UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-Q

(Mark One)
(X)      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the quarterly period ended March 31, 2001

                                       OR

( )      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the transition period from __________ to __________

                        COMMISSION FILE NUMBER: 000-27257

                              SMARTDISK CORPORATION
           ----------------------------------------------------------
             (Exact name of registrant as specified in its charter)

            DELAWARE                                    65-0733580
-------------------------------             ------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

                  3506 Mercantile Avenue, Naples, Florida 34104
                  ---------------------------------------------
                    (Address of principal executive offices)

                                 (941) 436-2500
                                 --------------
              (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].

As of April 30, 2001, there were 17,696,234 shares of the Registrant's Common
Stock outstanding, par value $0.001.

<PAGE>
                              SMARTDISK CORPORATION

                                      INDEX

                                                                            Page
                                                                            ----
PART I.           FINANCIAL INFORMATION

     Item 1.      Financial Statements (Unaudited).............................3

         1) Condensed Consolidated Balance Sheets
                as of December 31, 2000 and March 31, 2001.....................3

         2) Condensed Consolidated Statements of Operations
                for the three months ended March 31, 2000 and 2001.............4

         3) Condensed Consolidated Statements of Cash Flows
                for the three months ended March 31, 2000 and 2001.............5

         4) Notes to Condensed Consolidated Financial Statements--
                March 31, 2001 ................................................6

     Item 2.      Management's Discussion and Analysis of Financial Condition
                  and Results of Operations...................................10

     Item 3.      Quantitative and Qualitative Disclosure About Market Risk...29


PART II.          OTHER INFORMATION

     Item 1.      Legal Proceedings...........................................31

     Item 2.      Changes in Securities and Use of Proceeds...................31

     Item 6.      Exhibits and Reports on Form 8-K............................32


SIGNATURES....................................................................33

                                       2
<PAGE>

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

                              SMARTDISK CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                        (in thousands, except par value)
<TABLE>
<CAPTION>
                                                                     December 31,    March 31,
                                                                        2000           2001
                                                                     ------------    ---------
                                                                                    (Unaudited)
<S>                                                                   <C>            <C>
ASSETS
Current assets:
   Cash and cash equivalents                                          $  12,833      $  13,267
   Restricted cash                                                        1,671          1,088
   Short-term investments                                                 6,001          1,009
   Accounts and notes receivable, net                                     7,204          7,968
   Inventories                                                           16,666         15,789
   Prepaid expenses and other current assets                              3,262          2,376
                                                                      ---------      ---------
                  Total current assets                                   47,637         41,497
Property and equipment, net                                               3,265          3,015
Goodwill and other intangible assets, net                                75,098         67,731
Deposits and other assets                                                   309            326
                                                                      ---------      ---------
TOTAL ASSETS                                                          $ 126,309      $ 112,569
                                                                      =========      =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                   $   9,125      $   7,626
   Bank line of credit and discounted notes                               1,907          1,211
   Income taxes payable                                                     878            427
   Deferred revenue                                                         725            363
   Other accrued liabilities                                              4,865          4,633
                                                                      ---------      ---------
                  Total current liabilities                              17,500         14,260

Deferred income taxes and other                                           8,494          6,782

Commitments and contingencies

Stockholders' equity:
   Preferred stock, $0.001 par value; 5,000 shares authorized;
     none issued                                                           --             --
   Common stock, $0.001 par value; 60,000 shares authorized;
     17,596 issued and 17,509 outstanding at December 31, 2000;
     17,608 issued and 17,521 outstanding at March 31, 2001                  18             18
   Capital in excess of par value                                       146,388        146,418
   Treasury  stock,  87 shares at December 31, 2000 and March 31,
     2001, at cost                                                          (89)           (89)
   Accumulated other comprehensive income                                   315           (109)
   Notes receivable from officers/employees                                (336)          (333)
   Unearned compensation                                                   --              (16)
   Accumulated deficit                                                  (45,981)       (54,362)
                                                                      ---------      ---------
                  Total stockholders' equity                            100,315         91,527
                                                                      ---------      ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                            $ 126,309      $ 112,569
                                                                      =========      =========
</TABLE>

See notes to condensed consolidated financial statements

                                       3
<PAGE>

                              SMARTDISK CORPORATION
           CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                      (in thousands, except per share data)
<TABLE>
<CAPTION>
                                                                        Three Months Ended
                                                                            March 31,
                                                                      ----------------------
                                                                        2000          2001
                                                                      --------      --------
<S>                                                                   <C>           <C>
REVENUES
     Net product sales                                                $ 16,194      $ 16,832
     Research and development                                            1,148          --
     License fees and royalties                                             41           430
                                                                      --------      --------
         Total revenues                                                 17,383        17,262
COST OF REVENUES                                                        11,330        12,429
                                                                      --------      --------
GROSS PROFIT                                                             6,053         4,833
OPERATING EXPENSES
     Research and development                                            2,004         2,509
     Sales and marketing                                                   808         2,275
     General and administrative                                          2,169         2,883
     Amortization of goodwill and other acquisition related
        intangible assets                                                2,238         7,550
                                                                      --------      --------
         Total operating expenses                                        7,219        15,217
                                                                      --------      --------
OPERATING LOSS                                                          (1,166)      (10,384)
Interest and other income, net                                             717           447
Interest expense                                                           (46)           (7)
                                                                      --------      --------
Net loss before income taxes                                              (495)       (9,944)
Income tax expense (benefit)                                                 8        (1,563)
                                                                      --------      --------
NET LOSS                                                              $   (503)     $ (8,381)
                                                                      ========      ========
Net loss per share - basic and diluted                                $  (0.03)     $  (0.48)
Shares used in per share computation                                    16,005        17,328
</TABLE>

See notes to condensed consolidated financial statements

                                       4
<PAGE>

                              SMARTDISK CORPORATION
           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                             Three Months Ended
                                                                                  March 31,
                                                                           ----------------------
                                                                             2000          2001
                                                                           --------      --------
<S>                                                                        <C>           <C>
Cash flows from operating activities:
   Net loss                                                                $   (503)     $ (8,381)
   Adjustments to reconcile net loss to
     net cash provided by (used in) operating activities:
       Depreciation and amortization                                          2,804         8,180
       Provision for uncollectible accounts, sales returns and other credits     13           288
       Provision for inventory obsolescence                                     181           469
       Deferred income taxes                                                   (431)       (1,705)
       Other                                                                    (21)         (253)
       Changes in assets and liabilities:
             Accounts and notes receivable                                     (432)       (1,051)
             Inventories                                                        591           407
             Prepaid expenses and other current assets                          376           878
             Deposits and other assets                                         (230)          (17)
             Accounts payable                                                   506        (1,499)
             Income taxes payable                                              (839)         (452)
             Deferred revenue                                                  (308)         (363)
             Other accrued liabilities                                         (308)         (230)
                                                                           --------      --------
Net cash provided by (used in) operating activities                           1,399        (3,729)

Cash flows from investing activities:
   Purchases of property and equipment, net of disposals                       (181)         (219)
   Cash paid for acquisitions, net of cash acquired                         (17,628)         --
   Cash paid for intellectual property                                         --            (250)
   Decrease in restricted cash                                                 --             583
   Purchases of short-term investments                                       (9,117)         --
   Sales and maturities of short-term investments                            17,914         5,007
                                                                           --------      --------
Net cash (used in) provided by investing activities                          (9,012)        5,121

Cash flows from financing activities:
   Net borrowings (repayments) under lines of credit                         (7,254)         (696)
   Collections on notes receivable from officers/employees                        4             3
   Proceeds from exercise of stock options                                       13            12
                                                                           --------      --------
Net cash used in financing activities                                        (7,237)         (681)
Effect of exchange rate fluctuations on cash                                     96          (277)
                                                                           --------      --------
Increase (decrease) in cash and cash equivalents                            (14,754)          434
Cash and cash equivalents at beginning of period                             19,080        12,833
                                                                           --------      --------
Cash and cash equivalents at end of period                                 $  4,326      $ 13,267
                                                                           ========      ========
Significant non-cash activities:
   Issuance of common stock for intellectual property                      $    240      $   --
   Note receivable obtained for stock option exercise                      $    210      $   --
</TABLE>

See notes to condensed consolidated financial statements

                                       5
<PAGE>

                              SMARTDISK CORPORATION
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                                 MARCH 31, 2000

Note 1. Basis of Presentation

         The accompanying unaudited interim condensed consolidated financial
statements for SmartDisk Corporation ("SmartDisk" or the "Company") have been
prepared in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted. The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. In the opinion of management, all adjustments-consisting
of normal recurring accruals-considered necessary for a fair presentation have
been included. Certain amounts in prior year's condensed consolidated financial
statements have been reclassified to conform to the current year's presentation.
The reclassifications had no effect on previously reported net income (loss) or
stockholders' equity. Operating results for the three-month period ended March
31, 2001 are not necessarily indicative of the results that may be expected for
the year ended December 31, 2001.

         The balance sheet at December 31, 2000 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.

         The unaudited interim condensed consolidated financial statements
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in this report and the
audited consolidated financial statements and accompanying notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000, filed
with the Securities and Exchange Commission.

                                       6
<PAGE>

Note 2. Inventories

         Inventories are stated at the lower of cost or market (estimated net
realizable value), with cost being determined on a first-in, first-out basis.
Inventories consist of the following:

                                  December 31,       March 31,
                                     2000             2001
                                  ------------       ---------
                                        (in thousands)
         Finished goods             $ 6,147          $ 9,460
         Raw materials               10,519            6,329
                                    -------          -------
         Total inventories          $16,666          $15,789
                                    =======          =======

Note 3. Net Loss Per Share

         For the three months ended March 31, 2000 and 2001, potential common
shares totaling 2,816,153 and 559,155, respectively, were excluded from the
computation of net loss per share because their effect was anti-dilutive.
Potential common shares include stock options and shares of non-vested stock.

Note 4. Comprehensive Loss

         Other comprehensive loss refers to revenues, expenses, gains, and
losses that under accounting principles generally accepted in the United States
are included in comprehensive loss but are excluded from net loss as these
amounts are recorded directly as an adjustment to stockholders' equity, net of
tax. SmartDisk's other comprehensive loss is composed of unrealized gains and
losses on available-for-sale securities and foreign currency translation
adjustments. The following table sets forth the computation of comprehensive
loss for the periods indicated:

                                                       Three Months Ended
                                                           March 31,
                                                     --------------------
                                                      2000         2001
                                                     -------      -------
                                                         (in thousands)
         Net loss                                    $  (503)     $(8,381)
         Other comprehensive income (loss):
              Unrealized gain (loss) on short-term
                 investments, net of tax                 (18)           1
              Foreign currency translation               (64)        (425)
                                                     -------      -------
         Total comprehensive loss                    $  (585)     $(8,805)
                                                     =======      =======

                                       7
<PAGE>

Note 5. Acquisition

         On March 6, 2000, SmartDisk completed its acquisition of VST
Technologies, Inc. ("VST"), a Delaware corporation, located in Acton,
Massachusetts, for approximately $16.4 million in cash, 1.1 million shares of
SmartDisk common stock and options to acquire 443,000 shares of SmartDisk common
stock. On April 28, 2000, SmartDisk completed its acquisition of Impleo Limited
("Impleo"), a corporation established under the laws of the United Kingdom,
located in Wokingham, England, for approximately $200,000 in cash and 125,000
shares of SmartDisk common stock. These acquisitions were accounted for under
the purchase method of accounting; therefore, the interim condensed
consolidated financial statements include the operating results of VST and
Impleo from the respective dates of acquisition.

Note 6. Segment Information

         Based on its method of internal reporting, SmartDisk has two reportable
segments: Digital connectivity products and personal storage systems. Digital
connectivity products primarily consist of the Company's FlashPath and Universal
Serial Bus ("USB") flash memory card readers. Personal storage systems primarily
consist of the family of 1394 ("FireWire") bus and USB-based products, which
include high performance, portable hard disk drives, optical disk drives and
floppy disk drives for desktop and notebook PCs.

         The following table presents information about the Company's reportable
segments:

                                            Three Months Ended
                                                 March 31,
                                            -------------------
                                             2000        2001
                                            -------     -------
                                               (in thousands)
         Digital connectivity products:
               Revenues                     $10,210     $ 6,202
               Gross profit                 $ 3,444     $ 2,061

         Personal storage systems:
               Revenues                     $ 5,984     $10,630
               Gross profit                 $ 1,420     $ 2,501

         Other:
               Revenues                     $ 1,189     $   430
               Gross profit                 $ 1,189     $   271

         Total

               Revenues                     $17,383     $17,262
               Gross profit                 $ 6,053     $ 4,833

         SmartDisk does not allocate operating expenses, interest and other
income, interest expense, or income tax expense or benefit to these segments for
internal reporting purposes.


                                       8
<PAGE>

Note 7. Contigencies

         The Company relies on a combination of patents, trademarks, copyright
and trade secret laws, confidentiality procedures and licensing arrangements to
protect its intellectual property rights. There can be no assurance that there
will not be any disputes regarding the Company's intellectual property rights.
Specifically, there can be no assurance that any patents held by the Company
will not be invalidated, that patents will be issued for any of the Company's
pending applications or that any claims allowed from existing or pending patents
will be of sufficient scope or strength or be issued in the primary countries
where the Company's products can be sold that will provide meaningful protection
or any commercial advantage to the Company. Additionally, competitors of the
Company may be able to design around the Company's patents.

         On June 26, 2000, a party filed a complaint in the Central District
Federal Court of the State of California alleging SmartDisk's infringement of a
patent. On November 20, 2000, the Company prevailed in removing the venue for
such action from the State of California to the Middle District of Florida. The
Company considers this claim to be wholly without merit. Accordingly, a
contingent loss has not been accrued by the Company as of March 31, 2001.

Note 8. Recent Accounting Pronouncements

         Effective January 1, 2001, the Company adopted Financial Accounting
Standards Board issued Statement ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133, as amended, establishes
accounting and reporting standards for derivative instruments and hedging
activities and requires the Company to recognize all derivatives as either
assets or liabilities on the balance sheet at fair value. The accounting for
gains and losses from changes in the fair value of a derivative instrument are
recorded each period in current earnings or other comprehensive income,
depending on whether the derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. Historically, the Company has not
entered into derivative contracts either to hedge existing risks or for
speculative purposes. The adoption of SFAS No. 133 did not have a material
impact on the financial position, results of operations or cash flows of the
Company.

                                       9
<PAGE>

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

         The following discussion should be read in conjunction with the
unaudited interim condensed consolidated financial statements and the notes
thereto included in Item 1 of this Quarterly Report.

         Certain statements in this report on Form 10-Q are forward-looking in
nature within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Terminology such as "may,"
"will," "intend," "expect," "plan," "anticipate," "estimate," "believe,"
"continue," "predict," or other similar words identify forward-looking
statements. These statements discuss future expectations, contain projections of
results of operations or of financial condition or state other forward-looking
information. Forward-looking statements appear in a number of places in this
Form 10-Q and include statements regarding management's intent, belief or
current expectation about, among other things, the following: our anticipated
growth strategies, including trends in revenues, costs, gross margins and
profitability; our intention to develop, market and introduce new products;
anticipated growth of digital appliances and technology industries; anticipated
trends in our businesses, including trends in the demand for personal storage
and digital appliances and, therefore, demand for our products; expectations of
consumer preferences and desires; future projections of our financial
performance, future expenditures for capital projects and research and
development; the emergence of certain competing technologies; potential uses for
and applications of our products; and our ability to continue to control costs
and maintain quality. Although our management believes that the expectations
reflected in these forward-looking statements are based on reasonable
assumptions, forward-looking statements are not guarantees of future performance
and involve risks and uncertainties that could cause actual results to differ
materially from those in such forward-looking statements. Readers are cautioned
not to place undue reliance on the forward-looking statements included in this
document, which are based on information available to us on the date hereof. We
make no commitment to update or revise any such forward-looking statements or to
disclose any facts, events, or circumstances after the date hereof that may
affect the accuracy of any forward-looking statement. Actual results may differ
materially from those predicted in the forward-looking statements as a result of
various factors, including those set forth below in "Factors That May Affect
Future Results of Operations" and in other documents that we file from time to
time with the Securities and Exchange Commission.

         All trade names referenced in this report are either trademarks or
registered trademarks of their respective holders.

Overview

         We design, develop, manufacture and market technologies and products
that enable consumers and businesses to create, manage and use various types of
digital content in easy and enjoyable ways. With the growth of digital
appliances, such as digital still cameras, digital video cameras, digital audio
players, digital voice recorders and personal digital assistants, consumers are
increasingly using the personal computer, or PC, as the "multimedia center" of
the home or

                                       10
<PAGE>

office. These digital appliances capture digital data on high capacity, reusable
flash memory cards that appeal to consumers because of their small size,
versatility and portability. Our digital connectivity products enable the easy
and convenient sharing of the information on the cards between the digital
appliance, PCs and the Internet. Our personal storage systems and related
software are designed to provide an easy way to store, organize and retrieve
this digital data on portable, high-speed, high-capacity disk drives. Our
innovative software is planned to offer consumers the capacity to create
multimedia DVDs and CDs that combine their digital pictures, videos and music
and then share them with or without using a PC.

         Our digital connectivity products are designed to work across all
popular PC platforms, support all leading flash memory media types and use high
performance PC interfaces, such as Universal Serial Bus, or USB. Our patented
FlashPath digital connectivity products allow consumers to use the familiar
3.5-inch floppy drive - found on most PCs worldwide - to simplify the exchange
of images and other digital data between PCs and digital appliances. We market
three FlashPath products that support four different flash memory cards: the
SanDisk MultiMediaCard, the Sony Memory Stick, the Toshiba SmartMedia card and
the SanDisk, Toshiba and Matsushita Secure Digital Card. These flash memory
cards are used in various digital appliances including digital still cameras,
digital video cameras, digital audio players and personal digital assistants
made by a number of leading electronics manufacturers, including FujiFilm, JVC,
Olympus, Palm, Panasonic, Sanyo, Sharp, Sony and Toshiba. Our high-speed Flash
Media Reader and Tri-Media Reader address an expanding installed base of PCs
with USB cable interfaces and are compatible with both Windows and Macintosh
operating systems. We believe that as consumers embrace the digital lifestyle,
the number of applications for flash memory cards will continue to grow.

         Our FireWire- and USB-based personal storage systems include high
performance, portable hard disk drives, optical disk drives (CD-R/W) and floppy
disk drives for desktop and notebook PCs. Substantially all of our personal
storage systems are compatible with Windows and Macintosh operating systems. We
believe that the significant increase in data intensive digital content, such as
imaging, music and video has created the need for increased digital personal
storage. Our personal storage systems and related software enhance the user's
ability to store, organize and retrieve digital content. These systems support
very high data transfer rates and offer up to 120 Gigabytes of capacity.

         As digital applications and appliances proliferate, users are demanding
software that will allow them to collect digital images and audio files from a
variety of sources, create media shows via the PC, and then display them
anywhere, using a PC or DVD or CD player. SmartDisk software, including our new
MVP suite of software solutions, is planned to enable consumers and businesses
to create, organize and use digital multimedia both with and away from the PC.

Results of Operations

         Revenues. Our product revenues are recognized when title and risk of
loss are transferred to customers, which is generally at the time of shipment.
We defer recognition of revenue on shipments to certain distributors until the
distributors have resold the products. We record a provision for estimated
product returns at the time the related revenue is recognized on sales to
certain resellers that have rights of return. Product revenues at our Japanese
subsidiary are

                                       11
<PAGE>

recognized upon acceptance by the customer. Total revenues were approximately
$17.3 million for the three months ended March 31, 2001 compared to
approximately $17.4 million for the three months ended March 31, 2000. This
decrease resulted from a decline in revenue generated from digital connectivity
products, as well as the absence of research and development revenue in the
current period, offset by the additional sales for personal storage systems for
the full quarter.

         Our product revenues from the sale of digital connectivity products
decreased from approximately $10.2 million for the three months ended March 31,
2000 to approximately $6.2 million for the three months ended March 31, 2001.
This decrease was primarily attributable to the anticipated decline in the use
of the 3.5-inch floppy drive as a flash memory card interface, as consumers move
towards devices with higher transfer speeds, such as our USB-based flash media
readers. This is contributing to the decline in sales of our FlashPath products.
We expect this trend to continue during 2001, resulting in revenue from digital
connectivity products to be lower than the 2000 revenue.

         Our product revenues from the sale of personal storage systems
increased from approximately $6.0 million for the three months ended March 31,
2000 to approximately $10.6 million for the three months ended March 31, 2001.
This increase was primarily attributable to the inclusion of VST's results for
the whole quarter compared to the period from March 6, 2000 to March 31, 2000 in
the corresponding quarter in the preceding year. Although the results for the
three months ended March 31, 2001, represents a 53% increase in revenues as
compared to the three months ended December 31, 2000, we experienced slower
growth in our sales of USB- and FireWire-based products for the Apple market
resulting from the recent decrease in demand for that market. With improvement
in this market and the overall economy, we expect this trend to improve,
especially as we expand the sales of these products in Asian and European
markets.

         Our research and development revenue is recognized upon final customer
acceptance of our work performed under the terms of the agreement. Our revenues
from research and development agreements were approximately $1.1 million for the
three months ended March 31, 2000. We had no research and development revenues
for the three months ended March 31, 2001. We intend to continue to enter into
research and development agreements for the development of new technologies.

         Our license fee and royalty revenues primarily consist of fees earned
from license agreements on our SafeBoot intellectual property. These revenues
represent approximately two percent of our total revenues for the three months
ended March 31, 2001. We intend to enter into additional licensing agreements
for our existing and future intellectual property.

         Cost of Revenues. Cost of revenues includes the purchased cost of
product, packaging, storage, freight, scrap, and inventory provisions, as well
as royalties for some of our digital connectivity products and personal storage
systems. Cost of revenues increased to approximately $12.4 million for the three
months ended March 31, 2001 compared to approximately $11.3 million for the
three months ended March 31, 2000. This increase in cost was due primarily to
higher sales volume in our personal storage systems segment. For the three
months ended March 31, 2000, our total revenue included revenue from a
significant research and development

                                       12
<PAGE>

agreement, while the current period excludes any such revenue. The majority of
costs associated with these agreements are included in operating expense as
research and development.

         Gross Profit. Our gross profit for the three months ended March 31,
2001 decreased to approximately $4.8 million or 28% of total revenue, compared
to approximately $6.1 million or 35% of total revenue for the three months ended
March 31, 2000. The decrease in the amount of gross profit is primarily
attributable to the absence of research and development revenue in the current
quarter and a change in the mix of our sales toward more personal storage
systems. The gross margin on personal storage products is typically less than on
digital connectivity products. We expect our gross margin percentage to remain
relatively consistent with current levels as long as our revenue mix of personal
storage products and digital connectivity products remains consistent.

         Research and Development Expenses. Our research and development
expenses consist primarily of salaries and payroll-related expenses for our
design and development engineers, as well as prototype supplies and contract or
professional services. These expenses increased to approximately $2.5 million,
or 14% of total revenues, for the three months ended March 31, 2001 compared to
approximately $2.0 million, or 11% of total revenues, for the three months ended
March 31, 2000. This increase was the result of the inclusion of VST in our
results, as well as hiring additional technical personnel, including salaries
and related payroll expenses, costs incurred in conjunction with one of our
research and development contracts and the outsourcing of product development.

         Research and development expenses related to digital connectivity and
personal storage systems products were incurred to support the development of
new products as well as the maintenance and refresh of existing products. In
addition, research and development expenses were incurred in support of the
development of our MVP software product. We believe that the continued
introduction of new products with an emphasis on being first-to-market is
important to our growth and will require increases in research and development
expenditures. We expect that our research and development expenses will continue
to increase as we invest in the development of software applications and new and
refined digital connectivity and personal storage products to conveniently
create, transfer, store, manage and use digital content.

         Sales and Marketing Expenses. Sales and marketing expenses include
salaries, benefits and travel expenses for our sales, marketing and product
management personnel in the United States, Japan and the United Kingdom. These
expenses also include other selling and marketing expenditures for items such as
trade shows, advertising, marketing and other promotional programs. Sales and
marketing expenses for the three months ended March 31, 2001 increased by
approximately $1.5 million to approximately $2.3 million compared to the three
months ended March 31, 2000. This increase was primarily attributable to the
inclusion of VST's results for the whole quarter compared to the period from
March 6, 2000 to March 31, 2000 in the corresponding quarter in the preceding
year. In connection with the VST acquisition in March 2000, we added a number of
new products to our existing product lines, significantly increasing our total
sales and marketing expenses. These added products require more catalog and
magazine advertising than we have needed in the past due to our OEM
relationships. We expect our sales

                                       13
<PAGE>

and marketing expenses to increase in the future as we launch new products and
broaden our distribution into more traditional consumer electronic and mass
retail channels.

         General and Administrative Expenses. General and administrative
expenses include the salaries and related expenses of our executive management,
finance, information systems, operations, human resources, legal and
administrative functions, as well as lease rental expense, utilities,
maintenance expenses, taxes, insurance, legal and accounting professional fees,
depreciation and amortization. General and administrative expenses increased to
approximately $2.9 million for the three months ended March 31, 2001 compared to
approximately $2.2 million for the three months ended March 31, 2000. These
increases are primarily due to the inclusion of VST, as well as, increases in
professional services, legal fees and personnel related costs including
salaries, bonuses and relocation expenses.

         Amortization of Goodwill and Other Acquisition Related Intangible
Assets. Amortization of goodwill and other acquisition related intangible assets
includes the amortization of the purchase price allocated to separately
identified intangible assets acquired in the acquisition of VST Technologies,
Inc. and Impleo Limited and from El Gato Software LLC. The separately identified
intangible assets acquired consist of non-compete agreements, distribution
channels, trade names, patents, and workforce in place. These intangible assets
have lives ranging from one to five years from the date of acquisition. Purchase
price not allocated to separately identified intangible assets was allocated to
goodwill. Goodwill is amortized over a five-year life from the date of
acquisition. For the three months ended March 31, 2001, amortization of goodwill
and other acquisition related intangible assets totaled approximately $7.6
million compared to approximately $2.2 million for the three months ended March
31, 2000. This increase is attributable to the inclusion of the amortization
associated with the acquisition of VST for the three months ended March 31, 2001
compared to the period from March 6, 2000 to March 31, 2000.

         Interest and Other Income. The primary components of interest and other
income are interest earned on cash, cash equivalents and short-term investments
and gains or losses on foreign exchange.

         Interest Expense. Interest expense is incurred on the bank line of
credit in Japan and the United Kingdom.

         Provision for Income Taxes. We are subject to tax in the United States,
Japan, Switzerland and the United Kingdom. These jurisdictions have different
marginal tax rates. For the three months ended March 31, 2001, income tax
expense totaled approximately $0.1 million. This amount was offset by income tax
benefits of approximately $1.7 million resulting from amortization expense on
certain intangible assets related to the VST and Impleo acquisitions. A
valuation allowance is provided to reduce deferred tax assets to the amount that
will more likely than not be realized.

                                       14
<PAGE>

Liquidity and Capital Resources

         Cash and cash equivalents increased to approximately $13.3 million at
March 31, 2001 from approximately $12.8 million at December 31, 2000. The
increase resulted primarily from approximately $5.1 provided by investing
activities offset in part by $3.7 million and $0.7 million used in operating and
financing activities, respectively. In addition to cash and cash equivalents, we
have approximately $1.0 million in short-term investments and approximately $1.1
million in restricted cash of which a portion was used as collateral for our
line of credit in Japan.

         Net cash used in operating activities was approximately $3.7 million
for the three months ended March 31, 2001 compared to cash provided by operating
activities of approximately $1.4 million for the three months ended March 31,
2000. Net cash used in operating activities during 2001 reflected a net loss of
approximately $8.4 million offset by approximately $8.2 million in depreciation
and amortization along with approximately $0.8 million in provisions for
uncollectible accounts, sales returns and other credits and inventory
obsolescence. In addition, there were decreases in inventories of approximately
$0.4 million and prepaid expenses and other current assets of approximately $0.9
million. These amounts were partially offset by increases in accounts and notes
receivable of approximately $1.1 million and decreases in accounts payable of
approximately $1.5 million, income taxes payable of approximately $0.5 million,
deferred revenue of approximately $0.4 million, other accrued liabilities of
approximately $0.2 million and deferred income taxes of approximately $1.7
million.

         Net cash provided by investing activities was approximately $5.1
million for the three months ended March 31, 2001 compared to cash used in
investing activities of approximately $9.0 million for the three months ended
March 31, 2000. The most significant contributors of cash from investing
activities in the first quarter of 2001 were approximately $5.0 million in
connection with the sale of short-term investments and a decrease in restricted
cash of approximately $0.6 million. These amounts were partially offset by
approximately $0.5 million used for the acquisition of development and
production equipment and the intellectual property of Multimedia Technology
Center.

         Net cash used in financing activities was approximately $0.7 million
and $7.2 million for the three months ended March 31, 2001 and 2000,
respectively. Cash used in financing activities in the first quarter of 2001 was
primarily attributable to net repayments under our lines of credit in Japan and
the United Kingdom. During the first quarter of 2000, we used approximately $4.3
million to pay off the line of credit assumed as part of the acquisition of VST
and $3.0 million to repay credit facilities in Japan.

         We maintain a line of credit in the United States under which we may
borrow up to $10.0 million subject to a borrowing base agreement, which includes
not more than 80% of specified accounts receivable. Any amounts borrowed under
this line of credit bear interest at 2% over the 30-day LIBOR rate and are
secured by substantially all of our assets. As of March 31, 2001, we had not
borrowed against this line of credit. This line of credit expires in May 2001,
at which time we plan to renew it.

                                       15
<PAGE>

         As of March 31, 2001, our Japanese subsidiary had a line of credit with
a maximum borrowing capacity of approximately $1.2 million, which was secured by
accounts receivable of specified trade customers and a time deposit. The
outstanding balance under the line of credit was approximately $0.8 million as
of March 31, 2001. This line of credit expires in February 2002. The interest
rate on borrowings under the credit facility is 1.5% per year.

         As of March 31, 2001, our Japanese subsidiary also had a loan payable
of approximately $0.4 million, which will be repaid in equal monthly
installments through August 2001. This loan bears interest at an annualized rate
of 1.5%.

         As of March 31, 2001, our UK subsidiary had a line of credit with a
maximum borrowing capacity of approximately $0.5 million. The credit facility
expires in November 2001. The interest rate on borrowings under the credit
facility is 1.5% over the 30-day LIBOR rate. As of March 31, 2001, no amounts
were outstanding under this line of credit.

         We believe our cash and cash equivalents, short-term investments,
credit facilities and the remaining net proceeds of our initial public offering,
or IPO, in October 1999, will be sufficient to meet our working capital and
anticipated capital expenditure needs for at least the next 12 months. We may
need to raise additional capital if we expand more rapidly than currently
planned, to develop and market new or enhanced products and/or services, to
respond to competitive pressures or to acquire complementary products,
businesses or technologies. The capital, if needed, may not be available or may
not be available on terms acceptable to us.

Factors That May Affect Future Results of Operations

         Our business, results of operations and financial condition could be
adversely affected by a number of factors, including the following:

We have incurred net losses and cannot guarantee that we will be profitable in
the future.

         Except for the third and fourth quarters of 1999, we have incurred net
losses on a quarterly basis since inception. We had a net loss of approximately
$8.3 million for the three months ended March 31, 2001, primarily as a result of
$5.9 million in amortization of goodwill and other intangible assets from the
VST and Impleo acquisitions, net of tax. In addition, as of March 31, 2001, we
had an accumulated deficit of approximately $54.4 million. In light of our loss
history and the amortization of goodwill and other intangible assets from the
VST and Impleo acquisitions, we cannot assure you that we will be profitable in
the future.

We have a limited operating history on which to base an investment decision.

         We were incorporated in March 1997, commenced operations in January
1998, and our predecessor corporation only conducted limited operations. As a
result of our limited operating history, we have limited financial data that can
be used in evaluating our business and prospects and in projecting future
operating results.

                                       16
<PAGE>

We may not be able to sell sufficient quantities of our products to sustain a
viable business if the market for digital connectivity products does not
continue to develop or if a competing technology displaces these products.

         Our current FlashPath products and other flash media readers are
designed to provide connectivity between personal computers and digital
appliances that use flash memory cards. The flash memory market is in the early
stage of development and is still evolving. Our current dependence on sales of
FlashPath exposes us to a substantial risk of loss in the event that the flash
memory market does not develop or if a competing technology replaces flash
memory cards. If a competing memory storage device replaces or takes significant
market share from the flash memory cards which our digital connectivity products
support, we will not be able to sell our products in quantities sufficient to
grow our business.

We may not be able to sell sufficient quantities of our digital connectivity
products to sustain our current business if a single standard for flash memory
cards emerges.

         We believe that demand for our flash memory connectivity products is
driven, to a large extent, by the absence of a single standard for flash memory
cards. There are currently five major flash memory cards, none of which has
emerged as the industry standard. Should one of these cards or a new technology
emerge as an industry standard, flash memory card readers could be built into
PCs, eliminating the need for our current flash memory connectivity products.

A reduction in the use of the 3.5-inch floppy disk drive by consumers and
manufacturers is contributing to the slow growth in sales of our FlashPath
products.

         Our current FlashPath products only work in conjunction with the
standard 3.5-inch floppy disk drive. While the 3.5-inch floppy disk drive is
found today in most PCs, a number of newer PC models do not have this device and
new industry standards may emerge that render the 3.5-inch floppy disk drive
obsolete. Advances in input devices such as CD-ROM and removable data storage
disk drives, such as Zip drives, are reducing the need for the 3.5-inch floppy
diskette, which is contributing to the slow growth in sales of our FlashPath
products. In the future, we will have to rely on our other products and develop
new products that use a different interface between personal computers and
digital appliances.

Since our FlashPath products work only in conjunction with the 3.5-inch floppy
disk drive, advances in flash memory cards may make these products less
competitive because of the increased time needed to transfer data using the
3.5-inch floppy disk drive.

         Consumer acceptance of our FlashPath products will depend upon their
ability to quickly transfer information from flash memory cards to PCs. However,
the time needed to transfer information using a 3.5-inch disk drive increases as
more data is transferred. As more memory is condensed on to flash memory cards,
the time necessary to transfer all of the data from a single card will increase.
As technological advances make it possible and feasible to produce higher
density cards, our ability to create products, which quickly transfer all of the
stored information on a single card will be constrained by the inherent
limitations of the 3.5-inch disk drive. In that case, our products would be less
attractive to consumers and our sales would decline.

                                       17
<PAGE>

We may not be able to sell sufficient quantities of our personal storage systems
to sustain our future growth if PC manufacturers do not adopt IEEE 1394 as a
high-speed peripheral interface or if a competing CPU interface displaces or
prevents the widespread adoption of IEEE 1394.

         A substantial portion of our business depends on the adoption of
Institute of Electrical and Electronics Engineering, or IEEE, 1394 technology by
PC manufacturers. IEEE 1394 is a high speed PC interface that is replacing Small
Computer System Interface, or SCSI, and parallel interfaces. If these
manufacturers do not include a IEEE 1394 interface on their PCs or notebook
computers, then we may not be able to sell sufficient quantities of our FireWire
personal storage systems to support our future growth. FireWire is Apple's trade
name for IEEE 1394. For example, a new, competing high speed interface, such as
Universal Serial Bus, or USB, 2.0, could be developed and emerge as an industry
standard, thus limiting the demand for our FireWire technology and related
personal storage systems.

We may not be able to sell sufficient quantities of our personal storage systems
to support our business if suppliers of our drives develop native FireWire-based
personal storage systems that do not require our FireWire conversion technology.

         We embed conversion ASICs and integrated software drivers in the hard
disk drives and Zip drives we obtain from our suppliers, which enables our
FireWire-based personal storage systems to be used with FireWire-equipped
computers. We license this technology and the firmware from LSI Logic. If our
suppliers were to develop a native FireWire solution that does not require the
conversion ASICs and drivers embedded in our products, then we may not be able
to sell sufficient quantities of our FireWire personal storage systems to
support our business.

Most of our revenues are derived from only a few major products and our business
will be seriously harmed if demand for those products declines.

         To date, substantially all of our revenue has been derived from the
sale of only a few major products. While our long-term strategy is to derive
revenue from multiple products, we anticipate that the sale of our FlashPath
products and our USB and FireWire storage systems will continue to represent the
most substantial portion of our revenues through at least 2001. A decline in the
price of or demand for these products as a result of competition, technological
change, the introduction of new products by us or others, a failure to
adequately manage product transitions, or for other reasons, would seriously
harm our business. During the three months ended March 31, 2001, we derived
approximately 68% of our product revenues from the sale of FlashPath and USB-
and FireWire-based personal storage systems.

We must develop new products and introduce them in a timely manner in order to
remain competitive.

         We operate in an industry that is subject to evolving industry
standards, rapid technological changes, rapid changes in consumer demands and
the rapid introduction of new, higher performance products that shorten product
life cycles. To be competitive in this demanding market, we must both continue
to refine current products so that they remain competitive, and continually
design, develop and introduce, in a timely manner, new products

                                       18
<PAGE>

that meet the performance and price demands of OEMs and consumers. These
development activities will require the investment of substantial resources
before revenues are derived from product sales. Any significant delay in
releasing new products would adversely affect our reputation, provide a
competitor a first-to-market opportunity or allow a competitor to achieve
greater market share. Product development is inherently risky because it is
difficult to foresee developments in technology, coordinate our technical
personnel and strategic relationships, and identify and eliminate design flaws.
If we are unable to develop and sell new products, we will not be able to
continue our strategy of maintaining media neutrality, and our target market
will be limited. Further, we may not be able to recoup research and development
expenditures if new products are not widely commercially accepted.

We may not be able to develop or maintain the strategic relationships necessary
to provide us with the insight we need to develop commercially viable products.

         We may not be able to produce commercially viable products if we are
unable to anticipate market trends and the price, performance and functionality
requirements of flash memory card, PC and digital appliance manufacturers. We
must continue to collaborate closely with our customers, our OEM manufacturers
and our other contract manufacturers to ensure that critical development
projects proceed in a coordinated manner. This collaboration is also important
because our ability to anticipate trends and plan our product development
activities depends to a significant degree upon our continued access to
information derived from these strategic relationships. We currently rely on
strategic relationships with flash memory card manufacturers, such as SanDisk,
Sony and Toshiba, PC manufacturers, such as Apple, and consumer product OEMs,
such as Olympus and FujiFilm. For example, through our co-development efforts
with Sony, we developed our FlashPath for the Sony Memory Stick and introduced a
follow-on FlashPath product for new models of Sony's Mavica digital still camera
a few months later. If we cannot maintain our relationship with these
manufacturers then we may not be able to continue to develop products that are
compatible with their flash memory cards, PCs and digital appliances. However,
collaboration is more difficult because many of these companies are located
overseas. If any of our current relationships deteriorates or is terminated, or
if we are unable to enter into future alliances that provide us with comparable
insight into market trends, we will be hindered in our ability to produce
commercially viable products. For example, we depend on our relationship with
Iomega Corporation in order to produce our Zip drive products for Apple notebook
computers. If we cannot maintain our relationship with Iomega, or if Iomega
wishes to produce these products internally, then our current market for these
products will deteriorate.

We may not be able to sustain our relationship with Apple Computer, which would
greatly hinder our ability to timely develop products, which are compatible with
Macintosh operating systems.

         Historically, Apple has provided us, as an Apple developer, access to
selected product road maps, which has allowed us to timely develop and engineer
many of our current products, including our current FireWire and USB storage
systems. As a result of this collaborative relationship, we have received a
substantial portion of our historical revenues from direct sales to Apple and
Apple users. Moreover, we anticipate that a significant portion of our product

                                       19
<PAGE>

revenues will continue to be derived from sales of our Apple compatible products
in the near future. If Apple were to terminate our status as an Apple developer
or if there were a material deterioration of our relationship, we would not be
able to timely develop new technologies that are compatible with Apple's product
road maps and this would have an adverse effect on our business. Moreover, we
currently sell a number of our Apple products through the Apple Web Store, where
our products may be sold separately or may be configured and ordered along with
a Macintosh computer. While we do not anticipate any change in this arrangement,
Apple is not contractually obligated to offer our products on their website.

A continued decline in the demand for Apple products would further reduce the
market for many of our products.

         Our continued growth depends to a large extent on both our strategic
relationship with Apple and demand for Apple products. This dependence is due
primarily to the fact that, to date, Apple has been the principal PC
manufacturer using the FireWire interface technology on which many of our
products are based. The recent decline in demand for Apple products has
contributed to the recent decline in sales of our personal storage products. If
the decline in the demand for Apple products continues or if Apple suffers a
material change in its business, the market for many of our products would be
further negatively impacted.

Our operating results have fluctuated significantly and may fluctuate
significantly in the future, which could lead to decreases in our stock price.

         Our operating results have fluctuated significantly in the past and we
expect that they will continue to fluctuate in the future. If our future
operating results materially fluctuate or are below the expectations of stock
market analysts, our stock price would likely decline. Future fluctuations may
result from a variety of factors including the following:

         o        The timing and amount of orders we receive from our customers,
                  which may be tied to seasonal demand for the consumer products
                  manufactured and sold by OEMs;

         o        Cancellations or delays of customer product orders, or the
                  loss of a significant customer;

         o        Reductions in consumer demand for our customers' products in
                  general, such as Apple products, or for our products in
                  particular, such as FlashPath;

         o        The timing and amount of research and development
                  expenditures;

         o        The availability of manufacturing capacity necessary to make
                  our products;

         o        General business conditions in our markets in the United
                  States, Japan and Europe, as well as general economic and
                  political conditions;

         o        Any new product introductions, or delays in product
                  introductions, by us or our competitors;

         o        Increased costs charged by our suppliers or changes in the
                  delivery of products to us;

                                       20
<PAGE>

         o        Increased competition or reductions in the average selling
                  prices that we are able to charge;

         o        Fluctuations in the value of foreign currencies, particularly
                  the Japanese yen and British Pound, against the U.S. dollar;
                  and

         o        Changes in our product mix as well as possible seasonal demand
                  for our products.

         As a result of these and other factors, we believe that
period-to-period comparisons of our historical results of operations are not a
good predictor of our future performance.

         The stock market has experienced significant price and volume
fluctuations that have particularly affected the market prices of the stocks of
technology companies. Recently, the market price of our common stock, like that
of many technology companies, has experienced significant fluctuations. For
instance, from October 6, 1999, the date of our IPO, to April 30, 2001, the
reported last sale price for our common stock ranged from $2.19 to $65.13 per
share. On April 30, 2001, the reported last sale price of our common stock was
$2.56 per share.

         The market price of our common stock also has been and is likely to
continue to be significantly affected by expectations of analysts and investors.
Reports and statements of analysts do not necessarily reflect our views. The
fact that we have in the past met or exceeded analyst or investor expectations
does not necessarily mean that we will do so in the future.

We may fail to adequately protect our intellectual property and, therefore, lose
our competitive advantage.

         Our proprietary technology with respect to 3.5-inch floppy disk drive
interfaces and USB and FireWire source codes is critical to our future growth.
We rely in part on patent, trade secret, trademark and copyright law to protect
our intellectual property. However, the patents issued to us may not be adequate
to protect our proprietary rights, to deter misappropriation or to prevent an
unauthorized third party from copying our technology, designing around the
patents we own or otherwise obtaining and using our products, designs or other
information. We have, in fact, filed a complaint against one of our former
patent attorneys for improperly copying one of our patent applications and
filing a patent application without our consent naming himself as a co-inventor.
This matter was settled with no materially adverse consequences to SmartDisk. In
addition, we may not receive trademark protection for our "SmartDisk" name. We
have filed for trademark registration of the name "SmartDisk," but this has not
yet been granted. We are aware of a trademark application for the name
"SmartDisk" that was filed by another company. Our application could be denied
and we could be prohibited from using the "SmartDisk" name. In that event, we
would be required to incur substantial costs to establish new name recognition.

         We also claim copyright protection for some proprietary software and
documentation. We attempt to protect our trade secrets and other proprietary
information through agreements with our customers, employees and consultants,
and through other security measures. However, despite our efforts to protect our
intellectual property, unauthorized parties may attempt to copy aspects of our
products or obtain and use information and software that we regard as
proprietary. Those parties may have substantially greater financial resources
than we have, and we may not

                                       21
<PAGE>

have the resources available to challenge their use of our proprietary
technology. If we fail to adequately protect our intellectual property, it will
be easier for our competitors to sell competing products.

We may face competition from Intel if it decides to utilize its competing
patent.

         Intel Corporation was issued a patent in 1997 disclosing and claiming
technology substantially similar to that disclosed in one of our key patents.
The Intel patent was filed four years after our effective filing date, and we do
not believe that the Intel patent can be validly applied to any of the
technology disclosed in our patent. However, given the substantial resources
available to Intel, our financial condition could suffer if we engage in a
dispute with Intel. Our business could also be harmed if Intel's patent is
determined to be valid and Intel or any licensee of Intel decides to sue our
customers or develop and commercialize products based on its patent.

Infringement claims by third parties could result in costly litigation and
otherwise adversely impact our business.

         From time to time we may receive communications from third parties
asserting that our products infringe, or may infringe, the proprietary rights of
these third parties. These claims of infringement may result in protracted and
costly litigation that could require us to pay substantial damages or have sales
of our products stopped by an injunction. Infringement claims could also cause
product shipment delays, require us to redesign our products or require us to
enter into royalty or licensing agreements, any of which could harm our
business. For example, we received communications alleging that our FlashPath
products infringed a third party's patent rights. We have met with this third
party, a non-public limited liability company, to gain a better understanding of
its claim and attempted to resolve the dispute through mediation. Such mediation
did not yield a resolution to the dispute and such party subsequently filed a
complaint in the Central District Federal Court of the State of California (See
Part II, Item 1. "Legal Proceedings"). While we believe that we do not infringe
upon this third party's patent and that such claim is wholly without merit, we
cannot guarantee that the effects or outcome of this litigation will be
favorable to SmartDisk. We also received correspondence alleging that our
SafeBoot product violated another third party's intellectual property rights. We
discussed this correspondence with counsel and concluded that our product does
not infringe upon the third party's rights. In addition, we license a portion of
the intellectual property included in our products from third parties, which may
increase our exposure to infringement actions because we rely upon those third
parties for information about the origin and ownership of the licensed
intellectual property. We may also lose our license rights with respect to the
intellectual property for which infringement is claimed. Further, if our
customers are required to obtain a license on other than commercially reasonable
terms, our business could be jeopardized.

We have indemnification obligations related to our intellectual property, which
may require us to pay damages.

         Our arrangements with Fuji Photo USA, Iomega, SanDisk, Sony, Toshiba
and others require us to indemnify them for any damages they may suffer if a
third party claims that we are violating their intellectual property rights.
While, to date, we have not received indemnification

                                       22
<PAGE>

claims, there may be future claims. For example, Fuji Photo USA has been named
as a co-defendant in the above referenced complaint filed in the Central
District Federal Court of the State of California. SmartDisk has agreed to
indemnify Fuji Photo USA with respect to expenses or damages incurred by Fuji
Photo USA in connection with this matter. Any indemnification claim may require
us to pay substantial damages, which could negatively impact our financial
condition.

We may have particular difficulty protecting our intellectual property rights
overseas.

         The laws of some foreign countries do not protect proprietary rights to
as great an extent as do the laws of the United States, and many U.S. companies
have encountered substantial infringement problems in some foreign countries.
Because many of our products are sold and a portion of our business is conducted
overseas, primarily Japan and Europe, our exposure to intellectual property
risks may be higher.

Because most of our sales are to a relatively small number of customers the loss
of any of our key customers would seriously harm our business.

         Our business will be seriously harmed if we lose any of our significant
customers, particularly Apple, FujiFilm, Ingram Micro, Olympus or Sony, or
suffer a substantial reduction in or cancellation of orders from these
customers. Our current distribution strategy results, and will continue to
result, in sales to only a limited number of customers. Some of our products are
sold as stand-alone products by OEMs and, to a lesser extent, are bundled
together and sold with systems manufactured by third party OEMs. During the
three months ended March 31, 2001, Apple, Sony and Ingram Micro accounted for
approximately 16%, 13% and 11% of our revenues and our top five customers
collectively accounted for approximately 50% of our revenues. Furthermore, we
expect to continue to depend on sales of our products to relatively few
customers, which will continue to account for a significant portion of our net
revenues, for the foreseeable future.

Since we sell our products to a limited number of large customers, we expect
that those customers may pressure us to make price concessions, which would
reduce our future gross margins.

         Our reliance on sales to a limited number of large customers may expose
us to pressure for price concessions. Because of this reliance and because of
our dependence on OEMs as a significant distribution channel, we expect that our
OEM customers may seek price concessions from us, which would reduce our average
selling prices and our gross margins. Since we do not manufacture our own
products, we may be unable to reduce our manufacturing costs in response to
declining average per unit selling prices.

Our customers could stop purchasing our products at any time because we do not
have long-term purchase contracts with them.

         No OEM or other customer is contractually obligated to purchase
products from us. As a result, our customers are free to cancel their orders or
stop ordering our products at any time. In addition, even if we are able to
demonstrate that our products are superior, OEMs may still

                                       23
<PAGE>

choose not to bundle our products with theirs or market and distribute our
products on a stand-alone basis. OEMs may also change their business strategies
and manufacturing practices, which could cause them to purchase fewer of our
products, find other sources for products we currently manufacture or
manufacture these products internally.

Our ability to sell our products will be limited if the OEMs' products do not
achieve market acceptance or if the OEMs do not adequately promote our products.

         We depend upon our OEM customers to market certain of our products.
Failure of the OEMs' products to achieve market acceptance, the failure of the
OEMs to bundle our products with theirs, or any other event causing a decline in
our sales to the OEMs could seriously harm our business. Even if consumers buy
OEMs' products, their ultimate decision to buy our products depends on OEM
packaging, distribution and sales efforts, which may not be sufficient to
maintain or increase sales of our products. If we cannot achieve or maintain a
sufficient consumer acceptance rate of our products concurrent with their
purchases of OEM products, our future sales to OEM customers will be adversely
affected.

A new or competing data transfer solution that achieves significant market share
or receives significant support from flash memory card or digital appliance
manufacturers would jeopardize our business.

         Our products currently compete with a number of cable and non-cable
interfaces between personal computers and digital appliances, including ports,
PCMCIA slots and infrared interfaces, all of which are PC peripheral interfaces.
It is possible that one of these competing data transfer solutions, or another
existing or new technology, could achieve a significant market presence or
become supported by a number of significant flash memory card or digital
appliance manufacturers. Regardless of the relative benefits of our products, if
a competing product gains significant market share or significant support of
flash card manufacturers, this product would likely emerge as the industry
standard and thereby achieve a dominant market position that would jeopardize
our survival.

We expect to continue outsourcing key operational functions and our ability to
do so will be impaired if we are unable to maintain our strategic relationships.

         We have formed strategic relationships with a number of significant
industry participants, including Apple, FujiFilm, Hitachi, Iomega, Olympus,
Rohm, SanDisk, Sony, Toshiba and Yamaichi. We depend upon these corporations to
provide technical assistance and perform key manufacturing, marketing,
distribution and other functions. For example, Yamaichi is currently one of two
manufacturers of our FlashPath products, Toshiba and Apple provide technological
assistance in the development of our products, and Olympus and FujiFilm market
our products. We expect that these and similar types of relationships will be
critical to our growth because our business model calls for the continued
outsourcing of many key operational functions and we do not currently have the
resources to perform these functions ourselves.

                                       24
<PAGE>

We must overcome geographic and cultural differences in order to maintain our
strategic relationships.

         There are inherent difficulties in developing and maintaining
relationships with foreign entities. Language and cultural differences often
impair relationships, and geographical distance, at times, is also an
impediment. If any of our current relationships is impaired, or if we are unable
to develop additional strategic relationships in the future, our product
development costs would significantly increase and our business would be
materially and adversely affected.

A portion of our sales and expenses are geographically concentrated in Japan,
and, therefore, we could suffer from exchange rate fluctuations and economic and
political difficulties.

         Approximately 29% of our revenues for the three months ended March 31,
2000 were attributable to sales to Japanese customers, and we expect that sales
to Japanese customers will continue to account for a significant portion of our
total revenues for the foreseeable future. All of our Japanese sales, as well as
the related expenses, are denominated in Japanese yen. Fluctuations in exchange
rates between the yen and the U.S. dollar, particularly with respect to Japanese
transactions denominated in a currency other than the yen, could adversely
impact our financial results. Some transactions and accounts of our Japanese and
European subsidiary are U.S. dollar denominated. Since the foreign subsidiaries'
accounting records are kept in local currency, those U.S. dollar denominated
transactions are accounted for using the local currency at the time of the
transaction. U.S. dollar denominated accounts are remeasured at the end of the
accounting period. This remeasurement results in adjustments to income. In
addition, the balance sheet accounts of our foreign subsidiaries are translated
to the U.S. dollar for financial reporting purposes and resulting adjustments
are made to stockholders equity. The value of the Japanese yen and the British
pound may deteriorate against the dollar, which would impair the value of
stockholders' investment in us. Fluctuations in the value of the Japanese yen
and the British pound against the dollar have occurred in the three months ended
March 31, 2001, resulting in a foreign currency gain of approximately $280,000
and a foreign currency translation adjustment to reduce equity for approximately
$425,000. Further, we do not currently hedge against foreign currency exposure.
In the future, we could be required to denominate our product sales in other
currencies, which would make the management of currency fluctuations more
difficult and expose us to greater currency risks.

We depend on a limited number of contract and offshore manufacturers, and it may
be difficult to find replacement manufacturers if our existing relationships are
impaired.

         We contract with offshore manufacturers to produce some of our products
and our dependence on a limited number of contract manufacturers exposes us to a
variety of risks, including shortages of manufacturing capacity, reduced control
over delivery schedules, quality assurance, production yield and costs. For
example, Yamaichi and Mitsumi are the sole manufacturers of our FlashPath
products. We do not have contracts with Yamaichi or Mitsumi. If Yamaichi or
Mitsumi terminates production, or cannot meet our production requirements, we
may have to rely on other contract manufacturing sources or identify and qualify
new contract manufacturers. The lead-time required to qualify a new manufacturer
could range from approximately three to six months. Despite efforts to do so, we
may not be able to identify or

                                       25
<PAGE>

qualify new contract manufacturers in a timely manner and these new
manufacturers may not allocate sufficient capacity to us in order to meet our
requirements. Any significant delay in our ability to obtain adequate quantities
of our products from our current or alternative contract manufacturers would
cause our sales to decline.

Toshiba introduced us to one of our manufacturers and we may not be able to
retain the services of the manufacturer if our relationship with Toshiba is
impaired.

         Yamaichi, one of the manufacturers of our FlashPath products, was
introduced to us by Toshiba, which is one of our major stockholders. If our
relationship with Toshiba is impaired, we may not be able to retain the services
of Yamaichi in manufacturing our products.

Our dependence on foreign manufacturing and international sales exposes us to
difficulties often not encountered by exclusively domestic companies.

         Many of our products are manufactured overseas and a significant
portion of our revenues is derived from overseas sales. Approximately 39% of our
revenues during the three months ended March 31, 2001 were derived from
customers located outside the United States, primarily in Japan. Our dependence
on foreign manufacturers and international sales poses a number of risks,
including:

         o        Difficulties in monitoring production;

         o        Transportation delays and interruptions;

         o        Unexpected changes in regulatory requirements;

         o        Currency exchange risks;

         o        Tariffs and other trade barriers, including import and export
                  restrictions;

         o        Difficulties in staffing and managing disparate branch
                  operations;

         o        Political or economic instability;

         o        Compliance with foreign laws;

         o        Difficulties in protecting intellectual property rights in
                  foreign countries;

         o        Exchange controls; and

         o        Potential adverse tax consequences, including with respect to
                  repatriation of earnings.

         We intend to continue manufacturing our products overseas and we
anticipate that international sales will continue to account for a significant
portion of our revenues. Therefore, we expect to be subject to the risks
outlined above for the foreseeable future.

                                       26
<PAGE>

We have a limited number of suppliers of key components and our ability to
produce finished products will be impaired if we are unable to obtain sufficient
quantities of some components.

         Rohm is our sole provider of application specific integrated circuits,
or ASICs, for our FlashPath products. In our FlashPath products, the specific
function of these integrated circuits is the conversion of digital and analog
data. In addition, Iomega is a sole source supplier of Zip drives, and LSI Logic
is our primary supplier of ASICs for our FireWire products. Our dependence on a
limited number of suppliers and our lack of long-term supply contracts exposes
us to several risks, including a potential inability to obtain an adequate
supply of components, price increases, late deliveries and poor component
quality. Disruption or termination of the supply of components could delay
shipments of our products. The lead-time required for orders of some of our
components is as much as six months. In addition, the lead-time required to
qualify new suppliers for our components is as much as 12 months. If we are
unable to accurately predict our component needs, or if our component supply is
disrupted, we may miss market opportunities by not being able to meet the demand
for our products. This may damage our relationships with current and prospective
customers.

Our current and potential competitors have significantly greater resources than
we do, and increased competition could harm sales of our products.

         Many of our current and potential competitors have significantly
greater financial, technical, marketing, purchasing and other resources than we
do. As a result, some of our competitors may be able to respond more quickly to
new or emerging technologies or standards or to changes in customer
requirements. Our competitors may also be able to devote greater resources to
the development, promotion and sale of products, and may be able to deliver
competitive products at a lower end-user price. Current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to increase the ability of their products to
address the needs of our prospective customers. Therefore, it is possible that
new competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition is likely to result in price
reductions, reduced operating margins and loss of market share. Any of these
factors could have a material adverse effect on our business and operating
results.

Our business may suffer if we are unable to manage our growth.

         Failure to effectively manage our growth could impair our ability to
execute our business strategy. Our business has grown substantially in recent
periods, with revenues increasing from approximately $15.3 million in 1998 to
approximately $96.7 million in 2000. The growth of our business has placed a
strain on our management, operations and financial systems. In addition, the
number of employees has increased from 16 at January 1, 1998 to 119 as of April
30, 2001. We expect to continue to increase the number of employees as our
business grows, and may expand operations to locations other than those in which
we currently operate.

         Continued growth is likely to place a greater burden on our operating
and financial systems as well as our senior management and other personnel.
Existing and new members of management may not be able to improve existing
systems and controls or implement new

                                       27
<PAGE>

systems and controls in response to anticipated growth. Management of our
operations in diverse locations may also complicate the task of managing our
growth.

We may not be able to integrate the business of companies we acquire and
therefore these acquisitions may not provide additional value to our
stockholders.

         We continually evaluate potential acquisitions of complementary
businesses, products and technologies. We acquired VST in March 2000 and Impleo
in April 2000. We may not realize the desired benefits of these transactions or
of future transactions. In order to successfully integrate acquired companies we
must, among other things:

         o        Continue to attract and retain key management and other
                  personnel;

         o        Integrate the acquired products from both an engineering and
                  sales and marketing prospective;

         o        Establish a common corporate culture; and

         o        Integrate geographically distant facilities, systems and
                  employees.

         If our management's attention to day-to-day operations is diverted to
integrating acquired companies or if problems in the integration process arise,
our business could be adversely affected and we could be required to use a
significant portion of our available cash. If an acquisition is made utilizing
our securities, a significant dilution to our stockholders and significant
acquisition related charges to earnings could occur.

         Our acquisitions of VST and Impleo were dilutive and we expect that our
earnings per share will remain negative for the foreseeable future as a result
of these acquisitions. We may incur additional charges in the future resulting
from redundancies in product lines, customer lists and sales channels associated
with these acquisitions. Acquisitions may also cause us to incur or assume
additional liabilities or indebtedness, including liabilities that are unknown
or not fully known to us at the time of the acquisition, which could have an
adverse effect on us. Furthermore, we cannot assure that any products we acquire
in connection with any acquisition will gain acceptance in our markets.

Some of our products may be returned to us by our OEM customers if projected
consumer demand does not materialize, which would lead to a reduction in our
revenues.

         Lack of consumer demand for our products may result in efforts by OEMs
to return products to us. While we are contractually obligated to accept
returned products from our OEMs only on a limited basis, we may determine that
it is in our best interest to accept returns in order to maintain good relations
with them. Product returns would reduce our revenues. While we have experienced
very limited product returns to date, returns may increase in the future.

                                       28
<PAGE>

We could be held liable for product defects, which could require us to pay
substantial damages and harm our reputation with our customers.

         Complex products such as ours can contain errors, defects and bugs when
first introduced or as new versions are released. Delivery of products with
production defects or reliability, quality or compatibility problems could
hinder market acceptance of our products, which could damage our reputation and
harm our ability to attract and retain customers. Errors, defects or bugs could
also cause interruption, delays or a cessation of sales to our customers, and
could subject us to warranty claims from our customers. We would have to expend
significant capital and resources to remedy these problems. Errors, defects or
bugs could be discovered in our new products after we begin commercial
production of them, despite testing by us and our suppliers and customers. This
could result in additional development costs, loss of, or delays in, market
acceptance, diversion of technical and other resources from our other
development efforts, claims by our customers or others against us or the loss of
credibility with our current and prospective customers.

Our executive officers and key personnel are critical to our business, and these
officers and personnel may not remain with us in the future.

         We depend upon the continuing contributions of our key management,
sales and product development personnel. The loss of any of those personnel
could seriously harm us. Although some of our officers are subject to employment
agreements, we cannot be sure that we will retain their services. In addition,
we have not obtained key-person life insurance on any of our executive officers
or key employees.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

         Interest Rate Risk. Our exposure to market risk for changes in interest
rates relates primarily to our investment portfolio. The primary objective of
our investment activities is to preserve our invested funds while at the same
time maximizing the income we receive from our investments without significantly
increasing risk. Some of the securities that we have invested in may be subject
to market risk. This means that a change in prevailing interest rates may cause
the principal amount of the investment to fluctuate. For example, if we hold a
security that was issued with a fixed interest rate at the then-prevailing rate
and the prevailing interest rate later rises, the principal amount of our
investment will probably decline in value. If market interest rates were to
increase immediately and uniformly by 10 percent from levels at March 31, 2001,
this would not materially change the fair market value of our portfolio. To
minimize this risk, we maintain our portfolio of cash equivalents and short-term
investments in a variety of securities including U.S. government and government
agency notes, corporate bonds and money market funds. In general, money market
funds are not subject to interest rate risk because the interest paid on such
funds fluctuates with the prevailing interest rate. Our investment portfolio
includes marketable securities with contractual maturities of less than one year
and active secondary or resale markets to ensure portfolio liquidity.

                                       29
<PAGE>

         The following table presents the aggregate fair value of our cash
equivalents and short-term investments that are subject to market risk and
weighted-average interest rates as of March 31, 2001. This table does not
include money market funds because those funds are not subject to market risk.

                                                       Aggregate      Average
                                                      Fair Value   Interest Rate
                                                      ----------   -------------
Included in cash and cash equivalents (0-3 months)      $ 2,799        5.19%
Included in short-term investments (3-6 months)         $ 1,009        6.65%

         We do not currently hold or issue derivative securities, derivative
commodity instruments or other financial instruments for trading purposes.

         Foreign Exchange Risk. We conduct operations and sell products in
several different countries. Some balance sheet accounts of our U.S., Japanese
and European operations are denominated in currencies other than the respective
local currency and are remeasured to the respective local currency at the end of
the accounting period. This remeasurement results in an adjustment to income.
Additionally, the balance sheet accounts of our Japanese and European operations
are translated to U.S. dollars for financial reporting purposes and resulting
adjustments are made to stockholders' equity. The value of the respective local
currency may strengthen or weaken against the U.S. dollar, which would impact
the value of stockholders' investment in our common stock. Fluctuations in the
value of the Japanese yen and the British pound against the U.S. dollar have
occurred in 2001, resulting in a realized foreign currency gain of approximately
$280,000 for the three months ended March 31, 2001. In addition, such
fluctuations resulted in an unrealized foreign currency translation loss of
approximately $425,000 for the three months ended March 31, 2001, which is
included in accumulated other comprehensive income and shown in the equity
section of our balance sheet.

         While most of the transactions of our U.S., Japanese and European
operations are denominated in the respective local currency, some transactions
are denominated in other currencies. Since the accounting records of our foreign
operations are kept in the respective local currency, any transactions
denominated in other currencies are accounted for in the respective local
currency at the time of the transaction. Upon settlement of such a transaction,
any foreign currency gain or loss results in an adjustment to income.

         Our operating results may be impacted by the fluctuating exchange rates
of foreign currencies, especially the Japanese yen and the British pound, in
relation to the U.S. dollar. Most of the revenue and expense items of our
Japanese and European subsidiaries are denominated in the respective local
currency. In both regions, we believe this serves as a natural hedge against
exchange rate fluctuations because although an unfavorable change in the
exchange rate of the foreign currency against the U.S. dollar will result in
lower revenues when translated into U.S. dollars, operating expenses will also
be lower in these circumstances. For example, a decrease in the Japanese yen to
U.S. dollar of 10 percent would have resulted in a decrease in revenues of
approximately $3.0 million and a decrease in the net loss before income tax of
approximately $0.3 million. A 10 percent adverse change in the British pound
against the U.S. dollar would not have a material effect on net loss before
income taxes.

                                       30
<PAGE>

         We do not currently engage in hedging activities with respect to our
foreign currency exposure; however, we continually monitor our exposure to
currency fluctuations. We have not incurred significant realized losses on
exchange transactions. If realized losses on foreign transactions were to become
significant, we would evaluate appropriate strategies, including the possible
use of foreign exchange contracts, to reduce such losses.

         Intangible Asset Risk. We have a substantial amount of intangible
assets. Although at March 31, 2001 we believe our intangible assets are
recoverable, changes in the economy, the business in which we operate and our
own relative performance could change the assumptions used to evaluate
intangible asset recoverability. We continue to monitor those assumptions and
their consequent effect on the estimated recoverability of our intangible
assets.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

         A complaint was filed on June 26, 2000 in the Central District Federal
Court of the State of California by a party alleging our infringement of that
party's patent. On November 20, 2000, we prevailed in removing the venue for
such action from the State of California to the Middle District of Florida. We
consider this claim to be wholly without merit. We intend to vigorously defend
against this claim. See "Factors That May Affect Future Results of Operations--
Infringement claims by third parties could result in costly litigation and
otherwise adversely impact our business."

Item 2. Changes in Securities and Use of Proceeds

         On October 6, 1999, we completed our initial public offering of
3,450,000 shares of common stock from which we realized net proceeds of
approximately $39.1 million. These shares were registered under the Securities
Act of 1933, as amended, on a registration statement on Form S-1 (No.
333-82793), which the Securities and Exchange Commission declared effective on
October 5, 1999.

         Through March 31, 2000, we used approximately $19.3 million of the net
proceeds from the offering for the acquisitions of VST Technologies, Inc.,
Impleo Limited and the intellectual property of El Gato Software, LLC and
Multimedia Technology Center. In addition, we used $4.3 million to pay off VST's
outstanding line of credit and $9.9 million for the purchase of equipment and
funding of operations. The remaining $5.9 million has been invested in
short-term, interest-bearing, investment grade securities.

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<PAGE>

Item 6. Exhibits and Reports on Form 8-K

         (a)      Exhibits:

   Exhibit
   Number                          Description
   -------                         -----------
   10.27      Employment Agreement with Rod H. King

         (b)      Reports on Form 8-K:

         No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 2001.

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<PAGE>

                                   SIGNATURES

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


                                SMARTDISK CORPORATION


                                By: /s/ Michael S. Battaglia
                                   ---------------------------------------------
                                    Michael S. Battaglia
                                    President and Chief Executive Officer
                                    (Principal Executive Officer)


                                By: /s/ Michael R. Mattingly
                                   ---------------------------------------------
                                    Michael R. Mattingly
                                    Chief Financial Officer
                                    (Principal Financial and Accounting Officer)

Dated: May 14, 2001

                                       33
<PAGE>

                                  EXHIBIT INDEX

   EXHIBIT
   NUMBER                          DESCRIPTION
   -------                         -----------
   10.27      Employment Agreement with Rod H. King