"I have not thought about the dreamcast product in a long time. Yes the prototypes were fully functioning and performed well in qualification testing. The product was ready to be approved for production. Sega decided not to move forward with the product. The price point and uncertainty of the use model were the likely concerns. I don't remember the exact conversation with Sega.
Both the Iomega and Sega engineering tested the drive. Sega did the OS additions for UI and to allow games to talk with the drive. Iomega did the low level drivers. I don't believe the proto would work without the OS additions. If I remember correctly the games OS enhancements let the games be read directly from the drive."
-Keith Slankard, former director of Iomega's Beyond PC Initiative