productsales for the fiscal years ended June 30, 2006, 2005 and 2004.  One of these distributors, CompexTechnologies (formerly Rehabilicare, Inc.) was our second largest distributorand accounted for over 16% of our total product sales during each of the pastthree fiscal years.  Following theiracquisition by Encore Medical Corporation, the parent company of our primarycompetitor (Empi, Inc.), Compex elected to terminate its distribution agreementwith us effective July 1, 2006.  The lossof this distributor will have a negative effect on our future sales andoperating results.

 ***Demand for our products isdependent on third party reimbursement.***

Product salesdepend, in part, on continued reimbursement by third party payers to cliniciansand their patients for using our products in patient treatments.  These third party payers, includinggovernment health administration authorities, private health insurers and otherorganizations, can affect the pricing and relative attractiveness of using ourproducts and competing products, including alternative therapies, by regulatingreimbursement levels.  Changes in theserelative reimbursement levels may affect sales of our product.  In addition, some of these payers limitreimbursement amounts paid to health care providers for use of our products incertain applications and may further limit reimbursement in the future.  Furthermore, significant uncertainty existsas to the reimbursement status of any new product we may develop.

***Thebusiness in which we operate is intensely competitive and prone to rapidtechnological change.***

Our commercialbusiness has formidable competition, and we expect competition to remainintense during fiscal 2007 and beyond. Our technology competes with various companies in the drug delivery,pharmaceutical and biotechnology industries. These industries are highly competitive and rapidly evolving withsignificant developments expected to continue at a rapid pace.   Our competitors include public and privatecorporations, academic institutions, governmental agencies and public andprivate research organizations that are involved in developing, manufacturingor marketing iontophoretic and other drug delivery systems.  Many of our competitors are substantiallylarger with greater financial and other resources, have more experience, havegreater name recognition, offer broader product lines, and are able to offerdiscounts as a competitive tactic.  Ourcompetitors may succeed in more rapidly developing competing technologies,obtaining FDA approval, or gaining market share for products than us.  Many competitors currently have drug deliveryproducts approved or in development.  Someof these products could be more effective or commercially attractive to ourcustomers than our products.

In the case of newproducts, the first product to reach the market is often able to establish andmaintain significant market share relative to later entrants to themarket.  New drugs or further developmentof alternative drug delivery methods may provide greater therapeutic benefitsfor a specific drug or indication or may offer comparable performance at lowercosts than our products.   Our competitors’ability to more rapidly develop new products than us represents a significantcompetitive advantage.

***Notransaction may result from our determination to explore strategicalternatives.***

We commenced aprocess in September 2005 to explore various strategic alternatives to seek tomaximize shareholder value, including possible sale transactions involving ourentire company or certain of our assets. We are uncertain whether any transaction will result from this process.  If a transaction does result, we areuncertain what its form or terms would be. Any transaction that does result from this process may not

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ultimatelymaximize shareholder value.  If atransaction does not result from that process our stock price may be adverselyaffected.  Uncertainties and adverseeffects related to this process include:

·                  disruption ofoperations and distraction of management’s attention;

·                  perceiveduncertainties regarding our future direction resulting in the loss of andincreasing the difficulty of attracting new customers, employees or businesspartners;

·                  difficultiesretaining or replacing key employees;

·                  the incurrenceof costs and expense related to this process; and

·                  inabilityto identify and consummate an attractive strategic alternative.

***Amaterial agreement to which we are a party contains terms that may detertakeover attempts and limit the opportunity of our shareholders to sell theirshares at a favorable price.***

We are party to across-license agreement with Alza Corporation pursuant to which we have exchangednon-exclusive, royalty free rights to certain patented technologies which eachparty believed to be of significant strategic importance to the potentialtechnological success of many iontophoretic drug delivery applications.  This agreement may have the effect ofdelaying or preventing the sale, merger, assignment, or transfer of all or partof our company or technologies because both Alza and ourselves are prohibitedfrom assigning rights under the agreement to certain named companies or to anyother entity that derives more than 50 percent of its income from thedevelopment, licensing and/or sale of drug delivery systems to otherpharmaceutical companies without the consent of the other party.  In addition, this agreement may limit ourability to capitalize on the commercial and other economic potential of ourtechnologies through collaborative and other transactions.

***Ourability to utilize net operating losses may become limited and adversely affectfinancial results.***

As of June 30,2006, we had approximately $20 million and $15 million in federal and state netoperating loss carryforwards, respectively. Our ability to utilize these net operating loss carryforwards could besignificantly limited if we or our shareholders engage in transactions that resultin an “ownership change” as defined in Section 382 of the Internal RevenueCode.  If our usage of net operatinglosses were to become subject to limitation and if at that time we areprofitable, our earnings and cash flows could be adversely impacted due to ourincreased tax liability.   In addition,the financial benefits of certain strategic alternatives, which may beavailable to us, such as a disposition of a portion of our assets, would bereduced if the use of our net operating losses is subject to limitation.

***Ourbusiness relies on our proprietary technology and intellectual property rights.***

Our successdepends on our and our licensors’ proprietary technology.  We rely on a combination of patents, tradesecrets, confidentiality procedures, trademarks, licensing arrangements andcopyrights to establish and protect our proprietary rights position.  The creation and protection of proprietaryrights is expensive and may require us to engage in costly and distractinglitigation.  Despite these efforts thirdparties could copy or otherwise use our technology without authorization.

The patentpositions of drug delivery, pharmaceutical and biotechnology companies arehighly uncertain and involve complex legal and factual questions.  The patents owned and licensed by us may notprevent other companies from developing similar or therapeutically equivalentproducts and licensors who have licensed technology to us on a non-exclusivebasis may license the same technology to competitors.  In addition, other companies may be issuedpatents that prevent the sale of our products or require licensing and thepayment of significant royalties by us.  Any current or new products, processes, or methods may not be patentableor may not provide an exclusive position in the covered subject matter.  Furthermore, our pending patent applicationsmay not result in issued patents, we or our licensors may not protect issuedpatents, we may become involved in patent infringement actions, and our and ourlicensor’s patents may not be enforceable or may not provide meaningfulprotection.  We also operate in manyforeign countries that do not protect intellectual property rights to the sameextent as the United States.

We also rely ontrade secrets and other confidential proprietary information which we seek toprotect through confidentiality agreements. Our competitors may independently develop similar information and theseagreements may not be effective to prevent disclosure of our confidentialinformation or provide adequate remedy in the event of an unauthorizeddisclosure.  If competitors gain accessto our proprietary

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technology orinformation, our business, financial position, and results of operations may bematerially adversely impacted.

***ThirdParties claiming that we infringe their proprietary rights regardless of theirmerit could cause us to incur significant legal expenses and prevent us fromselling our products.***

From time to time,we have received claims that we have infringed the intellectual property rightsof others and lawsuits alleging such have been brought against us, includingone such lawsuit that is currently pending (***EEMSO,Inc. v. Compex Technologies, Inc. f/k/a Rehabilicare, Inc. and Iomed, Inc.)***.  These claims have included allegations ofinfringement of patents, trade secrets, or other proprietary rights as well asallegations of unfair competition.  For example, the claim brought against us byTravanti Pharma was resolved through a settlement that included the acquisitionof certain intellectual property rights for $750,000 after we had incurredsignificant fees and expenses in the defense of that matter.  The ultimate outcome ofany allegation or lawsuit is uncertain and, regardless of outcome, any suchclaim, with or without merit, could be time consuming to defend, result incostly litigation, and divert management’s time and attention from ourbusiness.  A claim successfully broughtcould result in us being required to stop selling, delay shipping, or redesignone or more of our products.  Inaddition, we could also be required to satisfy indemnification obligations tosome of our customers, purchase a license to use the intellectual property, andpay substantial monetary damages.

***Productdevelopment is expensive, time consuming, and may be unsuccessful.***

It is veryexpensive to develop and bring a new product to market in our industry.  We are required to undertake time-consumingand costly product development activities, including clinical trials, and seekregulatory approval for new applications and products.  Our product development efforts, either aloneor in collaboration with other parties, may never be successfully completed,obtain regulatory approvals, be manufactured at acceptable cost or withappropriate quality, meet market needs or achieve market acceptance.  Before seeking regulatory approval of ourproducts, we may not successfully complete preclinical studies or clinicaltrials that demonstrate our products are both safe and effective for use in thetarget indications.  The results ofpreclinical and early clinical trials are not indicative of the results oflarge scale testing.  A new product couldalso produce undesirable side effects that could result in the interruption,delay or suspension of clinical trials, or the failure to obtain FDA or otherregulatory approval for targeted indications.

If our futureproducts are not shown to be safe and effective in clinical trials, resultingdelays in developing other compounds and conducting related preclinical testingand clinical trials, as well as the need for additional financing to completesuch testing and trials, could have a material adverse effect on our business,financial condition, and results of operations. Product revenues on future products may not be realized for severalyears, and, if our product development efforts are unsuccessful, may never beachieved.  Even if a product developmenteffort is successful, a product could prove to be difficult to commercializebecause of manufacturing costs or lack of market acceptance.  We may need to raise additional capital orenter into a collaborative arrangement in order to undertake a significant newproduct development effort.

***If weare unable to maintain relationships with current collaborative partners orenter into new collaborative arrangements then our business could be harmed.***

Part of ourbusiness strategy is to form collaborative arrangements with corporatepartners, licensors, licensees and other parties for the development, clinicaltesting, manufacture, marketing or commercialization of our products orproducts in development.  The process ofestablishing a collaborative arrangement is difficult, time-consuming, andinvolves significant uncertainty.  Discussionswith potential collaborators may not lead to the establishment of a successfulcollaborative relationship with favorable terms.  Once established, a collaborative arrangementmay prove to be unsuccessful or may not generate significant revenue.  Until we enter into additional collaborativearrangements, we will be required to internally fund all research anddevelopment expenditures.  Futurecollaborative arrangements may require that we continue to fund all or aportion of product development costs.

Collaborativearrangements limit our flexibility in pursuing alternatives for the developmentor commercialization of products.  Ourstrategic partner may not comply with the terms of the agreement, elect

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not to providefunding, or terminate the agreement.  Astrategic partner may also pursue alternative competitive products on its ownor with others, including our competitors.

If we are unableto establish, and to the extent we choose to defer the establishment of,collaborative arrangements, we will experience significantly increased businessrisk and capital requirements with respect to any significant new productdevelopment we choose to undertake.  Wecould also encounter significant delays in bringing any resulting products tomarket or find that the development, manufacture or sale of resulting productsis adversely affected by the absence of collaborative arrangements.

***Theloss of key personnel could adversely impact our business.***

We are dependenton the continued services of our key personnel that have acquired specializedknowledge and skills with respect to our operations.  The loss of one or more of these keypersonnel could negatively impact our performance.  In addition, were we to have to replace oneor more of these individuals or were to seek to hire additional personnel wewould experience the intense competition that exists in our industry for thelimited number of qualified personnel. We do not carry key-person insurance with respect to any of ouremployees.

***Wemay not be able to effectively manage expanded operations for existing or newproducts.***

Expanded businessoperations could result in new and increased responsibilities for ourmanagement personnel and place significant strain on our management, operatingand financial systems and other resources. To accommodate any such expansion and compete effectively, we may berequired to implement improved information systems, procedures and controls,and to hire additional personnel which we may not be able to do successfully.

***Wedepend on a limited number of suppliers.***

Key materials usedin many of our electrode products have limited sources of supply.  Although we believe that, if necessary,alternative sources could be developed and/or alternate materials substitutedfor each of these limited source materials, this activity could result ininterruptions in our business and manufacturing operations, increased costs andtime for product validations, and additional regulatory submissions andapprovals.

***Wehave limited production capacity and manufacturing experience and rely oncontract manufacturers.***

Our Phoresor dosecontrollers and certain patch components are manufactured under contracts withthird party manufacturers and we rely on them to manufacture a sufficientquantity of product to satisfy demand for our products on a timely basis and tomeet quality and performance standards for the manufacturing facility.  In the event of a loss of a contractmanufacturer, we would be required to identify, qualify, and validate analternative supply source within a reasonable period of time.

We manufacture allof our iontophoretic drug delivery electrode patches in quantities sufficientto satisfy our current level of product sales. Significant capital expenditures for manufacturing equipment or a newcontract manufacturing relationship may be required to increase capacity for existingproducts or any modifications to existing products or new products.    We may not be able to successfully increasecapacity on a profitable basis, or contract with another party on acceptableterms, if at all.

Significantincreases in production volume could likely require changes in products andmanufacturing processes in order to facilitate increased production automationand our efforts to automate production may not be successful.  Accordingly, we may not be able tosuccessfully increase production on a profitable basis or at all.

Our and our thirdparty manufacturer’s facilities operate in accordance with the FDA’s QualitySystem Regulations and other quality systems regulations, including ISO13485,which is similar to ISO 9001 but with additional elements specifically formedical device manufacturers, and CE Mark standards.  We are also audited by the FDA for compliancewith good manufacturing process (GMP) regulations.  Any failure by us or our contractmanufacturer to maintain compliance with any of these regulations could have amaterial adverse effect on our business.

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***Theregulation of our business is extensive and uncertain.***

In the UnitedStates, the research, development, manufacture and marketing of our products isregulated by the FDA, which requires approval of drugs and medical devicesbefore they can be marketed.  Similarapprovals are also required from other regulatory bodies outside the UnitedStates.  The regulatory processesestablished by these government agencies are extensive and uncertain, andcompliance is expensive.  In addition, anapproval may be withdrawn and the applicable regulations may change.

Even if we obtainand maintain regulatory approval for a product, the manufacture of it andrelated operations are subject to extensive government regulation and periodicinspections to confirm compliance with procedures relative to control anddocumentation of product design, control and validation of the manufacturingprocess and overall product quality. Discovery of a failure to comply with applicable regulations couldresult in FDA or other regulatory sanctions, restrictions, or an order towithdraw and/or recall a product.

The FDA currentlyallows us to market our iontophoretic dose controllers and electrode productsfor use with ions of soluble salts or other drugs under the FDA’s 510(k)regulations governing medical devices. We also have FDA approval to market Iontocaine, our own brand oflidocaine, for use with our Phoresor system but stopped marketing Iontocaine infiscal 2005.  In 1994, the FDA publiclystated that it intends to require manufacturers of iontophoretic devices toobtain Pre-Market Approval (PMA) for marketed devices currently used with drugsnot specifically labeled for iontophoretic delivery, which would include ourdose controller for use with ions of soluble salts or other drugs, such asdexamethasone.  The agency to date hasnot published such a regulation.

If the FDArequires a PMA for our iontophoretic devices, we would be required to seek FDAapproval to continue to market those devices. Such a regulation could require that an application be filed as quicklyas 90 days after the publication date of the regulation.  In such an event we might not be able tocomplete and file a PMA within the prescribed time period, or the FDA might notprovide approval.  Failure to submit aPMA within the prescribed time period and ultimately to obtain FDA approvalcould result in our being required to cease commercial distribution of thePhoresor system for use with dexamethasone or any other drug other thanIontocaine.  Any interference with ourability to distribute our Phoresor system for use with dexamethasone would havea material adverse effect on our financial condition and results of operations.

Our iontophoreticdose controller and electrode kits are marketed under 510(k) clearance.  Since obtaining these clearances we have mademodifications to certain products.  Underthe FDA’s regulations, we are required to obtain an additional 510(k) clearanceif we modify a device for which we have previously received a 510(k) clearancein a way that significantly affects the safety or efficacy of the device, or ifthe modification results in a major change in intended use.  Based on the limited guidance provided by theFDA to assist manufacturers in determining whether they are required to obtaina 510(k) clearance for a modified device, we determined that a new 510(k)submission was not required in connection with certain products.  However, the FDA could require us to obtainone or more additional 510(k) clearances in the future for certain of thoseproducts.  During that process, we couldbe prohibited from marketing the modified device until the clearance isobtained from the FDA.

***Wemay require additional capital in the future and that capital may not beavailable.***

Our future capitalrequirements depend on many factors, including:

·                  the costs,timing, and success of our product development activities, includingpreclinical studies and clinical trials and the terms of any associatedcollaborative relationship;

·                  market demandfor any new product resulting from our product development activity;

·                  requirements toimprove or increase manufacturing capacity;

·                  the costs,timing, and success of our sales and marketing efforts

·                  acquisitionopportunities;

·                  the terms of anynew collaborative relationships;

·                  competingtechnological and market developments; and

·                  thecosts to obtain, maintain and to enforce our intellectual property rights anddefend ourselves from claims that we have infringed a third party’sintellectual property rights.

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Although webelieve that at current operating levels, existing cash balances and cashgenerated from operations will be sufficient to fund our operating needsthrough fiscal 2008 and beyond; we may be required or elect to raise additionalcapital before that time.  To satisfycapital requirements, we may seek to raise funds through public or privatefinancings, collaborative relationships or other arrangements that may bedilutive to shareholders, involve significant restrictive covenants, or requireus to relinquish rights to certain technologies, products or marketingterritories.  Additional capital, ifrequired, may not be available on terms satisfactory to us, if at all.  Failure to raise capital when needed couldhave a material adverse effect on our business, financial condition and resultsof operations.

***Acquisitionactivity could disrupt our ongoing business and involve significant risks.***

Acquisitions areinherently risky.  We can not be certainthat an acquisition will be successful and will not materially adversely affectour business.  We have acquired and inthe future may evaluate and acquire businesses, services, products ortechnologies that compliment our strategic direction.  These acquisitions may involve significantrisks, including:

·                  potentiallydilutive issuances of our stock;

·                  incurrence ofdebt and contingent liabilities;

·                  inability tosuccessfully integrate the acquired technologies, services, products, andoperations into our business and to maintain uniform standards, controls,policies and procedures;

·                  distraction ofmanagement from normal business operations;

·                  insufficientrevenue generation to offset liabilities assumed and justify the purchaseprice;

·                  write offs relatedto intangible assets; and

·                  unidentifiedissues not discovered in the due diligence process.

***Productliability insurance is costly and difficult to obtain.***

Product liabilityinsurance in our industry is expensive and difficult to obtain and we may notbe able to maintain existing levels of coverage or obtain desired coverage onacceptable terms in the future.   Inaddition, we are not sure if our existing coverage is adequate.  An inability to maintain or obtain sufficientproduct liability insurance on acceptable terms to protect against potentialproduct liability claims could prevent or inhibit the continuedcommercialization of our products.

***If wewere successfully sued for product liability we could face substantialliabilities.***

Our businessexposes us to potential liability risks inherent in the testing, marketing andsale of drug delivery and related pharmaceutical products for use in humans,including product liability claims, product recall, or excessive warrantyclaims. The use of our products in clinical trials and the sale of futureproducts may also expose us to potential product liability risks.  A successful product liability claim inexcess of our insurance coverage could have a material adverse effect on ourbusiness and could further prevent us from obtaining product liabilityinsurance in the future on commercially desirable or reasonable terms.

***Ourbusiness involves environmental risks that may result in liability for us.***

Our research anddevelopment activities involve the controlled use of hazardous materials,chemicals and various radioactive compounds. The use, disposal and handling of these materials are extensivelyregulated by federal, state and local government authorities.  Although we believe our safety procedures forhandling and disposing of such materials comply in all material respects withthe standards prescribed by state and federal regulations, the risk ofaccidental environmental contamination or personal injury from these materialscannot be completely eliminated and we could be required to incur significantcosts to comply with applicable regulations in the future.  Furthermore, in the event of an accident, wecould be held liable for any damages and any such liability could exceed ourresources.

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**Item 1B.****                                  UNRESOLVEDSTAFF COMMENTS**

Not applicable.

**Item 2.****                                           PROPERTIES**

Our administrative, manufacturing operations, and research office spaceis housed in a single facility, consisting of approximately 34,000 square feet,located at 2441 South 3850 West in Salt Lake City, Utah.  The facility is leased to us until December31, 2012.  We believe our facilities willbe adequate and suitable for our present needs and that additional space willbe available as needed.

**Item 3.****                                           LEGALPROCEEDINGS**

The followingdiscussion provides a summary of certain outstanding and settled legalmatters.  In addition to the specificlegal matters discussed below, we are subject to various claims and legalproceedings covering matters that arise in the ordinary course of business.

**(a)Outstanding Legal Matters**

***EEMSO,Inc. v. Compex Technologies, Inc. f/k/a Rehabilicare, Inc. (“Compex”) andIomed, Inc.*,** U.S. District Court for the NorthernDistrict of Texas*.* This action was initially filed on April 6, 2005 by a competitor ofIomed in the District Court of Dallas County, Texas, 192nd Judicial District and was removed by Iomed andco-defendant Compex Technologies to the U.S. District for the Northern Districtof Texas, Dallas Division.  The complaintalleges that Compex, a distributor of Iomed’s iontophoretic drug deliveryproducts, wrongfully and in violation of a non-disclosure agreement with EEMSO,provided confidential proprietary information to Iomed pertaining to anintegrated electrode iontophoretic device that had been developed by EEMSO.  The complaint further alleges that Iomedmisappropriated this information and incorporated features of the EEMSO productin its own integrated electrode product (the Companion 80), and that Iomed isliable for interference with contract, unfair competition, conversion and civilconspiracy.  EEMSO seeks injunctiverelief and unspecified monetary damages. The case is scheduled for trial in October 2006.  The Company believes that EEMSO’s claims arewithout merit and will continue a vigorous defense.

Management does not believe that the outcomes of thelegal matters discussed in this section above will have a material adverseimpact on the Company.  However, thelegal fees and expenses in these actions will likely be substantial and, in theevent of an unfavorable resolution, the outcome could have a material adverseimpact on our business, financial position, or results of operations.

**(b)Settled Legal Matters**

Effective August31, 2005, we entered into a settlement that resolved our involvement in alllegal matters related to two civil complaints we filed in April 2002 in statecourt against two former executives, among others, alleging misappropriation ofour trade secrets, interference with economic relationships and civilconspiracy.

Effective January24, 2006, we entered into a settlement agreement with Travanti Pharma, Inc.(the successor to Birch Point Medical, Inc.) with respect to the action broughtagainst us by Birch Point Medical. Pursuant to the settlement agreement, we acquired a fully paid-up,non-exclusive, worldwide, royalty-free license and a perpetual covenant not tosue under certain patents and patents pending belonging to Travanti Pharma,Inc. with respect to our iontophoretic medical device products sold into theorthopedic therapy market for a one-time license fee of $750,000.  The settlement agreement also provided for amutual release of claims.

**Item 4.****                                           SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

No matters weresubmitted to a vote of security holders during the fourth quarter of the fiscalyear covered by this Report.

21

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### **PART II**

**Item 5.****                                           MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

### **MarketInformation**

Our common stockis traded on the American Stock Exchange (the “AMEX”), under the symbol “IOX”.  The following table sets forth, for theperiods indicated, the high and low sales prices as reported by the AMEX.  These prices represent quotations betweendealers and do not include retail mark-up, markdown or commission, and do notnecessarily represent actual transactions.
|                | ** ** | **Fiscal 2006** | ** ** | **Fiscal 2005** | ** ** |
|----------------|------------|----------------------|------------|----------------------|------------|
| ** **     | ** ** | **High**             | ** ** | **Low**              | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  |       | $                    | 2.90       |                 | $          | 2.04 |   | $ | 2.95 |   | $ | 1.36 |   |
| Second Quarter |       | $                    | 3.10       |                 | $          | 2.47 |   | $ | 2.72 |   | $ | 1.60 |   |
| Third Quarter  |       | $                    | 3.27       |                 | $          | 2.55 |   | $ | 2.78 |   | $ | 1.70 |   |
| Fourth Quarter |       | $                    | 3.04       |                 | $          | 1.99 |   | $ | 2.38 |   | $ | 1.85 |   |

 

### **Security Holders**

As of June 30,2006, there were 123 shareholders of record of our common stock.

### **Dividends**

We have not paiddividends to date and do not anticipate or contemplate paying cash dividends inthe foreseeable future.  It is the presentintention of management to utilize all available funds for the development andgrowth of our business.

**Equity Compensation Plan Information**

The followingtable shows information about the securities authorized for issuance under ourequity compensation plans as of June 30, 2006:
| **Plan Category**                                      | ** ** | **(a)  Number of securities to  be issued upon exercise  of outstanding options,  warrants and rights** | ** ** | **(b)  Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **(c)  Number of securities  remaining available for future  issuance under equity  compensation plans  (excluding securities reflected  in column (a))** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders     |       | 1,186,000                                                                                                                                                 |       | $                                                                                                                | 2.40       |                                                                                                                                                                                                                  | 1,475,000  |   |
|                                                        |       |                                                                                                                                                      |       |                                                                                                             |       |                                                                                                                                                                                                                  |       |
| Equity  compensation plans not approved by security holders |       | —                                                                                                                                                    |       | —                                                                                                           |       | —                                                                                                                                                                                                                |       |
|                                                        |       |                                                                                                                                                      |       |                                                                                                             |       |                                                                                                                                                                                                                  |       |
| Total                                                       |       | 1,186,000                                                                                                                                                 |       | $                                                                                                                | 2.40       |                                                                                                                                                                                                                  | 1,475,000  |   |

 

### **Recent Sales of Unregistered Securities;Issuer Purchases of Equity Securities**

None.

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**Item 6.****                                           SELECTEDFINANCIAL DATA**

The following selected income statement data for the years ended June30, 2006, 2005 and 2004, and the balance sheet data as of June 30, 2006 and2005 are derived from the audited financial statements included in this reportand should be read in conjunction with those financial statements and the notesthereto.  The selected income statementdata for the years ended June 30, 2003 and 2002, and the balance sheet data asof June 30, 2004, 2003 and 2002 are derived from our audited consolidatedfinancial statements, which are not included herein and are qualified by referenceto such financial statements and the notes thereto.  Certain reclassifications have been made toprior year balances to conform to the financial statement presentation includedherein.
| ** **                                              | ** ** | **Fiscal Year ended June 30,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Income  Statement Data:**                             |       |                                               |       |   |   |   |   |   |   |   |   |
|                                                    |       |                                               |       |   |   |   |   |   |   |   |   |
| Product sales,  net                                     |       | $                                                  | 10,843,000 |   | $ | 11,426,000 |   | $ | 12,189,000 |   | $ | 11,935,000 |   | $ | 11,169,000 |   |
| Cost of products  sold                                  |       | 4,277,000                                          |       | 4,401,000 |   | 4,607,000 |   | 4,376,000 |   | 4,165,000 |   |
| Gross profit                                            |       | 6,566,000                                          |       | 7,025,000 |   | 7,582,000 |   | 7,559,000 |   | 7,004,000 |   |
|                                                    |       |                                               |       |   |   |   |   |   |   |   |   |
| Operating costs  and expenses:                          |       |                                               |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative (1)                 |       | 5,171,000                                          |       | 5,703,000 |   | 5,593,000 |   | 5,711,000 |   | 5,585,000 |   |
| Research and development                                |       | 1,101,000                                          |       | 993,000 |   | 1,050,000 |   | 1,232,000 |   | 2,600,000 |   |
| Non-recurring (income) expense                          |       | —                                             |       | — |   | — |   | (76,000 | )(2) | 1,695,000 | (3) |
| Total costs and expenses                                |       | 6,272,000                                          |       | 6,696,000 |   | 6,643,000 |   | 6,867,000 |   | 9,880,000 |   |
|                                                    |       |                                               |       |   |   |   |   |   |   |   |   |
| Income (loss)  from operations                          |       | 294,000                                            |       | 329,000 |   | 939,000 |   | 692,000 |   | (2,876,000 | ) |
|                                                    |       |                                               |       |   |   |   |   |   |   |   |   |
| Interest expense                                        |       | (78,000                                            | )          | (121,000 | ) | (169,000 | ) | (213,000 | ) | (263,000 | ) |
| Interest income  & other, net (4)                   |       | 384,000                                            |       | 217,000 |   | 184,000 |   | 306,000 |   | 777,000 |   |
|                                                    |       |                                               |       |   |   |   |   |   |   |   |   |
|  Net income (loss) (5)                             |       | $                                                  | 600,000    |   | $ | 425,000 |   | $ | 954,000 |   | $ | 785,000 |   | $ | (2,362,000 | ) |
|                                                    |       |                                               |       |   |   |   |   |   |   |   |   |
| **Diluted  Per Common Share Amounts:**                  |       |                                               |       |   |   |   |   |   |   |   |   |
| Net income  (loss)                                      |       | $                                                  | 0.08       |   | $ | 0.06 |   | $ | 0.12 |   | $ | 0.10 |   | $ | (0.36 | ) |
|                                                    |       |                                               |       |   |   |   |   |   |   |   |   |
| Shares used in  computing diluted per share amounts (6) |       | 7,910,000                                          |       | 7,665,000 |   | 7,708,000 |   | 7,497,000 |   | 6,545,000 |   |
|                                                    |       |                                               |       |   |   |   |   |   |   |   |   |
| **Balance  Sheet Data:**                                |       |                                               |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                              |       | $                                                  | 8,426,000  |   | $ | 8,293,000 |   | $ | 7,338,000 |   | $ | 5,921,000 |   | $ | 4,422,000 |   |
| Restricted cash                                         |       | 275,000                                            |       | 585,000 |   | 1,062,000 |   | 1,689,000 |   | 2,279,000 |   |
| Total assets                                            |       | 12,673,000                                         |       | 12,538,000 |   | 12,511,000 |   | 12,491,000 |   | 12,079,000 |   |
| Long-term  obligations, including current portion       |       | 836,000                                            |       | 1,368,000 |   | 1,971,000 |   | 2,569,000 |   | 3,125,000 |   |
| Accumulated  deficit                                    |       | (31,132,000                                        | )          | (31,732,000 | ) | (32,157,000 | ) | (33,111,000 | ) | (33,896,000 | ) |
| Shareholders’ equity                               |       | 10,816,000                                         |       | 9,868,000 |   | 9,443,000 |   | 8,416,000 |   | 7,631,000 |   |
|                                                         |            |                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)    Includes litigation-related expenses of $0.9 million,$1.0 million, $0.4 million, and $0.4 million in fiscal years 2006, 2005, 2004,and 2003, respectively.

(2)    Reflects the reversal of the remaining accrual amountrelating to the fiscal 2000 lease abandonment charge for facilities relocation.

(3)    Reflects a $1,190,000 non-recurring, non-cash chargefor the impairment of long-lived assets and a $505,000 non-recurringrestructuring charge.

(4)    Includes income from contract research, royalties, andlicense fees.

(5)    As a result of adopting Financial Accounting StandardsBoard Statement of Financial Accounting Standards No. 123R, fiscal 2006 netincome includes a non-cash charge of $150,000 related to stock-based compensationexpense.

(6)    See Notes to Consolidated Financial Statements forinformation concerning the computation of per share amounts.

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**Item 7.****              MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

*Thefollowing discussion of our financial condition and results of operationsshould be read in conjunction with the Consolidated Financial Statements andthe related Notes thereto included elsewhere in this Report.  The following Management’s Discussion andAnalysis of Financial Condition and Results of Operations containsforward-looking statements, within the meaning of Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934, thatinvolve risks and uncertainties.  Ouractual results of operations could differ significantly from those anticipatedin such forward-looking statements as a result of numerous factors discussedunder Item 1 “Business” and elsewhere in this Report.*

**Overview**

We are a leader inthe development, manufacture and sale of active drug delivery systems primarilyused to treat local inflammation in the physical and occupational therapy andsports medicine markets.  Our currentproduct line is based on proprietary iontophoretic drug deliverytechnology.  The majority of our revenueshave been generated through the sale of the Phoresor system, including thereusable dose controller and single use, disposable patch kits.  We are pursuing opportunities to advance ourposition as a provider of quality, innovative medical products that improvepatient healthcare.  In addition, we areseeking collaborative opportunities to develop its non-invasive drug deliverytechnology to satisfy unmet medical needs. We have proprietary iontophoresis technology in various stages ofresearch and product development primarily for transdermal drug delivery andfor the treatment of ophthalmic disease. From our inception through fiscal 2002, we have generally incurredoperating losses as a result of costs associated with internally fundedresearch and development activities. During fiscal 2003, 2004, 2005 and 2006, we reported net income.  As of June 30, 2006, our accumulated deficitwas approximately $31.1 million.  Ourability to sustain profitability will depend on our ability to achieve marketacceptance and successfully expand sales of our existing products andsuccessfully complete the development of, receive regulatory approvals for, andsuccessfully manufacture and market our current and future products, andresolve pending litigation matters, as to which there can be no assurance.

**Strategic Assessment Update**

OnSeptember 15, 2005, we announced that our Board of Directors decided to explorevarious strategic alternatives for the Company to maximize shareholdervalue.  In connection with this process,we retained Seven Hills Partners LLC to act as our financial advisor.  We have engaged in discussions with variousparties regarding potential transactions. At the present time, the assessment of strategic alternatives isongoing.  We are uncertain whether anytransaction will result from this process and if a transaction does result fromthat process what form it will take and what impact it may have on our stockprice.

**Loss of Distributor**

We were party to adistribution agreement with Compex Technologies, Inc. (formerly Rehabilicare,Inc.) that was terminated effective July 1, 2006.   Compex was our second largest customer andaccounted for over 16% of our total product sales during each of the past threefiscal years.  Compex elected toterminate the Distribution Agreement (the “Agreement”) between Iomed, Inc. andRehabilicare following their acquisition by Encore Medical Corporation, theparent company of our primary competitor, Empi, Inc.  These events will likely have a negativeeffect on our future sales and operating results.  Nevertheless, we believe that userpreference, the strength of our alternative distribution channels and our owninternal sales and marketing efforts provide us with an opportunity to retain asubstantial portion of the revenue generated by the end user customers formerlyserviced by Compex.  The Agreementprovided us with certain provisions to protect our business interests followingsuch termination.  Under the Agreement,Compex is subject to a twelve month non-compete provision and we were providedaccess to end user customer data.  Weintend to exercise our rights under the Agreement and to utilize alternativedistribution channels to service former Compex accounts.  Due to certain factors, including variousmarket dynamics, limited resources, and our limited access to the end useraccount information of our distributors; it will be difficult for the Companyto precisely measure its success in retaining these accounts.

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**Fiscal Years Ended June 30, 2006and 2005**

*Productsales. *Product salesdecreased 5% to $10.8 million in fiscal 2006 from $11.4 million in fiscal 2005primarily due to reduced unit sales volume to large dealers, including CompexTechnologies, during the fourth quarter of fiscal 2006.  In addition, a slight decrease in averageselling prices during the first quarter of fiscal 2006 compared with the firstquarter of fiscal 2005 contributed to lower sales in fiscal 2006.

*Costs of Products Sold. *Costs of products sold were$4.3 million in fiscal 2006 compared to $4.4 million in the prior year.  Gross margins on product sales were 60.6% infiscal 2006 compared to 61.5% in the prior year.  Improved material costs, labor efficienciesand overhead costs partially mitigated the effects of lower total unit salesvolume on gross margin.

*Selling, General and Administrative Expenses. *Selling, general andadministrative expenses decreased 9% to $5.2 million in fiscal 2006 compared to$5.7 million in the prior year.  The decreaserelates primarily to reduced personnel, professional fees andlitigation-related expenses (See “Item 3. Legal Proceedings”).   Expenses related to litigation were $0.9million and $1.0 million in fiscal 2006 and 2005, respectively.   We continue to look for opportunities toreduce expenses.  The beneficial effectsof a re-negotiated facility lease also resulted in additional expensereductions and cash flow contributions during fiscal 2006.

*Research and Product DevelopmentExpense. *Research andproduct development expenditures increased 11% to $1.1 million in fiscal 2006compared to $1.0 million for the prior year. The increase is a result of increased investment in new productdevelopment activities for our core business offset, in part, by the beneficialeffects of the renegotiated facility lease, including decreased allocations ofmonthly rent and depreciation expense. During fiscal 2007, we intend to focus research and product developmentefforts on our core business and new market opportunities for our iontophoresistechnology.

*Other Income and Expenses. * Interest expense decreased to $78,000 infiscal 2006 from $121,000 in the prior year due to a decreasing balance onlong-term obligations.  Interest incomeand other miscellaneous income was $384,000 in fiscal 2006 compared to $217,000in the prior year.  Amounts in bothperiods primarily reflect interest earnings on invested cash balances andincome from a royalty and license agreement. The increase was due to increased interest income from improved rates.

*Income Taxes. *During fiscal years 2006and 2005, we recognized no income tax expense due to certain future taxbenefits and the reversal of valuation allowance that had been previouslyrecorded to offset deferred tax assets associated with our net operating losscarryforwards.  We have substantial netoperating loss carryforwards, which, under the current “change of ownership”rules of the Internal Revenue Code of 1986, as amended, may become subject tosubstantial annual limitation in the future. Such “changes of ownership” can result from purchases and sales of ourshares by large shareholders.  If weexperience a 50% change in the ownership of our stock, then we may be limitedin the amount of net operating loss carryforwards that we can use in any givenyear.  Due to the uncertainty of therealizability of our net deferred tax assets, primarily associated with netoperating loss carryforwards, we have recorded a full valuation allowance tooffset these deferred tax assets.  Wewill continue to monitor the realizability of these assets and could adjust thevaluation allowance in the future.

*Net Income. *We recognized net income of$600,000, or $0.08 per diluted share, during fiscal 2006 compared with netincome of $425,000, or $0.06 per diluted share, during the prior year. Netincome in the current year was negatively affected by a non-cash charge of$150,000 for stock option compensation expense following the Company’s adoptionof FASB Statement No. 123R, Share-Based Payment.  The increase in net income is a result of thevarious factors discussed above.

**Fiscal Years Ended June 30, 2005and 2004**

*Product sales. *Product sales were $11.4million in fiscal 2005, a 6% decrease from $12.2 million in fiscal 2004.  Product sales in fiscal 2005 were impacted bya reduction in average selling prices due, in part, to factors relating to therestructuring of our distribution network. In addition, the effect of cost constraints in physical therapy clinics,including legislative changes in certain workers’ compensation markets, is,among other factors, resulting in decreased reimbursement for physical therapyservices, which may have an indirect impact on the utilization of ourproducts.  Other market trends resulted inan increasing portion of our sales to large national suppliers who offer abroader line of products and lower overall pricing.  These

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suppliers have greateraccess to volume discounts, which results in lower average selling pricesrealized by us.  Sales in fiscal 2005were further impacted by a reduction in inventory levels carried by certain ofour dealers.  We believe the inventoryreductions were due, in part, to the restructuring of our dealer network.  Sales in fiscal 2005 were favorably impactedby increased unit volumes of new products.

*Costs of Products Sold. *Costs of products sold were$4.4 million in fiscal 2005 compared to $4.6 million in fiscal 2004.  Gross margins on product sales were 61.5% infiscal 2005 compared to 62.2% in fiscal 2004. The beneficial effects of the renegotiated facility lease, beginning inthe second quarter of fiscal 2005, including decreased monthly rent andallocated depreciation expense, partially mitigated the effects of lower totalproduct sales and average selling prices on gross margin.

*Selling, General and Administrative Expenses. *Selling, general andadministrative expenses increased 2% to $5.7 million in fiscal 2005 compared to$5.6 million in fiscal 2004.  Theincrease relates primarily to litigation expenses which off-set the reductionsin on-going selling, general and administrative expenses achieved fromoperating efficiencies initiated over the last four years.  Expenses related to litigation, including theestablishment of reserves with respect thereto, were $1.0 million and $0.4million in fiscal 2005 and 2004, respectively.  We continue to look for opportunities to reduce expenses.  The beneficial effects of a re-negotiatedfacility lease also resulted in additional expense reductions and cash flowcontributions during fiscal 2005.

*Research and Product DevelopmentExpense. *Research andproduct development expenditures decreased 5% to $1.0 million in fiscal 2005compared to $1.1 million for fiscal 2004. The decrease is primarily a result of the beneficial effects of therenegotiated facility lease, including decreased allocations of monthly rentand depreciation expense.

*Other Income and Expenses. * Interest expense decreased to $121,000 infiscal 2005 from $169,000 in fiscal 2004 due to a decreasing balance onlong-term obligations.  Interest incomeand other miscellaneous income was $217,000 in fiscal 2005 compared to $184,000in fiscal 2004.  Amounts in both periodsreflect interest earnings on invested cash balances and income from a royaltyand license agreement.  The increase wasdue to increased interest income from improved rates and a larger invested cashbalance offset, in part, by reduced royalty income from the royalty and licenseagreement.  Under the terms of thisagreement, the royalty rate decreased beginning during fiscal 2004.

*Income Taxes*.  No income tax expense was recognized for fiscal 2005 or 2004.

*Net Income. *We recognized net income of$425,000, or $0.06 per diluted share, during fiscal 2005 compared with netincome of $954,000, or $0.12 per diluted share, during fiscal 2004.

**Liquidity and Capital Resources**

During fiscal 2006, 2005,and 2004, our operations, including costs associated with its research anddevelopment programs, were funded by cash flow from our commercial operatingbusiness.

As of June 30, 2006, we hadcash and cash equivalents totaling approximately $8.4 million.  Additionally, we had approximately $0.3million of long-term restricted cash, invested in mutual funds and used tosecure long-term financing.  Cash inexcess of immediate requirements is invested in a manner which is intended tomaximize liquidity and return while minimizing investment risk, and, wheneverpossible, we seek to minimize the potential effects of concentration of creditrisk.

Wegenerated $1.0 million, $1.1 million and $1.4 million in cash from operatingactivities in fiscal 2006, 2005 and 2004, respectively.  The decrease in positive operating cash flowin fiscal 2006 was a result of a net decrease in trade accounts payableand accrued expenses related to the timing of payments for litigation and otherexpenses.   In fiscal 2005, the decrease incash generated from operations was primarily related to the reduced net incomeand depreciation partially offset by the timing of payments for certain accruedlitigation expenses and other liabilities.

As of June 30, 2006, wehad approximately $0.8 million in debt, including the current portion,outstanding under financing agreements. We do not anticipate a significant investment in capital equipmentduring the next 12 months.  Our equipmentand furniture expenditures were $60,000, $61,000, and $95,000 in fiscal

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2006, 2005, and 2004,respectively.  In addition, we used$750,000 to acquire a fully paid-up, non-exclusive, worldwide, royalty-freelicense and other rights under certain patents and patents pending.

Other sources and uses ofcash during the periods included the following: During fiscal 2006, we used $532,000 for payments on long-termobligations; received $198,000 in proceeds from exercise of stock options; andits restricted cash requirements decreased $310,000.  During fiscal 2005, we used $603,000 forpayments on long-term obligations and its restricted cash requirementsdecreased $477,000.  During fiscal 2004,we used $598,000 for payments on long-term obligations; received $73,000 inproceeds from exercise of stock options; and its restricted cash requirementsdecreased $627,000.  The reduction incash restrictions resulted from payments made on long-term obligations and morefavorable terms negotiated with the lender.

Duringfiscal 2007, costs associated with our commercial business, including researchand development activities, will be funded internally from our establishedcommercial business; term loan and capital lease financing agreements; and fromexisting cash balances.  We anticipatethat at our current operating levels, existing cash balances and cash generatedfrom operations will be sufficient to fund our operating needs through fiscal2008 and beyond.  However, we may berequired to or elect to raise additional capital before that time.  Our actual capital requirements will dependon numerous factors, many of which are outside of our control.

### **DisclosureAbout Contractual Obligations**

The following tablerepresents our contractual obligations as of June 30, 2006:
| ** **                      | ** ** | **Payments Due by Period** | ** ** |
|---------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligation** | ** ** | **Total**                                 | ** ** | **Less Than  1 year** | ** ** | **1 – 3 years** | ** ** | **3 – 5  years** | ** ** | **Greater  than 5  years** | ** ** |
| Term loan  obligations          |       | $                                         | 891,000    |   | $ | 486,000 |   | $ | 405,000 |   | $ | — |   | $ | — |   |
| Operating Leases                |       | 1,856,000                                 |       | 278,000 |   | 550,000 |   | 575,000 |   | 453,000 |   |
| Total Contractual  Obligations  |       | $                                         | 2,747,000  |   | $ | 764,000 |   | $ | 955,000 |   | $ | 575,000 |   | $ | 453,000 |   |

Operating lease obligations in the above schedule primarily reflect the obligations for our administrative, manufacturing, and research facility.

**Critical Accounting Policies**

TheSecurities Exchange Commission’s Financial Reporting Release No. 60 requiresall companies to include a discussion of critical accounting policies ormethods used in the preparation of financial statements.  The following list is not intended to be acomprehensive list of all of our accounting policies.  Our significant accounting policies are morefully described in Note 1 of our consolidated financial statements.  In many cases, the accounting treatment of aparticular transaction is dictated by U.S. generally accepted accountingprinciples, with no need for management’s judgment or estimation inapplication.  There are also areas inwhich management’s judgment in selecting an available alternative would notproduce a materially different result. The following is a brief discussion of the more significant accountingpolicies and methods we employ:

*General* - The preparation of financial statements in conformity with U.S.generally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities atthe date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from those estimates.

*Revenue Recognition* – Revenues on product sales are recognized when there is persuasiveevidence that an arms length transfer has occurred, generally upon shipment,when title has passed, and the price is fixed or determinable.  We provide our customers certain purchaseincentives, including performance rebates and volume pricing discounts, basedon the achievement of specified purchase levels.  We accrue for performance rebates based uponestimated customer purchase levels and records volume pricing discounts whenproducts are purchased.  Revenue, whichis stated as net product sales, is reduced by these incentives.

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*Long Lived Assets* – The carrying amounts of long-lived assets, and the relatedamortization periods, are reviewed for impairment whenever events occur orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable within the estimated useful life.  When we determine the existence of impairmentindicators, the impairment loss is measured based on the excess of carryingvalue over the estimated fair value of the impaired assets.  The carrying value of the underlying assetsis reduced, with the reduction charged to expense, so that the carrying valueis equal to estimated fair value.

*Inventories* – Inventories are stated at the lower of cost or market.  Cost is determined using the first-in,first-out method.  We evaluate thecarrying value of its inventories at least quarterly, taking into account suchfactors as historical and anticipated future sales compared with quantities onhand, the price we expect to obtain for its products in their respectivemarkets compared with historical cost, and the remaining shelf life of goods onhand.

*Stock-basedCompensation* – Wehave adopted Financial Accounting Standards Board Statement of FinancialAccounting Standards (“SFAS”) No. 123R, Share-Based Payment.  We use the Modified Prospective method, whichrequires the application of SFAS No. 123R to new awards and to awards modified,repurchased or cancelled after the effective date.  Additionally, compensation cost for theportion of outstanding awards for which service has not been rendered (such asunvested options) that are outstanding as of the date of adoption will berecognized as the remaining services are rendered.  We recorded $150,000 in stock-basedcompensation expense during the fiscal 2006. Results from prior periods have not been restated.

**Item 7a.****          QUANTITATIVEAND QUALITATIVE INFORMATION ABOUT MARKET RISK**

Not applicable.

**Item 8.**            **FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

Consolidated financialstatements are included elsewhere in this Report.

**Item 9.****            CHANGESAND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

None.

**Item 9A.**         **CONTROLS AND PROCEDURES**

Our Chief Executive Officer and Chief Financial Officer, together withother members of the Company’s management, conducted an evaluation of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures (as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934) as of the end of the period covered by thisreport and concluded that the Company’s disclosure controls and procedures wereeffective as of the end of such period. During the fourth quarter of the period covered by this report, therewas no change in the Company’s internal controls over financial reporting thathas materially affected, or is reasonably likely to materially affect, theCompany’s controls over financial reporting.

 

**Item 9B.****         OTHERINFORMATION**

None.

28

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**Consolidated Financial Statements**

**IOMED, Inc.**

**June 30, 2006**

29

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**INDEX TOFINANCIAL STATEMENTS**

**IOMED,Inc.**
| **Audited Financial Statements:**                                                         |   |   |
|-------------------------------------------------------------------------------------------|--------|--------|
| ** **                                                                                |   |   |
| Report of Independent  Registered Public Accounting Firm                                  |   |   |
|                                                                                      |   |   |
| Balance Sheets at June 30, 2006 and 2005                                                  |   |   |
|                                                                                      |   |   |
| Income Statements for the Years Ended June  30, 2006, 2005 and 2004                       |   |   |
|                                                                                      |   |   |
| Statements of Shareholders’  Equity for the Years Ended June 30, 2006, 2005 and 2004 |   |   |
|                                                                                      |   |   |
| Statements of Cash Flows for the Years  Ended June 30, 2006, 2005 and 2004                |   |   |
|                                                                                      |   |   |
| Notes to Financial  Statements                                                            |   |   |

 

30

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors and Shareholders

IOMED, Inc.

We have audited theaccompanying balance sheets of IOMED, Inc. as of June 30, 2006 and 2005, andthe related statements of income, shareholders’ equity, and cash flows for eachof the three years in the period ended June 30, 2006. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. We were not engaged to perform an audit of theCompany’s internal control over financial reporting. Our audits includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of IOMED, Inc. at June 30, 2006 and 2005, andthe results of its operations and its cash flows for each of the three years inthe period ended June 30, 2006, in conformity with U.S. generally acceptedaccounting principles.

As discussed in Notes 1and 5 to the financial statements, effective July 1, 2005, the Company adoptedStatement of Financial Accounting Standards No. 123 (revised 2004), “ShareBased Payment.”
|                       | /S/:   | ERNST & YOUNG LLP |   |
|-----------------------|--------|-----------------------|--------|
|                  |   |                  |
| Salt Lake City,  Utah |   |                  |
| August 3, 2006        |   |                  |

31

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**IOMED,Inc.**

**BALANCE SHEETS**
| ** **                                                                                                                                  | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                                                  | ** ** | **2006**          | ** ** | **2005** | ** ** |
| ASSETS                                                                                                                                      | ** ** | ** **        | ** ** | ** ** | ** ** |
|                                                                                                                                        |       |              |       |   |   |
| Current assets:                                                                                                                             |       |              |       |   |   |
| Cash and cash equivalents                                                                                                                   |       | $                 | 8,426,000  |   | $ | 8,293,000 |   |
| Accounts receivable, less allowance for doubtful  accounts of $62,000 in 2006 and 2005                                                      |       | 1,215,000         |       | 1,319,000 |   |
| Inventories                                                                                                                                 |       | 1,139,000         |       | 1,153,000 |   |
| Prepaid expenses                                                                                                                            |       | 102,000           |       | 101,000 |   |
| Total current assets                                                                                                                        |       | 10,882,000        |       | 10,866,000 |   |
|                                                                                                                                        |       |              |       |   |   |
| Equipment and  furniture, net                                                                                                               |       | 750,000           |       | 1,025,000 |   |
| Restricted cash                                                                                                                             |       | 275,000           |       | 585,000 |   |
| Other assets                                                                                                                                |       | 766,000           |       | 62,000 |   |
| Total assets                                                                                                                                |       | $                 | 12,673,000 |   | $ | 12,538,000 |   |
|                                                                                                                                        |       |              |       |   |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                   | ** ** | ** **        | ** ** | ** ** | ** ** |
|                                                                                                                                        | ** ** | ** **        | ** ** | ** ** | ** ** |
| Current  liabilities:                                                                                                                       | ** ** | ** **        | ** ** | ** ** | ** ** |
| Trade accounts payable                                                                                                                      |       | $                 | 277,000    |   | $ | 211,000 |   |
| Accrued liabilities                                                                                                                         |       | 744,000           |       | 1,091,000 |   |
| Current portion of long-term obligations                                                                                                    |       | 443,000           |       | 532,000 |   |
| Total current liabilities                                                                                                                   |       | 1,464,000         |       | 1,834,000 |   |
|                                                                                                                                        |       |              |       |   |   |
| Long-term  obligations                                                                                                                      |       | 393,000           |       | 836,000 |   |
|                                                                                                                                        |       |              |       |   |   |
| Commitments and  contingencies                                                                                                              |       |              |       |   |   |
|                                                                                                                                        |       |              |       |   |   |
| Shareholders’  equity:                                                                                                                 |       |              |       |   |   |
| Common shares, no par value; 100,000,000 shares authorized;  7,600,356 and 6,585,213 shares issued and outstanding in 2006 and 2005         |       | 41,948,000        |       | 34,719,000 |   |
| Convertible preferred shares, no par value;  10,000,000 shares authorized; zero and 893,801 shares issued and outstanding  in 2006 and 2005 |       | —            |       | 6,881,000 |   |
| Accumulated deficit                                                                                                                         |       | (31,132,000       | )          | (31,732,000 | ) |
| Total shareholders’ equity                                                                                                             |       | 10,816,000        |       | 9,868,000 |   |
| Total  liabilities and shareholders’ equity                                                                                            |       | $                 | 12,673,000 |   | $ | 12,538,000 |   |

 

See accompanyingnotes.

32

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**IOMED,Inc.**

**STATEMENTS OF INCOME**
| ** **                           | ** ** | **Year ended June 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                 |       |                                   |       |   |   |   |   |
| Product sales,  net                  |       | $                                      | 10,843,000 |   | $ | 11,426,000 |   | $ | 12,189,000 |   |
| Cost of products  sold               |       | 4,277,000                              |       | 4,401,000 |   | 4,607,000 |   |
| Gross profit                         |       | 6,566,000                              |       | 7,025,000 |   | 7,582,000 |   |
| Operating costs  and expenses:       |       |                                   |       |   |   |   |   |
| Selling, general and administrative  |       | 5,171,000                              |       | 5,703,000 |   | 5,593,000 |   |
| Research and product development     |       | 1,101,000                              |       | 993,000 |   | 1,050,000 |   |
| Total costs and expenses             |       | 6,272,000                              |       | 6,696,000 |   | 6,643,000 |   |
| Income from  operations              |       | 294,000                                |       | 329,000 |   | 939,000 |   |
|                                 |       |                                   |       |   |   |   |   |
|  Interest expense               |       | (78,000                                | )          | (121,000 | ) | (169,000 | ) |
| Interest income  and other, net      |       | 384,000                                |       | 217,000 |   | 184,000 |   |
| Income before  income tax expense    |       | 600,000                                |       | 425,000 |   | 954,000 |   |
| Income tax  expense, net             |       | —                                 |       | — |   | — |   |
| Net income                           |       | $                                      | 600,000    |   | $ | 425,000 |   | $ | 954,000 |   |
|                                 |       |                                   |       |   |   |   |   |
| Basic net income  per common share   |       | $                                      | 0.09       |   | $ | 0.06 |   | $ | 0.15 |   |
|                                 |       |                                   |       |   |   |   |   |
| Diluted net income per  common share |       | $                                      | 0.08       |   | $ | 0.06 |   | $ | 0.12 |   |

 

See accompanyingnotes.

33

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**IOMED,Inc.**

**STATEMENTS OF SHAREHOLDERS’ EQUITY**
| ** **                       | ** ** | ** **             | ** ** | ** **    | ** ** | **Convertible** | ** ** | ** **  | ** ** | ** ** | ** **  |
|----------------------------------|------------|------------------------|------------|---------------|------------|-----------------|------------|-------------|------------|------------|-------------|
| ** **                       | ** ** | **Common Shares** | ** ** | **Preferred** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
| ** **                       | ** ** | **Shares**             | ** ** | **Amount**    | ** ** | **Shares**      | ** ** | **Deficit** | ** ** | **Total**  | ** **  |
| **Balance  at June 30, 2003**    |       | 6,544,670              |       | $             | 34,646,000 |            | $          | 6,881,000   |       | $          | (33,111,000 | ) | $ | 8,416,000 |   |
| Stock options exercised          |       | 40,543                 |       | 73,000        |       | —          |       | —      |       | 73,000     |        |
| Net income                       |       | —                 |       | —        |       | —          |       | 954,000     |       | 954,000    |        |
| **Balance  at June 30, 2004**    |       | 6,585,213              |       | 34,719,000    |       | 6,881,000       |       | (32,157,000 | )          | 9,443,000  |        |
| Net income                       |       | —                 |       | —        |       | —          |       | 425,000     |       | 425,000    |        |
| **Balance  at June 30, 2005**    |       | 6,585,213              |       | 34,719,000    |       | 6,881,000       |       | (31,732,000 | )          | 9,868,000  |        |
| Stock options exercised          |       | 121,342                |       | 198,000       |       | —          |       | —      |       | 198,000    |        |
| Stock based compensation expense |       | —                 |       | 150,000       |       | —          |       | —      |       | 150,000    |        |
| Conversion of Preferred Shares   |       | 893,801                |       | 6,881,000     |       | (6,881,000      | )          | —      |       | —     |        |
| Net income                       |       | —                 |       | —        |       | —          |       | 600,000     |       | 600,000    |        |
| **Balance at June 30, 2006**     |       | 7,600,356              |       | $             | 41,948,000 |            | $          | —      |       | $          | (31,132,000 | ) | $ | 10,816,000 |   |

 

See accompanyingnotes.

34

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**IOMED,Inc.**

**STATEMENTS OF CASH FLOWS**
| ** **                                                                         | ** ** | **Year ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Cash  flows from operating activities**                                          | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                      | 600,000    |   | $ | 425,000 |   | $ | 954,000 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                   |       |   |   |   |   |
| Depreciation and amortization                                                      |       | 381,000                                |       | 550,000 |   | 954,000 |   |
| Other non-cash charges                                                             |       | 150,000                                |       | — |   | — |   |
| Changes in operating assets and liabilities:                                       |       |                                   |       |   |   |   |   |
| Accounts receivable                                                                |       | 104,000                                |       | 28,000 |   | (47,000 | ) |
| Inventories                                                                        |       | 14,000                                 |       | (58,000 | ) | (68,000 | ) |
| Prepaid expenses                                                                   |       | (1,000                                 | )          | (8,000 | ) | 26,000 |   |
| Trade accounts payable                                                             |       | 66,000                                 |       | (237,000 | ) | (56,000 | ) |
| Accrued expenses and other liabilities                                             |       | (347,000                               | )          | 442,000 |   | (353,000 | ) |
| Net cash  provided by operating activities                                         |       | 967,000                                |       | 1,142,000 |   | 1,410,000 |   |
| ** **                                                                         | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash  flows from investing activities**                                          |       |                                   |       |   |   |   |   |
| Purchases of  equipment and furniture                                              |       | (60,000                                | )          | (61,000 | ) | (95,000 | ) |
| Purchase of  intangible assets                                                     |       | (750,000                               | )          | — |   | — |   |
| Net cash used in  investing activities                                             |       | (810,000                               | )          | (61,000 | ) | (95,000 | ) |
| ** **                                                                         | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash  flows from financing activities**                                          |       |                                   |       |   |   |   |   |
| Proceeds from  issuance of common shares                                           |       | 198,000                                |       | — |   | 73,000 |   |
| Change in  restricted cash                                                         |       | 310,000                                |       | 477,000 |   | 627,000 |   |
| Payments on  long-term obligations                                                 |       | (532,000                               | )          | (603,000 | ) | (598,000 | ) |
| Net cash  provided by (used in) financing activities                               |       | (24,000                                | )          | (126,000 | ) | 102,000 |   |
|                                                                               |       |                                   |       |   |   |   |   |
| Net increase in  cash and cash equivalents                                         |       | 133,000                                |       | 955,000 |   | 1,417,000 |   |
| Cash and cash  equivalents at beginning of year                                    |       | 8,293,000                              |       | 7,338,000 |   | 5,921,000 |   |
| Cash and cash equivalents  at end of year                                          |       | $                                      | 8,426,000  |   | $ | 8,293,000 |   | $ | 7,338,000 |   |
|                                                                               |       |                                   |       |   |   |   |   |
| **Supplemental  disclosures of cash flow information**                             |       |                                   |       |   |   |   |   |
| Cash paid for  interest                                                            |       | $                                      | 78,000     |   | $ | 124,000 |   | $ | 169,000 |   |
| Cash paid for income  taxes                                                        |       | $                                      | —     |   | $ | — |   | $ | — |   |

 

See accompanyingnotes.

35

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**IOMED,Inc.**

**NOTES TO FINANCIAL STATEMENTS**

**1.             Description of Business and Summary of SignificantAccounting Policies**

*Description of Business*

IOMED, Inc., a Utahcorporation (the “Company”), is a leader in the development, manufacture andsale of active drug delivery systems used primarily to treat acute localinflammation in the physical and occupational therapy and sports medicinemarkets.  The Company is pursuingopportunities to advance its position as a provider of quality, innovativemedical products that improve patient healthcare.  In addition, the Company is seekingcollaborative opportunities to develop its non-invasive drug deliverytechnology to satisfy unmet medical needs. The Company has proprietary technology in various stages of research andproduct development primarily for transdermal drug delivery and for thetreatment of ophthalmic disease.

*Estimates*

Preparation of financialstatements in conformity with U.S. generally accepted accounting principlesrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities at the date of the financial statements andthe reported amounts of revenue and expenses during the reporting period.  Actual results could differ from thoseestimates.

*Cash Equivalents*

TheCompany considers all highly liquid investments with maturities of three monthsor less, when purchased, to be cash equivalents, including $310,000 restrictedto secure the current portion of certain long-term obligations (see note 4).

*Concentrations of Credit Risk*

The Company’s financialinstruments that are exposed to concentrations of credit risk consist primarilyof cash, cash equivalents and trade accounts receivable.  Cash and cash equivalents are held infederally insured financial institutions or invested in high-grade short-termcommercial paper issued by major United States corporations.  The Company sells its products primarily to,and has trade accounts receivable with, independent durable medical equipmentdealers in the United States and abroad. Less than 10% of product sales are to foreign customers.  As a general policy, collateral is notrequired for accounts receivable.  TheCompany maintains an allowance for losses based upon expected collections ofaccounts receivable.  Additionally,customers’ financial condition and credit worthiness are regularly evaluatedand historical losses have not been material. Combined sales to the Company’s two largest customers accounted forapproximately 43%, 40% and 32% of the Company’s total product sales for theyears ended June 30, 2006, 2005 and 2004. At June 30, 2006, 2005 and 2004, amounts due from such customersaccounted for approximately 56%, 55% and 47% of trade receivables, all of whichwas current.  Effective July 1, 2006, thedistribution agreement between the Company and one of these customers hasterminated.  The Company is evaluatingthe impact on future operations.  TheCompany considers credit risk from concentrations of trade accounts receivableto be low.

*Revenue Recognition*

Revenues on product sales are recognized when there is persuasiveevidence that an arms length transfer has occurred, generally upon shipment,when title has passed, the price is fixed or determinable, and collectibilityis reasonably assured.  The Companyprovides its customers certain purchase incentives, including performancerebates and volume pricing discounts, based on the achievement of specifiedpurchase levels.  The Company accrues forperformance rebates based upon estimated customer purchase levels and recordsvolume pricing discounts when products are purchased.  Revenue,which is stated as net product sales, is reduced by these incentives.

36

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*Research and Product Developmentand Patent Costs*

The Company expensescosts associated with its research and development efforts, includingcollaborative relationship efforts, as incurred.  Research and development expenses includesalaries and benefits, facility costs, overhead allocations, clinical trials,consulting, contract services, and costs related to development of commercialscale manufacturing capabilities.  TheCompany also incurs certain costs in the preparation, application, filing,maintenance and defense of patents and trademarks.  Where such costs primarily relate to patentsand trademarks covering technologies or products which are under development orin the early stages of commercialization, the Company expenses such costs asincurred.

*Inventories*

Inventoriesare stated at the lower of cost or market. Cost is determined using the first-in, first-out method.  The Company evaluates the carrying value ofits inventories at least quarterly, taking into account such factors ashistorical and anticipated future sales compared with quantities on hand, theprice the Company expects to obtain for its products in their respectivemarkets compared with historical cost, and the remaining shelf life of goods onhand.  Inventories consist of thefollowing:

|                  | ** ** | **June 30,** | ** ** |
|------------------|------------|-------------------|------------|
| ** **       | ** ** | **2006**          | ** ** | **2005** | ** ** |
| Raw materials    |       | $                 | 563,000    |   | $ | 643,000 |   |
| Work-in-progress |       | 65,000            |       | 56,000 |   |
| Finished goods   |       | 511,000           |       | 454,000 |   |
|             |       | $                 | 1,139,000  |   | $ | 1,153,000 |   |

 

*Equipment and Furniture*

Equipment and furnitureare stated at cost.  Depreciation andamortization is computed using the straight-line method over estimated usefullives of three to five years.  Leaseholdimprovements are amortized over the term of the lease or the useful life of theimprovements, whichever is shorter. Equipment and furniture consist of the following:

|                                                 | ** ** | **June 30,** | ** ** |
|-------------------------------------------------|------------|-------------------|------------|
| ** **                                      | ** ** | **2006**          | ** ** | **2005** | ** ** |
| Manufacturing  equipment                        |       | $                 | 1,825,000  |   | $ | 1,790,000 |   |
| Office and  research and development equipment  |       | 2,162,000         |       | 2,137,000 |   |
| Leasehold  improvements                         |       | 2,749,000         |       | 2,749,000 |   |
|                                            |       | 6,736,000         |       | 6,676,000 |   |
| Less accumulated  depreciation and amortization |       | (5,986,000        | )          | (5,651,000 | ) |
|                                            |       | $                 | 750,000    |   | $ | 1,025,000 |   |

 

## *Long Lived Assets*

Thecarrying amounts of long-lived assets, and the related amortization periods,are reviewed for impairment whenever events occur or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable within theestimated useful life.  When the Companydetermines the existence of impairment indicators, the impairment loss ismeasured based on the excess of carrying value over the estimated fair value ofthe impaired assets.  The carrying valueof the underlying asset is reduced, with the reduction charged to operatingexpense, so that the carrying amount is equal to the estimated fair value.

37

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*Stock-based Compensation*

The Company adoptedFinancial Accounting Standards Board Statement of Financial AccountingStandards (“SFAS”) No. 123R, Share-Based Payment, effective as of July 1, 2005,the beginning of the Company’s fiscal year. The Company has adopted the Modified Prospective method, which requiresthe application of SFAS No. 123R to new awards and to awards modified,repurchased or cancelled after the effective date.  Additionally, compensation cost for theportion of outstanding awards for which service has not been rendered (such asunvested options) that are outstanding as of the date of adoption will berecognized as the remaining services are rendered.  Results from prior periods have not beenrestated.

Through June 30, 2005,the Company elected to follow Accounting Principles Board Opinion No. 25 - *Accounting for Stock Issued to Employees*(APB 25) and related interpretations in accounting for its employee stockoptions rather than adopting the alternative fair value accounting provided forunder SFAS No. 123, *Accounting forStock-Based Compensation*, as amended by SFAS No. 148, *Accounting for Stock Based Compensation – Transitionand Disclosure*, and as a result the Company did not recognize anycompensation expense.  The table belowillustrates the effect on net income and income per share had compensation costfor the Company’s employee stock options been determined consistent with thefair value methodology prescribed under SFAS 123 for the fiscal years endedJune 30, 2005 and 2004.  Net income forthe fiscal year ended June 30, 2006 includes $150,000 in stock-based compensationexpense.
|                                                                                | ** ** | **June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                     | ** ** | **2006**          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income - as  reported                                                      |       | $                 | 600,000    |   | $ | 425,000 |   | $ | 954,000 |   |
| Less: Total  stock compensation expense determined using the fair value method |       | —            |       | (248,000 | ) | (273,000 | ) |
| Net income - pro  forma                                                        |       | $                 | 600,000    |   | $ | 177,000 |   | $ | 681,000 |   |
|                                                                           |       |              |       |   |   |   |   |
| Income per  share:                                                             |       |              |       |   |   |   |   |
| Basic - as  reported                                                           |       | $                 | 0.09       |   | $ | 0.06 |   | $ | 0.15 |   |
| Diluted - as  reported                                                         |       | $                 | 0.08       |   | $ | 0.06 |   | $ | 0.12 |   |
|                                                                           |       |              |       |   |   |   |   |
| Proforma income  per share:                                                    |       |              |       |   |   |   |   |
| Basic - pro  forma                                                             |       | $                 | 0.09       |   | $ | 0.03 |   | $ | 0.10 |   |
| Diluted - pro forma                                                            |       | $                 | 0.08       |   | $ | 0.02 |   | $ | 0.09 |   |

 

The fair value of stockoption grants were determined using the Black-Scholes option valuation model,which was developed for use in estimating the fair value of traded options thathave no vesting restrictions and are fully transferable.  In addition, option valuation models requirethe input of highly subjective assumptions, including the expected stock pricevolatility.  In management’s opinion theexisting models do not necessarily provide a reliable single measure of thefair value of its employee stock options because the Company’s employee stockoptions have characteristics different from those of traded options and becausechanges in the highly subjective input assumptions can materially affect thefair value estimate.

38

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## *Net IncomePer Common Share*

The Company’s net incomeper common share has been calculated in accordance with SFAS No. 128-*Earnings Per Share* and, accordingly, includes a computationof both basic and diluted net income per common share.  Net income as presented in the incomestatements represents the numerator used in computing net income per commonshare and the following table sets forth the computation of the weightedaverage shares used in determining basic and diluted net income per commonshare:
| ** **                                                                                                            | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                                            | ** ** | **(in thousands)** | ** ** |
| Denominator for  basic net income per common share – weighted average shares                                     |       | 7,039                   |       | 6,585    |       | 6,559    |       |
| Dilutive  securities: preferred stock, warrants and stock options                                                     |       | 871                     |       | 1,080    |       | 1,150    |       |
| Denominator for diluted  net income per common share – adjusted weighted average shares and assumed  conversions |       | 7,910                   |       | 7,665    |       | 7,709    |       |

 

In all periods presented,certain securities were not included in the computation of diluted income pershare due to their antidilutive effect. At June 30, 2006, options to purchase approximately 200,000 commonshares at a weighted average exercise price of $4.88 were not included.  At June 30, 2005, options to purchaseapproximately 669,000 common shares were not included.  At June 30, 2004, options to purchaseapproximately 422,000 common shares were not included.

*Income Taxes*

The Company accounts forincome taxes using the asset and liability method.  Under the asset and liability method,deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases, and operating loss and tax credit carryforwards.  Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recovered orsettled.  The effect on deferred taxassets and liabilities of a change in tax rates is recognized in income in theperiod that includes the enactment date.

*IntangibleAssets*

At June 30, 2006,intangible assets totaling $709,000, net of accumulated amortization totaling$41,000, are included in other assets. The intangible assets consist of a fully paid-up, non-exclusive,worldwide, royalty-free license and other rights under certain issued andpending patents.  The Company purchasedthese assets in fiscal 2006 for $750,000. The assets are being amortized on a straight-line basis over anestimated useful life of seventeen years. Amortization expense of $41,000 associated with these assets wasrecorded during fiscal 2006. Amortization expense for each of the next five years is expected to beapproximately $45,000 per year.

**2.             Restricted Cash**

The Company maintains aninterest bearing money market account with a lending bank, $275,000 of which isbeing held as a compensating balance under a long-term obligation (see notes 1and 4) and is restricted as to withdrawal. The restricted cash balance requirement decreases over the life of theobligation as payments are made.

39

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**3.             Accrued Liabilities**

Accrued liabilitiesconsist of the following:

|                               | ** ** | **June 30,** | ** ** |
|-------------------------------|------------|-------------------|------------|
| ** **                    | ** ** | **2006**          | ** ** | **2005** | ** ** |
| Payroll and  related benefits |       | $                 | 207,000    |   | $ | 217,000 |   |
| Professional  fees            |       | 245,000           |       | 598,000 |   |
| Royalties                     |       | 87,000            |       | 70,000 |   |
| Other                         |       | 205,000           |       | 206,000 |   |
|                          |       | $                 | 744,000    |   | $ | 1,091,000 |   |

 

**4.             Commitments**

*Operating Leases*

The Company leasesspace and certain equipment under non-cancelable operating lease agreementsthat expire at various dates through 2012. Rental expense for such leases was $277,000, $286,000 and $347,000 forthe years ended June 30, 2006, 2005 and 2004, respectively.  It is generally expected that, in the normalcourse of business, operating leases that expire will be renewed or replaced byother leases with similar terms.  Futureminimum lease payments under non-cancelable operating leases at June 30, 2006,were $1,856,000.  These obligations mature as follows:  fiscal 2007 — $278,000; fiscal 2008 — $274,000;fiscal 2009 — $276,000; fiscal 2010 — $283,000; and fiscal 2011 and thereafter— $745,000.

*Long-Term Obligations*

The Company has acquiredcertain equipment and furniture under capital lease agreements.  The capitalized cost of such equipment was$1,339,000 at June 30, 2006 and 2005 and accumulated amortization was$1,339,000 and $1,210,000, respectively. Under these capital lease agreements, the Company was required to meetcertain financial covenants, all of which were met at all times prior toconclusion.

During fiscal 2001, theCompany refinanced $2,700,000 of capital lease obligations into a term loan,collateralized by the underlying assets and restricted cash, with a fixed rateof 6.82%, payable in 84 monthly installments of $40,519 maturing April 2008.  At June 30, 2006, the outstanding balance was$836,000.  Payments of approximately$486,000 are due within one year, of which $443,000 is principal reduction.

The carryingvalues of the long-term obligations approximate fair values as the interestrates on these long-term obligations approximate market rates of interest.  Future minimum payments under long-termobligations consisted of the following at June 30, 2006:

| Year ending June 30:            | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|------------|------------|
| 2007                                           |       | 486,000    |       |
| 2008                                           |       | 405,000    |       |
| Thereafter                                     |       | —     |       |
| Total minimum  payments                        |       | 891,000    |       |
| Amounts  representing interest                 |       | (55,000    | )          |
| Present value of  net minimum payments         |       | 836,000    |       |
|                                           |       |       |       |
| Less current  portion of long-term obligations |       | (443,000   | )          |
| Long-term obligations                          |       | $          | 393,000    |   |
|                                                |            |            |            |  |

 

40

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## *RoyaltyAgreements*

The Company is thelicensee under royalty agreements, which provide for the payment of royaltiesto the licensor based upon net sales of the products under royalty.  Royalty expense in each of the three years inthe period ended June 30, 2006 was not material.

**5.             Stock-based Compensation**

The Company has adopted and approved two incentive stock compensation plans.  The Company’s 1988 Stock Option Plan and the 1997 Share Incentive Plan were approved by the shareholders in November 1988 and in November 1997, respectively.  The 1988 Stock Option Plan expired in August 1998 and no further grants were made under the Plan following the adoption of the 1997 Share Incentive Plan.  The Company’s 1997 Share Incentive Plan permits the grant of up to 2,812,500 stock options.  Option awards are generally granted with an exercise price equal to the market price of the of the Company’s stock at the date of grant.  In general, options granted vest over zero to five years and have 10-year contractual terms.  A summary of activity under the Plans during the fiscal year ended June 30, 2006, 2005, and 2004 is as follows:
|                           | ** ** | **Weighted Average** | ** ** |
|---------------------------|------------|---------------------------|------------|
| ** **                | ** ** | **Outstanding**           | ** ** | **Exercise** | ** ** | **Remaining** | ** ** | **Aggregate** | ** ** |
| **Options**               | ** ** | **Shares**                | ** ** | **Price** | ** ** | **Contractual Term** | ** ** | **Intrinsic Value** | ** ** |
| Balance at June  30, 2003 |       | 1,532,000                 |       | $ | 2.65 |   |   |   | $ | 154,000 |   |
| Granted                   |       | 75,000                    |       | $ | 2.36 |   |   |   | $ | 43,000 |   |
| Exercised                 |       | (41,000                   | )          | $ | 1.80 |   |   |   | $ | 45,000 |   |
| Forfeited/expired         |       | (192,000                  | )          | $ | 3.09 |   |   |   | $ | 123,000 |   |
| Balance at June  30, 2004 |       | 1,374,000                 |       | $ | 2.60 |   |   |   | $ | 1,173,000 |   |
| Granted                   |       | 74,000                    |       | $ | 2.39 |   |   |   | $ | — |   |
| Exercised                 |       | —                    |       | $ | — |   |   |   | $ | — |   |
| Forfeited/expired         |       | (125,000                  | )          | $ | 3.47 |   |   |   | $ | 27,000 |   |
| Balance at June  30, 2005 |       | 1,323,000                 |       | $ | 2.50 |   |   |   | $ | 565,000 |   |
| Granted                   |       | 60,000                    |       | $ | 2.55 |   |   |   | $ | — |   |
| Exercised                 |       | (121,000                  | )          | $ | 1.63 |   |   |   | $ | 59,000 |   |
| Forfeited/expired         |       | (76,000                   | )          | $ | 5.47 |   |   |   | $ | 1,000 |   |
| Balance at June  30, 2006 |       | 1,186,000                 |       | $ | 2.40 |   | 5.2 years |   | $ | 311,000 |   |
|                      |       |                      |       |   |   |   |   |   |   |
| Vested at June 30, 2006   |       | 1,145,000                 |       | $ | 2.40 |   | 5.2 years |   | $ | 309,000 |   |

 

The Company adopted SFAS No. 123R, Share-Based Payment, effective as of July 1, 2005, the beginning of its fiscal year.  SFAS No. 123R revises SFAS No. 123 and supersedes APB 25 and requires companies to expense the value of employee stock options and other equity-based awards.  For the fiscal year ended June 30, 2006, the Company recorded a total non-cash charge of $150,000 related to stock-based compensation.  As a result of adopting SFAS No. 123R, the Company’s operating income and net income for the fiscal year ended June 30, 2006 were $150,000 less than if the Company had continued to account for stock-based compensation under APB Opinion No. 25.  Basic and diluted net loss per share for the fiscal year ended June 30, 2006 would have increased by $0.02 if the Company had not adopted SFAS No. 123R.

The Company recognizes compensation expense equal to the grant-date fair value of stock-based awards for all awards expected to vest, over the period during which the related service is rendered by grantees. The fair value of stock-based awards is determined primarily using the Black-Scholes pricing model, which is the same valuation model used previously in valuing stock options for the pro forma footnote disclosures under the requirements of SFAS No. 123 (see Note 1).  The Company uses the “straight line” vesting method to value awards and to allocate those values over the requisite service periods, which is the same method as used previously in determining pro forma expense under SFAS No. 123.

41

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Black-Scholes pricing models require using certain assumptions, including expected volatility, dividend yields, risk-free interest rates, expected lives, and forfeiture rates.  Expected stock price volatility, which ranged from 0.47 to 0.75 and had a weighted average of 0.71, was estimated using historical volatilities of the Company’s stock at each grant date.  Expected dividend yields were 0.0%.  US Treasury bill yields with terms corresponding to expected terms of the awards being valued were used to estimate risk-free interest rates, the weighted average of which was 4.2%.  In estimating expected lives, contractual and vesting terms of awards, along with historical experience, were considered; however, due to insufficient historical data from which to reliably estimate expected lives, the Company used estimates based on the “shortcut approach” set forth in SFAS 123R, where the expected life of 6 years was estimated to be the mid-point between the vesting date and the end of the contractual term.  Estimated forfeiture rates were based primarily on historical data.

A summary of activity for non-vested options under the Plans during the period ended June 30, 2006 is as follows:

|                            | ** ** | ** **  | ** ** | **Weighted**        | ** ** |
|----------------------------|------------|-------------|------------|---------------------|------------|
| ** **                 | ** ** | ** **  | ** ** | **Average**         | ** ** |
| ** **                 | ** ** | ** **  | ** ** | **Grant Date** | ** ** |
| **Nonvested Options** | ** ** | **Options** | ** ** | **Fair Value** | ** ** |
| Balance at July  1, 2005   |       | 97,000      |       | $                   | 1.16       |   |
| Granted                    |       | 60,000      |       | $                   | 1.29       |   |
| Vested                     |       | (116,000    | )          | $                   | 1.16       |   |
| Forfeited/expired          |       | —      |       |                |       |
| Balance at June  30, 2006  |       | 41,000      |       | $                   | 1.30       |   |

 

As of June 30, 2006, there was $48,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plans.  That cost is expected to be recognized over a weighted-average period of 1.0 years.

The weighted average fairvalue of options granted in the years ended June 30, 2006, 2005 and 2004, was$1.29, $1.46 and $1.45, respectively. Additional information regarding the options outstanding at June 30,2006 follows: 
| **Options Outstanding**        | ** ** | **Options Exercisable** | ** ** |
|-------------------------------------|------------|------------------------------|------------|
| ** **                          | ** ** | ** **                   | ** ** | **Weighted Average** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| **Range of  Exercise  Prices** | ** ** | **Number  Outstanding**      | ** ** | **Remaining  Contractual  Life** | ** ** | **Average  Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Average  Exercise  Price** | ** ** |
| $0.70-$1.89                         |       | 535,000                      |       | 5.67 |   | $ | 1.52 |   | 532,000 |   | $ | 1.52 |   |
| $2.20-$3.00                         |       | 461,000                      |       | 5.18 |   | $ | 2.36 |   | 425,000 |   | $ | 2.35 |   |
| $3.24-$4.80                         |       | 111,000                      |       | 4.38 |   | $ | 3.72 |   | 109,000 |   | $ | 3.73 |   |
| $6.50-$9.00                         |       | 79,000                       |       | 3.76 |   | $ | 6.75 |   | 79,000 |   | $ | 6.75 |   |
| $0.70-$9.00                         |       | 1,186,000                    |       | 5.23 |   | $ | 2.40 |   | 1,145,000 |   | $ | 2.40 |   |

 

**6.             Series D Convertible PreferredShares**

During the fiscalyear ended June 30, 2006, all holders of Series D Convertible Preferred Sharesconverted their shares into 893,801 shares of common stock on a share for sharebasis, pursuant to the terms of such preferred stock.  There are no Series D preferred sharesoutstanding at June 30, 2006.

**7.             Employee Benefit Plan**

The Company hasestablished a 401(k) savings plan for its full-time employees and makes amatching contribution based on a percentage of the contributions ofparticipating employees.  The Companycontributed approximately $99,000, $100,000 and $79,000 for the years endedJune 30, 2006, 2005 and 2004, respectively.

42

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**8.             Income Taxes**

Deferred income taxesreflect the net effect of temporary differences between the carrying amounts ofassets and liabilities for financial reporting purposes and the amounts usedfor income tax purposes.  Significantcomponents of the Company’s net deferred tax assets as of June 30 2006 and 2005are as follows:
|                                    | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|------------------------------------|------------|-------------|------------|-------------|------------|
| Deferred tax  assets:              |       |        |       |        |       |
| Net operating loss carryforwards   |       | $           | 7,280,000  |        | $          | 7,238,000 |   |
| Book in excess of tax depreciation |       | 767,000     |       | 744,000     |       |
| Book in excess of tax amortization |       | 2,144,000   |       | 2,518,000   |       |
| Tax credit carryforwards           |       | 742,000     |       | 801,000     |       |
| Allowances and accruals            |       | 263,000     |       | 274,000     |       |
| Total deferred  tax assets         |       | 11,196,000  |       | 11,575,000  |       |
| Valuation  allowance               |       | (11,196,000 | )          | (11,575,000 | )          |
| Net deferred tax assets            |       | $           | —     |        | $          | — |   |

 

Management hasestablished a valuation allowance for all gross deferred tax assets based onmanagement’s expectations of net realizable value.  The valuation allowance for deferred taxassets decreased by $379,000 in fiscal 2006 and decreased by $239,000 in fiscal2005.  There were no significant deferredtax liabilities in the current or prior two fiscal years.

The Companyrecorded no current federal or state income tax provision for fiscal 2006,2005, or 2004.  There was also nodeferred income tax provision in any of the years presented.  The reconciliation of income taxes at thestatutory United States federal income tax rate and the Company’s effectiveincome tax expense attributable to continuing operations is as follows:
|                                               | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Tax at U.S.  statutory rates                  |       | 34.0     | %          | 34.0     | %          | 34.0     | %          |
| State tax, net  of federal tax benefit        |       | 3.3      |       | 3.3      |       | 3.3      |       |
| Tax credits                                   |       | 9.7      |       | 17.4     |       | (1.9     | )          |
| Non-deductible  interest and other expenses   |       | 2.2      |       | 3.1      |       | 1.4      |       |
| Effect of  deferred tax valuation adjustments |       | (49.2    | )          | (57.8    | )          | (36.8    | )          |
| Effective income tax  rate (percentage)       |       | —   | %          | —   | %          | —   | %          |

 

As of June 30, 2006, theCompany had approximately $19,954,000 and $15,019,000, non tax-effected, infederal and state net operating loss carryforwards, respectively, and $742,000in federal tax credit carryforwards, that expire from 2006 through 2025, if notutilized.  Utilization of the Company’snet operating loss and tax credit carryforwards is limited to the futuretaxable income of the Company.  Under the“change of ownership” provisions of the Internal Revenue Code, utilization ofthese net operating loss and credit carryforwards may be subject to substantialannual limitation in the future.  Such “changesof ownership” can result from purchases and sales of our shares by large shareholders.  If such a change in ownership of our shareswas to occur, we may be limited in the amount of net operating losscarryforwards that we can use in any given year.

**9.             Contingencies**

The Company issubject to various claims and legal proceedings (see Note 11) covering mattersthat arise in the ordinary course of its business activities.  Except as otherwise disclosed, managementbelieves any liability that may ultimately result from the resolution of thesematters will not have a material adverse effect on the Company’s consolidatedfinancial position, operating results, or cash flows.

43

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**10.          Quarterly Financial Information (Unaudited)**
| ** **                    | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** | ** ** | ** ** |
|-------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|
| ** **                    | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Total**  | ** ** |
| Fiscal 2006                   |       |        |       |        |       |        |       |        |       |       |       |
| Product sales                 |       | $           | 2,828,000  |        | $          | 2,710,000   |       | $           | 2,688,000  |       | $          | 2,617,000 |   | $ | 10,843,000 |   |
| Gross profit                  |       | 1,717,000   |       | 1,604,000   |       | 1,591,000   |       | 1,654,000   |       | 6,566,000  |       |
| Net income                    |       | 288,000     |       | 244,000     |       | 15,000      |       | 53,000      |       | 600,000    |       |
|                          |       |        |       |        |       |        |       |        |       |       |       |
| Basic net income per  share   |       | $           | 0.04       |        | $          | 0.03        |       | $           | —     |       | $          | 0.01 |   | $ | 0.09 |   |
| Diluted net income per  share |       | $           | 0.04       |        | $          | 0.03        |       | $           | —     |       | $          | 0.01 |   | $ | 0.08 |   |
|                          |       |        |       |        |       |        |       |        |       |       |       |
| Fiscal 2005                   |       |        |       |        |       |        |       |        |       |       |       |
| Product sales                 |       | $           | 3,017,000  |        | $          | 2,589,000   |       | $           | 2,879,000  |       | $          | 2,941,000 |   | $ | 11,426,000 |   |
| Gross profit                  |       | 1,873,000   |       | 1,613,000   |       | 1,727,000   |       | 1,812,000   |       | 7,025,000  |       |
| Net income                    |       | 326,000     |       | 37,000      |       | 32,000      |       | 30,000      |       | 425,000    |       |
|                          |       |        |       |        |       |        |       |        |       |       |       |
| Basic net income per  share   |       | $           | 0.05       |        | $          | 0.01        |       | $           | —     |       | $          | — |   | $ | 0.06 |   |
| Diluted net income per share  |       | $           | 0.04       |        | $          | —      |       | $           | —     |       | $          | — |   | $ | 0.06 |   |

 

**11.          Litigation**

A description ofcertain outstanding and settled legal matters involving the Company is providedbelow.  In addition to the legal mattersdiscussed below, the Company is subject to various claims and legal proceedingscovering matters that arise in the ordinary course of business.

(a) Outstanding LegalMatters

The Company is aco-defendant with a former distributor of the Company’s products, in a claimasserting misappropriation of trade secrets. The Company has denied all allegations of the complaint.  The case is scheduled for trial in October2006.  The Company believes that EEMSO’sclaims are without merit and will continue a vigorous defense.  At this stage, it is too early to predict theoutcome.

Management does notbelieve that the outcome of this legal matter will have a material adverseimpact on the Company.  However, legalfees and expenses will likely be substantial and, in the event of anunfavorable resolution, the outcome could have a material adverse impact on theCompany’s business, financial position, or results of operations.

(b) Settled Legal Matters

Effective August 31,2005, the Company entered into a settlement agreement that resolved the Company’sinvolvement in all legal matters related to two civil complaints filed in April2002 by the Company in state court against two former executives, among others,alleging misappropriation of the Company’s trade secrets, interference witheconomic relationships and civil conspiracy.

Effective January 24,2006, the Company entered into a settlement agreement with Travanti Pharma,Inc. (the successor to Birch Point Medical, Inc.) with respect to the actionbrought against the Company by Birch Point Medical.  Pursuant to the settlement agreement, theCompany acquired a fully paid-up, non-exclusive, worldwide, royalty-freelicense and a perpetual covenant not to sue under certain patents and patentspending belonging to Travanti Pharma, Inc. with respect to the Company’siontophoretic medical device products sold into the orthopedic therapy marketfor a one-time license fee of $750,000. The settlement agreement also provided for a mutual release of claims.

44

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**PART III**

**Item 10.         DIRECTORSAND EXECUTIVE OFFICERS OF THE COMPANY**

Information required bythis item is included under “Election of Directors,” “The Board of Directorsand Committees,” “Code of Business Conduct and Ethics,” and “Executive Officers”in the Company’s Proxy Statement to be filed in connection with its AnnualMeeting of Shareholders, to be held on November 10, 2006, and is incorporatedherein by reference.

**Item 11.         EXECUTIVECOMPENSATION**

The information requiredby this item is included under “Compensation of Directors and ExecutiveOfficers” in the Company’s Proxy Statement to be filed in connection with itsAnnual Meeting of Shareholders, to be held on November 10, 2006, and isincorporated herein by reference.

**Item 12.****                            SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

The information requiredby this item is included under “Security Ownership of Certain Beneficial Ownersand Management” in the Company’s Proxy Statement to be filed in connection withits Annual Meeting of Shareholders, to be held on November 10, 2006, and isincorporated herein by reference.

**Item 13.         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

The information requiredby this item is included under “Certain Relationships and Related Transactions”in the Company’s Proxy Statement to be filed in connection with its AnnualMeeting of Shareholders, to be held on November 10, 2006, and is incorporatedherein by reference.

**Item 14.         PRINCIPALACCOUNTANT FEES AND SERVICES**

The information requiredby this item is included under “Fees paid to Independent Accountants” in theCompany’s Proxy Statement to be filed in connection with its Annual Meeting ofShareholders, to be held on November 10, 2006, and is incorporated herein byreference.

45

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**PARTIV**

**Item 15.         EXHIBITS,FINANCIAL STATEMENT SCHEDULES**

**FinancialStatements**

The consolidatedfinancial statements of the Company are included elsewhere in this Report.

**Schedules**

No schedules are requiredin connection with the filing of this Report as amounts are either immaterialor are otherwise disclosed in the financial statements.

**Exhibits**
| Number      | ** ** | **Description**                                                                                                                                            |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1*        |       | Amended and Restated Articles of Incorporation of  the Company                                                                                             |
| 3.2**       |       | Articles of Amendment of the Amended and Restated  Articles of Incorporation of the Company                                                                |
| 3.3*        |       | Amended and Restated Bylaws of the Company                                                                                                                 |
| 4.1*        |       | Reference is made to Exhibit 3.1                                                                                                                           |
| 4.2*        |       | Specimen of Common Share Certificate                                                                                                                       |
| 4.3***      |       | 1988 Stock Option Plan of the Company                                                                                                                      |
| 4.4***      |       | 1997 Share Incentive Plan of the Company                                                                                                                   |
| 10.1*       |       | License Agreement between the Company and Elan  International Services, dated April 14, 1997                                                               |
|  10.2* |       | License Agreement between the Company and Drug  Delivery Systems, Inc., dated April 14, 1997                                                               |
| 10.3*       |       | Asset Acquisition Agreement between the Company and  Fillauer, Inc., dated December 27, 1996                                                               |
| 10.4*       |       | License Agreement between the Company and Fillauer,  Inc., dated December 26, 1996                                                                         |
| 10.5*       |       | Research and Development Agreement among the  Company, Dermion, Inc. and Ciba-Geigy Corporation, dated March 29, 1996                                      |
| 10.6*       |       | Agreement between the Company and Laboratoires  Fournier S.C.A., dated February 20, 1996                                                                   |
| 10.7*       |       | Agreement between the Company and ALZA Corporation,  dated July 28, 1993                                                                                   |
| 10.8*       |       | License Agreement between the Company and the  University of Utah Research Foundation, dated October 1, 1992                                               |
| 10.9*       |       | Exchange Agreement among the Company, Novartis  Pharmaceuticals Corporation and Dermion, Inc., dated November 1, 1997                                      |
| 10.10*      |       | First Amendment of Research & Development  Agreement among the Company, Novartis Pharmaceuticals Corporation and  Dermion, Inc. dated November 1, 1997 |
| 10.11****   |       | Lease between the Company and NP#2, dated May 22,  2000                                                                                                    |
| 10.12#      |       | Amendment to Lease Agreement between the Company and  NP#2, dated September 17, 2004                                                                       |
| 10.13##     |       | Settlement Agreement between the Company and  Travanti Pharma Inc., dated January 24, 2006                                                                 |
| 11.1*****   |       | Statement re computation of earnings per share                                                                                                             |
| 21.1*       |       | Schedule of Subsidiaries                                                                                                                                   |
| 23.1###     |       | Consent of Ernst & Young LLP, Independent  Registered Public Accounting Firm                                                                           |
| 31.1###     |       | Certification of Chief Executive Officer                                                                                                                   |
| 31.2###     |       | Certification of Chief Financial Officer                                                                                                                   |
| 32.1###     |       | Certification of Chief Executive Officer                                                                                                                   |
| 32.2###     |       | Certification of Chief Financial Officer                                                                                                                   |

 

----

| *     |   | Filed by the Company as an exhibit to the Form S-1  Registration Statement on October 3, 1997, as amended. |
|-------|--------|------------------------------------------------------------------------------------------------------------|
| **    |   | Filed by the Company as an exhibit to the Annual  Report on Form 10-K on September 28, 1998.               |
| ***   |   | Filed by the Company as an exhibit to the Form S-8  Registration Statement on February 9, 2000             |
| ****  |   | Filed by the Company as an exhibit to the Annual  Report on Form 10-K on September 28, 2000.               |
| ***** |   | Information included in consolidated financial  statements.                                                |
| #     |   | Filed by the Company as an exhibit to the Annual  Report on Form 10-K on September 28, 2004.               |
| ##    |   | Filed by the Company as an exhibit to the Quarterly  Report on Form 10-Q on May 15, 2006.                  |
| ###   |   | Filed herewith.                                                                                            |

46

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
|        |   |               | IOMED, INC. |
|--------|--------|--------------------|-------------|
|   |   |               |        |   |   |
| Date:  |   | September 26, 2006 | By:         |   | /s/ Robert J. Lollini |   |
|   |   |               |        |   | Robert J.  Lollini |
|   |   |               |        |   | President and  Chief Executive Officer |
|   |   |               |        |   |   |
|   |   |               |        |   |   |
| Date:  |   | September 26, 2006 | By:         |   | /s/ BRIAN L. MOWER |   |
|   |   |               |        |   | Brian L. Mower |
|   |   |               |        |   | Chief Financial  Officer |

 

**SIGNATURES**

In accordance withthe Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the Company and in the capacities and on thedates indicated.
| Signature                | ** ** | **Capacity** | ** ** | **Date**           |
|--------------------------|------------|--------------|------------|--------------------|
|                     |       |         |       |               |
| /s/ PETER J.  WARDLE     |       | Chairman     |       | September 26, 2006 |
| Peter J. Wardle          |       |         |       |               |
|                     |       |         |       |               |
| /s/ JOHN W.  FARA, PH.D. |       | Director     |       | September 26, 2006 |
| John W. Fara,  Ph.D.     |       |         |       |               |
|                     |       |         |       |               |
| /s/ MICHAEL T.  SEMBER   |       | Director     |       | September 26, 2006 |
| Michael T.  Sember       |       |         |       |               |
|                     |       |         |       |               |
| /s/ WARREN WOOD          |       | Director     |       | September 26, 2006 |
| Warren Wood              |       |         |       |               |
|                     |       |         |       |               |
| /s/ D. STEPHEN  ANTION   |       | Director     |       | September 26, 2006 |
| D. Stephen  Antion       |       |         |       |               |
|                     |       |         |       |               |
| /s/ ROBERT J.  LOLLINI   |       | Director     |       | September 26, 2006 |
| Robert J.  Lollini       |       |         |       |               |

 

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