SMARTDISK CORP, S-1, 1999-07-14

SMARTDISK CORP
S-1, 1999-07-14

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As filed with the Securities and Exchange Commission on July 14, 1999
Registration No. 333-
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
SMARTDISK CORPORATION
(Exact name of registrant as specified in its charter)

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<S> <C> <C>
DELAWARE 3577 65-0733580
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>

3506 MERCANTILE AVENUE
NAPLES, FLORIDA 34104
(941) 436-2500
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)

-----------------

MICHAEL S. BATTAGLIA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
3506 MERCANTILE AVENUE
NAPLES, FLORIDA 34104
(941) 436-2500

(Name, address, including zip code, and telephone number,
including area code, of agent for service)

-----------------
COPIES OF COMMUNICATIONS TO:

<TABLE>
<S> <C> <C>
BRUCE E. MACDONOUGH, ESQ. TIMOTHY TOMLINSON, ESQ. ALAN K. AUSTIN, ESQ.
MICHAEL G. TAYLOR, ESQ. TOMLINSON ZISKO MOROSOLI & MASER LLP TREVOR J. CHAPLICK, ESQ.
GREENBERG TRAURIG, P.A. 200 PAGE MILL ROAD WILSON SONSINI GOODRICH
1221 BRICKELL AVENUE PALO ALTO, CALIFORNIA 94306 & ROSATI, PROFESSIONAL CORPORATION
MIAMI, FLORIDA 33131 (650) 325-8666 650 PAGE MILL ROAD
(305) 579-0500 PALO ALTO, CALIFORNIA 94303
(650) 493-9300
</TABLE>

------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
-------------------

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (the "Securities Act"), other than securities offered only in connection
with dividend or interest reinvestment plans, check the following box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] _______________

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _______________

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _______________

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_] _______________

-------------------

CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1)(2) REGISTRATION FEE(2)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.001 par value................ $40,000,000 $11,120
===========================================================================================
<FN>
(1) Includes shares that the Underwriters have the option to purchase from the
Company to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act.
</FN>
</TABLE>

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================

<PAGE>

The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
securities and exchange commission is effective. This prospectus is not an offer
to sell these securities, and we are not soliciting offers to buy these
securities, in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED JULY 14, 1999

[SMARTDISK LOGO]

____________ SHARES

COMMON STOCK

SmartDisk Corporation is offering _________ shares of its common stock.
This is our initial public offering and no public market currently exists for
our shares. We have filed an application for the common stock to be quoted on
The Nasdaq National Market under the symbol "SMDK." We anticipate that the
initial public offering price will be between $____ and $____ per share.

------------------------------

INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.

------------------------------

PER SHARE TOTAL
----------- ---------
Public Offering Price....................... $ $
Underwriting Discounts and Commissions...... $ $
Proceeds to SmartDisk....................... $ $

THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

We have granted the underwriters a 30-day option to purchase up to an
additional ________ shares of common stock to cover over-allotments.

------------------------------

BANCBOSTON ROBERTSON STEPHENS

HAMBRECHT & QUIST

U.S. BANCORP PIPER JAFFRAY

------------------------------

The undersigned is facilitating internet distribution

E*TRADE SECURITIES

The date of this prospectus is , 1999

<PAGE>

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM
THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS
TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK. IN THIS PROSPECTUS, REFERENCES TO
"SMARTDISK," "WE," "OUR" AND "US" REFER TO SMARTDISK CORPORATION.

UNTIL _______, 1999, ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

------------------------------

TABLE OF CONTENTS

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<CAPTION>
PAGE
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<S> <C>
Prospectus Summary....................................................................................... 1

Risk Factors............................................................................................. 4

Note Regarding Forward-Looking Statements................................................................ 15

Use of Proceeds.......................................................................................... 15

Dividend Policy.......................................................................................... 15

Capitalization........................................................................................... 16

Dilution................................................................................................. 17

Selected Financial Data.................................................................................. 18

Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 19

Business................................................................................................. 25

Management............................................................................................... 36

Certain Transactions..................................................................................... 44

Principal Stockholders................................................................................... 46

Description of Capital Stock............................................................................. 47

Shares Eligible for Future Sale.......................................................................... 49

Underwriting............................................................................................. 51

Legal Matters............................................................................................ 53

Experts.................................................................................................. 53

Where You can Find Additional Information................................................................ 53

Index to Financial Statements............................................................................ F-1
</TABLE>

------------------------------

We own or have rights to the product names, tradenames and trademarks
that we use in conjunction with the sale of our products. This prospectus also
contains product names, tradenames and trademarks of other companies.

<PAGE>

PROSPECTUS SUMMARY

THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN
THIS PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL OF THE
INFORMATION THAT YOU SHOULD CONSIDER BEFORE BUYING SHARES IN THE OFFERING. YOU
SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY.

OUR BUSINESS

SmartDisk is a market leader in the design and development of products
that enable consumers to easily share digital data among advanced consumer
electronic products, PCs and the Internet. Consumers are increasingly relying on
the transfer of digital information as an important part of their daily
lifestyles. We believe that our products provide an easy-to-use, cost-effective
and versatile solution for the exchange of digital data. Our patented products,
FlashPath and Smarty, allow consumers to use the familiar 3.5 inch floppy drive
- - found on most PCs worldwide - to simplify the exchange of images, music, voice
and other digital data.

Our current FlashPath product is used primarily to transfer images to
PCs from digital cameras using the Toshiba SmartMedia flash memory card.
SmartMedia cards are used in cameras made by a number of leading camera
manufacturers, including Agfa, FujiFilm, Olympus, Polaroid, Ricoh, Sanyo, Sharp
and Toshiba. FlashPath also enables consumers to transfer voice between digital
voice recorders and PCs, and digital music between PCs. During the 12-month
period ended June 30, 1999, we sold over 700,000 FlashPaths.

We are currently developing, with Sony and SanDisk, additional
FlashPath products to support their flash memory cards - the Memory Stick and
the MultiMediaCard. These flash memory cards are expected to have applications
in "smart" cellular phones, digital cameras and camcorders, digital audio
players and video game devices. In addition to our product development efforts
with Sony and SanDisk, we also have strategic relationships with a number of key
industry players, including Hitachi, NEC and Toshiba. Our strategic partners
actively participate in the development of our products, provide us with access
to leading-edge manufacturing capabilities, and market and distribute our
products globally.

o Capitalizing on our technology expertise and technology
platform to expand our product offerings;

o Expanding our customer and strategic industry relationships to
take advantage of the significant marketing clout of our OEM
customers and the new product insights that result from our
cooperative development activities;

o Supporting different flash memory card standards in order to
address the data transfer needs of purchasers of emerging
digital appliances that use different flash memory card
formats;

o Promoting market awareness of our FlashPath and Smarty brand
names; and

o Continuing our focus on easy-to-use products that do not
require hardware installation, cables or the use of PC ports.

We were incorporated in Delaware on March 5, 1997 as "Fintos, Inc." and
changed our name to "SmartDisk Corporation" on September 26, 1997. Our executive
offices are located at 3506 Mercantile Avenue, Naples, Florida 34104, and our
telephone number is (941) 436-2500.

1
<PAGE>

THE OFFERING

Common stock offered by SmartDisk....... _________ shares

Common stock to be outstanding
after this offering................... _________ shares

Use of proceeds......................... We intend to use the estimated
$____ million net proceeds from
this offering for working
capital, potential acquisitions
of technology or businesses and
other general corporate
purposes.

Proposed Nasdaq National Market symbol.. SMDK

- -------------------

Except as otherwise indicated, information in this prospectus is based
on the following assumptions:

o The number of shares of our common stock to be outstanding
after the offering is based on shares outstanding as of July
1, 1999.

o The number of shares excludes:

(a) _______ shares of common stock available for issuance
if the underwriters' over-allotment option is
exercised in full;

(b) 3,425,135 shares of common stock available for
issuance under our 1998 Employee Stock Option Plan,
3,148,875 of which were subject to outstanding
options at a weighted average exercise price of $1.55
per share at July 1, 1999;

(c) 726,000 shares of common stock available for issuance
under our 1998 Directors and Consultants Stock Option
Plan, 417,125 of which were subject to outstanding
options at a weighted average exercise price of $1.83
per share at July 1, 1999;

(d) __________ shares of common stock available for
issuance under our 1999 Incentive Compensation Plan,
none of which was subject to outstanding options at
July 1, 1999; and

(e) _______ shares of common stock available for issuance
under our 1999 Employee Stock Purchase Plan, none of
which had been issued at July 1, 1999.

2
<PAGE>

SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------- ------------------------
1994 1995 1996 1997 1998 1998 1999
----------- ----------- --------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales................ $102 $316 $500 $893 $15,038 $421 $5,430
Royalties.................... -- -- -- -- 285 111 77
----------- ----------- --------- --------- --------- ----------- ---------
Total revenues................. 102 316 500 893 15,323 532 5,507

Cost of revenues............... 68 486 367 301 12,600 441 4,647
----------- ----------- --------- --------- --------- ----------- ---------
Gross profit (loss)............ 34 (170) 133 592 2,723 91 860
Operating expenses:
Research and development..... 499 163 720 1,412 1,608 302 925
Sales and marketing.......... 47 48 6 12 2,547 253 726
General and administrative... 546 1,933 3,418 3,184 4,049 742 1,015
Impairment loss.............. -- -- 7,807 -- -- -- --
----------- ----------- --------- --------- --------- ----------- ---------
Total operating expenses....... 1,092 2,144 11,951 4,608 8,204 1,297 2,666
----------- ----------- --------- --------- --------- ----------- ---------
Operating loss................. (1,058) (2,314) (11,818) (4,016) (5,481) (1,206) (1,806)
Gain (loss) on translation..... -- -- -- -- (48) -- 63
Interest and other income...... -- 38 -- 8 76 13 26
Interest expense............... -- -- -- (1) (52) (15) (9)
----------- ----------- --------- --------- --------- ----------- ---------
Net loss before income taxes... (1,058) (2,276) (11,818) (4,009) (5,505) (1,208) (1,726)
Income tax benefit............. -- -- (2,348) (45) (77) (19) (19)
----------- ----------- --------- --------- --------- ----------- ---------
Net loss....................... $(1,058) $(2,276) $(9,470) $(3,964) $(5,428) $(1,189) $(1,707)
=========== =========== ========= ========= ========= =========== =========
Net loss per share(1)........ $(0.04) $(0.08) $(0.31) $(0.13) $(0.14) $(0.04) $(0.04)

Shares used in computing net
loss per share (2)(3)..... 29,400 29,400 30,496 31,262 38,351 31,306 45,938
</TABLE>

MARCH 31, 1999
----------------------
AS
ACTUAL ADJUSTED(4)
-------- -----------
(UNAUDITED)

BALANCE SHEET DATA:
Cash and cash equivalents......................... $1,807
Working capital................................... 1,069
Total assets...................................... 12,113
Long-term debt (including current portion)........ 631
Total stockholders' deficit....................... 7,101
- ---------------------

(1) Basic and diluted net loss per share are the same for all periods
presented.

(2) Redeemable common stock shares are included in shares used in computing net
loss per share for all 1998 and 1999 periods.

(3) Shares used in computing net loss per share reflect the retroactive
adjustment of outstanding shares related to the mergers of SmartDiskette
Limited and SmartDisk Security Corporation into SmartDisk.

(4) Adjusted to give effect to our sale of the _______ shares of common stock
at an assumed public offering price of $_____ per share (after deduction of
the estimated underwriting discount and offering expenses) and the receipt
and application of the net proceeds therefrom. See "Use of Proceeds."

3
<PAGE>

RISK FACTORS

BEFORE YOU INVEST IN OUR COMMON STOCK, YOU SHOULD BE AWARE OF VARIOUS
RISKS, INCLUDING THOSE DESCRIBED BELOW. YOU SHOULD CAREFULLY CONSIDER THESE RISK
FACTORS, TOGETHER WITH ALL OF THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS,
BEFORE YOU DECIDE WHETHER TO PURCHASE SHARES OF OUR COMMON STOCK.

THIS PROSPECTUS ALSO CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF MANY FACTORS,
INCLUDING THE RISKS FACED BY US WHICH ARE DESCRIBED BELOW AND ELSEWHERE IN THIS
PROSPECTUS.

WE HAVE INCURRED OPERATING LOSSES AND CANNOT GUARANTEE THAT WE WILL EVER BE
PROFITABLE.

We have incurred operating losses on a quarterly basis since inception.
We had operating losses of $5.5 million and $1.8 million during 1998 and the
first three months of 1999, respectively. In addition, as of March 31, 1999, we
had an accumulated deficit of $24.3 million. In light of our loss history, we
cannot assure you when, if ever, SmartDisk will be able to achieve or sustain
profitability on an annual or quarterly basis in the future.

WE HAVE A LIMITED OPERATING HISTORY ON WHICH TO BASE AN INVESTMENT DECISION.

We were incorporated in March 1997 and commenced operations in January
1998. Our predecessor corporation only conducted limited operations. Further,
commercial sales of our primary product, FlashPath, only commenced in mid-1998.
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. In addition, our management team has worked together
only for a short time. Our Chief Financial Officer, Senior Vice President,
Research and Development, Vice President, Asian Operations, and Vice President,
Corporate Development and Legal Affairs all joined SmartDisk during the last
year.

OUR BUSINESS DEPENDS UPON THE DEVELOPMENT OF THE FLASH MEMORY MARKET AND OUR
ABILITY TO DEVELOP PRODUCTS FOR THAT MARKET.

Although we are investing significantly in research and development to
diversify our product lines, our business is heavily dependent on sales from our
primary product, FlashPath. Our current and planned FlashPath products are
designed to provide connectivity between personal computers and digital
appliances that use flash memory cards. Accordingly, our prospects depend upon
the continued development of the market for flash memory data storage systems.
The flash memory market is in the early stage of development and is still
evolving. Our current dependence on sales of FlashPath and lack of product
diversification 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. Alternate technologies may displace the market for flash memory
products. If a competing memory storage device replaces or takes significant
market share from the flash memory cards which our products support, our
business, financial condition and results of operations would suffer.

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 four 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 in to
PCs, eliminating the need for our current flash memory connectivity products.

WE CURRENTLY DEPEND ON THE 3.5 INCH FLOPPY DISK DRIVE AND ARE TECHNOLOGICALLY
CONSTRAINED BY THAT DEPENDENCE.

Our current products only work in conjunction with the standard 3.5
inch floppy disk drive. While the 3.5 inch floppy disk drive is today found in
most PCs, new industry standards may emerge that render obsolete the 3.5 inch
floppy disk drive. Advances in input devices such as CD-ROM and removable data
storage disk drives, such as Zip drives, may reduce or eliminate the need for
the 3.5 floppy diskette. Any reduction in the use or availability of 3.5 inch
floppy disk drives will lead to a corresponding reduction in demand for our
products. We would then have to develop new products that use a different
interface between personal computers and digital appliances. We may not be able
to redesign our products to fit the new interface and demonstrate technological
feasibility of those

4
<PAGE>

products on a timely basis, if at all, or in a cost effective manner.
Consequently, our business, financial condition and results of operation could
suffer.

In addition, there are technological constraints inherent in the 3.5
inch disk drive. 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
our use of the 3.5 inch disk drive. While our products currently are capable of
quickly transferring information from existing memory devices to personal
computers, memory density may increase to such a degree that the time needed to
transfer the data using a 3.5 inch disk drive becomes excessively long. In such
case, our products would be less attractive to consumers and our sales would
decline.

WE CURRENTLY DEPEND ON ONLY ONE PRODUCT AND DO NOT HAVE MULTIPLE SOURCES OF
REVENUE.

To date, substantially all of our revenue has been derived from the
sale of our FlashPath product. While our long-term strategy is to derive revenue
from multiple products, we anticipate that the sale of FlashPath products will
continue to represent the most substantial portion of our revenues through at
least 2000. A decline in the price of or demand for FlashPath products as a
result of competition, technological change, the introduction of new products by
us or others, a failure to manage product transitions successfully, or for other
reasons, would cause our business, financial condition and results of operations
to suffer. For the year ended December 31, 1998 and the three months ended March
31, 1999, we derived approximately 89.7% and 92.8%, respectively, of our product
revenues from the sale of FlashPath.

Our current FlashPath product reads and writes only to the SmartMedia
flash memory card produced by Toshiba and Samsung, and our future success will
depend on the successful introduction and sale of products currently under
development, particularly FlashPath for the Sony Memory Stick and FlashPath for
the SanDisk MultiMediaCard. We have not yet demonstrated that we will be able to
successfully develop these products on a timely basis and in a cost-effective
manner, or at all. Even if we successfully develop these products, we cannot
guarantee that they will achieve market acceptance. If we are unable to
successfully develop and sell these new products, we will not be able to
continue our strategy of maintaining media neutrality, and our target market
will be limited to makers and consumers of products that use only one of the
four leading flash memory cards.

OUR BUSINESS DEPENDS UPON OUR ABILITY TO SUCCESSFULLY INTRODUCE AND
COMMERCIALIZE NEW PRODUCTS UNDER DEVELOPMENT.

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 which shorten product
life cycles. To be competitive in this demanding market, we must continually
design, develop and introduce, in a timely manner, new data transfer products
that meet both the performance and price demands of OEMs and consumers. We must
also continue to refine current products so that they remain competitive. We
must also continue to collaborate closely with our customers, flash memory
manufacturers and our contract manufacturers to ensure that critical development
projects proceed in a coordinated manner. This collaboration is more difficult
because many of our partners are located overseas. Product development is
inherently risky because it is difficult to foresee developments in technology,
coordinate the technical personnel or various competing entities and identify
and eliminate design flaws. Any significant delay in releasing new products
would adversely affect our reputation, give a competitor a first-to-market
advantage or cause a competitor to achieve greater market share. In addition,
new products introduced by us may fail to achieve a significant degree of market
acceptance or, once accepted, may fail to sustain acceptance for any significant
period. These factors could cause our business, financial condition and results
of operations to suffer.

We expect to spend a significant amount of time and resources to
develop other products and refine existing products. In light of the long
product development cycles present in our industry, these expenditures will be
made well in advance of the prospect of deriving revenue from the sale of
products. Our ability to commercially introduce and successfully market new
products is subject to a wide variety of challenges during this development
cycle, including start-up bugs, design defects and other matters that could
delay launch of the product. In addition, since our customers are not obligated
by long-term contracts to purchase our products, our anticipated product

5
<PAGE>

orders may not materialize, or orders for products may be cancelled. As a
result, we may not be able to realize volume sales of our products in order to
recoup research and development expenditures.

We also must anticipate market trends and the price, performance and
functionality requirements of flash memory manufacturers. Our ability to
anticipate trends depends to a significant degree upon our continued access to
information derived from the strategic relationships we currently have with
flash memory card manufacturers and, to a lesser extent, consumer product OEMs.
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
successful products.

OUR OPERATING RESULTS HAVE FLUCTUATED SIGNIFICANTLY AND MAY FLUCTUATE
SIGNIFICANTLY IN THE FUTURE.

Our operating results have fluctuated significantly in the past and we
expect that they will continue to fluctuate in the future. 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 these 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
generally or for our products in particular;

o A reduction in the average selling price for our products as a
result of competitive factors;

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, particularly
Japan, as well as global economic uncertainty;

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;

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

o Fluctuations in the value of foreign currencies, particularly
the Japanese yen, 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 or operations are not a
good predictor of our future performance. If our future operating results are
below the expectations of stock market analysts, our stock price would likely
decline.

OUR SUCCESS DEPENDS UPON PROTECTING OUR INTELLECTUAL PROPERTY.

Our proprietary technology with respect to 3.5 inch floppy disk drive
interfaces is critical to our future success. 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. Thus, despite
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 us, and we may not have the resources available to successfully
challenge their use of our proprietary technology.

6
<PAGE>

Intel Corporation was issued a patent in 1997 disclosing and claiming
technology substantially similar to that disclosed in one of our key patents.
Intel's patent was filed four years after our effective filing date. In view of
Intel's late filing date, we do not believe that the Intel patent can be validly
applied to any of the technology disclosed in our patent. We have communicated
these facts to Intel. Nevertheless, given the substantial resources available to
Intel, our business, financial condition and results of operations could suffer
if we engage in a dispute with Intel or 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.

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. For instance, we received a letter from SanDisk stating
that SanDisk held two patents which might apply to our products. Although we
subsequently obtained a non-exclusive worldwide license for all of SanDisk's
intellectual property rights in connection with multimedia floppy disk adapters
for a 10-year period, if the license terminates or expires, we could face a
potential conflict with SanDisk regarding the scope of such patents. In another
instance, we received correspondence alleging that our SafeBoot product violated
a third party's intellectual property rights. We reviewed the patent and
concluded that our products do not infringe upon the third party's patent
rights. While neither claim has resulted in litigation, these or similar future
claims of infringement may result in protracted and costly litigation which
could require us to pay substantial damages or have sales of our products
stopped by an injunction. Such infringement claims could also cause product
shipment delays, require us to redesign our products or enter into royalty or
licensing agreements, any of which could cause our business, financial condition
and results of operation to suffer. 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.

In addition, the laws of some foreign countries do not protect our
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 most of our business is conducted overseas, our
exposure to intellectual property risks may be higher.

We also claim copyright protection for certain 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, our efforts may not be successful.

If we fail to adequately protect our intellectual property, it will be
easier for our competitors to sell competing products.

BECAUSE MOST OF OUR SALES ARE TO A RELATIVELY SMALL NUMBER OF CUSTOMERS, THE
LOSS OF ANY KEY CUSTOMERS WOULD SERIOUSLY HARM OUR BUSINESS.

Our current strategy is principally based on sales to OEMs, which
results and will continue to result in sales to only a limited number of
customers. Olympus and FujiFilm accounted for approximately 32.0% and 38.0% of
our revenues in fiscal 1998 and our top five customers collectively accounted
for approximately 86.4% of our revenues during that period. In the three months
ended March 31, 1999, Olympus and FujiFilm accounted for approximately 39.0% and
32.0% of our revenues and our top five customers collectively accounted for
approximately 90.6% of our revenues during that period. We do not have purchase
contracts with any of our customers that obligate them to continue to purchase
our products and these customers could cease purchasing our products at any
time. 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. Our business will be
seriously harmed if we lose any of our significant customers, particularly
Olympus or FujiFilm, or suffer a substantial reduction in or cancellation of
orders from these customers.

WE DEPEND ON SALES TO ORIGINAL EQUIPMENT MANUFACTURERS.

We currently rely on digital camera manufacturers, such as Olympus and
FujiFilm, to purchase our products for use with their digital cameras. Our
products are sold as standalone products by OEMs and, to a lesser extent, are
bundled together and sold with systems manufactured by third party OEMs. We rely
on those OEMs'

7
<PAGE>

products to be successful, and if they are not, we will not sell our products in
volume quantities. In 1998, almost all of our sales were to OEMs and we expect
this dependence on OEM sales to continue. We currently sell to seven OEMs, sales
to which collectively accounted for 80.8% and 78.8% of our revenues for 1998 and
the first three months of 1999, respectively. No OEM is obligated to purchase
products from us. Even if we are able to demonstrate that our products are
superior, OEMs may still choose not to bundle our products with theirs or market
and distribute our products on an unbundled 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. Further, there are a
limited number of OEMs to which we can sell our products. Failure of OEMs'
products to achieve market acceptance, the failure of OEMs to bundle our
products with theirs, or any other event causing a decline in our sales to OEMs
could cause our business, financial condition and results of operations to
suffer. 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 SIGNIFICANT SUPPORT OF FLASH CARD 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,
USBs, PCMCIA slots and infrared 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 THAT OEM DEMANDS WILL REDUCE OUR GROSS MARGINS IN THE FUTURE.

Our reliance on sales to a limited number of large customers exposes us
to pressure for price concessions. 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. Many of our current and potential competitors are larger with greater
resources and therefore may be able to achieve greater economies of scale and
would be less vulnerable to price competition.

WE DEPEND ON OUR STRATEGIC RELATIONSHIPS, AND THE DIFFICULTIES OF MAINTAINING
THESE RELATIONSHIPS IS EXACERBATED BY GEOGRAPHIC AND CULTURAL DIFFERENCES.

We have formed strategic relationships with a number of significant
industry participants, including FujiFilm, Hitachi, Olympus, Rohm, SanDisk,
Sony, Toshiba, Visa and Yamaichi. Our strategic relationships provide access to
valuable information regarding trends in our industry, which allows us to better
plan our product development activities. In addition, we depend upon these
corporations to provide technical assistance and perform key manufacturing,
marketing, distribution and other functions. For example, Yamaichi is currently
the sole manufacturer of our FlashPath products, Toshiba provides 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 success 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.

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. We must overcome these difficulties in order to be successful. 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.

8
<PAGE>

OUR SALES AND EXPENSES ARE GEOGRAPHICALLY CONCENTRATED IN JAPAN.

Approximately 84.4% of our revenues for 1998 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 such Japanese sales, as well as most of the related
expenses, are denominated in yen. Accordingly, we are also subject to the risks
associated with fluctuations in exchange rates between the yen and the U.S.
dollar, particularly in the event that yen-denominated receivables remain
outstanding for extended periods. Our operating results may fluctuate because of
currency rate fluctuations. We cannot guarantee that the value of the yen will
not deteriorate against the dollar, which would impair the value of
stockholders' investment in us. Deterioration of the yen against the dollar has
occurred in recent years. 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 are also subject to risks associated with a significant amount of
sales being made to one geographical area. An economic downturn in Asia
generally, and Japan in particular, could lead to a reduced demand for our
products. In recent years, Japan has been subject to political and economic
instability and, if it continues, sales of our products in Japan may be
adversely affected.

Given our dependence on sales to Japanese customers, we must develop
and maintain alliances in Japan to help with the promotion and distribution of
our products. We cannot guarantee that we will be able to develop or maintain
these alliances.

OUR OEM CUSTOMERS MAY CHOOSE TO WORK WITH A LOCAL COMPETITOR.

Our OEM customers, most of which are based in Japan, may choose to work
with, and purchase products from, a local competitor if one were able to provide
a substitute product. This may occur because of geographic distance, time
differences, or for other reasons. Our business, financial condition and results
of operations could suffer if this happens.

WE DEPEND ON CONTRACT AND OFFSHORE MANUFACTURING.

We contract with offshore manufacturers to produce our products and our
dependence on a limited number of contract manufacturers exposes us to certain
risks, including shortages of manufacturing capacity, reduced control over
delivery schedules, quality assurance, production yield and costs. Yamaichi and
Mitsumi are the sole manufacturers of our FlashPath products. We do not have
contracts with either 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. Yamaichi was introduced to us by
Toshiba. If our relationship with Toshiba is impaired, we may not be able to
retain the services of Yamaichi in manufacturing our products. Despite efforts
to do so, we may not be able to identify or 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.

In addition, foreign manufacturing poses a number of risks, including
the following:

o difficulties in monitoring production;

o transportation delays and interruptions;

o difficulties in staffing;

o currency fluctuations;

o potentially adverse tax consequences;

o unexpected changes in regulatory requirements;

o tariffs and other trade barriers; and

9
<PAGE>

o political and economic instability.

Any significant delay in our ability to obtain adequate quantities of our
products from our current or alternative contract manufacturers could cause our
business, financial condition and results of operations to suffer.

WE HAVE A LIMITED NUMBER OF SUPPLIERS OF KEY COMPONENTS.

Rohm is our sole source provider of ASICs for our FlashPath products
and we purchase ASICs for Smarty from Rohm and Atmel. Moreover, we do not have
long-term contracts with our suppliers. Our dependence on sole source suppliers
of components imposes 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 these components
could delay shipments of our products. For example, in the past we faced
temporary shortages of processors used in 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 MARKETS ARE HIGHLY COMPETITIVE.

The market for our products is intensely competitive and characterized
by rapidly changing technology and rapid changes in consumer preference. We
believe that competition in this market is likely to intensify as a result of
increasing demand for digital appliances using both flash memory cards and smart
cards. Future competition may also include flash memory card manufacturers and
consumer product OEMs that are our current customers.

Several competitive developments would have a particularly significant
impact on our business. First, new competing data storage devices may replace
the flash memory cards which our products support. Second, the market for flash
memory connectivity and digital data security products may ultimately require
technological solutions that are not based on floppy disk drive interface
technology that is the basis for our current products. Third, it is possible
that a new or existing competing data transfer solution that achieves a
significant market presence or establishes a number of significant relationships
with flash memory card manufacturers will emerge as an industry standard and
achieve a dominant market position. Any of such events would have a material
adverse effect on our business and prospects.

Many of our current and potential competitors have significantly
greater financial, technical, marketing, purchasing and other resources than we
do. As a result, our competitors may be able to respond more quickly to new or
emerging technologies or standards and 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. See the
discussion in "Business --Competition" for a more complete discussion of
competitive factors in our industry.

WE NEED TO SUCCESSFULLY MANAGE OUR GROWTH.

Our business has grown substantially in recent periods, with revenues
increasing from $532,000 in the first quarter of 1998 to $5.5 million in the
first quarter of 1999. 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 44 as of May 31, 1999. 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.

If we are successful in achieving our growth plans, our growth is
likely to place a significant burden on our operating and financial systems and
increased responsibility for senior management and other personnel. Existing
management or any new members of management may not be able to improve existing
systems and controls or

10
<PAGE>

implement new systems and controls in response to anticipated growth. Management
of our operations in diverse locations may also prove to be difficult. Our
failure to effectively manage our growth could cause our business, financial
condition and results of operations to suffer.

WE FACE RISKS RELATED TO INTERNATIONAL SALES AND CURRENCY FLUCTUATIONS.

SmartDisk conducts a substantial portion of its business overseas.
Approximately 89.9% and 85.0% of our revenues in 1998 and the first three months
of 1999, respectively, were derived from customers located outside the United
States, substantially all of which were derived from customers located in Japan.
We also anticipate future increased sales to Europe and Latin America. Because a
significant number of our principal customers are located in other countries, we
anticipate that international sales will continue to account for a significant
portion of our revenues. As a result, a significant portion of our sales and
operations may continue to be subject to certain risks, including:

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.

These factors could cause our business, financial condition and results
of operations to suffer.

OUR BUSINESS DEPENDS ON THE DEVELOPMENT OF THE SMART CARD MARKET.

SmartDisk's future growth and operating results will depend, in part,
on whether our Smarty family of smart card readers is commercially successful.
The current primary use for Smarty is as a smart card token-based security
application designed to provide protection from unauthorized access to digital
information. However, the market for network and electronic commerce security
applications is still emerging and the smart card may not become the industry
standard for these applications. Similarly, the market for other smart card
applications may not develop, or may develop more slowly than we expect.

If the market for the Smarty family of products fails to develop or
develops more slowly than expected, or if any of the standards supported by us
do not achieve or sustain market acceptance, our business and operating results
would be materially and adversely affected.

WE CURRENTLY HAVE INDEMNIFICATION OBLIGATIONS TO OTHERS.

Our agreements with strategic partners often 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 claims from any of our strategic partners, we cannot
guarantee that there will not be future claims. Any such claim may require us to
pay substantial damages, which could cause our business, financial condition and
results of operations to suffer.

WE FACE PRODUCT RETURN, PRODUCT LIABILITY AND PRODUCT DEFECT RISKS.

Lack of consumer demand for our products may result in efforts by OEMs
to return products to us. In addition, complex products such as ours frequently
contain errors, defects and bugs when first introduced or as new versions are
released. We have discovered such errors, defects and bugs in the past. Delivery
of products with production defects or reliability, quality or compatibility
problems could hinder market acceptance of our products.

11
<PAGE>

This 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. Any such event would cause our business, financial condition and
results of operations to suffer.

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 such 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. Because our technology is specialized and complex, we need to
recruit and train qualified technical personnel. However, there are many
employers competing to hire qualified technical personnel and we may have
difficulty attracting and retaining such personnel.

We are further hindered in our recruiting efforts by the lack of a
readily available pool of candidates in Naples, Florida, where we are
headquartered. The inability to attract and retain qualified personnel could
cause our business, financial condition and results of operations to suffer.

WE ARE CONTROLLED BY A PRINCIPAL STOCKHOLDER THAT MAY PREVENT OR DELAY A CHANGE
OF CONTROL AND WHOSE INTERESTS MAY BE DIFFERENT FROM THOSE OF OUR OTHER
STOCKHOLDERS.

Phoenix House Investments, L.L.C. and persons affiliated with Phoenix
House will own approximately ____% of SmartDisk after the offering. Accordingly,
Phoenix House will be able to control SmartDisk, subject to the fiduciary duties
of its representatives on the board of directors under Delaware law. The
interests of Phoenix House may not always coincide with our interests or the
interests of other stockholders. Phoenix House, through its representatives on
the board of directors, could cause us to enter into transactions or agreements
which we would not otherwise consider absent Phoenix House's influence.

Upon completion of this offering, executive officers and directors and
their affiliates will own, in the aggregate, approximately ______% of our
outstanding common stock. The purchasers of common stock in this offering will
not have sufficient voting power to elect any members of our board of directors.
As a result, our current stockholders will be able to exercise control over all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions, which could have the effect of
delaying or preventing a change of control of SmartDisk.

OUR BUSINESS COULD BE AFFECTED BY YEAR 2000 ISSUES.

The "Year 2000 Issue" refers generally to the problems that some
software may have in determining the correct century of the year. Many existing
electronic systems, including computer systems, use only the last two digits to
refer to a year. Therefore, these systems may recognize a date using "00" as
1900 rather than the year 2000. If not corrected, these electronic systems could
fail or create erroneous results when addressing dates on and after January 1,
2000. The Year 2000 Issue could cause our business, financial condition and
results of operations to suffer. For a more complete discussion, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Issues."

WE HAVE ANTITAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION OF OUR
COMPANY.

Certain provisions of our certificate of incorporation and bylaws and
the provisions of Delaware law could have the effect of delaying, deferring or
preventing an acquisition of SmartDisk. For example, we have a staggered board
of directors, the members of which may only be removed for cause, authorized but
unissued shares of preferred stock which could be used to fend off a takeover
attempt, our stockholders may not take actions by written consent and our
stockholders are limited in their ability to make proposals at stockholder
meetings.

12
<PAGE>

WE MAY NEED TO RAISE ADDITIONAL CAPITAL WHICH MIGHT NOT BE AVAILABLE OR WHICH,
IF AVAILABLE, MIGHT ONLY BE AVAILABLE ON TERMS ADVERSE TO PERSONS BUYING
SHARES IN THIS OFFERING.

We expect the net proceeds from this offering, our current cash and
cash equivalents and cash from commercial borrowing availability under credit
facilities will meet our working capital and capital expenditure needs for at
least one year. After that, we may need to raise additional funds, and we cannot
be certain that we will be able to obtain additional financing on favorable
terms, if at all. We may also require additional capital for the acquisition of
businesses, products and technologies that are complementary to ours. Further,
if we issue equity securities, the ownership percentage of our stockholders
would be reduced, and the new equity securities may have rights, preferences or
privileges senior to those of existing holders of our common stock. If we cannot
raise needed funds on acceptable terms, we may not be able to develop or enhance
our products, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements, which could seriously harm our
business, operating results and financial condition.

OUR STOCK MAY BE VOLATILE OR THINLY TRADED, WHICH MIGHT MAKE IT HARD FOR
INVESTORS TO SELL THEIR SHARES.

Prior to this offering, you could not buy or sell our common stock on a
public market. An active public market for our common stock may not develop or
be sustained after this offering. We negotiated and determined the initial
public offering price with the representatives of the underwriters based upon
several factors. This price will likely vary from the market price after this
offering. The market price of our common stock will likely fluctuate
significantly in response to the following factors, some of which are beyond our
control:

o Variations in our quarterly operating results;

o Changes in financial estimates of our revenues and operating
results by securities analysts;

o Announcements by us or our competitors of significant
contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;

o Loss of or decrease in sales to a major customer or failure to
complete significant transactions;

o Additions or departures of key personnel;

o Future sales of our common stock, including sales which dilute
existing investors;

o Stock market price and volume fluctuations attributable to
inconsistent trading volume levels of our stock;

o General stock market conditions;

o Commencement of or involvement in litigation; and

o Announcements by us or our competitors of key innovations or
product introductions.

WE COULD BE SUBJECT TO CLASS ACTION LITIGATION DUE TO STOCK PRICE VOLATILITY,
WHICH, IF IT OCCURS, WILL DISTRACT MANAGEMENT, RESULT IN SUBSTANTIAL COSTS
AND HARM OUR BUSINESS.

In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. We may be the target of similar litigation in the future. Securities
litigation could result in substantial costs and divert management's attention
and resources, which could cause serious harm to our business, financial
condition and results of operations.

FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.

After this offering, we will have ________________ shares of common
stock outstanding. Of these shares, the ____________ sold in this offering will
be freely tradable without restriction under the Securities Act except for any
shares held by "affiliates" of SmartDisk as that term is defined in Rule 144 of
the Securities Act. As of July 1, 1999, the remaining 50,094,045 shares of
common stock held by existing stockholders are "restricted shares" as that

13
<PAGE>

term is defined in Rule 144, and will be available for sale in the public market
180 days after the date of this prospectus or afterwards.

The above assumes the effectiveness of certain lock-up arrangements
with the underwriters under which the stockholders have agreed not to sell or
otherwise dispose of their shares of common stock. Most of the shares that will
be available for sale after the 180th day after the date of this prospectus or
afterwards will be subject to certain volume limitations because they are held
by affiliates of SmartDisk. In addition, we cannot assure you that these lock-up
restrictions will not be removed prior to 180 days after the offering without
prior notice by the underwriters.

As of July 1, 1999, there were options to purchase 3,566,000 shares of
our common stock outstanding. Should the holders of these options exercise their
options, there will be additional shares eligible for sale 180 days after the
date of this prospectus.

Three of our principal stockholders have the right to require us to
file a registration statement to enable them to sell their shares. These and
another stockholder also have the right to require us to include their shares in
subsequently filed registration statements.

If our stockholders sell substantial amounts of the common stock,
including shares issued upon the exercise of outstanding options, in the public
market, the market price of our common stock could fall. For more detailed
information regarding future sales of our common stock, please see "Shares
Eligible for Future Sale" and "Underwriting."

OUR CURRENT STOCKHOLDERS WILL BENEFIT FROM THIS OFFERING, AND YOU WILL
EXPERIENCE IMMEDIATE DILUTION.

The initial public offering price is expected to be substantially
higher than the current book value per share of our outstanding common stock.
Stockholders existing as of March 31, 1999 have paid an average of $0.57 per
share for their common stock which is considerably less than the amount to be
paid for such common stock in this offering. As a result, investors purchasing
common stock in this offering will incur immediate and substantial dilution. In
addition, we have issued options to acquire common stock at prices significantly
below the initial public offering price. To the extent such outstanding options
are ultimately exercised, there will be further dilution to investors in this
offering.

WE HAVE BROAD DISCRETION TO USE THE OFFERING PROCEEDS AND HOW WE INVEST THESE
PROCEEDS MAY NOT YIELD A FAVORABLE RETURN.

The principal purposes of this offering are to increase our equity
capital, to create a public market for our shares, to facilitate our future
access to public equity markets and to provide increased visibility and
credibility for us in a marketplace in which many of our current and potential
competitors are or are expected to be publicly held companies. As of the date of
this prospectus, we have no specific plans to use the net proceeds from the
offering other than for general corporate purposes, including possible
acquisitions, although none is as yet imminent, and plan to invest the net
proceeds in short-term, investment-grade, interest-bearing securities.
Accordingly, our management will retain broad discretion to allocate a
substantial portion of the net proceeds from this offering to uses that the
stockholders may not deem as desirable, and there can be no assurance that these
proceeds can or will yield a significant return.

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<PAGE>

NOTE REGARDING FORWARD-LOOKING STATEMENTS

All statements, trend analyses and other information contained in this
prospectus regarding markets for our products and trends in net revenues, gross
margin and anticipated expense levels, and any statement that contains the words
"anticipate," "believe," "plan," "estimate," "expect," "should," "intend" and
other similar expressions, constitute forward-looking statements. These
forward-looking statements are subject to business and economic risks, including
those risks identified in "Risk Factors" and elsewhere in this prospectus and
our actual results of operations may differ significantly from those contained
in the forward-looking statements because of such risks. The cautionary
statements made in this prospectus apply to all forward-looking statements
wherever they appear in this prospectus.

USE OF PROCEEDS

We estimate that our net proceeds from the sale of the ______________
shares of common stock that we are offering will be approximately $______
million at an assumed initial public offering price of $_______ per share and
after deducting estimated offering expenses of $_____ and underwriting discounts
and commissions payable by SmartDisk. We intend to use the net proceeds
primarily for additional working capital and other general corporate purposes.
Although we may use a portion of the net proceeds to acquire technology or
businesses that are complementary to our business, we have no current plans in
this regard. Pending such uses, we plan to invest the net proceeds in
short-term, interest-bearing, investment grade securities. Another primary
purpose of the offering is to create a public market for our common stock and
facilitate our future access to public capital markets.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our common stock
or other securities and do not anticipate paying cash dividends in the
foreseeable future.

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<PAGE>

CAPITALIZATION

The following table sets forth our capitalization as of March 31, 1999:

o On an actual basis; and

o On an as adjusted basis to reflect the sale of the shares of common
stock offered hereby (assuming an initial public offering price of
$_____ per share) and the application of the net proceeds we will
receive from the offering in the manner described in "Use of Proceeds."

<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------------------
ACTUAL AS ADJUSTED
------------ ---------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents....................................... $1,807,295 $
============ ===============
Redeemable common stock: 9,950,000 shares issued and
outstanding, actual, and none issued and outstanding, as
adjusted..................................................... $9,991,918 $
============ ===============
Stockholders' (deficit) equity:
Common Stock, $0.001 par value; 60,000,000 shares authorized;
38,453,742 shares issued and 38,129,833 shares outstanding,
actual; and _______ shares issued and ___________ shares
outstanding, as adjusted..................................... $ 38,453
Capital in excess of par value............................... 17,213,556
Treasury stock.................................................. (58,304)
Accumulated other comprehensive income.......................... 455,501
Notes receivable from officers/employees........................ (417,334)
Accumulated deficit............................................. (24,332,540)
------------ ---------------
Total stockholders' deficit.................................. (7,100,668)
------------ ---------------
Total capitalization......................................... $2,891,250 $
============ ===============
</TABLE>

The table does not reflect the issuance of 1,600,000 shares of common
stock in July 1999.

The outstanding share information excludes the following:

o 1,561,500 shares of common stock issuable on exercise of
outstanding options as of March 31, 1999 with a weighted
average exercise price of $0.96 per share;

o 2,373,227 shares of common stock reserved for grant and
issuance under our stock option plans as of March 31, 1999;
and

o 323,909 shares of common stock held in treasury as of March
31, 1999.

This table should be read together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements and the Notes thereto included elsewhere in this prospectus. See "Use
of Proceeds" and "Management--Employee Benefit Plans."

16
<PAGE>

DILUTION

Our net tangible book value as of March 31, 1999 was approximately $2.5
million, or approximately $0.05 per share. Net tangible book value per share
represents the amount of our total tangible assets less total liabilities,
divided by the total number of shares of our common stock outstanding. Net
tangible book value excludes the $3.2 million of proceeds we realized upon the
sale of our common stock in July 1999, net of expenses.

Net tangible book value dilution per share to new investors represents
the difference between the amount per share paid by purchasers of shares of
common stock in this offering and the net tangible book value per share of
common stock immediately after completion of this offering. After giving effect
to our sale of _______ shares of common stock in this offering at an assumed
initial offering price of $_____ per share and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses and the
application of the estimated net proceeds therefrom, our net tangible book value
as of March 31, 1999 would have been $____ million or $____ per share. This
represents an immediate increase in net tangible book value of $____ per share
to existing stockholders and an immediate dilution of $____ per share to
purchasers of common stock in the offering, as illustrated in the following
table:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........................ $
Net tangible book value per share as of March 31, 1999.............. $
Increase in net tangible book value per share attributable to new
investors.........................................................
-------------
Net tangible book value per share after the offering...................
---------------
Dilution per share to new investors.................................... $
===============
</TABLE>

The following table summarizes, as of March 31, 1999, the differences
between existing stockholders and the new investors with respect to the number
of shares of common stock purchased from SmartDisk, the total consideration paid
and the average price per share paid, before deducting the underwriting
discounts and commissions and estimated offering expenses payable by SmartDisk.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------ -----------------------
NUMBER PERCENT AMOUNT PERCENT
------------ ------- ----------- -------
<S> <C> <C> <C> <C>
Existing stockholders.................................. % $ %
New stockholders.......................................
------------ ------- ----------- -------
Totals.............................................. 100% 100%
============ ======= =========== =======
</TABLE>

The foregoing discussion and tables assume no exercise of any stock
options outstanding as of March 31, 1999. As of March 31, 1999, there were
options outstanding to purchase a total of 1,561,500 shares of common stock with
a weighted average exercise price of $0.96 per share. To the extent that options
with exercise prices below the price per share of this offering are exercised,
there will be an additional $____ dilution to new investors. See "Risk
Factors--Our current stockholders will benefit from this offering, and you will
experience immediate dilution," "Management--Employee Benefit Plans,"
"Description of Capital Stock," and Note 8 of Notes to Financial Statements.

17
<PAGE>

SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The selected financial data of SmartDisk as of and for each of the
three years in the period ended December 31, 1998, have been derived from
SmartDisk's audited consolidated financial statements as included herein. The
selected financial data of SmartDisk as of and for each of the two years in the
period ended December 31, 1995, have been derived from unaudited consolidated
financial statements not included herein. The selected financial data of
SmartDisk as of and for the three months ended March 31, 1998 and 1999, have
been derived from unaudited consolidated financial statements included elsewhere
in this prospectus and contain all adjustments, consisting only of normal
recurring accruals, which SmartDisk believes are necessary for a fair statement
of SmartDisk's financial position and results of operations for such periods.
The financial information for the three months ended March 31, 1999 may not be
indicative of the results that may be expected for the entire fiscal year ending
December 31, 1999. The following selected financial data should be read in
conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and Notes beginning on page F-1 of this prospectus.

THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------- ------------------------
1994 1995 1996 1997 1998 1998 1999
----------- ----------- --------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales................ $102 $316 $500 $893 $15,038 $421 $5,430
Royalties.................... -- -- -- -- 285 111 77
----------- ----------- --------- --------- --------- ----------- ---------
Total revenues................. 102 316 500 893 15,323 532 5,507

Shares used in computing net
loss per share (2)(3)..... 29,400 29,400 30,496 31,262 38,351 31,306 45,938
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1994 1995 1996 1997 1998 1999
---------- ------------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.... $76 $51 $8 $330 $2,920 $1,807
Working capital.............. (1,468) (3,652) (2,191) (4,753) 2,869 1,069
Total assets................. 1,054 437 250 1,607 10,836 12,113
Long-term debt (including
current portion).......... -- -- 93 645 643 631
Total stockholders' deficit.. 1,400 3,580 2,017 4,626 6,561 7,101
<FN>
- ---------------------
(1) Basic and diluted net loss per share are the same for all periods
presented.

(2) Redeemable common stock shares are included in shares used in computing net
loss per share for all 1998 and 1999 periods.

18
<PAGE>

MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ TOGETHER WITH OUR FINANCIAL STATEMENTS AND THE NOTES
TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION
CONTAINS FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO BUSINESS RISKS AND
UNCERTAINTIES, AND OUR ACTUAL RESULTS OF OPERATIONS MAY DIFFER MATERIALLY FROM
THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS. FOR A MORE DETAILED
DISCUSSION OF THESE BUSINESS RISKS AND UNCERTAINTIES, PLEASE SEE "RISK FACTORS."

COMPANY BACKGROUND

SmartDisk Corporation was incorporated in March 1997 and commenced
operations in January 1998. From May 1993 until May 1998, we conducted
operations primarily through our predecessor, SmartDisk Security Corporation, or
SDSC. SDSC became a wholly owned subsidiary of SmartDisk in May 1998 and was
merged into SmartDisk in June 1998. Moreover, during 1996 and 1997, Fischer
International Systems Corporation, a company controlled by our principal
stockholder and Chairman of the Board, conducted all of SDSC's operations and
development activities pursuant to an operating agreement. Most of our 1996
expenses related to our acquisition and development activities with respect to a
product that was eventually abandoned in late 1996. Moreover, in 1997, we were
primarily a development stage company with limited revenues. We did not begin to
recognize significant revenues from our Smarty and FlashPath products until
mid-1998. Because of these significant fluctuations in our product mix and the
development stage nature of our operations prior to mid-1998, we do not believe
that period-to-period comparisons of our historical results are meaningful or
predictive of future performance. For additional information, see "Certain
Transactions" and note 1 of the notes to our financial statements.

OVERVIEW

We are currently developing, with Sony and SanDisk, additional
FlashPath products to support their flash memory cards - the Memory Stick and
the MultiMediaCard. These flash memory cards are expected to have applications
in "smart" cellular phones, digital cameras and camcorders, digital audio
players and video game devices. In addition to our product development efforts
with Sony and SanDisk, we also have strategic relationships with a number of key
industry players, including Hitachi, NEC and Toshiba. Our strategic partners
actively participate in the development of our product pipeline, provide us with
access to leading-edge manufacturing capabilities, and market and distribute our
products globally.

RESULTS OF OPERATIONS

GENERAL

Today, substantially all of our revenues are derived from the sale of
our FlashPath product that works with SmartMedia flash memory cards. Moreover,
most of our revenues are derived from sales to relatively few OEM customers.
FujiFilm and Olympus collectively accounted for approximately 70% of our 1998
revenues and our top five customers accounted for approximately 86% of our
revenues. Our OEM customers generally package, market and distribute our
products on a stand-alone basis, with approximately 25% of our sales being
derived from the sale of bundled products. Although we work closely with the
OEMs to forecast sales, we do not have purchase contracts

19
<PAGE>

with any of our customers that obligate them to continue to purchase our
products, and they could cease purchasing products from us at any time. Our
operating results also fluctuate based on the timing and amount of orders we
receive from our customers, which are dependent on the ability of OEMs to
achieve consumer acceptance of our products and this acceptance rate may in turn
be tied to seasonal demand for the consumer electronic products manufactured and
sold by these OEMs. Because fluctuations in orders from our major customers
could cause our net revenues to fluctuate significantly in any given quarter or
annual period, we do not believe that period-to-period comparisons of our
financial results are necessarily meaningful and should not be relied upon as an
indication of future performance. In addition, historically the average selling
prices of our products have declined and we expect that our OEM customers may
seek price concessions, which would reduce our average selling prices and our
gross margins in the future.

Our net losses have resulted from our significant investment in our
research and development and in building sales and marketing and general and
administrative infrastructure. These expenses have exceeded our gross profits.
We expect to continue to invest significantly in research and development
related to new and refined FlashPath products, as well as marketing and sales
activities to support such products, in each case in advance of realizing
revenues associated with such expenses. No assurance can be given that the
introduction or market acceptance of new products will be successful.

We purchase our products from contract manufacturers located in Asia.
As a result, a substantial portion of our costs and expenses are denominated in
currencies other than the U.S. dollar. In addition, approximately 90% of our
1998 revenues were derived from customers located outside the United States. See
note 11 of the notes to our financial statements for additional information with
respect to our foreign operations.

Our backlog at March 31, 1999 was approximately $6.0 million compared
to approximately $3.0 million at March 31, 1998. However, a substantial portion
of our backlog is typically scheduled for delivery within 60 days. Moreover,
variations in the size and delivery schedules of purchase orders received by us,
as well as changes in customers' delivery requirements, may result in
substantial fluctuations in backlog from period to period. Accordingly, we
believe that backlog cannot be considered a meaningful indicator of future
financial results.

THREE MONTHS ENDED MARCH 31, 1999 AND 1998

REVENUES. Our revenues from the sale of our FlashPath and Smarty
products are recognized at the time of shipment to customers. Our royalty
revenue consists of royalties earned on the sales of our first product,
SafeBoot, which is licensed to and sold by Fischer International, an affiliate.
Our total revenues were approximately $5.5 million in the first quarter of 1999,
compared to approximately $532,000 in the first quarter of 1998. This increase
was primarily attributable to our commercial introduction of FlashPath in
mid-1998, partially offset by an approximately $100,000 decrease in our Smarty
sales. As a result of the growth of our FlashPath revenues and the decrease in
Smarty sales, Smarty revenues represented less than 6.0% of total revenues in
the first quarter of 1999.

COST OF REVENUES. Cost of revenues increased to approximately $4.6
million in the first quarter of 1999 from $441,000 in the first quarter of 1998,
primarily due to the increase in FlashPath sales.

GROSS PROFIT. Our gross profit increased to approximately $860,000 in
the first quarter of 1999 from $91,000 in the comparable 1998 period, resulting
from FlashPath revenue growth.

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 $925,000 in the
first quarter of 1999 from $302,000 in the first quarter of 1998. This increase
was primarily due to our hiring of additional technical personnel and the
outsourcing of certain functions to support our development of enhanced versions
of our existing FlashPath and Smarty products, as well as our development of a
new FlashPath product designed to work with the Sony Memory Stick. We expect
that our research and development expenses will continue to increase to support
the development of new FlashPath and other products.

SALES AND MARKETING EXPENSES. Sales and marketing expenses include
salaries, benefits and travel expenses for our marketing and product management
personnel in the United States and Japan. These expenses also include other
selling and marketing expenses, such as trade show expenses, marketing programs
and promotional

20
<PAGE>

expenses. Sales and marketing expenses increased to approximately $726,000 in
the first quarter of 1999 from $253,000 in the comparable 1998 period. This
increase was due primarily to an increase in our sales and marketing personnel
and related expenses at our headquarters office in Florida and to staff our
Tokyo, Japan office which we established in April 1998. We expect sales and
marketing expenses to increase as we increase promotional efforts for our
product brands and as sales of our products grow and we develop additional
distribution channels for our products.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses include the salaries and related expenses of our executive management,
finance, information systems, 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
$1.0 million in the first quarter of 1999 from $743,000 in the first quarter of
1998 as we hired new executives and established the corporate infrastructure
needed to support future growth.

GAIN (LOSS) ON TRANSLATION. Most of our revenues, as well as related
expenses, are denominated in Japanese yen. Gain (loss) on translation generally
reflects the translation of inter-company transactions that are denominated in
different currencies. We had a gain on translation of approximately $63,000 in
the first quarter of 1999 compared to a slight loss in the first quarter of
1998. See note 2 of the notes to our financial statements for additional
information.

PROVISION FOR INCOME TAXES. We are subject to tax in Japan and a number
of other jurisdictions where we do business, including the United States and
United Kingdom. These jurisdictions have different marginal tax rates. We
incurred a loss during the quarters ended March 31, 1998 and 1999 and therefore
did not incur income tax obligations in either period. Income tax benefits of
approximately $19,000 were realized in each period due to amortization of
intangible assets. As of March 31, 1999 we had a net operating loss carry
forward of $532,000 for Japanese income tax purposes and approximately $6.1
million for U. S. Federal income tax purposes. However, we have provided a
valuation allowance to reduce the related deferred tax asset to zero. See note
10 of the notes to our financial statements for additional information.

YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

REVENUES. Our revenues increased to approximately $15.0 million in 1998
from $893,000 in 1997 and $500,000 in 1996. The increase from 1997 to 1998 was
primarily due to an approximately $13.4 million increase in sales of our
FlashPath product and a $1.0 million increase in sales of Smarty. Substantial
shipments of these products did not occur until the first quarter of 1998 for
Smarty and the second quarter of 1998 for FlashPath. The only product shipped
all three years was SafeBoot. During 1996 approximately $277,000 of our
Crypto-SmartDisk product was shipped. This product was specifically developed
and produced for the United States General Services Administration and was
expected to be a high volume product, but significant orders never developed and
the product was abandoned in late 1996. Because of these significant
fluctuations in our product mix and the development stage nature of our
operations prior to mid-1998, we do not believe that period-to-period
comparisons of our historical results are meaningful or predictive of future
performance.

GROSS PROFIT. Gross profit increased to approximately $2.7 million in
1998 from $592,000 in 1997 and $134,000 in 1996. The increase in gross profit
was primarily due to increasing revenues and especially to the market
introduction of the Smarty product in late 1997 and the FlashPath product in
mid-1998.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $1.6 million in 1998 from $1.4 million in 1997 and $720,000 in
1996. The increases were primarily attributable to the hiring of additional
technical personnel to support the development of our FlashPath and Smarty
products.

SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
$2.5 million in 1998 from $12,000 in 1997 and $6,000 in 1996. These increases
were due primarily to the hiring of sales, marketing and product management
personnel to support our FlashPath and Smarty products, particularly the opening
of our Tokyo, Japan office in April 1998.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased to approximately $4.0 million in 1998 from $3.2 million in
1997 and $3.4 million in 1996. The increase from 1997 to 1998 was

21
<PAGE>

primarily attributable to our hiring of additional executives to support our
growth, as well as the April 1998 opening of our Tokyo office. The decrease from
1996 to 1997 was primarily attributable to the abandonment of our
Crypto-SmartDisk business.

IMPAIRMENT LOSS. As discussed in more detail in note 5 of the notes to
our financial statements, in 1996 we incurred an approximately $7.8 million
impairment loss. The loss related to the acquisition by one of our affiliates of
a business that was primarily based on the future potential of one product,
Crypto-SmartDisk. This product was specifically being developed and produced for
the United States General Services Administration and was expected to be a high
volume product. However, significant orders never developed and the product was
eventually abandoned in late 1996.

QUARTERLY RESULTS

The following table sets forth unaudited quarterly operating data for
each of the five quarters ended March 31, 1999. In the opinion of management,
these data have been prepared substantially on the same basis as the audited
financial statements appearing elsewhere in this prospectus, and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of such data. However, our operating results have fluctuated
significantly in the past and we expect that they will continue to fluctuate in
the future. Future fluctuations may be a result of a variety of factors,
including the timing and amount of orders we receive from our customers,
reductions in average selling prices, the timing and level of our research and
development expenditures, and the availability of manufacturing capacity
necessary to make our products. Accordingly, we believe that period-to-period
comparisons of our historical results are neither meaningful nor predictive of
our future performance. The quarterly data should be read together with the
financial statements and the notes to those statements appearing elsewhere in
this prospectus.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1998 1998 1998 1998 1999
------------- -------------- ---------------- ------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues.................... $ 532 $ 3,408 $ 4,921 $ 6,462 $ 5,507
Gross profit................ 91 511 1,638 482 860
Gross profit margin......... 17% 15% 33% 7% 16%
Total operating expenses.... 1,297 2,206 2,135 2,565 2,666
Operating loss.............. 1,206 1,695 497 2,082 1,806
Net loss.................... $ 1,189 $ 1,705 $ 488 $ 2,046 $ 1,707
</TABLE>

Our revenues fluctuated on a quarter-to-quarter basis during the
periods presented primarily because we were in the early stages of our
development. Substantial shipments of our FlashPath product did not commence
until the second quarter of 1998, and our operating expenses in that quarter
increased significantly primarily as a result of our hiring additional personnel
to support our growth. We increased the price of our FlashPath product during
the third quarter of 1998, which resulted in significantly higher gross profit
and gross profit margin for that quarter. The improvement in gross profit and
gross profit margin resulted in significantly improved operating and net losses
for the third quarter. We reduced the price of our FlashPath product in the
fourth quarter of 1998 in an effort to gain market share. Even though our
revenues increased in that quarter because of increased unit sales of our
product, our gross profit and gross profit margins were reduced because of lower
selling prices and increases in the cost of revenues associated with the
increased product sales. The reductions in gross profit and gross profit margin
were further exacerbated by the write down of certain inventory and the write
off of certain production equipment relating to FlashPath I.

As a result of our extremely limited operating history, we do not have
historical financial data for a significant number of periods on which to base
planned operating expenses. Our expense levels are based in part upon our
expectations concerning future revenue and, to a certain extent, are fixed.
Quarterly revenues and operating results depend substantially upon the timing
and amount of orders we receive from our relatively small number of customers,
which may be tied to seasonal demand for the consumer electronic products
manufactured and sold by these OEMs. Accordingly, the cancellation or delay of
customer orders, or the loss of a significant customer, could have a material
adverse effect on our business. We may be unable to adjust spending for our

22
<PAGE>

research and development or other activities in a timely manner to compensate
for any unexpected revenue shortfall, and any significant shortfall in revenue
in relation to our expectations would have an immediate adverse effect on our
business, results of operations and financial condition.

Due to the foregoing factors, quarterly revenues and results of
operations are difficult to forecast, and we believe that period-to-period
comparisons of our operating results is neither meaningful nor predictive of
future performance. In one or more future quarters our results of operations may
fall below the expectations of securities analysts and investors. In such event,
the trading price of our common stock would likely be materially adversely
affected.

LIQUIDITY AND CAPITAL RESOURCES

In 1996 and 1997, we financed our operations principally through loans
payable to related parties. During 1998 and 1999, we financed our operations and
repaid loans outstanding through short-term borrowings and the sale of equity
securities in private placements with several strategic investors including
Hitachi, NEC, Rohm, Toshiba and Yamaichi. At March 31, 1999, we had working
capital of approximately $1.1 million and approximately $1.8 million of cash and
cash equivalents.

To date, we have experienced negative cash flows from operating
activities. Net cash used in operating activities was approximately $6.0 million
in 1998 and $1.5 million in the first quarter of 1999. Cash used in operating
activities in 1998 was primarily attributable to a net loss of $5.4 million, a
$3.7 million increase in accounts receivables and a $1.4 million increase in
inventories, partially offset by a $3.5 million increase in accounts payable.
Cash used in operating activities for the first three months of 1999 primarily
resulted from a $1.7 million net loss and a $2.2 million increase in accounts
receivable, partially offset by a $1.3 million decrease in inventories.

Net cash used in investing activities of $2.1 million in 1998 was
attributable to approximately $1.0 million of capital expenditures (primarily
production equipment for the manufacture of our products) and our approximately
$1.1 million time deposit that collateralizes our credit facility. Net cash used
in investing activities in the first quarter of 1999 was $1.5 million, all of
which was attributable to our purchases of property and equipment (primarily
production equipment for an enhanced version of our FlashPath for SmartMedia
product). Although we have no commitments, we expect that we will continue to
make significant capital expenditures to acquire the production equipment for
the products we are currently developing, particularly the FlashPaths that will
support the Sony Memory Stick and the SanDisk MultiMediaCard.

Net cash provided by financing activities totalled approximately $10.4
million in 1998 and consisted primarily of proceeds from our issuance of common
stock and short-term borrowings under our credit facility, partially offset by
the repayment of certain loans to affiliates. Net cash provided by financing
activities was $1.8 million in the first quarter of 1999 and consisted primarily
of proceeds from our issuance of common stock and short-term borrowings. We have
an approximately $2.6 million credit facility with a Japanese bank that permits
borrowings based upon our time deposits and the accounts receivable of specified
customers. Borrowings under the facility bear interest at 1.375% per year and
mature December 1999.

We believe that the net proceeds of this offering, along with cash on
hand, will be sufficient to meet our working capital and anticipated capital
expenditure needs for at least the next 12 months. Thereafter, we may require
additional sources of funds to continue to support our business. We cannot
guarantee that such capital, if needed, will be available or will be available
on terms acceptable to us.

YEAR 2000 ISSUES

In assessing the effect of the Year 2000 Issue on SmartDisk, we
determined that we need to evaluate four general areas:

o Supplier relationships;

23
<PAGE>

o Internal infrastructure;

o Products sold to customers; and

o Other third-party relationships.

MANUFACTURER AND SUPPLIER RELATIONSHIPS. We outsource the manufacturing
of our products to a number of subcontractors. If our subcontractors are
affected by the Year 2000 Issue, our supply of products could be delayed or
eliminated. Any disruption in our supply of products from our subcontractors
would seriously harm our business, financial condition and results of
operations. We are currently seeking assurances from our subcontractors that
their manufacturing of our products will be unaffected by the Year 2000 Issue
but have not received such assurances to date.

INTERNAL INFRASTRUCTURE. The Year 2000 Issue could also affect our
internal systems, including both our information technology and non-information
technology systems. We have initiated an assessment of our material internal
information technology systems, including third-party software and hardware
technology. Based upon representations received from these third-party software
and hardware suppliers, we do not believe that our material internal information
technology systems will be affected by the Year 2000 Issue. We have also
initiated an assessment of our non-information technology internal systems, such
as our test facility. Based on our preliminary assessment, we do not believe
that our material non-information technology internal systems will be affected
by the Year 2000 Issue. However, we may experience serious unanticipated
problems and costs caused by undetected errors or defects in the technology used
in our internal information technology and non-information technology systems.

PRODUCTS SOLD TO CUSTOMERS. Our FlashPath and Smarty products do not
contain two digit date codes and therefore are generally unaffected by the Year
2000 Issue. However, once shipped, our products are used in conjunction with
products, which we do not develop. The performance of our products could be
affected if a Year 2000 Issue exists in a different component of a customer's
product. We have not, and will not, assess the existence of these potential
problems in our customers' products.

We do not currently have any information concerning the Year 2000
compliance status of our customers. Our current or future customers may incur
significant expenses to achieve Year 2000 compliance. If our customers are not
Year 2000 compliant, they may experience significant costs to remedy problems,
or they may face litigation costs. In either case, Year 2000 issues could reduce
or eliminate the budgets that current or potential customers could have for
purchases of our products and services. As a result, our business, results of
operations or financial condition could be materially adversely affected.

OTHER THIRD-PARTY RELATIONSHIPS. We rely on outside vendors for
utilities and telecommunication services as well as climate control, building
access and other infrastructure services. We are not capable of independently
evaluating the Year 2000 compliance of the systems utilized to supply these
services. We cannot assure you that these suppliers will resolve any or all Year
2000 Issues with these systems before the occurrence of a material disruption to
our business. Any failure of these third parties to resolve Year 2000 Issues
with their systems in a timely manner could have a material adverse effect on
our business, financial condition or results of operations.

We have not developed a contingency plan to address situations that may
result if we are unable to achieve Year 2000 readiness of our critical
operations, and we do not plan to do so in the future. Any investigations we
have undertaken with respect to Year 2000 Issues have been funded from available
cash, and these costs have not been separately accounted for. To date, these
costs have not been significant.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement
Number 133, Accounting for Derivative Instruments and Hedging Activities. We
expect to adopt the new statement effective January 1, 2001. The statement will
require us to recognize all derivatives on our balance sheet at fair value. We
do not anticipate that the adoption of the statement will have a significant
effect on our results of operations or financial position.

24
<PAGE>

BUSINESS

OVERVIEW

We are currently developing, with Sony and SanDisk, additional
FlashPath products to support their flash memory cards - the Memory Stick and
the MultiMediaCard. These flash memory cards are expected to have applications
in "smart" cellular phones, digital cameras and camcorders, digital audio
players and video game devices. In addition to our product development efforts
with Sony and SanDisk, we also have strategic relationships with a number of key
industry players, including Hitachi, NEC and Toshiba. Our strategic partners
actively participate in the development of our product pipeline, provide us with
access to leading-edge manufacturing capabilities, and market and distribute our
products globally.

INDUSTRY OVERVIEW

Consumer lifestyles are being transformed by the increasing use of
digital information in the home and workplace. Individuals increasingly rely
upon PCs, computer networks and the Internet to access digital information for
entertainment and productivity purposes. The proliferation of PCs in both the
home and office, as well as the explosive growth of Internet use, has led to
widespread consumer familiarity with the storage, manipulation, transfer and
management of digital data.

In recent years, digital computing and processing have expanded beyond
the boundaries of desktop computer systems to include a broader array of
sophisticated, consumer electronic products. These new digital appliances
include digital cameras, personal digital assistants such as the PalmPilot,
highly portable computers, digital audio recorders and "smart" cellular
telephones. The market for these advanced electronic products is growing rapidly
as a result of consumers' increased familiarity with these products and
increased dependence on expanding digital applications. According to
International Data Corporation, or IDC, 18 million digital appliances were
shipped worldwide in 1998. IDC expects this number to increase to more than 75
million by 2002.

The convergence of advanced consumer electronic products, PCs and the
Internet offers consumers the opportunity to personalize and exchange digital
data generated from a wide range of sources. This convergence has precipitated
greater demand for connectivity. While significant resources have focused on
increasing the speed and capacity of the connection between PCs and the
Internet, the connection between digital appliances and PCs has yet to achieve
the compatibility, simplicity and convenience sought by consumers.

One of the principal barriers to connectivity is the variety of
non-standardized flash memory cards available in the market today. Flash memory
cards are the miniature devices used by many of the emerging consumer electronic
products to store digital data. There are currently four major removable flash
memory cards, none of which has emerged as an industry standard and none of
which is compatible or operable with any of the others:

o the Toshiba SmartMedia card;

o the SanDisk CompactFlash card;

o the SanDisk/Siemens MultiMediaCard; and

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o the Sony Memory Stick.

A second major barrier is the current lack of convenient connection
methods. While many consumers have increased their use of digital appliances,
there is still a large group of potential users that has not ventured beyond
desktop PCs because they are intimidated by the inherent difficulty of
connecting digital appliances that have non-conforming interfaces and
difficult-to-master connections. As a result, we believe that the continued
growth of the consumer-oriented digital appliance market will depend in large
part upon the ability of users to conveniently transfer stored digital data
which is captured by digital appliances. For example, the rapid growth of the
digital camera market was based, to a large degree, upon consumers' desire to
both transfer images to family members and others through the Internet and
manipulate the captured images with their PCs. The popularity of the PalmPilot
was also largely fueled by the ability of consumers to easily connect and
transfer data to and from their PCs. Accordingly, one of the principal
challenges faced by manufacturers of consumer digital appliances is the
interface between their appliances and PCs or other digital appliances.

There are currently a number of interfaces used to transfer data from
digital appliances to personal computers:

o cable interfaces such as serial ports, the Universal Serial
Bus, or USB, and parallel ports; and

o non-cable interfaces such as infrared interfaces and PCMCIA
and floppy disk drive slots.

We believe that most interfaces have disadvantages that make them
impractical for use with consumer-oriented digital appliances. Consumers
typically do not like to use cable connections, such as serial ports, USBs and
parallel ports. Such interfaces require the use of limited PC ports, which are
frequently dedicated to connecting the PC to devices such as printers, modems,
PalmPilots and other peripherals. In addition, the need to connect a cable to
the back of the PC is inconvenient and often resisted. Other disadvantages of
cable interfaces include desktop clutter and the fact that the newer interfaces
such as USB are not present on most installed PCs. Certain of the non-cable
interfaces also have inherent limitations. For example, while virtually all
portable PCs being sold today contain a PCMCIA slot or infrared interface as a
standardized feature, neither the PCMCIA standard nor the infrared interface has
generally been adopted for desktop computers. In addition, infrared interfaces
have achieved limited market acceptance, primarily because of current
reliability concerns.

THE SMARTDISK SOLUTION

We design, develop, manufacture and distribute easy-to-use, portable
and low cost devices that facilitate data exchange between digital appliances,
PCs and the Internet. Our patented products connect through the most
widely-accepted and user-friendly PC interface, the 3.5 inch floppy disk drive,
allowing the OEMs that market their and our consumer products to reach a large
installed base of potential users.

Our current and planned FlashPath and Smarty products are designed to
offer the following principal benefits:

EASE OF USE. Our products are easy to use and install. FlashPath
transfers digital data to the PC without cables or hardware installation and
without using limited desktop space or personal computer ports. A consumer using
a digital camera removes the flash memory card that serves as the camera's
digital film, places that flash memory card into our FlashPath product, and then
inserts the FlashPath into the PC's 3.5 inch floppy disk drive. FlashPath easily
transfers to the PC the images that are captured by the digital camera and
stored on the flash memory card. The consumer can then use the PC to edit and
print the image, add sound or text, transmit the image over the Internet or
incorporate the image in advertisements, newsletters, reports or other documents
produced using the PC.

PRODUCTS COMPATIBLE WITH MULTIPLE MEDIA. We believe that our
established ability to design products that support competing flash memory cards
is critical because of the lack of flash memory industry standards. Our initial
FlashPath product was designed to transfer digital photographs from the Toshiba
SmartMedia card to the PC for transmission over the Internet. Other flash memory
products under development are designed to be compatible with the Sony Memory
Stick and the SanDisk/Siemens MultiMediaCard. Our ability to design products
compatible with multiple media is enhanced by our strategic relationships with
the three leading manufacturers of flash memory

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<PAGE>

storage cards - SanDisk, Sony and Toshiba. By supporting various media, we will
be able to address the data transfer needs of purchasers of existing and
emerging digital appliances that use different flash memory cards. In addition,
our Smarty reader/writer product supports various smart card formats.

FAMILIAR FORM. Our products are shaped like a 3.5 inch floppy disk and
use the floppy disk drive slot familiar to most PC users. This widely recognized
format reduces consumer intimidation frequently created by new technologies,
facilitating the adoption of our products and various consumer-oriented digital
appliances.

VERSATILE. Our FlashPath and Smarty products can be used with a variety
of PC hardware platforms and software environments. Our driver software is
included with our products and can also be downloaded free of charge from the
Internet. The software enables our products to operate with Windows 95, Windows
98, Windows NT, NEC Windows and Macintosh operating systems. As a result, the
same FlashPath that is used by an advertising executive to transfer images from
his Olympus digital camera to his Microsoft-based office PC can be used by his
daughter to transfer images from her FujiFilm camera to her Apple computer.
Similarly, the same FlashPath that is used to transfer images may also be used
to transfer voice and other digital data from a variety of digital appliances
that use the same flash memory card. The versatility of our products will become
more important as consumers increase their reliance on flash memory cards to
store and transfer digital data where traditional memory storage devices such as
floppy disks are inadequate due to capacity or form factor constraints.

INDEPENDENT POWER SOURCE. Unlike cables, our FlashPath and Smarty
products do not rely upon a digital appliance's power source to transfer digital
data from a flash memory card to a PC. Each of our products runs on two
replaceable batteries. This is important because digital appliances, such as
digital cameras, consume significant amounts of power and require frequent
battery replacement or recharging. The use of cable interfaces quickly drains
power from digital appliances, making those competing products less attractive.

BUSINESS STRATEGY

Our objective is to establish our FlashPath products as the
industry-standard solution for the transfer of data between digital appliances
and PCs by strengthening our position as a technological and market leader. We
also intend to capitalize on the anticipated growth of smart card applications
through our Smarty product line. Key elements of our business strategy include
the following:

CAPITALIZE ON TECHNOLOGY EXPERTISE TO EXPAND OUR PRODUCT OFFERINGS. We
have developed extensive expertise, intellectual property and core competencies
in flash memory data transfer and smart card technologies. Each of our products
is based on our core leverageable technology platform. Our leverageable
technology platform allows us to quickly respond to industry developments,
providing first-to-market advantages and reducing development costs for future
products. We expect to capitalize on our technology base and patent portfolio to
design, develop and manufacture a broad range of data transfer devices that can
operate across a variety of flash memory products, hardware platforms and
software environments. In the short-term, we are developing products to transfer
digital data between PCs and different flash memory cards and are expanding our
applications to support digital audio players. In addition, we are using our
technology expertise, patents and trade secrets to develop application-specific,
non-PC-based devices that will permit flash memory cards to be used with other
existing technologies. We also will strive to capitalize on our core product
design competencies to develop products that support computer interfaces other
than the 3.5 inch floppy disk drive.

EXPAND CUSTOMER AND STRATEGIC INDUSTRY RELATIONSHIPS. We have formed
strategic relationships with a number of leading consumer product OEMs and other
key industry players, including FujiFilm, Hitachi, NEC, Olympus, SanDisk, Sony
and Toshiba. We intend to continue to develop long-term alliances with a
diversified base of OEMs and other industry participants in additional consumer
electronics segments. We believe that these relationships provide significant
operating leverage and a number of other important benefits:

o Our OEM customers advertise, promote, package, sell and
distribute our products under some of the world's most
recognized brand names. These include FujiFilm, Hitachi,
Olympus, Polaroid, Sharp and Toshiba. As a result, we have
access to extraordinary market clout without the need to
invest heavily in our own marketing infrastructure and
programs.

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o Our cooperative development alliances frequently provide
access to flash memory card manufacturers early in the design
phase of their product development process. This allows us to
anticipate these manufacturers' future technological
requirements and to develop long-term relationships across a
number of products and through multiple product generations.
In addition, these partners often assist with engineering and
design for manufacturability, which helps assure that
mechanical and electrical considerations are integrated into a
total systems approach to achieve a high quality and
cost-effective product.

MAINTAIN MEDIA NEUTRALITY. We are using our leverageable technology
architecture and core competencies to create products that enable consumers to
use most leading flash memory cards. There is a rapidly growing number of
digital appliances that use competing flash memory technologies, none of which
we currently expect to become an industry standard. We are committed to
maintaining media neutrality to enable users of various leading flash memory
technologies to transfer data quickly and easily among devices that use
different flash memory card formats.

PROMOTE BRAND AWARENESS OF OUR PRODUCTS. Most of our products are
packaged, marketed and distributed by OEMs on a stand-alone basis, with
approximately 25% of our sales being derived from the sale of bundled products.
Accordingly, it is critical that we obtain ultimate consumer acceptance of and
demand for our products independent of bundled sales. To this end, we intend to
build upon our initial success by promoting the FlashPath and Smarty brand
names. Our brands are often displayed on the packaging of the OEM products and,
as a result, we are able to benefit from the powerful advertising and promotion
of our products by the OEMs while simultaneously building our brand identity. In
addition, we intend to expand our use of advertising and other marketing
programs designed to promote our brand and enhance brand awareness. We also
intend to increase distribution channels for our products by promoting direct
sales via the Internet and through retailers.

EMPHASIZE USER-FRIENDLY PRODUCTS. We are committed to capitalizing on
our patent portfolio to enable consumers to conveniently transfer images, music,
voice and other types of digital data between consumer electronic devices, the
Internet and PCs without hardware installation, cables or the use of personal
computer ports.

TECHNOLOGY

Since our inception, we have focused our research and development
efforts on designing and developing products that facilitate the transfer of
data from digital appliances using flash memory cards and smart cards to PCs. We
have been actively involved in all aspects of this development process,
including the development of a highly leverageable, proprietary technology
architecture that supports all of our FlashPath and Smarty products. We believe
that our core technological competencies encompass research, product design and
product development.

SmartDisk products are compatible with a broad range of hardware
platforms and software environments. Our leverageable floppy disk drive
interface architecture has also allowed us to develop products that support
different flash memory and smart cards. In addition, we believe that this
leverageable architecture improves reliability, decreases time to market and
lowers new product development costs. For example, the development of our
FlashPath product for SmartMedia flash memory cards took approximately 18 months
from determining product feasibility to commencing commercial production, and we
expect the time for the development of our products for the MultiMediaCard and
Sony Memory Stick will be shortened to less than 12 months. We believe that we
will take advantage of similar opportunities to leverage our core technological
competencies as we continue our efforts to develop products to conveniently
transfer digital data from competing flash memory cards to existing, non-PC
technologies and, in the future, products that support computer interfaces other
than the 3.5 inch floppy disk drive.

During the remainder of 1999 and 2000, we expect that our development
efforts will be primarily focused on the following initiatives:

o expanding our FlashPath product line to support the Sony
Memory Stick and the MultiMediaCard;

o further reducing our production costs;

o enhancing product performance; and

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o developing new, application-specific products that will allow
flash memory cards to be used with existing non-PC
technologies.

We believe that our patents provide substantial proprietary protection
relating to the transfer of digital data through floppy disk emulation.
Accordingly, a key element of our intellectual property strategy is to enter
into strategic alliances without licensing our technology to OEMs. Our strategic
alliances with Hitachi, NEC, Sony and Toshiba began with their initial inquiries
to license our FlashPath technology. Those preliminary overtures developed into
more extensive dialogues and the exchange of information that permitted us to
better demonstrate our technology platform, proprietary rights and research,
design and development expertise. We believe that the broad scope of our
strategic alliances with these leading industry participants demonstrates the
appeal and strength of our proprietary technology. Many of these alliances have
led to equity investments and cooperative development arrangements.

The technology comprised in our product offerings consists of five key
components:

o FLASH MEMORY READ/WRITE SYSTEM. This proprietary system uses
the central processing logic to write and read data to and
from the flash memory card in the product. These tasks are
performed under the control of the processor and by the use of
a direct memory access controller and a buffer to store the
contents while the read/write operations are taking place.

o DIGITAL ASIC. Our proprietary digital ASIC prepares the
digital data read from the flash memory, encodes it and sends
it to the analog ASIC. The digital ASIC also decodes data from
the analog ASIC for use with the flash memory read/write
system.

o ANALOG ASIC. Our proprietary analog ASIC converts the digital
data to analog signals for reading from the flash memory card.

o CENTRAL PROCESSING UNIT. This unit consists of an industry
standard microprocessor, memory and other processing logic to
control the functions of the digital and analog ASICs and the
flash read/write system.

o DRIVER SOFTWARE. Our proprietary driver software enables our
products to operate with a variety of commonly installed
personal computer operating systems such as Microsoft Windows.

MARKETING, CUSTOMERS AND STRATEGIC RELATIONSHIPS

SALES AND MARKETING. We market and sell our current FlashPath product
primarily to OEMs, including Agfa, FujiFilm, Olympus, Polaroid, Ricoh, Sanyo,
Sharp and Toshiba. These OEMs compete in some of the fastest growing segments of
the electronics industry, including digital cameras, digital audio players,
digital camcorders and personal digital assistants.

OEMs generally provide or sell our products on a stand-alone basis,
with approximately 25% of our sales being derived from the sale of bundled
products. Often, both the OEM's brand name and our FlashPath or Smarty tradename
appear on the product packaging. As a result, we benefit from the powerful
advertising and promotion of our products by the OEMs without having to incur
significant additional marketing expenses. For example, our products have been
featured in OEM advertisements in major publications, including THE WALL STREET
JOURNAL, TIME MAGAZINE and USA TODAY.

The packaging of our FlashPath product with FujiFilm's and Olympus'
digital cameras illustrates the synergistic relationships we have with some of
our customers. Their marketing campaigns emphasize the convenience of using the
FlashPath product to transfer digital photographs to the PC. We believe that our
FlashPath adapter is one of the key reasons that many of the top selling digital
cameras in the world use Toshiba's SmartMedia card. We shipped approximately
700,000 FlashPath units during the 12-month period ended June 30, 1999 largely
as a result of our customers' extensive market penetration.

We support the marketing activities of our customers with a dedicated
product manager for each of our product lines. In addition, we support their
sales efforts through sales training courses, public relations activities,

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trade shows and industry education programs. We also employ marketing
communications personnel to develop packaging, brochures and other collateral
materials.

We market and sell our Smarty product to financial institutions and
other service providers who promote Smarty to their customers as part of their
smart card-based programs. Our Smarty customers include ABN Amro Bank (The
Netherlands), Bally Gaming, Bank of America, la Caixa Bank (Spain) and Visa.

As of June 30, 1999, we had nine full-time employees engaged in sales
and marketing activities. We also use the services of Japan-based dealers to
serve as our agents in connection with sales to OEMs based in that country. Such
intermediaries generally mark up the selling price to the OEM purchaser by
approximately 3%. Our customers generally place orders for our products on an
as-needed basis, with no long-term commitments.

STRATEGIC RELATIONSHIPS. An important element of our business strategy
is to develop strategic relationships with industry players that can assist us
in the development of new products, provide us with access to leading-edge
manufacturing capabilities and market and distribute our products globally. This
approach allows us to concentrate our resources on our core competencies of
product design and development, reduces our capital requirements and generally
provides a high degree of operating leverage. In addition, our close
relationships with flash memory card manufacturers and consumer product OEMs
frequently provide insight into the current and future needs of these companies,
enabling us to design specific products to meet these needs. OEMs frequently
distribute our FlashPath product in connection with the distribution of their
consumer electronic products. As a result, we believe that these strategic
relationships allow us to take advantage of OEMs' direct sales organization,
distributors and manufacturers' representatives. We evaluate potential
collaborative arrangements on an ongoing basis and intend to continue to pursue
additional strategic relationships.

Set forth below are brief descriptions of certain of our strategic
relationships:

TOSHIBA. Toshiba Corporation, a leading electronics company,
played a critical role in our early development stage. Toshiba made an
equity investment of approximately $10.0 million in SmartDisk and
introduced us to most of the key technical personnel that now
constitute our Tokyo-based applied engineering and production
engineering team. Toshiba also assisted us in the development and
engineering of FlashPath, helped guide our selection of manufacturing
techniques, aided our introduction into mass production and introduced
our management to other potential strategic partners. Toshiba continues
to provide cooperative support in several areas. For example, four of
their engineers continue to reside in and provide full-time support to
our Tokyo office on a contract basis. In addition, we expect to receive
technical engineering and manufacturing assistance that will aid our
product development activities on an ongoing basis.

SONY. Under our co-development agreement with Sony, we are
developing a FlashPath product for use with the Sony Memory Stick. We
expect that we will manufacture, and that Sony will distribute, the
co-developed product.

SANDISK. We also have a co-development agreement with SanDisk,
a leading developer and marketer of flash memory storage products,
including CompactFlash and the MultiMediaCard. Under this arrangement,
we are jointly developing with SanDisk a floppy disk adapter that will
use our FlashPath technology to support the SanDisk MultiMediaCard.

VISA. We have an arrangement with VISA International, a
leading issuer of credit cards, to test our Smarty product. Under the
pilot program, Smarty is used in conjunction with the Visa Platinum
card to permit controlled access to the Visa website, allowing card
holders to access account information and other ancillary services.
Since inception of the program, Visa has purchased and distributed
approximately 15,000 Smarty units.

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The following table illustrates the nature of our strategic
relationships:

<TABLE>
<CAPTION>
TYPE OF STRATEGIC RELATIONSHIP
----------------------------------------------------------------------------------------------
COOPERATIVE TECHNOLOGY
STRATEGIC PARTNER INVESTOR DEVELOPMENT LICENSOR SUPPLIER MANUFACTURER CUSTOMER
- ----------------------- ------------ --------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Hitachi X X X X

Mitsumi X X

NEC X X X

Rohm X X X

SanDisk X X X X

Sony X X

Toshiba X X X X

Yamaichi X X X
</TABLE>

PRODUCTS

Each of our products is based upon our core, patented technology and is
designed to easily transfer digital data between PCs, the Internet and various
types of digital appliances.

FLASHPATH. FlashPath is a solid state electronic device in the shape of
a 3.5 inch floppy diskette. It works in any standard 3.5 inch floppy drive - the
type found in most PCs today. The current principal use of our FlashPath product
is to transfer images from digital cameras to PCs. Digital cameras use flash
memory cards as film. After the flash memory card captures and stores images,
the flash memory card is removed from the camera and is placed into FlashPath.
FlashPath is then inserted into the PC's floppy disk drive and the images are
transferred to the PC to edit, to add text, graphics or sound, or to mail over
the Internet. Because FlashPath transfers images from the camera to the PC
without using cables or PC ports and without any hardware installation, the
consumer has a device that is familiar, easy to use, not intimidating and
transportable among multiple PCs. FlashPath uses our proprietary driver software
provided with our products and available free of charge from the Internet. Our
driver software enables our products to operate with Windows 95, Windows 98,
Windows NT, NEC Windows and Macintosh operating systems.

Our current FlashPath product transfers images from digital cameras
using the SmartMedia flash memory card manufactured by Toshiba and Samsung. A
number of manufacturers use the SmartMedia card in their digital cameras,
including Agfa, FujiFilm, Olympus, Polaroid, Ricoh, Sanyo, Sharp and Toshiba.
During the 12-month period ended June 30, 1999, we sold over 700,000 FlashPath
adapters for SmartMedia cards.

We are also developing two other FlashPath products that use different
flash memory media. One is designed to work with the Sony Memory Stick, which
initially will have applications in digital cameras, and the other is designed
to work with the SanDisk MultiMediaCard, which initially will be used in
conjunction with "smart" cellular telephones being developed by Nokia and
camcorders by JVC. In addition, we expect that these new FlashPath adapters will
support other applications, including digital audio players. We expect to
commercially introduce FlashPath for the Sony Memory Stick in the fourth quarter
of 1999 and FlashPath for the SanDisk MultiMediaCard in the first quarter of
2000. These new products are expected to enable us to reach new markets and new
customers. In addition, we are developing a new consumer-oriented product that
is designed to allow flash memory cards to be used with an existing, non-PC
technology.

SMARTY. Our Smarty products enable smart cards to be read and written
through a PC's floppy disk drive, thereby eliminating the need for special
purpose smart card reader peripherals. Like our FlashPath products, the Smarty
smart card reader/writer is a solid state electronic device the size of a 3.5
inch floppy disk, is powered by two replaceable batteries and requires no
external power source or wire connections. Smart cards are inserted into our
Smarty product, which accesses information on the smart card from the card's
embedded microprocessing chip.

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A user simply places the smart card into Smarty, inserts Smarty into the 3.5
inch floppy disk drive and connects with the smart card application. Smarty
reads and writes to any standard smart card without cable connections, without
any hardware installation and without consuming PC ports.

Smart cards are typically used to store information such as medical
information, digital money and security codes. Accordingly, smart cards can
serve as personal identification, a credit card, a mass transit pass and as a
cash substitute for purchases at stores or over the Internet.

Today, Smarty is primarily being used in pilot programs. The major
users of Smarty are ABN Amro Bank (The Netherlands), Bally Gaming, Bank of
America, la Caixa Bank (Spain) and Visa. Smarty is designed to work with
Microsoft's Personal Computer/Smart Card (PC/SC) standard.

RESEARCH AND DEVELOPMENT

Our product design and development activities are conducted in both our
Naples, Florida and Tokyo, Japan offices.

NAPLES. Our Naples team is primarily responsible for our core research
and development activities, including product conceptualization, software and
firmware development, technical writing, printed circuit board layouts and
mechanical engineering. Core competencies of our Naples team include floppy disk
emulation, flash memory media and smart card interfaces, driver, user and
utility software interfaces, ASIC design and firmware. Our engineers and other
research and development employees also develop design specifications based on
customer requirements and supervise our quality assurance activities. This
25-person Naples team consists of executive management, line management,
engineers, developers and quality assurance personnel.

TOKYO. Our Tokyo research and development team actively assists in the
implementation of our product designs, with primary responsibility for applied
engineering, production engineering and the supervision of our contract
manufacturers. Our Tokyo team also plays a principal role in coordinating our
development activities with the leading flash memory card manufacturers and
refining the product requirements of our OEM customers. Other activities include
the localization/translation of our products for the Japan market, debugging and
quality assurance. Our Tokyo research and development team consists of our
Japanese subsidiary's Vice President of Engineering and four Toshiba engineers
who provide services on a contract basis.

For 1996, 1997, 1998 and the first three months of 1999, our research
and development expenditures were approximately $720,000, $1.4 million, $1.6
million and $925,000, respectively.

In addition, since our inception we have endeavored to develop and
maintain close relationships with key suppliers of components and technologies
in order to enable us to quickly introduce new products that incorporate the
latest technological advances. As a result, the substantial resources of
strategic partners such as Hitachi, Mitsumi, NEC, Rohm, SanDisk, Sony, Toshiba
and Yamaichi augment our internal research and development efforts. These
cooperative development arrangements take many forms and provide a number of
benefits. For example, SanDisk, Sony and Toshiba have licensed certain
technology to us that allows our products to interface with their flash memory
cards and provide extensive engineering support. We believe that our close
relationships with flash card manufacturers and consumer product OEMs also
provide insight into their current and future needs, enabling us to design
specific products that meet those requirements.

MANUFACTURING AND SOURCES OF SUPPLY

We currently outsource our manufacturing and plan to continue to
outsource manufacturing for the foreseeable future. This strategy allows us to
focus on our core technological competencies of research, product design and
development, and to reduce the substantial capital investment required to
manufacture our products. We also believe that our use of experienced,
high-volume manufacturers provides greater manufacturing specialization and
expertise, higher levels of flexibility and responsiveness, and faster delivery
of product than in-house manufacturing. In addition, we frequently seek the
advice of our experienced manufacturers with respect to design changes that
reduce manufacturing costs or lead times or increase the manufacturing yields
and the quality of our finished products.

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Our products are currently manufactured in the Philippines at
facilities operated by Yamaichi and Mitsumi. Under our manufacturing
arrangements, we receive fully assembled and tested products based upon our
proprietary designs and specifications. We selected our ISO-certified contract
manufacturers based upon their reputations for quality, their cost structures,
their production capacities and their support of state-of-the-art manufacturing
processes and systems. However, our current dependence on a limited number of
manufacturers exposes us to certain risks, including shortages of manufacturing
capacity, reduced control over delivery schedules, quality assurance, production
yields and costs. See "Risk Factors--We depend on contract and offshore
manufacturing." Accordingly, we intend to seek additional manufacturing capacity
and, in particular, at least two manufacturers for each of our products. To that
end, in January 1999, we signed an agreement with Hitachi to have it manufacture
our Smarty product. We expect production by Hitachi to begin by the end of 1999.
We do not have contracts in place with any of our current manufacturers.

To ensure that products manufactured by others meet our standards, our
Tokyo production and engineering team works closely with our contract
manufacturers in all key aspects of the production process. We establish product
specifications, select the components to be used to produce our products, select
the suppliers, and negotiate the prices for most of these components. We also
work with our contract manufacturers to improve process control and product
design, and conduct periodic, on-site inspections of our manufacturers. In
addition, our Tokyo team conducts monthly review meetings with our manufacturers
to discuss sales forecasts and the procurement of long lead-time parts,
production capacities and facilities.

We rely upon a limited number of suppliers of several key components
used in our products. In particular, Rohm manufactures our proprietary ASICs
used in our FlashPath products and our proprietary analog ASICs used in our
Smarty products, and Atmel manufactures our proprietary digital ASICs used in
our Smarty products. Moreover, we purchase ASICs and other components pursuant
to purchase orders placed from time to time and have no guaranteed supply
arrangements. Our reliance on limited source suppliers involves several risks,
including a potential inability to obtain an adequate supply of required
components, price increases, timely delivery and component quality. See "Risk
Factors--We have a limited number of suppliers of key components."

COMPETITION

There are no competitors known to us that offer a digital data transfer
solution for flash memory or smart cards using a 3.5 inch floppy drive. However,
we face competition from numerous providers of cable and other non-cable
interfaces, including ports, USBs and infrared interfaces. These competing
products are offered by a number of companies, including:

o in the case of flash memory card interfaces, Hagiwara, SanDisk
and SCM Microsystems; and

o in the case of smart card interfaces, Gemplus, Hitachi, SCM
Microsystems and Toshiba.

The market for data transfer products is intensely competitive and
characterized by rapidly changing technology and rapid changes in consumer
preference. We believe that competition is likely to intensify as a result of
increasing demand for digital appliances using flash memory cards. Future
competition may also include flash memory card manufacturers and the consumer
product OEMs that are our current customers. In addition, it is possible that
third parties may design around our patents or license technology to develop
competing products that use a 3.5 inch floppy drive interface.

Several competitive developments would have a particularly significant
impact on our business. First, new competing data storage devices may replace
the flash memory cards which our products support. Second, the market for flash
memory connectivity and digital data security products may ultimately require
technological solutions that are not based on the floppy disk drive interface
technology that is the basis for our products. Third, it is possible that a new
or existing competing data transfer solution that achieves a significant market
presence or establishes a number of significant relationships with flash memory
card manufacturers will emerge as an industry standard and achieve a dominant
market position. Any of such events would have a material adverse effect on our
business and prospects.

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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.

We believe that the principal competitive factors affecting the market
for flash memory connectivity and smart card reader products include:

o the extent to which products work with existing and will work
with future digital appliances;

o ease of use;

o quality and reliability;

o rate of throughput, or data transfer speed;

o strength of distribution channels; and

o price.

We believe that our products compete successfully on most of these
bases.

INTELLECTUAL PROPERTY

We currently do not intend to license our proprietary technology to
flash memory card manufacturers, consumer product OEMs or other third parties,
and the protection of our intellectual property rights is critical to our future
success. We rely in part on patent, trade secret, trademark, maskwork and
copyright law to protect our intellectual property. We own five United States
patents and 55 foreign patents. We also have a number of pending patent
applications in various countries. Our patents and patent applications cover
various aspects of our technology.

Although we believe that our patent rights (when considered in
conjunction with our allowed patent applications) and trade secret protection
should prevent another party from manufacturing and selling competing data
transfer products that use a floppy disk drive interface, there can be no
assurance that the steps we have taken to protect our technology will be
successful. 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. In
addition, patents may not issue under our current or future patent applications,
and the patents issued under such patent applications could be invalidated,
circumvented or challenged. It may also be particularly difficult to protect our
products and intellectual property under the laws of certain countries in which
our products are or may be manufactured or sold.

Moreover, third parties could develop technologies that are similar
or superior to our technology or could make infringement claims against us.
Regardless of the outcome, an infringement claim would likely result in
substantial cost and diversion of our resources. In addition, we may not prevail
in any such litigation or be able to license any valid and infringed patents
from third parties on commercially reasonable terms, if at all. Any infringement
claim or other litigation against us or by us could therefore harm our business,
financial condition and results of operations. See "Risk Factors - Our success
depends upon protecting our intellectual property."

Our FlashPath and Smarty trademarks are registered in the United States
and a variety of other countries in which we do business, and we will continue
to evaluate the registration of additional trademarks as appropriate. However,
we do not have the rights to the Smarty trade name in either Germany or The
Netherlands. We also claim copyright protection for certain proprietary software
and documentation. In addition, we generally enter into confidentiality and
non-disclosure agreements with our employees and with key consultants, vendors
and suppliers.

34
<PAGE>

EMPLOYEES

As of May 31, 1999, we had 44 full-time employees, including 25
employees engaged in research and development, nine engaged in sales and
marketing and ten engaged in general and administrative activities. Our
employees are not represented by any collective bargaining agreements, and we
have never experienced a work stoppage. We believe our employee relations are
good.

PROPERTIES

Our corporate and technical headquarters are located in Naples,
Florida. We lease approximately 15,000 square feet of space in Naples, Florida
under a three-year lease which expires in December 2000. We also lease
approximately 3,500 square feet of space in Tokyo for our Japanese operations.
This lease expires in April 2000. We believe that our existing facilities are
adequate to support our existing operations and that, if needed, we will be able
to obtain suitable additional facilities on commercially reasonable terms.

LITIGATION

SmartDisk is not a party to any material legal proceedings.

35
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Our executive officers and directors and their ages as of May 31, 1999,
are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ ------ -------------------------------------------------------
<S> <C> <C>
Addison M. Fischer.................. 50 Chairman of the Board of Directors
Michael S. Battaglia................ 54 President, Chief Executive Officer and Director
Michael R. Mattingly................ 50 Chief Financial Officer
Robert Protheroe.................... 43 Senior Vice President, Research and Development
Daniel E. Reed...................... 31 Vice President, Corporate Development and Legal Affairs
Quresh Sachee....................... 36 Vice President, Marketing
Yoshiaki Uchida..................... 56 Vice President and General Manager, Asian Operations
D. James Bidzos(1)(2)............... 54 Director
Shigeki Morita...................... 54 Director
Timothy Tomlinson(1)(2)............. 49 Director
<FN>
- -------------
(1) Member of the audit committee.
(2) Member of the compensation committee
</FN>
</TABLE>

ADDISON M. FISCHER has served as Chairman of the Board of Directors
since our inception in 1997. Mr. Fischer has been an investor in numerous
emerging technology companies as his principal occupation for at least the past
five years, many of which companies involve computer security and office
automation. He also serves on the board of directors of a number of companies,
including Fischer International Systems Corporation, a privately-held software
company which he controls. He was also a long-time board member of and
significant investor in RSA Data Security, Inc., a leader in cryptographic
software, until its merger in 1996 with Security Dynamics, Inc. Mr. Fischer also
controls Phoenix House Investments, L.L.C., our majority shareholder. In
addition, Mr. Fischer was one of the founders of VeriSign, Inc., a publicly-held
electronic credentials/digital certificate company. Mr. Fischer is a member of
committees that set U.S. standards for computer security and electronic
commerce. He has addressed the U.S. Congress, by invitation, on several topics,
including digital signature standards, proposed FBI digital telephony
legislation, and global U.S. competitiveness. Mr. Fischer holds numerous U.S.
and international patents, and is a lifetime member of the Association of Former
Intelligence Officers.

MICHAEL S. BATTAGLIA has served as our President and Chief Executive
Officer since January 1998 and as a director since October 1998. From May 1995
to December 1998, Mr. Battaglia was President and Chief Executive Officer of
Fischer International Systems Corporation, a company controlled by Addison
Fischer, our Chairman of the board of directors and holder of a majority
interest in Phoenix House Investments, L.L.C., our major shareholder. During
1998, Mr. Battaglia served as an officer of both SmartDisk and Fischer
International. From August 1992 to December 1994, Mr. Battaglia was President of
Mosler Inc., a provider of electronic security systems and security equipment.
For the 25-year period prior to his Mosler tenure, Mr. Battaglia held various
senior management positions in the computer and information systems industry. He
spent most of his professional career at Sperry Corporation in New York City and
Philadelphia. Mr. Battaglia also serves on the board of directors of Fischer
International, which is privately-held.

MICHAEL R. MATTINGLY has served as our Chief Financial Officer since
May 1999 and was our Corporate Controller from February 1999 to May 1999.
Previously, Mr. Mattingly was employed by Mosler Inc., a provider of electronic
security systems and security equipment. During a 20-year career at Mosler, Mr.
Mattingly held various positions in finance and accounting, most recently Cost
Controller and Company Controller. Prior to his service with Mosler, Mr.
Mattingly served in various financial and accounting positions with American
Standard,

36
<PAGE>

Inc., a public company whose shares are traded on the New York Stock Exchange.
His professional background includes 28 years of general accounting, cost
accounting, planning and budgeting, as well as management of those functions.

ROBERT PROTHEROE has served as our Senior Vice President, Research and
Development since March 1999. From November 1995 to March 1999, Mr. Protheroe
held senior management positions, most recently Vice President of Engineering,
at IVI/Checkmate Electronics, Inc., an Atlanta based designer and manufacturer
of point-of-sale payment systems. Prior to joining IVI/Checkmate, Mr. Protheroe
was employed by Electronic Power Technologies, Inc., AT&T Global Information
Systems and by NCR Corporation in various engineering and engineering management
positions.

DANIEL E. REED has served as our Vice President, Corporate Development
and Legal Affairs since May 1999. From August 1994 to May 1999, Mr. Reed was an
attorney with the law firm of Greenberg Traurig, P.A., Miami, Florida, where he
concentrated his law practice in the areas of mergers and acquisitions, public
offerings and private financings, representing both public and private
companies. From August 1989 to April 1991, Mr. Reed served as a senior auditor
with Ernst & Young, LLP, New York City, New York, concentrating his practice in
the financial services and electronics industries.

QURESH SACHEE has served as our Vice President, Marketing, since May
1998. From 1993 to May 1998, Mr. Sachee was employed by IVI/Checkmate
Electronics, Inc., a designer and manufacturer of point-of-sale systems, in
various positions, including Executive Vice President, Senior Vice President of
Product Management, and prior to that, Vice President, International Sales.
Prior to that time, Mr. Sachee was employed by VeriFone Inc., a Hewlett Packard
company, in various product development and marketing management positions, and
by Unisys Corporation.

YOSHIAKI UCHIDA has served as our Vice President and General Manager,
Asian Operations, since November 1998. Prior to that time, Mr. Uchida spent 33
years with Toshiba Corporation in various management positions. He served as
Deputy General Manager of Toshiba's OME manufacturing and development facility,
and most recently was Senior Executive Vice President of MediaServe Corporation,
a Toshiba affiliate.

D. JAMES BIDZOS has served as a director since May 1998. Mr. Bidzos is
presently Vice Chairman of the Board of Directors of Security Dynamics
Technologies, Inc., a network security company, and served as its Executive Vice
President from July 1996 to February 1999. From 1986 to February 1999, Mr.
Bidzos served as President, Chief Executive Officer and a director of RSA Data
Security, Inc., an encryption software company that was acquired by Security
Dynamics Technologies in July 1996. Mr. Bidzos is Chairman of the Board of
Directors of VeriSign, Inc., an electronic credentials/digital certificate
company, and was Chief Executive Officer of that company from April 1995 to July
1995.

SHIGEKI MORITA has served as a director since April 1999. Since April
1996, Mr. Morita has served in various capacities with Toshiba Corporation,
including his current position as General Manager, Strategic Marketing
Divisions, which he has held since November 1998.

TIMOTHY TOMLINSON has served as a director since SmartDisk's inception
in 1997. He co-founded Tomlinson Zisko Morosoli & Maser LLP, a law firm, in
1983, and has been a partner there since that time. Mr. Tomlinson also serves on
the board of directors of VeriSign, Inc., Oak Technology, Inc. and Portola
Packaging, Inc., as well as other, privately held companies, including Fischer
International where he has served since April 1999.

37
<PAGE>

KEY EMPLOYEES

Other key personnel and their ages as of May 31, 1998, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ ------ ------------------------------------------------------
<S> <C> <C>
O. Lee Drennan...................... 41 Director of Product Engineering
Kazuhiro Iwata...................... 53 Vice President, Engineering of SmartDisk International
Jon Kaplan.......................... 41 Vice President, Software Development
Konosuke Nakamura................... 52 Vice President, Marketing of SmartDisk International
</TABLE>

O. LEE DRENNAN has served as our Director of Product Engineering since
January 1998. From March 1991 to January 1998, he served in a number of
positions for Fischer International and SmartDisk Security Corporation, most
recently as Director of Product Engineering for Fischer International.

KAZUHIRO IWATA has served as Vice President, Engineering of SmartDisk
International since April 1999. Prior to that time, Mr. Iwata spent almost 28
years with Toshiba Corporation where he held a number of management positions,
most recently Chief Specialist, Engineering Administration.

JON KAPLAN has served as our Vice President, Software Development since
January 1998. Prior to that time, he spent 8 years with Fischer International as
Vice President, Product Development.

KONOSUKE NAKAMURA has served as Vice President, Marketing of SmartDisk
International since March 1999. Prior to that time, Mr. Nakamura spent nearly 29
years with Toshiba Corporation in various management positions. Most recently,
he served as a Senior Manager, International Sales & Marketing, Storage Device
Division for Toshiba.

BOARD OF DIRECTORS AND COMMITTEES

Our certificate of incorporation provides for a board of directors
consisting of three classes serving three-year staggered terms. Class I consists
of _______, with the initial term of office of the Class I directors expiring at
the annual meeting of stockholders in 2000. Class II consists of _______ and
_______, with the initial term of office of Class II directors expiring at the
annual meeting of stockholders in 2001. Class III consists of _______ and
_______, with the initial term of office of Class III directors expiring at the
annual meeting of stockholders in 2002.

The board of directors has a compensation committee and an audit
committee.

COMPENSATION COMMITTEE. The compensation committee of the board of
directors reviews and makes recommendations to the board regarding all forms of
compensation provided to the executive officers and directors of SmartDisk and
its subsidiaries including stock compensation and loans. In addition, the
compensation committee reviews and makes recommendations on stock compensation
arrangements for all employees of SmartDisk. As part of the foregoing, the
compensation committee also administers our 1998 Employee Stock Option Plan,
1998 Directors and Consultants Stock Option Plan, 1999 Incentive Compensation
Plan and 1999 Employee Stock Purchase Plan. The current members of the
compensation committee are Timothy Tomlinson and D. James Bidzos, with Mr.
Bidzos chairing the committee.

AUDIT COMMITTEE. The audit committee of the board of directors reviews
and monitors the corporate financial reporting and the internal and external
audits of SmartDisk, including, among other things, our internal audit and
control functions, the results and scope of the annual audit and other services
provided by our independent auditors and our compliance with legal requirements
that have a significant impact on our financial reports. The audit committee
also consults with our management and our independent auditors regarding the
preparation of financial statements and, as appropriate, initiates inquiries
into aspects of our financial affairs. In addition, the audit committee has the
responsibility to consider and recommend the appointment of, and to review fee
arrangements with, our independent auditors. The current members of the audit
committee are Timothy Tomlinson and D. James Bidzos, with Mr. Tomlinson chairing
the committee.

38
<PAGE>

DIRECTOR COMPENSATION

Our 1999 Incentive Compensation Plan includes an automatic option grant
program for non-employee directors of SmartDisk. Under the plan, non-employee
directors are automatically granted options to purchase 60,000 shares of common
stock upon their initial election to the board of directors and options to
purchase 2,000 shares upon appointment to any committee of the board and 2,000
shares upon appointment as chairman of a committee. Thereafter, on January 1 of
each year, the directors are granted options to purchase an additional 24,000
shares in January of each year that they serve on the board and 2,000 each year
that they serve as a member, and 2,000 each year that they serve as chairman, of
a committee. All options granted under the automatic grant program vest 2% a
month for each month after the grant. Directors who were serving on the board on
the date that the plan was passed are eligible to participate in the program in
2001. Otherwise, directors are eligible upon election to the board.

Timothy Tomlinson, one of our directors, will receive a stock grant of
10,000 shares of our common stock upon completion of this offering.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The compensation committee of the board of directors consists of
Timothy Tomlinson and D. James Bidzos. There were no compensation committee
interlocks during our last fiscal year.

EXECUTIVE COMPENSATION

The following table sets forth compensation information for the fiscal
year ended December 31, 1998 paid by us for services by our Chief Executive
Officer and our other executive officer whose total salary and bonus for such
fiscal year exceeded $100,000, collectively referred to below as the "named
executive officers":

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------------------- -------------------
SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS COMPENSATION
- ------------------------------------- ------------- ------------ -------------------- -------------
<S> <C> <C> <C> <C>
Michael S. Battaglia............. $100,440(1) $45,000(1) 1,704,545 --
Chief Executive Officer and
President

Quresh Sachee.................... 89,306 47,500 200,000 --
Vice President, Marketing
- ---------------------
<FN>
(1) In addition, Mr. Battaglia received $100,440 in salary and $60,000 in bonus
from Fischer International for services rendered to Fischer International
in 1998. Commencing January 1, 1999, Mr. Battaglia became our full-time
employee.
</FN>
</TABLE>

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth each grant of stock options during the
fiscal year ended December 31, 1998 to each of the named executive officers. No
stock appreciation rights were granted to these individuals during such year.

39
<PAGE>
OPTION GRANTS IN 1998

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------
% OF TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS AT ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OR OPTION TERM (1)
OPTIONS IN FISCAL BASE PRICE EXPIRATION ----------------------------
NAME GRANTED(2) YEAR ($)/(SH)(3) DATE 5%($) 10%($)
- ----------------------- ------------ ----------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Michael S. Battaglia 1,704,545 45.5% $0.18 1/27/08 $192,956 $488,989

Quresh Sachee....... 120,000 3.2 0.25 5/4/08 18,867 47,812
80,000 2.1 1.00 8/21/08 50,312 127,499
<FN>
- --------------------
(1) Potential realizable value is based on the assumption that the common stock
price appreciates at the annual rate shown (compounded annually) from the
date of grant until the end of the option term. The amounts have been
calculated based on the requirements promulgated by the Securities and
Exchange Commission. The actual value, if any, a named executive officer
may realize will depend on the excess of the stock price over the exercise
price on the date the option is exercised (if the executive were to sell
the shares on the date of exercise), so there is no assurance that the
value realized will be equal to or near the potential realizable value as
calculated in this table.

(2) The options granted to Michael Battaglia are immediately exercisable,
subject to our right to repurchase the shares upon the termination of Mr.
Battaglia's employment with us. Our repurchase right lapses as to 2% of the
shares each month for fifty months from the date of grant. The options
granted to Quresh Sachee in May 1998 are immediately exercisable, subject
to our repurchase right which lapses as to 25% of the shares one year after
the date of grant and as to 6.25% of the shares each quarter thereafter.
Those options granted to Mr. Sachee in August 1998 are immediately
exercisable, subject to our right of repurchase which lapses as to 25% of
the shares on January 1, 2000 and as to 6.25% of the shares each quarter
thereafter. Each of the options granted have a term of ten years from the
date of grant, subject to acceleration upon a change of control of our
company.

(3) Prior to this offering, there has been no public market for our common
stock. The exercise price of each of these options is equal to the fair
market value of our common stock on the date of grant as determined by our
board of directors.
</FN>
</TABLE>

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

The following table sets forth information concerning the year-end
number and value of unexercised options for each of the named executive
officers. There was no public trading market for the common stock as of December
31, 1998. Accordingly, these values have been calculated based on a price of
$1.20 per share, the board of director's determination of the fair market value
of the common stock as of December 31, 1998, minus the applicable per share
exercise price. We have never granted stock appreciation rights. Value Realized
is calculated by subtracting the aggregate exercise price paid from the fair
market value of the shares issued on the exercise date, as determined by our
board of directors.

AGGREGATE OPTION EXERCISES IN 1998 AND YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1998(#) DECEMBER 31, 1998($)
ACQUIRED VALUE ------------------------------ ----------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ --------------- ------------ ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael S. Battaglia.. 1,704,545 -- -- -- -- --
Quresh Sachee......... 120,000 -- 80,000 -- $16,000 --
</TABLE>

40
<PAGE>

EMPLOYMENT AGREEMENTS

The following executive officers have signed employment agreements with
SmartDisk.

MICHAEL S. BATTAGLIA. Mr. Battaglia's employment agreement has a
three-year term ending December 31, 2002. His annual base salary is $275,000 and
he is eligible for annual merit increases at the discretion of our board of
directors and an annual bonus of $125,000 for 1999 if he attains performance
thresholds. Bonuses for the remaining years in the term are at the discretion of
the compensation committee of our board of directors. If we terminate Mr.
Battaglia without cause, we must pay him severance of six months' base salary
plus fifty percent of his bonus, if any, for the year in which he was
terminated. Mr. Battaglia has agreed not to compete with us for one year after
his employment if he resigns and for six months after his employment if we
terminate him.

ROBERT PROTHEROE. Mr. Protheroe's employment agreement has a three-year
term ending March 15, 2002. His annual base salary is $180,000 and he is
eligible for a bonus of $60,000 for 1999 if he attains performance thresholds.
We have agreed to reimburse Mr. Protheroe for up to $40,000 in relocation
expenses. Bonuses for the remaining years are at the discretion of the
compensation committee of our board of directors. If we terminate Mr. Protheroe
without cause, we must pay him severance of six months' base salary. Mr.
Protheroe has agreed not to compete with us for one year after termination of
his employment.

QURESH SACHEE. Mr. Sachee's employment agreement has a two-year term
ending May 3, 2000. His annual base salary is $150,000 and he is eligible for a
bonus of $50,000 for 1999 if he attains performance thresholds. We agreed to
reimburse Mr. Sachee for up to $40,000 in relocation expenses. If we terminate
Mr. Sachee without cause, we must pay him severance of three months' base
salary. Mr. Sachee has agreed not to compete with us for one year after
termination of his employment if he resigns and for six months after his
employment if we terminate him.

EMPLOYEE BENEFIT PLANS

1999 INCENTIVE COMPENSATION PLAN. Our board of directors adopted our
1999 Incentive Compensation Plan in _______ 1999 and our stockholders approved
the adoption of the plan in _______ 1999. We have reserved _______ shares of
common stock for issuance under the plan. We have not granted any options under
the plan. Under the plan, officers, employees, members of the board of directors
and consultants are eligible to receive awards. The types of awards that may be
made under the plan are options to purchase shares of common stock, stock
appreciation rights, restricted shares, deferred shares, bonus shares, dividend
equivalents and other stock-based awards. Options may be either incentive stock
options that qualify for favorable tax treatment for the optionee under Section
422 of the Internal Revenue Code of 1986 or nonstatutory stock options not
designed to qualify for such favorable tax treatment. If shares awarded under
the plan are forfeited, then those shares will again become available for new
awards under the plan. Annual cash awards are limited to $10,000,000 per person,
and annual cash performance awards are limited to $20,000,000 per person.

The compensation committee of our board of directors administers the
plan. The committee has complete discretion to make all decisions relating to
the interpretation and operation of the plan, including the discretion to
determine which eligible individuals are to receive any award, and to determine
the type, number, vesting requirements and other features and conditions of each
award.

The plan includes an automatic grant program for our non-employee
directors. Under the plan, non-employee directors are automatically granted
options to purchase 60,000 shares of common stock upon their initial election to
the board of directors and 2,000 shares upon appointment to any committee of the
board and upon appointment as chairman of a committee. Thereafter, the directors
are granted options to purchase an additional 24,000 shares in January of each
year that they serve on the board and 2,000 each year that they serve as a
member, and 2,000 each year that they serve as chairman, of a committee. All
options granted under the automatic grant

41
<PAGE>

program vest 2% a month for each month after the grant. Directors who were
serving on the board on the date that the plan was adopted are eligible to
participate in the program in 2001. Otherwise, directors are eligible upon
election.

Our board of directors may amend or terminate our plan at any time. If
the board amends the plan, stockholder approval of the amendment will be sought
only if required by an applicable law. The plan will continue in effect
indefinitely unless the board decides to terminate the plan earlier.

1999 EMPLOYEE STOCK PURCHASE PLAN. Our board of directors adopted our
1999 Employee Stock Purchase Plan in _______ 1999, and our stockholders approved
the adoption of the plan in _______ 1999. We have reserved _______ shares of
common stock for issuance under the plan, none of which has been issued. Once an
employee enters the plan, on the first day of each offering period he or she is
granted an option to purchase shares of our common stock (up to a maximum of
1,000 shares) on June 30 and December 31 of each offering period. The plan,
which is intended to qualify under Section 423 of the Internal Revenue Code of
1986, will be implemented through successive twelve-month offering periods,
generally commencing the first of January each year. The initial offering period
will commence on the effective date of this offering and will run through
December 31, 1999. The plan will be administered by the compensation committee.
Employees will be eligible to participate if they are employed by us for at
least 20 hours per week and have been employed for more than five (5) months in
a calendar year. The plan permits eligible employees to purchase common stock
through payroll deductions, which may not exceed 15% of an employee's
compensation. The price of stock purchased under the plan will be 85% of the
lower of the fair market value of the common stock at the beginning or the end
of each twelve-month offering period. Employees may not be granted shares under
the plan if immediately following such grant they would hold stock and/or
options to acquire stock possessing more than 5% of the total voting power of
the shares of our company. In addition, employees may be granted options to
purchase a maximum of $25,000 worth of stock per year under the plan. Employees
may end their participation at any time and participation ends automatically
upon termination of employment with us. Our board of directors may amend or
terminate the plan at any time. If the board amends the plan, stockholder
approval of the amendment will be sought only if required by an applicable law.

1998 EMPLOYEE STOCK OPTION PLAN. Our board of directors adopted our
1998 Employee Stock Option Plan in January 1998, and our stockholders approved
the adoption of the plan in March 1998. We have reserved 5,818,181 shares of
common stock for issuance under the plan, of which options to purchase 3,148,875
shares were outstanding as of June 30, 1999. Under the plan, the eligible
individuals are our employees or those of any parent or subsidiary. The types of
awards that may be made under the plan are options to purchase shares of common
stock. Options may be incentive stock options that qualify for favorable tax
treatment for the optionee under Section 422 of the Internal Revenue Code of
1986 or nonstatutory stock options not designed to qualify for such favorable
tax treatment. If options awarded under the plan are forfeited, then the shares
underlying those options will generally become available for new awards under
the plan.

Our board of directors or a committee of our board administers the
plan. The administrator has complete discretion to make all decisions relating
to the interpretation and operation of the plan, including the discretion to
determine which eligible individuals are to receive any award, and to determine
the type, number, vesting requirements and other features and conditions of each
award.

The exercise price for incentive stock options granted under the plan
may not be less than 100% of the fair market value of the common stock on the
option grant date. The exercise price may be paid in cash or, at the discretion
of the compensation committee, in outstanding shares of common stock, by
delivery of a promissory note, or by any combination of cash, shares of common
stock or promissory notes. At the discretion of the compensation committee, the
exercise price may also be paid by using a cashless exercise method.

If a merger or other reorganization occurs, and our stockholders before
the transaction hold a majority of the voting securities of the acquiring or
surviving corporation after the transaction, outstanding options under the plan
shall become exercisable for securities of the acquiring or surviving
corporation. If our stockholders before the transaction hold less than a
majority of the voting securities of the acquiring or surviving corporation
after the transaction, outstanding options shall generally be canceled unless
the merger or reorganization agreement provides otherwise.

42
<PAGE>

Our board of directors may amend or terminate our 1998 Employee Stock
Option Plan at any time. If the board amends the plan, stockholder approval of
the amendment will be sought only if required by an applicable law. The plan
will terminate in 2008 unless the board decides to terminate the plan earlier.
The plan will automatically terminate when all shares reserved for grant under
the plan have been granted and are not subject to vesting or repurchase rights

1998 DIRECTORS AND CONSULTANTS STOCK OPTION PLAN. Our board of
directors adopted our 1998 Directors and Consultants Stock Option Plan in
January 1998, and our stockholders approved the adoption of the plan in March
1998. We have reserved 1,000,000 shares of common stock for issuance under the
plan, of which options to purchase 417,125 shares were outstanding as of June
30, 1999. Under the plan, our officers, directors and consultants and those of
our subsidiaries are eligible for option grants and other awards. The types of
awards that may be made under the plan are options to purchase shares of common
stock. Options will be nonstatutory stock options and are not designed to
qualify for favorable tax treatment under Section 422 of the Internal Revenue
Code of 1986. If options awarded under the plan are forfeited, then the shares
underlying those options generally become available for new awards under the
plan

Our board of directors or a committee of the board administers the
plan. The administrator has complete discretion to make all decisions relating
to the interpretation and operation of the plan, including the discretion to
determine which eligible individuals are to receive any award, and to determine
the type, number, vesting requirements and other features and conditions of each
award.

The exercise price for stock options granted under the plan shall be
determined by the compensation committee at the time of grant. The exercise
price may be paid in cash or, at the discretion of the committee, in outstanding
shares of common stock, by delivery of a promissory note, or by any combination
of cash, shares of common stock or promissory notes. At the discretion of the
committee, the exercise price may also be paid by using a cashless exercise
method.

Our board of directors may amend or terminate our 1998 Directors and
Consultant Stock Option Plan at any time. If the board amends the plan,
stockholder approval of the amendment will be sought only if required by an
applicable law. The plan will terminate in 2008 unless the board decides to
terminate the plan earlier. The plan will automatically terminate when all
shares reserved for grant under the plan have been granted and are not subject
to vesting or repurchase rights.

43
<PAGE>

CERTAIN TRANSACTIONS

PRE-FORMATION ADVANCES

Prior to 1997, Addison Fischer and his affiliates, including Fischer
International, advanced SDSC, our predecessor, non-interest bearing loans in the
aggregate amount of approximately $9.6 million in order to fund our operations.
Of the total amount advanced to us, approximately $4.6 million was contributed
to the capital stock of SDSC in 1996 and 1997. We repaid the remaining $5.0
million of advances in May 1998, of which $1,045,000 was paid to Fischer
International and $3,955,000 was paid to Addison Fischer.

In addition, from 1996 to March 1999, Addison Fischer and his
affiliates, including Fischer International, advanced SmartDiskette Limited, or
SDL, non-interest bearing loans in the aggregate amount of approximately
$600,000. In May 1999, prior to our acquisition of SDL, these advances were
converted into 386,841 shares of SDL common stock (which, in May 1999, were in
turn converted into 304,073 shares of our common stock).

FORMATION TRANSACTIONS

In February 1998, Toshiba, Fischer International, Phoenix House and
SmartDisk entered into an agreement which detailed a comprehensive plan of
capital contribution, corporate governance and business strategies for
SmartDisk.

Upon signing the agreement, Toshiba made an immediate loan to us of
$5.0 million in exchange for a convertible note. The note had an interest rate
of 4% per annum. The note remained outstanding until May 22, 1998. At that time,
Toshiba acquired 9,950,000 shares of our common stock in exchange for a cash
payment of $4,950,000 and delivery and cancellation of the February 1998 note,
including accrued interest.

At the same time that Toshiba purchased its shares of our common stock,
both Phoenix House and Fischer International acquired shares of our common
stock. Both Phoenix House and Fischer International are controlled by Addison
Fischer, the Chairman of our board of directors. Phoenix House acquired
29,400,000 shares in exchange for all of the outstanding shares of our
predecessor, SDSC. As a result, SDSC became a wholly owned subsidiary of ours
and we became the owner of the exclusive licenses, owned by SDSC, to our current
principal patents. Fischer International acquired 600,000 shares of our common
stock in return for trademarks it owned relating to our SafeBoot, FlashPath and
Smarty products.

On May 26, 1999, the shareholders of SDL, which included Addison
Fischer and Phoenix House, exchanged all of their shares of SDL for 2,062,000
shares of our common stock. Of the total number of our shares issued, Addison
Fischer received 1,715,072 shares, Phoenix House received 131,670 and the other
shareholders of SDL received the remaining 215,258 shares. As a result of this
transaction, we acquired 100% of SDL, the indirect owner of our current
principal patents.

FISCHER TRANSACTIONS

In 1996 and 1997, all of our products were sold through Fischer
International and its affiliates. Pursuant to the arrangement, Fischer
International and its affiliates received a fee of approximately 25% of our
sales. The revenues shown in our 1996 and 1997 financial statements are net of
the fees paid to Fischer International and its affiliates. In addition,
operating expenses totaling approximately $2.6 million in 1996 and $4.0 million
in 1997 were incurred by Fischer International on behalf of SDSC.

In January 1998, we entered into an operating agreement with Fischer
International to provide operating services to SDSC, including developing and
marketing our SafeBoot, FlashPath, SmartDisk and Smarty products. This agreement
was terminated in May 1998 and replaced with a new operating agreement with
Fischer International. Under this new agreement, as amended in June 1999, we
reimburse Fischer International for certain marketing, accounting and other
similar services. In addition, until recently we have shared office space with
Fischer International. We have reimbursed Fischer International for the cost of
this office space as well as other general and administrative expenses. Our
share of these expenses is based on an internal analysis of the relative amount
of time devoted to our business by employees of Fischer International as well as
the overhead charges attributable to these employees. In 1998, we paid Fischer
International $1.5 million under this arrangement.

In May 1998, we entered into license and distribution agreements with
Fischer International. Under these agreements, we granted Fischer International
non-exclusive license and distribution rights to our SafeBoot, Smarty and
FlashPath products until 2001. In 1998, we received approximately $285,000 from
Fischer International under these agreements in royalties related to SafeBoot,
and no royalties related to Smarty and FlashPath.

44
<PAGE>

TOSHIBA TRANSACTIONS

In May 1998, we entered into a license agreement with Toshiba, which
was contemporaneously becoming one of our principal shareholders. Under this
agreement, Toshiba granted us a non-exclusive license to patents relating to the
interface with Toshiba's SmartMedia cards. We agreed to pay a one-half of 1%
royalty on the net sales price of our products that use the Toshiba license.
This agreement was amended in September 1998 to expand the field of use for the
non-exclusive license. In 1998, we paid approximately $222,000 to Toshiba under
this license.

In addition, we sell a number of our products to an affiliate of
Toshiba which in turn serves as sales agent to Toshiba in its role as an OEM
customer. In 1997 and 1998, we had aggregate sales to Toshiba or the sales agent
of $495,000 and $0.

Also, since September 1998, four engineers from Toshiba have worked for
us on a contract basis. In 1998, we paid Toshiba $74,296 for these services.

EMPLOYEE ADVANCES

On March 3, 1998, we loaned Michael Battaglia $305,114 in connection
with Mr. Battaglia's exercise of an option to acquire 1,704,545 shares of common
stock. The loan bore interest at the rate of 5.47% per year and the interest is
payable quarterly. The principal balance is due on the earlier of March 3, 2003
or the end of his employment with us or an affiliate of ours.

On March 3, 1998, we loaned David Stone, a former officer, $61,023 in
connection with Mr. Stone's exercise of an option to acquire 340,909 shares of
common stock. The loan bears interest at the rate of 5.47% per year and was
repaid in June 1998.

On March 29, 1999, we loaned Robert Protheroe $60,000 in connection
with his repayment of amounts owed to his previous employer. The loan bears
interest at the rate of 4.71% per year and is due in four annual installments
ending in 2003, unless his employment with us ends at an earlier date, in which
case the principal balance and accrued interest are due within 30 days after
termination of employment.

OTHER TRANSACTIONS

On May 28, 1998, we sold 115,000 shares of our common stock at a price
of $1.00 per share to First TZMM Investment Partnership, an entity affiliated
with Tomlinson Zisko Morosoli & Maser LLP. Timothy Tomlinson, one of our
directors, is a partner of Tomlinson Zisko Morosoli & Maser LLP.

On July 1, 1999, as part of a larger round of investments led by SCM
Microsystems, we sold an aggregate of 80,000 shares of common stock to Messrs.
Tomlinson and Bidzos, two of our directors, for $160,000, or $2.00 per share.
Individually, Mr. Tomlinson received 30,000 shares and Mr. Bidzos received
50,000. In addition, First TZMM Investment Partnership acquired 110,000 shares
for $220,000.

Timothy Tomlinson, one of our directors, is a partner of Tomlinson
Zisko Morosoli & Maser LLP, which provided legal services to us in 1998. Fees
paid in 1998 to Mr. Tomlinson's firm did not exceed 5% of the law firm's gross
revenues for its last full fiscal year.

45
<PAGE>

PRINCIPAL STOCKHOLDERS

The table below sets forth information regarding the beneficial
ownership of SmartDisk's common stock as of July 1, 1999, by the following
individuals or groups:

o Each person or entity who is known by SmartDisk to own
beneficially more than 5.0% of SmartDisk's outstanding stock;

o Each of the named executive officers;

o Each director of SmartDisk; and

o All directors and executive officers as a group.

Unless otherwise indicated, the address of each of the individuals
listed in the table is c/o SmartDisk Corporation, 3506 Mercantile Avenue,
Naples, Florida 34104. Except as otherwise indicated, and subject to community
property laws where applicable, the persons named in the table have sole voting
and investment power with respect to all shares of common stock held by them.

Percentage ownership in the following table is based on 50,094,045
shares of common stock outstanding as of July 1, 1999. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect to
securities, subject to community property laws, where applicable. Shares of our
common stock subject to options that are presently exercisable or exercisable
within 60 days of July 1, 1999 are deemed to be outstanding and beneficially
owned by the person holding such options for the purpose of computing the
percentage of ownership of such person, but are not treated as outstanding for
the purpose of computing the percentage of any other person.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
AS A PERCENTAGE OF CLASS OUTSTANDING
NUMBER OF SHARES --------------------------------------
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
- ------------------------------------------ ------------------ --------------- --------------
<S> <C> <C> <C>
Phoenix House Investments, L.L.C.(1)...... 29,531,670 59.0% %
Addison M. Fischer(2)..................... 31,846,742 63.6
Toshiba Corporation(3).................... 9,950,000 19.9
Michael S. Battaglia...................... 1,640,546 3.3
Quresh Sachee(4).......................... 200,000 *
Timothy Tomlinson(5)...................... 350,000 *
D. James Bidzos(6)........................ 125,000 *
Shigeki Morita............................ 0 0
All directors and executive officers as a
group (10 persons)(7).................. 34,162,288 68.2
<FN>
- --------------------
* Less than one percent.

(1) The address for Phoenix House is 400 West King Street, Carson City, Nevada
89703. Phoenix House is controlled by Addison M. Fischer, the Chairman of
our board of directors.

(2) Includes 29,531,670 shares held of record by Phoenix House and 600,000
shares held by Fischer International. Mr. Fischer effectively controls both
entities.

(3) The address for Toshiba Corporation is 1-1 Shibaura 1-Chome, Minato-ku,
Tokyo 105, Japan.

(4) Includes 80,000 shares subject to options either currently exercisable or
exercisable by Mr. Sachee within 60 days of July 1, 1999.

(5) Includes 320,000 shares held by investment partnerships or trusts for which
Mr. Tomlinson is either the general partner or trustee. Mr. Tomlinson
disclaims beneficial ownership of those shares, except to the extent of his
pecuniary interest in the partnerships.

(6) Excludes shares held by Phoenix House, in which Mr. Bidzos owns a 2.5%
ownership interest. Mr. Bidzos disclaims beneficial ownership of the shares
held by Phoenix House.

(7) See footnotes (2), (4), (5) and (6) above.
</FN>
</TABLE>

46
<PAGE>

DESCRIPTION OF CAPITAL STOCK

GENERAL

On the closing of this offering, our authorized capital stock will
consist of 60,000,000 shares of common stock, $.001 par value, and 5,000,000
shares of preferred stock, $.001 par value.

COMMON STOCK

As of July 1, 1999, there were 50,094,045 shares of common stock
outstanding that were held of record by approximately 43 stockholders. There
will be _______ shares of common stock outstanding, assuming no exercise after
July 1, 1999 of outstanding options and after giving effect to the sale of the
shares of common stock offered to the public hereby.

The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to any preferential rights
of preferred stock holders, the holders of common stock are entitled to receive
dividends on a pro rata basis, if any, declared from time to time by the board
of directors out of legally available funds. We have never paid dividends in the
past and do not intend to do so in the future. In the event of our liquidation,
dissolution or winding up, subject to any preferential rights of preferred stock
holders, the holders of common stock are entitled to share on a pro rata basis
in all assets remaining after payment of liabilities. The common stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable, and the
shares of common stock to be issued upon completion of this offering will be
fully paid and nonassessable.

PREFERRED STOCK

On the closing of this offering, 5,000,000 shares of preferred stock
will be authorized and no shares will be outstanding. The board of directors has
the authority to issue the preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions of the preferred stock,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of such series, without
further vote or action by the stockholders. The issuance of preferred stock may
have the effect of delaying, deferring or preventing a change in control of our
company without further action by the stockholders and may adversely affect the
voting and other rights of the holders of common stock. The issuance of
preferred stock with voting and conversion rights may adversely affect the
voting power of the holders of common stock, including the loss of voting
control to others. At present, we have no plans to issue any preferred stock.

REGISTRATION RIGHTS

Concurrently with the purchase of our common stock by Toshiba
Corporation, Phoenix House Investments, L.L.C. and Fischer International Systems
Corporation, we entered into an agreement providing registration rights for
Toshiba, Phoenix House and Fischer International. At any time after 180 days
following the date of this prospectus, Toshiba Corporation, Phoenix House
Investments, L.L.C. or the holders of a majority of the shares held by them may
require us to file a registration statement under the Securities Act covering at
least 20% of the securities of SmartDisk held by them, or a lesser percentage if
the net aggregate offering price would exceed $10.0 million. We will not be
required to comply with such a request for registration on more than three
occasions or within 60 days before or 180 days after our good faith estimate of
the effective date of another registration statement filed pursuant to such a
request.

When we are eligible to utilize a registration statement on Form S-3 to
register an offering of our securities, holders of 20% of the shares held by
Toshiba Corporation, Phoenix House Investments, L.L.C. and Fischer International
Systems Corporation may request that we file a registration statement on Form
S-3, covering all or a portion of securities of SmartDisk held by them, provided
that the aggregate public offering price is at least $500,000. These holders can
request only two S-3 registrations.

These registration rights will be subject to SmartDisk's right to delay
the filing of a registration statement if, in the view of our board of
directors, such a filing would be seriously detrimental to us, not more than
once in

47
<PAGE>

any 12-month period, for not more than 150 days after the appropriate number of
holders have requested we file a registration statement.

In addition, Toshiba Corporation, Phoenix House Investments, L.L.C.,
SCM Microsystems, Inc. and Fischer International Systems Corporation have
"piggyback" registration rights. If we propose to register any common stock
under the Securities Act, other than pursuant to the registration rights noted
above and in some other instances, Toshiba Corporation, Phoenix House
Investments, L.L.C. and Fischer International Systems Corporation may require us
to include all or a portion of their securities in the registration. However,
the managing underwriter, if any, of any offering has the right to limit the
number of securities proposed to be included in the registration.

We are required to bear all registration expenses incurred in
connection with these registrations. Toshiba Corporation, Phoenix House
Investments, L.L.C. and Fischer International Systems Corporation will pay all
underwriting discounts and selling commissions applicable to the sale of their
securities.

We also agreed to indemnify Toshiba Corporation, Phoenix House
Investments, L.L.C. and Fischer International Systems Corporation for any
damages they suffer due to any untrue statement or omission that we make in a
registration statement covering their shares.

The registration rights of Toshiba Corporation, Phoenix House
Investments, L.L.C. and Fischer International Systems Corporation under the
agreement providing registration rights will terminate, as to each of them, when
it may sell all its shares in a three-month period under Rule 144 under the
Securities Act.

ANTITAKEOVER EFFECTS OF DELAWARE LAW AND PROVISIONS OF OUR CERTIFICATE OF
INCORPORATION AND BYLAWS

CERTIFICATE OF INCORPORATION AND BYLAWS. Our certificate of
incorporation provides that, effective upon the closing of this offering, all
stockholder actions must be effected at a duly called meeting and not by a
consent in writing. Our certificate of incorporation also provides that the
affirmative vote of 80% of our outstanding stock is required to remove any of
our directors, to approve a business combination involving our company or for
our stockholders to amend our bylaws or the anti-takeover provisions of our
certificate of incorporation. Our bylaws provide that our stockholders may not
call a special meeting of stockholders. The bylaws also include advance notice
procedures with regard to the nomination, other than by the board of directors,
of candidates for director elections. These provisions of our certificate of
incorporation and bylaws could discourage potential acquisition proposals and
could delay or prevent a change in control of SmartDisk. These provisions are
intended to enhance the likelihood of continuity and stability in the
composition of our board of directors and in the policies formulated by our
board of directors and to discourage certain types of transactions that may
involve an actual or threatened change of control of SmartDisk. These provisions
are designed to reduce our vulnerability to an unsolicited acquisition proposal.
The provisions also are intended to discourage tactics that may be used in proxy
fights. However, such provisions could have the effect of discouraging others
from making tender offers for our shares or proxy fights and, as a consequence,
they also may inhibit fluctuations in the market price of our shares that could
result from actual or rumored takeover attempts. Such provisions also may have
the effect of preventing changes in our management.

DELAWARE ANTITAKEOVER LAW. SmartDisk is subject to Section 203 of the
Delaware General Corporation Law, an antitakeover law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person became an interested stockholder, unless the
"business combination" or the transaction in which the person became an
interested stockholder is approved in a prescribed manner. Generally, a
"business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder.
Generally, an "interested stockholder" is a person who, together with affiliates
and associates, owns or within three years prior to the determination of
interested stockholder status, did own, 15.0% or more of a corporation's voting
stock. The existence of this provision may have an antitakeover effect with
respect to transactions not approved in advance by the board of directors,
including discouraging attempts that might result in a premium over the market
price for the shares of common stock held by stockholders.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the common stock is American Stock
Transfer & Trust Company.

48
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no market for the common stock
of SmartDisk, and there can be no assurance that a significant public market for
the common stock will develop or be sustained after this offering. Future sales
of substantial amounts of common stock, including shares issued upon exercise of
outstanding options, in the public market following this offering could
adversely affect market prices prevailing from time to time and could impair our
ability to raise capital through sale of our equity securities. As described
below, no shares currently outstanding will be available for sale immediately
after this offering because of contractual restrictions on resale. Sales of
substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.

Upon completion of this offering, we will have outstanding _______
shares of common stock based upon shares outstanding as of July 1, 1999,
assuming no exercise of outstanding options prior to completion of this offering
and no exercise of the underwriters over-allotment option. Of these shares, the
_______ shares sold in this offering will be freely tradable without restriction
under the Securities Act except for any shares purchased by "affiliates" of
SmartDisk as that term is defined in Rule 144 under the Securities Act. The
remaining 50,094,045 shares of common stock held by existing stockholders are
"restricted securities" as that term is defined in Rule 144. All of these
restricted shares are subject to lock-up agreements providing the stockholder
generally will not offer, sell, contract to sell or otherwise dispose of any
common stock or any securities that are convertible into common stock for a
period of 180 days after the date of this prospectus without the prior written
consent of BancBoston Robertson Stephens Inc. As a result of these lock-up
agreements, notwithstanding possible earlier eligibility for sale under the
provisions of Rules 144, 144(k) and 701, none of these shares will be eligible
for resale until 181 days after the date of this prospectus. BancBoston
Robertson Stephens Inc. may, at its sole discretion, and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements.

Beginning 181 days after the date of this prospectus, approximately
46,000,000 restricted shares will be eligible for sale in the public market, all
of which are subject to the volume limitations under Rule 144 described below.

In general, the volume limitations under Rule 144, as currently in
effect, provide that beginning 90 days after the date of this prospectus, a
person who has beneficially owned restricted shares for at least one year,
including the holding period of any prior owner except an affiliate, would be
entitled to sell in any three-month period a number of shares that does not
exceed the greater of:

- 1.0% of the number of shares of our common stock then
outstanding, which will equal approximately _______ shares
immediately after this offering; or

- the average weekly trading volume of our common stock during
the four calendar weeks preceding the filing of Form 144 with
respect to such sale.

Sales under Rule 144 must also be made in broker's transactions and are
subject to notice requirements and to the public availability of current
information about SmartDisk.

Within 90 days following the effectiveness of this offering, we will
file a registration statement on Form S-8 registering shares of common stock
subject to outstanding options or reserved for future issuance under its stock
option plans. As of July 1, 1999, options to purchase a total of 3,148,875
shares were outstanding and 276,261 shares were reserved for future issuance
under our 1998 Employee Stock Option Plan, options to purchase a total of
417,125 shares were outstanding and 308,876 shares were reserved for future
issuance under the 1998 Directors and Consultants Stock Option Plan, _______
shares were reserved for issuance under the 1999 Incentive Compensation Plan and
_______ shares were reserved for issuance under the 1999 Employee Stock Purchase
Plan. The holders of all of those outstanding options are subject to lock-up
agreements. Common stock issued upon exercise of outstanding vested options,
other than common stock issued to our affiliates, will be available for resale
in the open market 181 days after the close of this offering.

Beginning six months after the date of this offering, Toshiba
Corporation, Phoenix House Investments, L.L.C. and Fischer International Systems
Corporation will be entitled to registration rights for sale of their shares in
the public market. See "Description of Capital Stock--Registration Rights."
Registration of those shares under the

49
<PAGE>

Securities Act would result in those shares becoming freely tradable without
restriction under the Securities Act, except for shares purchased by affiliates,
immediately upon the effectiveness of the registration and this could affect the
stock price at that time.

50
<PAGE>

UNDERWRITING

The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Hambrecht & Quist LLC and U.S. Bancorp Piper
Jaffray Inc., have severally agreed with SmartDisk, subject to the terms and
conditions set forth in the underwriting agreement, to purchase from SmartDisk
the number of shares of common stock set forth opposite their names below. The
underwriters are committed to purchase and pay for all such shares if any are
purchased.

NUMBER
UNDERWRITER OF SHARES
----------- ---------
BancBoston Robertson Stephens Inc. .................
Hambrecht & Quist LLC................................
U.S. Bancorp Piper Jaffray Inc.......................
----------
Total.......................................
==========

SmartDisk has been advised by the representatives of the underwriters
that the underwriters propose to offer the shares of common stock to the public
at the initial public offering price set forth on the cover page of this
prospectus and to certain dealers at such price less a concession of not in
excess of $ per share, of which $ may be reallowed to other dealers. After the
initial public offering, the public offering price, concession and reallowance
to dealers may be reduced by the representatives. No such reduction shall change
the amount of proceeds to be received by SmartDisk as set forth on the cover
page of this prospectus. The common stock is offered by the underwriters as
stated herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part.

The underwriters do not intend to confirm sales to any accounts over
which they exercise discretionary authority.

OVER-ALLOTMENT OPTION. SmartDisk has granted to the underwriters an
option, exercisable during the 30-day period after the date of this prospectus,
to purchase up to _______ additional shares of common stock at the same price
per share as SmartDisk will receive for the _______ shares that the underwriters
have agreed to purchase. To the extent that the underwriters exercise this
option, each of the underwriters will have a firm commitment to purchase
approximately the same percentage of such additional shares that the number of
shares of common stock to be purchased by it shown in the above table represents
as a percentage of the shares offered hereby. If purchased, such additional
shares will be sold by the underwriters on the same terms as those on which the
_______ shares are being sold. SmartDisk will be obligated, pursuant to the
option, to sell shares to the extent the option is exercised. The underwriters
may exercise such option only to cover over-allotments made in connection with
the sale of the shares of common stock offered hereby. If such option is
exercised in full, the total public offering price, underwriting discounts and
commissions and proceeds to SmartDisk will be $________, $________ and
$________, respectively.

The following table summarizes the compensation and expenses we will
pay.

<TABLE>
<CAPTION>
TOTAL
-----------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
- ------------------------------------------------------- ---------------- ---------------- ---------------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by us...... $ $ $
Expenses payable by us................................. $ $ $
</TABLE>

INDEMNITY. The underwriting agreement contains covenants of indemnity
among the underwriters and SmartDisk against certain civil liabilities,
including liabilities under the Securities Act and liabilities arising from
breaches of representations and warranties contained in the underwriting
agreement.

LOCK-UP AGREEMENTS. Each of SmartDisk's executive officers, directors,
director-nominees, stockholders of record and optionholders of record has agreed
with the representatives of the underwriters, for a period of 180 days after the
date of this prospectus, subject to certain exceptions, not to offer to sell,
contract to sell, or otherwise

51
<PAGE>

sell, dispose of, loan, pledge or grant any rights with respect to any shares of
common stock, any options or warrants to purchase any shares of common stock, or
any securities convertible into or exchangeable for shares of common stock owned
as of the date of this prospectus or thereafter acquired directly by such
holders or with respect to which they have or hereafter acquire the power of
disposition, without the prior written consent of BancBoston Robertson Stephens
Inc. However, BancBoston Robertson Stephens Inc. may, in its sole discretion and
at any time without notice, release all or any portion of the securities subject
to the lock-up agreements. There are no agreements between the representatives
and any of SmartDisk's stockholders providing consent by the representatives to
the sale of shares prior to the expiration of the lock-up period.

FUTURE SALES. In addition, SmartDisk has agreed that during the lock-up
period SmartDisk will not, without the consent of BancBoston Robertson Stephens
Inc., subject to certain exceptions,

o consent to the disposition of any shares held by stockholders
subject to lock-up agreements prior to the expiration of the
lock-up period or

o issue, sell, contract to sell, or otherwise dispose of, any
shares of common stock, any options to purchase any shares of
common stock or any securities convertible into, exercisable
for or exchangeable for shares of common stock other than
SmartDisk's sale of shares in this offering, the issuance of
common stock upon the exercise of outstanding options, and the
issuance of options or shares under existing stock option and
incentive plans provided those options do not vest, or the
right to resell those shares do not arise until, prior to the
expiration of the lock-up period. See "Shares Eligible for
Future Sale."

LISTING. We have filed an application for the common stock to be quoted
on The Nasdaq National Market under the symbol "SMDK."

NO PRIOR PUBLIC MARKET. Prior to this offering, there has been no
public market for the common stock of SmartDisk. Consequently, the initial
public offering price for the common stock offered hereby will be determined
through negotiations between SmartDisk and the representatives of the
underwriters. Among the factors to be considered in such negotiations are
prevailing market conditions, certain financial information of SmartDisk, market
valuations of other companies that SmartDisk and the representatives believe to
be comparable to SmartDisk, estimates of the business potential of SmartDisk,
the present state of SmartDisk's development and other factors deemed relevant.

STABILIZATION. The representatives of the underwriters have advised
SmartDisk that, pursuant to Regulation M under the Securities Act, certain
persons participating in this offering may engage in transactions, including
stabilizing bids, syndicate covering transactions or the imposition of penalty
bids, that may have the effect of stabilizing or maintaining the market price of
the common stock at a level above that which might otherwise prevail in the open
market. A "stabilizing bid" is a bid for or the purchase of the common stock on
behalf of the underwriters for the purpose of fixing or maintaining the price of
the common stock. A "syndicate covering transaction" is the bid for or the
purchase of the common stock on behalf of the underwriters to reduce a short
position incurred by the underwriters in connection with this offering. A
"penalty bid" is an arrangement permitting the representatives to reclaim the
selling concession otherwise accruing to an underwriter or syndicate member in
connection with this offering, if the common stock originally sold by such
underwriter or syndicate member is purchased by the representatives in a
syndicate covering transaction and has therefore not been effectively placed by
such underwriter or syndicate member. The representatives have advised SmartDisk
that such transactions may be effected on The Nasdaq National Market or
otherwise and, if commenced, may be discontinued at any time.

DIRECTED SHARE PROGRAM. At our request, the underwriters have reserved
up to 7.5 percent of the shares of common stock to be issued by SmartDisk and
offered hereby for sale, at the initial public offering price, to directors,
officers, employees, business associates and related persons of SmartDisk. The
number of shares of common stock available for sale to the general public will
be reduced to the extent that such individuals purchase all or a portion of
these reserved shares. Any reserved shares which are not so purchased will be
offered by the underwriters to the general public on the same basis as the
shares of common stock offered hereby.

52
<PAGE>

LEGAL MATTERS

The validity of the common stock offered hereby will be passed upon for
SmartDisk by Greenberg Traurig, P.A., Miami, Florida. Certain legal matters in
connection with the offering will be passed upon for the underwriters by Wilson
Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California.

EXPERTS

Ernst & Young LLP, independent certified public accountants, have
audited our consolidated financial statements at December 31, 1997 and 1998 and
for each of the three years in the period ended December 31, 1998, as set forth
in their report. We have included our financial statements in this prospectus
and elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed with the Securities and Exchange Commission, Washington,
D.C. 20549, a registration statement on Form S-1 under the Securities Act with
respect to the common stock offered hereby. This prospectus does not contain all
of the information set forth in the registration statement and the exhibits and
schedules to the registration statement. For further information with respect to
SmartDisk and the common stock offered hereby, refer to the registration
statement and the exhibits and schedules filed as a part of the registration
statement. Statements contained in this prospectus concerning the contents of
any contract or any other document referred to are not necessarily complete;
refer in each instance to the copy of such contract or document filed as an
exhibit to the registration statement. Each such statement is qualified in all
respects by such reference to such exhibit. You may inspect a copy of the
registration statement without charge at the Securities and Exchange
Commission's principal office in Washington, D.C. and obtain copies of all or
any part thereof upon payment of certain fees from the Public Reference Room of
the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, or at the Securities and Exchange Commission's regional offices in
New York, located at 7 World Trade Center, Suite 1300, New York, New York 10048,
or in Chicago, located at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. You may obtain information on the operation of the Public Reference Room
by calling the Securities and Exchange Commission at 1-800-SEC-0330. The
Securities and Exchange Commission maintains an Internet site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Securities and Exchange
Commission. The Securities and Exchange Commission's World Wide Web address is
www.sec.gov.

SmartDisk intends to furnish holders of its common stock with annual
reports containing, among other information, audited financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited condensed financial information for the first three
quarters of each fiscal year. SmartDisk intends to furnish such other reports as
it may determine or as may be required by law.

<PAGE>

SMARTDISK CORPORATION

CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 1998 and 1997 (Audited)
Three months ended March 31, 1999 and 1998 (Unaudited)

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
-----
Report of Independent Certified Public Accountants ......... F-2

Consolidated Balance Sheets as of December 31, 1997 and
1998 and March 31, 1999 (Unaudited)...................... F-3

Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998 and for the Three Months
Ended March 31, 1998 and 1999 (Unaudited)................ F-4

Consolidated Statements of Stockholders' Deficit for the
Years Ended December 31, 1996, 1997 and 1998 and for the
Three Months Ended March 31, 1999 (Unaudited)............ F-5

Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998 and for the Three Months
Ended March 31, 1998 and 1999 (Unaudited)................ F-6

Notes to Consolidated Financial Statements ................. F-7

F-1
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
SmartDisk Corporation

We have audited the accompanying consolidated balance sheets of SmartDisk
Corporation as of December 31, 1997 and 1998, and the related consolidated
statements of operations, stockholders' deficit and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of SmartDisk Corporation at December 31, 1997 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles.

/s/ Ernst & Young LLP

Miami, Florida,
June 21, 1999

F-2
<PAGE>

SMARTDISK CORPORATION
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
-------------------------------- MARCH 31, MARCH 31,
1997 1998 1999 1999 (NOTE 7)
---------------- --------------- --------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................... $ 329,778 $ 2,919,728 $ 1,807,295
Restricted cash ................................. -- 1,050,000 1,050,000
Accounts receivable, net of allowance for
doubtful accounts of $0 in 1997, $33,848
in 1998 and $32,283 in 1999 ................... -- 3,736,751 5,983,674
Inventories ..................................... 294,496 1,689,020 354,210
Prepaid expenses and other current assets ....... 24,005 120,782 376,123
------------- ------------- -------------
Total current assets ........................... 648,279 9,516,281 9,571,302
Property and equipment, net ...................... 210,119 682,014 2,000,208
Intangible assets, net ........................... 748,137 440,978 353,441
Deposits and other assets ........................ -- 196,682 187,752
------------- ------------- -------------
TOTAL ASSETS ..................................... $ 1,606,535 $ 10,835,955 $ 12,112,703
============= ============= =============
LIABILITIES, REDEEMABLE COMMON
STOCK, AND STOCKHOLDERS' DEFICIT
Current liabilities: .............................
Accounts payable ................................ $ 253,812 $ 3,706,297 $ 4,234,479
Bank line of credit ............................. -- 2,247,718 2,955,774
Accrued payroll and related expenses ............ 346 222,085 419,446
Other accrued liabilities ....................... 147,587 471,505 893,068
Due to related parties .......................... 1,045,000 -- --
Stockholder loan ................................ 3,955,000 -- --
------------- ------------- -------------
Total current liabilities ...................... 5,401,745 6,647,605 8,502,767
Stockholder loan ................................. 644,591 648,147 630,797
Deferred income tax liability .................... 186,039 109,658 87,889
Commitments and contingencies .................... -- -- --
Redeemable common stock: 9,950,000 shares
issued and outstanding ......................... -- 9,991,918 9,991,918 --
Stockholders' deficit:
Common stock: $.001 par value; 60,000,000
shares authorized; 31,305,288 issued and
outstanding in 1997; 47,319,742 issued and
46,998,833 outstanding in 1998; 38,453,742
issued and 38,129,833 outstanding in 1999 ..... 31,305 37,369 38,453 $ 48,403
Capital in excess of par value .................. 12,351,783 16,023,020 17,213,556 27,195,524
Treasury stock, 320,909 shares in 1998 and
323,909 in 1999, at cost ...................... -- (57,764) (58,304) (58,304)
Accumulated other comprehensive income .......... 188,740 478,948 455,501 455,501
Notes receivable from officers/employees ........ -- (417,334) (417,334) (417,334)
Accumulated deficit ............................. (17,197,668) (22,625,612) (24,332,540) (24,332,540)
------------- ------------- ------------- -------------
Total stockholders' equity (deficit) ........... (4,625,840) (6,561,373) (7,100,668) $ 2,891,250
------------- ------------- ------------- =============
TOTAL LIABILITIES, REDEEMABLE
COMMON STOCK, AND
STOCKHOLDERS' DEFICIT .......................... $ 1,606,535 $ 10,835,955 $ 12,112,703
============= ============= =============
</TABLE>

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

F-3
<PAGE>

SMARTDISK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------- -------------------------------
1996 1997 1998 1998 1999
---------------- --------------- ---------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues
Product sales ...................... $ 500,252 $ 892,530 $ 15,038,281 $ 421,336 $ 5,429,711
Royalties .......................... -- -- 284,298 110,976 77,284
------------- ------------ ------------ ------------ ------------
Total revenues ...................... 500,252 892,530 15,322,579 532,312 5,506,995
Cost of revenues .................... 366,693 300,678 12,600,330 441,122 4,647,272
------------- ------------ ------------ ------------ ------------
Gross profit ........................ 133,559 591,852 2,722,249 91,190 859,723
Operating expenses
Research and development ........... 720,009 1,411,986 1,607,950 301,729 925,351
Sales and marketing ................ 5,884 11,582 2,546,602 252,539 726,156
General and administrative ......... 3,418,010 3,184,552 4,049,191 743,258 1,014,182
Impairment loss .................... 7,807,157 -- -- -- --
------------- ------------ ------------ ------------ ------------
Total operating expenses ............ 11,951,060 4,608,120 8,203,743 1,297,526 2,665,689
------------- ------------ ------------ ------------ ------------
Operating loss ...................... (11,817,501) (4,016,268) (5,481,494) (1,206,336) (1,805,966)
Gain (loss) on translation .......... -- -- (47,678) (358) 63,194
Interest and other income ........... -- 8,210 75,770 13,349 25,868
Interest expense .................... (275) (514) (51,858) (14,795) (9,063)
------------- ------------ ------------ ------------ ------------
Net loss before income taxes ........ (11,817,776) (4,008,572) (5,505,260) (1,208,140) (1,725,967)
Income tax benefit .................. (2,347,876) (44,598) (77,316) (19,203) (19,039)
------------- ------------ ------------ ------------ ------------
Net loss ............................ $ (9,469,900) $ (3,963,974) $ (5,427,944) $ (1,188,937) $ (1,706,928)
============= ============ ============ ============ ============
Net loss per share .................. $ (.31) $ (.13) $ (.14) $ (.04) $ (.04)
============= ============ ============ ============ ============
Shares used in computing net loss
per share .......................... 30,496,024 31,262,274 38,351,162 31,306,021 45,937,541
============= ============ ============ ============ ============
</TABLE>

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

F-4
<PAGE>

SMARTDISK CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN
----------------------- EXCESS OF COMPREHENSIVE
SHARES AMOUNT PAR VALUE LOSS
------------ ---------- -------------- ---------------
<S> <C> <C> <C> <C>
BALANCE,
DECEMBER 31, 1995 ............ 29,400,000 $29,400 $ 154,675
Comprehensive loss:
Net loss .................... $ (9,469,900)
Foreign currency
translation ................ 181,207
------------
Comprehensive loss .......... $ (9,288,693)
============
Acquisition of SDL ............ 1,793,940 1,794 6,940,311
Contribution of stockholder
loan to capital .............. 3,908,823
---------- ------- -----------
BALANCE,
DECEMBER 31, 1996 ............ 31,193,940 31,194 11,003,809
Comprehensive loss:
Net loss .................... $ (3,963,974)
Foreign currency
translation ................ 7,533
------------
Comprehensive loss .......... $ (3,956,441)
============
Acquisition of SDL ............ 111,348 111 693,313
Contribution of stockholder
loan to capital .............. 654,661
---------- ------- -----------
BALANCE,
DECEMBER 31, 1997 ............ 31,305,288 31,305 12,351,783
Comprehensive loss:
Net loss .................... $ (5,427,944)
Foreign currency
translation ................ 290,208
------------
Comprehensive loss .......... $ (5,137,736)
============
Issuance of common stock for
trademarks ................... 600,000 600 (600)
Issuance of common stock ...... 2,665,000 2,665 3,162,335
Shares issued upon exercise
of options ................... 2,799,454 2,799 509,502
Repurchase of common stock.....
---------- ------- -----------
BALANCE,
DECEMBER 31, 1998 ............ 37,369,742 37,369 16,023,020
Comprehensive loss:
Net loss .................... $ (1,706,928)
Foreign currency
translation ................ (23,447)
------------
Comprehensive loss .......... $ (1,730,375)
============
Issuance of common stock ...... 1,000,000 1,000 1,099,000
Stock compensation ............ 76,500
Shares issued upon exercise
of options ................... 84,000 84 15,036
Repurchase of common stock.....
---------- ------- -----------
BALANCE, MARCH 31,
1999 (Unaudited) ............. 38,453,742 $38,453 $17,213,556
========== ======= ===========

<CAPTION>
NOTES
ACCUMULATED RECEIVABLE
OTHER FROM TOTAL
ACCUMULATED COMPREHENSIVE OFFICERS/ TREASURY STOCKHOLDERS'
DEFICIT INCOME EMPLOYEES STOCK DEFICIT
---------------- --------------- ------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER 31, 1995 ............ $ (3,763,794) $ -- $ -- $ -- $ (3,579,719)
Comprehensive loss:
Net loss .................... (9,469,900)
Foreign currency
translation ................ 181,207
Comprehensive loss .......... (9,288,693)
Acquisition of SDL ............ 6,942,105
Contribution of stockholder
loan to capital .............. 3,908,823
------------- --------- ---------- --------- ------------
BALANCE,
DECEMBER 31, 1996 ............ (13,233,694) 181,207 -- -- (2,017,484)
Comprehensive loss:
Net loss .................... (3,963,974)
Foreign currency
translation ................ 7,533
Comprehensive loss .......... (3,956,441)
Acquisition of SDL ............ 693,424
Contribution of stockholder
loan to capital .............. 654,661
------------- --------- ---------- --------- ------------
BALANCE,
DECEMBER 31, 1997 ............ (17,197,668) 188,740 -- -- (4,625,840)
Comprehensive loss:
Net loss .................... (5,427,944)
Foreign currency
translation ................ 290,208
Comprehensive loss .......... (5,137,736)
Issuance of common stock for
trademarks ...................
Issuance of common stock ...... 3,165,000
Shares issued upon exercise
of options ................... (417,334) 94,967
Repurchase of common stock..... (57,764) (57,764)
------------- --------- ---------- --------- ------------
BALANCE,
DECEMBER 31, 1998 ............ (22,625,612) 478,948 (417,334) (57,764) (6,561,373)
Comprehensive loss:
Net loss .................... (1,706,928)
Foreign currency
translation ................ (23,447)
Comprehensive loss .......... (1,730,375)
Issuance of common stock ...... 1,100,000
Stock compensation ............ 76,500
Shares issued upon exercise
of options ................... 15,120
Repurchase of common stock..... (540) (540)
------------- --------- ---------- --------- ------------
BALANCE, MARCH 31,
1999 (Unaudited) ............. $ (24,332,540) $ 455,501 $ (417,334) $ (58,304) $ (7,100,668)
============= ========= ========== ========= ============
</TABLE>

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

F-5
<PAGE>

SMARTDISK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1996 1997 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................. $ (9,469,900) $ (3,963,974) $ (5,427,944)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation ....................................... 130,494 227,089 613,777
Amortization ....................................... 1,653,914 179,346 310,917
Foreign currency gain .............................. -- -- (31,235)
Employee stock option expense ...................... -- -- --
Deferred income tax benefit ........................ (2,347,876) (44,598) (77,316)
Impairment loss .................................... 7,807,157 -- --
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable ............................... -- -- (3,736,751)
Inventories ....................................... 289,236 23,529 (1,394,524)
Prepaid expenses and other current assets ......... (25,237) (274,894) (80,660)
Deposits and other assets ......................... (20,525) 20,525 (176,942)
Increase (decrease) in liabilitities:
Accounts payable .................................. 546,890 (397,416) 3,452,485
Accrued payroll and related expenses .............. (29,475) (41) 221,739
Other accrued liabilities ......................... 24,891 80,629 365,836
------------ ------------ ------------
Net cash used in operating activities ................ (1,440,431) (4,149,805) (5,960,618)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................. (200,821) (284,943) (1,019,878)
Increase in restricted cash ......................... -- -- (1,050,000)
------------ ------------ ------------
Net cash used in investing activities ................ (200,821) (284,943) (2,069,878)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of exchangeable note ......... -- -- 5,000,000
Net proceeds from line of credit .................... -- -- 2,247,718
Net proceeds (repayment) of stockholder loan ........ 1,450,844 3,709,527 (3,955,000)
Proceeds (repayment) of due to related parties ...... -- 1,045,000 (1,045,000)
Proceeds from sale of redeemable common stock ....... -- -- 4,950,000
Proceeds from sale of common stock .................. -- -- 3,165,000
Proceeds fom exercise of stock options .............. -- -- 94,967
Purchase of treasury stock .......................... -- -- (57,764)
------------ ------------ ------------
Net cash provided by financing activities ............ 1,450,844 4,754,527 10,399,921
Effect of exchange rate fluctuations on cash ......... 4,490 1,973 220,525
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ..... (185,918) 321,752 2,589,950
Cash and cash equivalents at beginning of period ..... 193,944 8,026 329,778
------------ ------------ ------------
Cash and cash equivalents at end of period ........... $ 8,026 $ 329,778 $ 2,919,728
============ ============ ============
SIGNIFICANT NON-CASH ACTIVITIES:
Acquisition of SDL/patents .......................... $ 6,942,105 $ 693,424 ---
Exchange of note payable plus accrued
interest for redeemable common stock ............... --- -- $ 5,041,918
Note receivable obtained for stock options .......... -- -- $ 417,334
Contribution of stockholder loan to capital ......... $ 3,908,823 $ 654,661 --

<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------------------
1998 1999
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................. $ (1,188,937) $ (1,706,928)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation ....................................... 82,984 176,227
Amortization ....................................... 77,222 87,537
Foreign currency gain .............................. -- (71,416)
Employee stock option expense ...................... -- 76,500
Deferred income tax benefit ........................ (19,203) (19,039)
Impairment loss .................................... -- --
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable ............................... (349,257) (2,246,923)
Inventories ....................................... (487,476) 1,334,810
Prepaid expenses and other current assets ......... 271,489 (255,341)
Deposits and other assets ......................... -- 8,930
Increase (decrease) in liabilitities:
Accounts payable .................................. 1,012,702 528,182
Accrued payroll and related expenses .............. 40,972 197,361
Other accrued liabilities ......................... (7,227) 421,563
------------ ------------
Net cash used in operating activities ................ (566,731) (1,468,537)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................. (460,270) (1,494,421)
Increase in restricted cash ......................... -- --
------------ ------------
Net cash used in investing activities ................ (460,270) (1,494,421)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of exchangeable note ......... 5,000,000 --
Net proceeds from line of credit .................... -- 708,056
Net proceeds (repayment) of stockholder loan ........ (306,502) --
Proceeds (repayment) of due to related parties ...... -- --
Proceeds from sale of redeemable common stock ....... -- --
Proceeds from sale of common stock .................. --- 1,100,000
Proceeds fom exercise of stock options .............. -- 15,120
Purchase of treasury stock .......................... -- (540)
------------ ------------
Net cash provided by financing activities ............ 4,693,498 1,822,636
Effect of exchange rate fluctuations on cash ......... 17,515 27,889
------------ ------------
Increase (decrease) in cash and cash equivalents ..... 3,684,012 (1,112,433)
Cash and cash equivalents at beginning of period ..... 329,778 2,919,728
------------ ------------
Cash and cash equivalents at end of period ........... $ 4,013,790 $ 1,807,295
============ ============
SIGNIFICANT NON-CASH ACTIVITIES:
Acquisition of SDL/patents .......................... --- --
Exchange of note payable plus accrued
interest for redeemable common stock ............... -- --
Note receivable obtained for stock options .......... -- --
Contribution of stockholder loan to capital ......... -- --
</TABLE>

The accompanying notes are an intregral part of these consolidated financial
statements.

F-6
<PAGE>

SMARTDISK CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND NATURE OF OPERATIONS

ORGANIZATION AND NATURE OF OPERATIONS

SmartDisk Corporation ("SmartDisk" or the "Company") was incorporated on
March 5, 1997, and its predecessor, SmartDisk Security Corporation ("SDSC") was
incorporated on May 18, 1993.

From 1993 to 1995, SDSC exploited technology that it licensed under a
manufacturing license agreement with Fischer International Systems Corporation
("FISC"), a related company, owned by Addison Fischer ("Fischer"). The patents
underlying the licensed technology were held by SmartDiskette GmbH ("SDG"), a
German company that is wholly-owned by SmartDiskette Limited ("SDL"), a related
English company. SDG licensed these patents to SDL. SDL in turn entered into a
manufacturing license agreement with FISC that FISC subsequently assigned to
SDSC. The license agreement covered the manufacture and sale of solid state
diskettes relating to the fields of data security and validation and computer
security and access control. For the period January 1, 1996 through December
31, 1997, FISC, pursuant to an operating agreement with SDSC, conducted all
operations and development activities on behalf of SDSC. During this period,
SDSC (through FISC) developed several products using proprietary, high-density
flash memory technology. These products are hereafter referred to as the
"SmartDisk Products." The SmartDisk Products consist primarily of FlashPath
(used to read/write flash memory cards) and Smarty (used to read/write smart
cards).

On March 21, 1997, FISC and Toshiba Corporation ("Toshiba") entered into a
memorandum of understanding in which the parties agreed to form a corporation
to exploit the SmartDisk Products. SmartDisk commenced operations January 1,
1998. Effective on that date, SDSC's operating agreement with FISC was
terminated.

On May 26, 1998, an agreement was finalized with Toshiba and FISC in order
to, among other things, capitalize SmartDisk. SDSC stockholders exchanged all
the issued and outstanding shares of SDSC for 29,400,000 shares of common stock
of SmartDisk, Toshiba contributed $9,991,918 (see note 7) for 9,950,000 shares
of redeemable common stock and FISC assigned trademarks to SmartDisk in
exchange for 600,000 shares of common stock. In conjunction with the
capitalization, SDSC was merged into SmartDisk. The merger was a combination of
entities under common control and accounted for at historical cost. The
individual financial statements of SmartDisk and SDSC are combined in the
accompanying financial statements.

From April 1993 through May 1997, Fischer acquired substantially all of
the shares of SDL in a series of transactions. In May 1999, the stockholders of
SDL exchanged all their shares of SDL for 2,062,000 shares of common stock of
SmartDisk and SDL became a wholly owned subsidiary of SmartDisk. The merger was
a combination of entities under common control and accounted for at historical
cost. The individual financial statements of SmartDisk and SDL are combined in
the accompanying financial statements from May 22, 1996, the date SDL came
under common control. The accounts of SDL were adjusted as of that date to
reflect a new basis under the purchase accounting method.

The Company serves customers in the electronics, banking and other
consumer markets. Principal geographic markets for the Company's products
include the United States, Japan, Europe and other world markets.

F-7
<PAGE>

SMARTDISK CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the financial
statements of SmartDisk, SDSC and SDL, entities that were under common control
and subsequently merged to form the entity that is now known as SmartDisk
Corporation. All significant intercompany balances and transactions have been
eliminated in consolidation.

Common stock shares and amounts as presented in the accompanying financial
statements have been retroactively adjusted to reflect the effect of the
mergers of SDL and SDSC into SmartDisk.

CERTAIN UNCERTAINTIES AND RISKS

The Company sells to original equipment manufacturers, retailers, and
distributors in the United States, Japan, Europe and other world markets.
However, the majority of the Company's sales are to Japanese customers.
Japanese sales as well as related expenses are denominated in Yen and,
accordingly, are subject to the risks associated with fluctuations in exchange
rates between the Yen and the US dollar. The Company does not hedge against
foreign currency exposure.

In the normal course of business, the Company extends unsecured credit to
its customers for the sale of products. Credit terms generally range from 30 to
150 days receivables with extended credit terms secured by promissory notes.
The Company evaluates and monitors the credit worthiness of each customer on a
case by case basis. Allowances are maintained for potential credit losses.

A limited number of customers account for a substantial portion of the
Company's revenues. Further, one product accounts for a substantial portion of
the Company's revenues. Sales of the Company's products will vary as a result
of fluctuations in market demand.

Certain raw materials used by the Company in the manufacture of its
products are available from a limited number of suppliers. The Company is
dependent on its manufacturers to allocate a sufficient portion of their
manufacturing capacity to meet the Company's needs.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of cash, accounts receivable, accounts payable and
other accrued liabilities in the accompanying balance sheet approximates fair
value because of the short-term maturity of these financial instruments. The
fair value of the restricted cash and line of credit approximates market, as
the interest rates on these financial instruments are market rates.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash and money market instruments
with short term maturities of 90 days or less.

F-8
<PAGE>

SMARTDISK CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

RESTRICTED CASH

Restricted cash is composed of a time deposit that the Company maintains
as collateral for a line of credit.

INVENTORIES

Inventories are stated at the lower of cost or market with cost being
determined on a first-in, first-out basis.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost less accumulated depreciation.
All major expenditures for production equipment are capitalized and depreciated
over the economic life of the asset. The costs of repairs and maintenance are
charged to expense in the year when they are incurred. Depreciation is computed
using the straight-line and declining balance methods over the estimated useful
lives of 2 to 15 years. In addition, certain production equipment is
depreciated using the units of production method. The units of production
method depreciates the property over the estimated life cycle production
quantities. The monthly depreciation cost is calculated by using the number of
pieces produced times the cost per piece computed from the estimated total
production quantity.

IMPAIRMENT OF LONG-LIVED ASSETS

In the event that facts and circumstances indicate that the costs of
assets may be impaired, an evaluation of recoverability is performed. If an
evaluation is required, the estimated future undiscounted cash flow associated
with the asset is compared to the asset's carrying amount to determine if a
write-down to market value is required.

SOFTWARE DEVELOPMENT COSTS

Development costs incurred in the research and development of new software
products and enhancements to existing software products are expensed as
incurred until technological feasibility has been established, at which time
certain development costs required to attain general production release would
be capitalized. To date, the Company's software development has essentially
been completed concurrent with the establishment of technological feasibility,
and, accordingly, no costs have been capitalized.

INCOME TAXES

The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes". Deferred income tax assets and liabilities are determined based
upon differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.

REVENUE RECOGNITION

Sales revenue is recognized at the time of shipment to customers. Royalty
revenue consists of royalties earned on sales of licensed products. Royalty
revenues are recognized when earned based upon contractual agreement.

F-9
<PAGE>

SMARTDISK CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

FOREIGN CURRENCY TRANSACTIONS

Substantially all of the Company's sales are made through a Japanese
subsidiary. This subsidiary and other foreign subsidiaries have their local
currency as their functional currency. Their assets and liabilities are
translated to the US dollar at the current exchange rates in effect at the
balance sheet date. Items of revenue and expense are translated using average
exchange rates in effect for the period in which the items occur. The resulting
gains and losses from translation are included as a component of stockholders'
equity.

Certain cash time deposits and inter-company accounts of the Japanese
subsidiary are dollar-denominated balances. These balances are remeasured to
the functional currency using the current exchange rate at the balance sheet
date, and resulting adjustments are reflected in the gain (loss) on translation
account included in the statement of operations. Inter-company gains (losses)
included in this account for the year ended December 31, 1998 and the three
months ended March 31, 1998 (unaudited) and 1999 (unaudited) totaled $170,416,
$-0- and $(535), respectively.

STOCK BASED COMPENSATION

The Company applies the intrinsic value method in accounting for its stock
options. Accordingly, no compensation expense has been recognized for options
granted with an exercise price equal to market value at the date of grant.

NET LOSS PER SHARE

Basic net income (loss) per share as disclosed in the statement of
operations, is based on the weighted effect of all common shares issued and
outstanding, and is calculated by dividing net income (loss) by the weighted
average shares outstanding during the period. Diluted net income (loss) per
share would be calculated by dividing net income by the weighted average common
shares used in the basic calculation plus the number of common shares that
would be issued assuming conversion of all potentially dilutive common shares
outstanding. Diluted net income (loss) is not presented, as the effect of
including potentially dilutive securities would be anti-dilutive.

Pro forma net loss per share assuming redemption of the redeemable common
stock, which contemplates inclusion of 4% interest on the redeemable common
stock in net loss and exclusion of the redeemable common stock shares from
weighted average shares outstanding, for the year ended December 31, 1998 and
the three months ended March 31, 1999 (unaudited) would be $0.17 and $0.05 per
share, respectively.

Net loss per share has been computed reflecting the retroactive adjustment
of outstanding shares related to the mergers of SDL and SDSC into SmartDisk.

ADVERTISING

Advertising costs are charged to expense as incurred, advertising expenses
for 1996, 1997 and 1998 were $3,539, $3,785 and $214,000, respectively, and for
the three months ended March 31, 1998 (unaudited) and 1999 (unaudited) were
$8,172 and $18,762, respectively.

F-10
<PAGE>

SMARTDISK CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARD

In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Company expects to adopt the new
Statement effective January 1, 2001. The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value. The Company does
not anticipate that the adoption of this Statement will have a significant
effect on its results of operations or financial position.

NOTE 3. INVENTORY

Inventories consist of the following:

DECEMBER 31,
-------------------------- MARCH 31,
1997 1998 1999
---------- ------------- -----------
(UNAUDITED)
Finished goods ......... $ -- $1,687,905 $338,291
Raw materials .......... 294,496 1,115 15,919
-------- ---------- --------
Inventories .......... $294,496 $1,689,020 $354,210
======== ========== ========

NOTE 4. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- MARCH 31,
1997 1998 1999
------------- ------------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Production equipment .............................. $ 396,307 $ 702,779 $2,083,125
Furniture and fixtures ............................ 9,789 191,576 226,494
Software .......................................... 31,112 167,519 238,071
---------- ---------- ----------
Property and equipment, at cost ................... $ 437,208 $1,061,874 $2,547,690
Accumulated depreciation and amortization ......... (227,089) (379,860) (547,482)
---------- ---------- ----------
Property and equipment, net ....................... $ 210,119 $ 682,014 $2,000,208
========== ========== ==========
</TABLE>

NOTE 5. INTANGIBLE ASSETS AND IMPAIRMENT LOSS

The financial statements of SDL are combined with those of the Company as
of May 22, 1996, the date that SDL came under common control ("1996
acquisition") as a result of the Company's principal stockholder acquiring an
87% ownership interest in SDL through a series of acquisitions. The purchase
price as of May 22, 1996 totaled approximately $7 million, all of which was
allocated to patents. In addition, goodwill and a corresponding deferred tax
liability totaling approximately $2.3 million were recorded to reflect the tax
effect of the acquisition. The intangibles were being amortized over their
estimated useful life of three years. Subsequently, pursuant to SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of", the Company evaluated the recoverability of the recorded
patents and goodwill. SDL was acquired for its two developed products. The
potential customer (U.S. Government) for one of these products

F-11
<PAGE>

SMARTDISK CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 5. INTANGIBLE ASSETS AND IMPAIRMENT LOSS--(CONTINUED)

abandoned an initiative in late 1996 for which this product was to be used and
management's assessment was that there was no alternative use for this product.
The other product did not meet management's market expectations. Further, no
significant sales ever occurred related to the patented products and such
products were discontinued in late 1996. The technology underlying the patents
was assessed by management to be obsolete and the related patents deemed
worthless. Accordingly, during 1996, the Company recorded an impairment loss of
$7,807,157 to write-off the remaining unamortized cost of the patents and
related goodwill.

On May 22, 1997, and additional 5% ownership interest in SDL was purchased
for approximately $700,000 through the exercise of a put option given to SDL
stockholders in connection with the 1996 acquisition. All of the additional
purchase price was allocated to new patents that were issued subsequent to the
1996 acquisition, and unrelated to the patented technology that became
worthless in 1996. In addition, goodwill and a corresponding deferred tax
liability totaling approximately $230,000 were recorded to reflect the related
tax effect. These intangible assets are being amortized over their estimated
useful lives of three years.

Intangible assets consist of:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- MARCH 31,
1997 1998 1999
------------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Patents ............................... $ 695,615 $ 698,334 $ 690,989
Goodwill .............................. 231,871 232,791 230,329
---------- ---------- ----------
927,486 931,125 921,318
Less accumulated amortization ......... (179,349) (490,147) (567,877)
---------- ---------- ----------
Intangible assets, net .............. $ 748,137 $ 440,978 $ 353,441
========== ========== ==========
</TABLE>

NOTE 6. BANK LINE OF CREDIT

The Company's wholly-owned Japanese subsidiary entered into an agreement
with the Bank of Tokyo-Mitsubishi, Ltd. on June 8, 1998, revised on January 29,
1999, for a Line of Credit with maximum borrowing capacity of $2.59 million
(300 million Yen). The facility is collateralized by a time deposit and
accounts receivable. The Company maintains a time deposit with the bank that
has a balance at December 31, 1998 of $1,050,000 (121,485,000 Yen). The Company
may borrow up to 90% of this amount. In addition, accounts receivable of up to
$1.73 million (200 million Yen) of specified trade customers may be used as
additional collateral. The interest rate on borrowings under the credit
facility is 1.375% per year and the credit facility must be renewed every six
months. The current agreement expires on December 25, 1999. The Company also
discounts certain short-term promissory notes received from trade customers
with the bank. Bank borrowings collateralized by promissory notes totaled
$1,382,000 at December 31, 1998 and $1,458,000 at March 31, 1999. The
borrowings are short-term and bear interest at 1.375%.

Interest paid during the periods ended December 31, 1998, March 31, 1998
(unaudited) and 1999 (unaudited) amounted to $5,017, $0 and $7,387,
respectively.

F-12
<PAGE>

SMARTDISK CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 7. COMMITMENTS AND CONTINGENCIES

LEASES

The Company leases space for its corporate headquarters from a related
party, FISC. There is no formalized agreement and the expense is accrued and
paid monthly based on a percent of usage basis. The Company's Japanese
subsidiary leases office space under a two year operating lease commencing in
April 1998. Total rent expense for 1996, 1997 and 1998 and for the three months
ended March 31, 1998 (unaudited) and 1999 (unaudited) was $14,155, $36,995,
$261,399, $32,994 and $88,694, respectively. Rent expense incurred related to
FISC for these same periods totaled $14,155, $36,995, $135,290, $26,982 and
$28,489, respectively.

The table below sets forth minimum payments for the years indicated under
leases with remaining terms in excess of one year, at December 31, 1998 and
March 31, 1999:

DECEMBER 31, MARCH 31,
1998 1999
-------------- ------------
(UNAUDITED)
1999 ......... $180,579 $135,434
2000 ......... 41,446 41,446
-------- --------
$222,025 $176,880
======== ========

CONTINGENCIES

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.

REDEEMABLE COMMON STOCK

In connection with the agreement that was finalized in May 1998 (see Note
1), Toshiba received 9,950,000 shares of redeemable common stock in exchange
for $9,991,918 (consisting of $4,950,000 cash, the exchange of a $5,000,000
note and accrued interest of $41,918). In March 1998, SmartDisk had executed a
4% note with Toshiba for $5,000,000 that was exchangeable into common stock at
$1 per share. The terms of the agreement provided Toshiba a put option that is
exercisable on February 24, 2000 and for a period of ninety days from that
date. This option provides that the Company may be asked to purchase all of the
redeemable common stock shares for a total of $9,950,000 plus 4% simple
interest per year. This right terminates if the Company completes an initial
public offering prior to the exercise date of the option. The redeemable common
stock will convert to nonredeemable common stock if the Company becomes a
publicly traded company prior to February 24, 2000 or the put option is not
exercised. In addition, Toshiba received Board of Director representation and
registration rights with regard to its common stock ownership in the Company.
The redeemable

F-13
<PAGE>

SMARTDISK CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 7. COMMITMENTS AND CONTINGENCIES--(CONTINUED)

common stock has a redemption amount at December 31, 1998 and March 31, 1999
(unaudited) of $10,277,073 and $10,375,654, respectively.

Unaudited pro forma stockholders' equity at March 31, 1999 as set forth on
the accompanying balance sheets reflects the exercise of the put option on the
common stock as if such exercise had occurred on March 31, 1999.

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with certain of its
employees. These agreements stipulate, among other things, severance and
benefit arrangements in the event of termination. In addition, the agreements
include confidentiality provisions, invention assignment provisions, and
covenants not to compete.

NOTE 8. STOCK BASED COMPENSATION

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options.

The Company's 1998 Employee Stock Option Plan has authorized the grant of
options to employees including members of the Company's Board of Directors who
are employees of the Company for up to 5,818,181 shares of the Company's common
stock of which 2,074,727 and 1,627,227 remain available as of December 31, 1998
and March 31, 1999 (unaudited), respectively. Options granted under the plan
have vesting dates ranging from four to five years and all options granted have
a ten year contractual life.

The Company's 1998 Directors and Consultants Stock Option Plan has
authorized the grant of options to officers, directors, consultants and other
independent contractors (including members of the Company's Board of Directors
who are not employees of the Company) for up to 1,000,000 shares of the
Company's common stock of which 480,000 and 746,000 remain available as of
December 31, 1998 and March 31, 1999 (unaudited), respectively. Options granted
under the plan have vesting dates ranging from four to five years and all
options granted have a ten year contractual life.

The Company had reserved 6,818,181 shares of common stock for issuance
under the aforementioned stock option plans. At December 31, 1998 and March 31,
1999 (unaudited), 2,554,127 and 2,373,227 shares, respectively, remain
outstanding and available for future grant.

Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock option under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1998 and 1999 (unaudited); volatility factor of the expected
market price of the Company's common stock of .80; risk-free interest rate of
5.25% and a weighted-average expected life of the option of 5 years.

F-14
<PAGE>

SMARTDISK CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 8. STOCK BASED COMPENSATION--(CONTINUED)

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The company's
pro forma information follows:

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
1998 1998 1999
---------------- ---------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Pro forma net loss ............... $ (1,203,840) $ (5,545,529) $ (1,824,513)
Pro forma loss per share ......... $ (0.04) $ (0.14) $ (0.04)
</TABLE>

A summary of the Company's stock option activity, and related information
for the year ended December 31, 1998 and the quarter ended March 31, 1999
(unaudited) are as follows:

<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE
--------------- ---------------
<S> <C> <C>
Outstanding at December 31, 1997 .................. -- --
Options granted with exercise prices
equal to fair market value ..................... 4,166,454 $ 0.32
Options granted with exercise prices
less than fair market value .................... 100,000 1.00
Options exercised ................................ (2,799,454) 0.18
Options canceled ................................. (3,000) 0.18
----------
Outstanding at December 31, 1998 .................. 1,464,000 $ 0.63
----------
Options granted with exercise prices
equal to fair market value ..................... 923,500 1.20
Options exercised ................................ (84,000) 0.18
Options canceled ................................. (742,000) 0.70
----------
Outstanding at March 31, 1999 (Unaudited) ......... 1,561,500 $ 0.96
==========
</TABLE>

The weighted average fair value of options granted during the year ended
December 31, 1998 and the quarter ended March 31, 1999 (unaudited) with
exercise prices equal to market value was $0.21 and $0.81, respectively.

The weighted average fair value of options granted during the year ended
December 31, 1998 with exercise prices less than market value was $0.85.

During the quarter ended March 31, 1999, compensation expense of $76,500
was recognized relating to the accelerated vesting of 84,000 options,
exercisable at $0.18 per share.

F-15
<PAGE>

SMARTDISK CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 8. STOCK BASED COMPENSATION--(CONTINUED)

As of December 31, 1998 and March 31, 1999 (unaudited), 2,052,545 and
1,810,772 shares of common stock acquired upon the exercise of 2,799,454
options during 1998 remain non-vested. Vesting of this restricted stock is
subject to the vesting provisions of the original option award.

The following table summarizes information about stock options outstanding
as of December 31, 1998 and March 31, 1999 (unaudited).

<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
---------------------------------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE
RANGE OF EXERCISE PRICE SHARES PRICE CONTRACTUAL LIFE SHARES PRICE
- ------------------------------- ------------ ---------- ------------------ -------- ---------
<S> <C> <C> <C> <C> <C>
December 31, 1998
$ 0.18 - $ 0.25 684,000 $ 0.19 9.1 years 9,000 $ 0.18
$1.00 - $1.20 780,000 $ 1.02 9.7 years -- --
------------- --------- -----
$0.18 - $1.20 1,464,000 $ 0.63 9.4 years 9,000 $ 0.18
========= =====
March 31, 1999 (unaudited)
$.018 - $0.25 330,000 $ 0.21 8.9 years 55,000 $ 0.19
$1.00 - $1.20 1,231,500 $ 0.96 9.8 years 1,200 $ 1.20
------------- --------- ------
$ .18 - $1.20 1,561,500 $ 0.96 9.6 years 56,200 $ 0.21
========= ======
</TABLE>

NOTE 9. RETIREMENT PLAN

Effective January 1, 1998, for the benefit of qualified employees, the
Company became a participant in a tax deferred savings plan offered to
employees of FISC. The plan is designed to provide employees with an
accumulation of funds at retirement. Qualified employees may elect to make pre
tax contributions into the plan for up to 15% of their annual compensation, up
to a maximum of $10,000 per year. The Company may make annual contributions to
the plan at the discretion of the Board of Directors. The Company's matching
contributions are earned by the employee based on a straight line, five year
vesting schedule. For the years ended December 31, 1998, and the three months
ended March 31, 1998 (unaudited) and 1999 (unaudited), the Company made
matching contributions of $10,747, $2,601, and $9,301, respectively.

NOTE 10. INCOME TAXES

The United States and foreign components of loss from continuing
operations before income taxes are as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED
------------------------------------------------------ -----------------------------------
1996 1997 1998 1998 1999
---------------- ---------------- ---------------- ---------------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States ......... $ (2,118,417) $ (3,462,924) $ (4,584,045) $ (903,679) $ (1,299,334)
Foreign ............... (9,699,359) (545,648) (921,215) (304,461) (426,633)
------------- ------------ ------------ ------------ ------------
Total ............... $ (11,817,776) $ (4,008,572) $ (5,505,260) $ (1,208,140) $ (1,725,967)
============= ============ ============ ============ ============
</TABLE>

The income tax benefit for each period presented in the statement of
operations relates to the reduction of the deferred income tax liability
associated with the identified intangible assets.

F-16
<PAGE>

SMARTDISK CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 10. INCOME TAXES--(CONTINUED)

The significant components of the Company's deferred income taxes are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------- MARCH 31,
1997 1998 1999
------------- --------------- (UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carry forwards ......... $ 770,243 $ 2,615,236 $ 3,094,602
Depreciation and amortization ............. -- 18,377 22,330
Accrued expenses .......................... -- 9,225 9,225
---------- ------------ ------------
Deferred tax assets ....................... 770,243 2,642,838 3,126,157
Less valuation allowance ................ (770,243) (2,642,838) (3,126,157)
---------- ------------ ------------
Net deferred tax assets ..................... -- -- --
Deferred tax liabilities:
Acquired intangibles ...................... (186,039) (109,658) (87,889)
---------- ------------ ------------
Total net deferred taxes .................... $ (186,039) $ (109,658) $ (87,889)
========== ============ ============
</TABLE>

The reconciliation of the U.S. federal statutory income tax rate to the
effective income tax rate is:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED
-------------------------------------------- -----------------------------
1996 1997 1998 1998 1999
-------------- -------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal income tax benefit .................. (34.00)% (34.00)% (34.00)% (34.00)% (34.00)%
State taxes, net of federal benefit ......... ( 3.63) ( 3.63) ( 3.63) ( 3.63) ( 3.63)
Foreign tax rate differential ............... 3.80 0.63 ( 0.13) 0.61 0.30
Non-deductible items ........................ -- -- 1.38 0.05 4.27
Goodwill .................................... 6.55 0.37 0.53 0.60 0.46
Recognition of net deferred tax
assets from change in SDSC status -- -- ( 0.17) -- --
S corporation loss reported by
shareholders ............................... 6.75 32.51 -- -- --
Change in valuation allowance ............... 0.67 3.02 34.01 34.43 31.07
Other ....................................... -- -- 0.61 0.36 0.43
------ ------ ------ ------ ------
(19.86)% ( 1.10)% ( 1.40)% ( 1.58)% ( 1.10)%
====== ====== ====== ====== ======
</TABLE>

Prior to May 1998, SDSC elected to be taxed as an S corporation under the
Internal Revenue Code. As a result, the taxable income or losses for periods
prior to May 1998 were reported by the shareholders on their individual income
tax returns. Upon the conversion from an S corporation to a C corporation, SDSC
became subject to income tax. Subsequent to the conversion from an S
corporation to a C corporation, SDSC was merged into SmartDisk, a C
corporation.

SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a valuation allowance of $770,000, $2,643,000 and $3,126,000 at

F-17
<PAGE>

SMARTDISK CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 10. INCOME TAXES--(CONTINUED)

December 31, 1997 and 1998, and March 31, 1999 (unaudited), respectively, is
necessary to reduce the deferred tax assets to the amount that will more likely
than not be realized. The change in valuation allowance amounted to $121,000,
$1,873,000 and $483,000 for December 31, 1997 and 1998, and March 31, 1999
(unaudited), respectively.

At December 31, 1998 and March 31, 1999 (unaudited), the Company had
United States and foreign net operating loss carry forwards for tax purposes as
follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999 (UNAUDITED)
---------------------------- ----------------------------
JURISDICTION AMOUNT EXPIRATION AMOUNT EXPIRATION
- --------------------------- ------------- ------------ -------------- -----------
<S> <C> <C> <C> <C>
United States .......... $4,932,000 2018 $ 6,149,000 2018-2019
United Kingdom ......... $2,343,000 Unlimited $ 2,368,000 Unlimited
Japan .................. $ 377,000 2003 $ 532,000 2003-2004
</TABLE>

NOTE 11. SEGMENT INFORMATION

The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information,". SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas and major customers. The Company
operates in one reportable business segment.

Sales to foreign markets and to significant customers as a percentage of
the Company's total revenues were as follows:

<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Foreign markets:
Asian and Pacific Rim Market ......... --% --% 84% --% 81%
United States ........................ 75 82 10 71 15
Europe ............................... 25 18 6 29 4
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
------------------------ --------------
1996 1997 1998 1998 1999
------ ------ ------ ------ -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Significant customers:
FISC ................ 100% 100% 14% 100% 11%
FujiFilm ............ -- -- 38 -- 32
Olympus ............. -- -- 32 -- 39
</TABLE>

F-18
<PAGE>

SMARTDISK CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 11. SEGMENT INFORMATION--(CONTINUED)

The following is a summary of the carrying amounts of the Company's
foreign net assets (liabilities) by geographic area in which they are located:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1998 1999
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Asia and Pacific Rim ......... $ -- $1,830,076 $1,581,425
Europe ....................... (28,263) (271,024) (345,257)
</TABLE>

The following is a summary of the Company's foreign long-lived assets by
geographic area in which they are located:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1998 1999
-------------- -------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Asia and Pacific Rim ......... $ -- $281,347 $1,440,928
Europe ....................... 757,926 450,821 363,020
</TABLE>

NOTE 12. RELATED PARTY TRANSACTIONS

Material related party transactions that have been entered into by the
Company that are not disclosed otherwise in these notes are summarized below.

As outlined in Note 1, SmartDisk (including SDSC and SDL) and FISC were
under the common ownership of Fischer. Further, there were various transactions
between SmartDisk and FISC, such as sharing of certain general and
administrative resources, the purchases/sales of products and services and
similar transactions. In the opinion of management, the allocations were
reasonable and reflect all of the cost of the companies doing business.

During 1996 and 1997, FISC provided operating services to SmartDisk
pursuant to an operating agreement. All of the Company's revenues for those
years and operating expenses totaling approximately $2.6 million in 1996 and
$4.0 million in 1997 were recognized or incurred by FISC on behalf of
SmartDisk.

As a direct result of this operating arrangement between FISC and
SmartDisk, the Company's stockholder loan from Fischer was increased by
$1,450,844 in 1996 and $3,158,817 in 1997 representing funding of SmartDisk
operations by Fischer through FISC. Stockholder loan amounts totaling
$3,908,823 in 1996 and $654,661 in 1997 were contibuted to capital. In
addition, stockholder loan amounts totaling $644,591, $648,147, and $630,797 at
December 31, 1997, 1998 and March 31, 1999, respectively, represented advances
made by Fischer and related companies to fund the operations of SDL. Those
advances, which were non-interest bearing and due upon demand, were converted
into 386,841 shares of common stock of SDL in May 1999.

At December 31, 1997, the Company owed $1,045,000 to FISC and $3,955,000
to Fischer, which represented non-interest amounts advanced to fund the
Company's operations. These amounts were repaid in 1998.

In connection with the 1998 agreement (see Note 1), the Company was
granted a non-exclusive license to certain patents relating to the interface
with Toshiba's SmartMedia cards. In September

F-19
<PAGE>

SMARTDISK CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 12. RELATED PARTY TRANSACTIONS--(CONTINUED)

1998, this license was amended to expand the field of use for the license. In
return, the Company agreed to pay a 1/2% royalty on products covered by the
Toshiba patents. Royalty expenses pertaining to this license were $221,968 in
1998, and $5,270, and $80,625 for the three months ended March 31, 1998 and
1999, respectively.

The Company has entered into various strategic agreements with related
parties to sell, manufacture and distribute products. In addition, the Company
procures certain engineering services from a strategic investor. During 1998,
and for the three months ended March 31, 1998 and 1999, approximately 14%, 100%
and 11%, respectively, of the Company's sales were to related parties. During
1998 and for the three months ended March 31, 1998 and 1999, purchases of
products and services of approximately $12,500,000, $320,000 and $4,500,000,
respectively, were made from related parties.

Pursuant to license and distribution agreements entered into in 1998
between FISC and the Company, FISC was granted the right to license and
distribute the Company's products through 2001. For this right, FISC agreed to
pay to the Company royalties ranging from 5% to 33.3% of net revenue derived
from SmartDisk product sales. All of the Company's royalty revenues are from
FISC.

Pursuant to operating agreements entered into in 1998, FISC provides
operating assistance to the Company consisting of services, facilities and
shared equipment. The Company recorded operating expenses related to these
agreements for the year ended December 31, 1998 and the three months ended
March 31, 1998 (unaudited) and 1999 (unaudited) of approximately $1,500,000,
$247,000 and $48,000, respectively.

Three of the Company's principal stockholders have the right to require
the Company to file a registration statement to enable them to sell their
shares

During February 1999, the Company loaned $60,000 to one of its officers
and the amount was outstanding as of March 31, 1999. The loan was made pursuant
to a Promissory Note, bears interest at 4.71%, and is repayable in four annual
installments. In addition, the Company has, in conjunction with the 1998
Employee Stock Option Plan, made loans to various of its employees to allow for
the immediate exercise of stock option grants. Each loan was made pursuant to a
full recourse Promissory Note, is secured by a pledge of the shares of stock
which the employee has acquired, bears interest at approximately 5.5% which is
payable quarterly, and is required to be paid in full within five years of the
date of issuance.

F-20

<PAGE>

[SMARTDISK LOGO]

<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by SmartDisk in connection with
the sale of common stock being registered. All amounts are estimates except the
SEC registration fee and the NASD filing fees.

Securities and Exchange Commission registration fee............. $ 11,120
NASD filing fee................................................. 4,500
Nasdaq National Market listing fee..............................
Printing and engraving expenses.................................
Accounting fees and expenses....................................
Legal fees and expenses.........................................
Blue Sky fees and expenses......................................
Transfer Agent's fees and expenses..............................
Miscellaneous...................................................
---------
TOTAL........................................................ $
=========

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law authorizes a court
to award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). The Registrant's bylaws provides for
mandatory indemnification of its directors and officers and permissible
indemnification of employees and other agents to the maximum extent permitted by
the Delaware General Corporation Law. The Registrant's certificate of
incorporation provides that, pursuant to Delaware law, its directors shall not
be liable for monetary damages for breach of the directors' fiduciary duty as
directors to SmartDisk and its stockholders. This provision in the certificate
of incorporation does not eliminate the directors' fiduciary duty, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of non-monetary relief will remain available under Delaware law. In addition,
each director will continue to be subject to liability for breach of the
director's duty of loyalty to SmartDisk for acts or omissions not in good faith
or involving intentional misconduct, for knowing violations of law, for actions
leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. Prior to the closing of this offering, the
Registrant will enter into Indemnification Agreements with its officers and
directors, a form of which is attached as Exhibit 10.18 hereto and incorporated
herein by reference. The Indemnification Agreements provide the Registrant's
officers and directors with further indemnification to the maximum extent
permitted by the Delaware General Corporation Law. Reference is made to Section
__ of the Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying
officers and directors of the Registrant against certain liabilities.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

On May 22, 1998, SmartDisk sold 29,400,000 shares of common stock to
Phoenix House Investments, L.L.C. in exchange for all outstanding shares of
SmartDisk Security Corporation.

On May 22, 1998, SmartDisk sold 9,950,000 shares of common stock to
Toshiba Corporation for $9,950,000.

On May 22, 1998, SmartDisk sold 600,000 shares of common stock to
Fischer International Systems Corporation in exchange for the assignment to
SmartDisk of certain trademarks.

II-1

<PAGE>

On May 28, 1998, SmartDisk sold 115,000 shares of common stock to First
TZMM Investment Partnership for $115,000.

On October 15, 1998, SmartDisk sold 1,000,000 shares of common stock to
Yamaichi Electronics Co., Ltd. for $1,200,000.

On October 16, 1998, SmartDisk sold 1,000,000 shares of common stock to
Rohm Co., Ltd. for $1,200,000.

On November 26, 1998, SmartDisk sold 500,000 shares of common stock to
NEC Corporation for $600,000.

On January 13, 1999, SmartDisk sold 1,000,000 shares of common stock to
Hitachi Software Engineering Co., Ltd. for $1,100,000.

On May 26, 1999, SmartDisk sold 2,062,000 shares of common stock to the
shareholders of SmartDiskette Limited, an English corporation, in exchange for
all of the outstanding shares of capital stock of SmartDiskette Limited.

On July 1, 1999, SmartDisk sold 1,250,000 shares of common stock to SCM
Microsystems, Inc. for $2,500,000. On that date, SmartDisk also sold an
aggregate of 350,000 shares of common stock to five investors, including two of
its directors, Messrs. Tomlinson and Bidzos, for $700,000, or $2.00 per share.

On July 1, 1999, SmartDisk issued 150,000 shares of common stock to
SanDisk Corporation as partial consideration for the grant of a license to
certain intellectual property.

Between January 1, 1998 and July 1, 1999, SmartDisk issued an aggregate
of 2,990,954 shares of common stock to 20 persons, all of whom were employees or
directors of, or consultants to, SmartDisk. Such shares were issued upon
exercise of stock options with exercise prices ranging from $0.18 to $2.00 per
share.

The sale of the above securities was deemed to be exempt from
registration under the Securities Act in reliance upon Section 4(2) of the
Securities Act or Rule 701 promulgated under Section 3(b) of the Securities Act
as transactions by an issuer not involving any public offering or transactions
pursuant to compensation benefit plans and contracts relating to compensation as
provided under such Rule 701. The recipients of securities in each such
transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with the Registrant, to information about the
Registrant.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

A. EXHIBITS

EXHIBIT EXHIBITS
------- --------
1.1 Form of Underwriting Agreement(1)

3.1 Certificate of Incorporation(1)

3.2 Bylaws(1)

5.1 Opinion of Greenberg Traurig, P.A.(1)

10.1 1998 Employee Stock Option Plan(2)

10.2 1998 Directors and Consultants Stock Option Plan(2)

10.3 1999 Incentive Compensation Plan(1)(2)

10.4 1999 Employee Stock Purchase Plan(1)(2)

10.5 Employment Agreement with Michael S. Battaglia

II-2

<PAGE>

10.6 Employment Agreement with Robert Protheroe

10.7 Employment Agreement with Quresh Sachee

10.8 License Agreement dated May 26, 1998 between Toshiba
Corporation and SmartDisk, as amended(1)

10.9 Operating Agreement dated May 28, 1998 between Fischer
International System Corporation and SmartDisk, as amended

10.10 License and Distribution Agreement dated May 28, 1998 between
SmartDisk and Fischer International Systems Corporation(1)

10.11 Distribution Agreement dated May 28, 1998 between Fischer
International Systems Corporation and SmartDisk

10.12 Investors' Rights Agreement dated May 22, 1998 among Smart
Disk and each of the investors a party thereto

10.13 Lease Agreement dated October 4, 1993 between Arnold
Industrial Park and SmartDisk, by assignment(1)

10.14 Development and License Agreement between SmartDisk and Sony
Corporation(1)

10.15 Cooperative Development Agreement dated June 30, 1999 between
SmartDisk and SanDisk Corporation(1)

10.16 Form of Indemnification Agreement between the Registrant and
each of its directors and executive officers

23.1 Consent of Greenberg Traurig, P.A. (included in Exhibit
5.1)(1)

23.2 Consent of Ernst & Young LLP

25.1 Power of Attorney (included on the signature page)

27.1 Financial Data Schedules (SEC use only)

- ----------
(1) To be filed by amendment.

(2) Management Compensation Plan or Arrangement.

(3) Confidential treatment requested for portions of this exhibit.

II-3

<PAGE>

ITEM 17. UNDERTAKINGS

The Registrant hereby undertakes to provide to the underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

The Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

II-4

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Naples,
State of Florida, on this 14th day of July, 1999.

SMARTDISK CORPORATION

By: /s/ MICHAEL S. BATTAGLIA
-----------------------------------------
Michael S. Battaglia
President and Chief Executive Officer

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints
Michael S. Battaglia and Daniel E. Reed or any one of them, as his or her true
and lawful attorneys-in-fact and agents with full power of substitution and
resubstitution for him or her in his or her name, place and stead in any and all
capacities to execute in the name of each such person who is then an officer or
director of the Registrant any and all amendments (including post-effective
amendments) to this Registration Statement, and any registration statement
relating to the offering hereunder pursuant to Rule 462 under the Securities Act
of 1933, as amended, and to file the same with all exhibits thereto and other
documents in connection therewith with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents and each of them full power and
authority to do and perform each and every act and thing required or necessary
to be done in and about the premises as fully as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ADDISON M. FISCHER Chairman and Director July 14, 1999
- ------------------------------------
Addison M. Fischer

/s/ MICHAEL S. BATTAGLIA President, Chief Executive Officer and Director July 14, 1999
- ------------------------------------ (Principal Executive Officer)
Michael S. Battaglia

/s/ MICHAEL R. MATTINGLY Chief Financial Officer (Principal Financial and July 14, 1999
- ------------------------------------ Accounting Officer)
Michael R. Mattingly

/s/ TIMOTHY TOMLINSON Director July 14, 1999
- ------------------------------------
Timothy Tomlinson

/s/ D. JAMES BIDZOS Director July 14, 1999
- ------------------------------------
D. James Bidzos

/s/ SHIGEKI MORITA Director July 14, 1999
- ------------------------------------
Shigeki Morita
</TABLE>

II-5

<PAGE>

EXHIBIT INDEX

EXHIBIT NO. DESCRIPTION
- -------------- --------------------------------------------------------------
10.1 1998 Employee Stock Option Plan

10.2 1998 Directors and Consultants Stock Option Plan

10.5 Employment Agreement with Michael S. Battaglia

10.6 Employment Agreement with Robert Protheroe

10.7 Employment Agreement with Quresh Sachee

10.9 Operating Agreement dated May 28, 1998 between Fischer
International System Corporation and SmartDisk, as amended

10.11 Distribution Agreement dated May 28, 1998 between Fischer
International Systems Corporation and SmartDisk

10.12 Investors' Rights Agreement dated May 22, 1998 among Smart
Disk and each of the investors a party thereto

10.16 Form of Indemnification Agreement between the Registrant and
each of its directors and executive officers

23.2 Consent of Ernst & Young LLP

27.1 Financial Data Schedules (SEC use only)

Exhibit 10.1

SMARTDISK CORPORATION

1998 EMPLOYEE STOCK OPTION PLAN
AS ADOPTED JANUARY 27, 1998

1. PURPOSE AND TYPES OF OPTIONS. This 1998 Stock Option Plan (the
"PLAN") is intended to increase the incentives of, and encourage stock ownership
by employees (including members of the Company's Board of Directors who are
employees of the Company) providing services to SmartDisk Corporation, a
Delaware corporation (the "COMPANY"), or to corporations which are or become
subsidiary corporations of the Company. As used in this Plan, the terms "PARENT
CORPORATION" and "SUBSIDIARY CORPORATION" shall have the meanings set forth in
Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986, as
amended ("INTERNAL REVENUE CODE"). The Plan is intended to provide such
employees with a proprietary interest (or to increase their proprietary
interest) in the Company, and to encourage them to continue their employment by
the Company or its subsidiaries. Options granted pursuant to the Plan, at the
discretion of the Company's Board of Directors ("Board"), may be either
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code, or options that do not so qualify as incentive stock options and
which are referenced herein as non-statutory stock options. This Plan is
intended to be a written compensatory benefit plan within the meaning of Rule
701 of the Securities Act of 1933, as amended ("SECURITIES ACT").

2. STOCK. The capital stock subject to the Plan shall be shares of the
Company's authorized but unissued Common Stock ("COMMON STOCK") or treasury
shares of Common Stock. Subject to adjustments pursuant to Section 8 hereof, the
maximum aggregate number of shares of Common Stock which may be issued under the
Plan is Five Million Eight Hundred Eighteen Thousand One Hundred One
(5,818,181). In the event that any outstanding option under the Plan shall
expire by its terms or is otherwise terminated for any reason (or if shares of
Common Stock of the Company which are issued upon exercise of an option granted
hereunder are subsequently reacquired by the Company pursuant to contractual
rights of the Company under the particular stock option agreement), the shares
of the Common Stock allocated to the unexercised portion of such option (or the
shares so reacquired by the Company pursuant to the terms of the stock option
agreement) shall again become available to be made subject to options granted
under the Plan. Notwithstanding any other provision of this Plan, the aggregate
number of shares of Common Stock subject to outstanding options granted under
this Plan at any given time, plus the aggregate number of shares which have been
issued upon exercise of all options granted under this Plan and which remain
outstanding, shall never be permitted to exceed the maximum number of shares
specified above in this Section 2 (subject to adjustments under Section 8).

3. ADMINISTRATION. The Plan shall be administered by the Board. The
interpretation and construction by the Board of any provision of this Plan, or
of any option granted pursuant hereto, shall be final, binding and conclusive.
No member of the Board shall be liable to the Company or to any Subsidiary or
Parent corporation, or to the holder of any option granted hereunder, for any
action, inaction, determination or interpretation made in good faith with
respect to the Plan or any transaction hereunder. Notwithstanding the foregoing,
the Board shall have the authority to delegate some or all of its duties to
administer this Plan and to exercise its powers hereunder to a committee
("COMMITTEE")

<PAGE>

SmartDisk Corporation
1998 Employee Stock Option Plan
Page 2

appointed by the Board. For purposes of this Plan, all references herein to
"Board" shall be deemed to also refer to any such Committee. Any Committee
charged with administration of the Plan shall have all the powers and
protections provided to the Board under this Plan until the Board shall revoke
or restrict such powers or protections. More specifically, the Board, subject to
compliance with the remaining provisions of this Plan, shall have the following
powers and authority (which listing is provided by way of example and is not
intended to be comprehensive or limiting to the extent of powers not included):

3.1 SELECTION OF OPTIONEES. To determine the persons providing
services to the Company to whom, and the time or times at which, options to
purchase Common Stock of the Company shall be granted;

3.2 NUMBER OF OPTION SHARES. To determine the number of shares
of Common Stock to be subject to options granted to each such person;

3.3 EXERCISE PRICE. To determine the price to be paid for the
shares of Common Stock upon the exercise of each option;

3.4 TERM AND EXERCISE SCHEDULE. To determine the term and the
exercise schedule of each option;

3.5 OTHER TERMS OF OPTIONS. To determine the terms and
conditions of each stock option agreement (which need not be identical) entered
into between the Company and any person to whom the Board determines to grant an
option;

3.6 INTERPRETATION OF PLAN. To interpret the Plan and to
prescribe, amend and rescind rules and regulations relating to the Plan;

3.7 AMENDMENT OF OPTIONS. With the consent of the holder
thereof, to modify or amend any option granted under the Plan; and

3.8 GENERAL AUTHORITY. To take such actions and make such
determinations deemed necessary or advisable by the Board for the administration
of the Plan, subject to complying with the Plan and with applicable legal
requirements.

4. ELIGIBILITY AND AWARD OF OPTIONS.

4.1 AUTHORITY TO GRANT AND ELIGIBILITY. The Board shall have
full and final authority, in its discretion and at any time and from time to
time during the term of this Plan, to grant or authorize the granting of options
to employees of the Company or its Subsidiary corporations as it may select, and
to determine the number of shares of Common Stock to be subject to each option.
Any individual who is eligible to receive a stock option under this Plan shall
be eligible to hold more than one option at any given time, in the discretion of
the Board. The Board shall have full and final authority in its discretion to
determine, in the case of employees (including employees that are officers or
directors), whether such options shall be incentive stock options or
non-statutory stock options;

<PAGE>

SmartDisk Corporation
1998 Employee Stock Option Plan
Page 3

however, no incentive stock option may be granted to any person who is not a
bona fide employee of the Company or of a Subsidiary corporation of the Company.
Persons selected by the Board who are prospective employees of the Company or
its subsidiaries, including members of the Board, shall be eligible to receive
non-statutory stock options; provided, however, that in the case of such
prospective employment or other engagement, the exercisability of such options
shall be subject in each case to such person in fact becoming an employee of the
Company or its subsidiaries.

4.2 CERTAIN RESTRICTIONS APPLICABLE TO STOCK OPTIONS. No
incentive stock option shall be granted to any employee who, at the time such
incentive stock option is granted, owns stock possessing more than ten percent
(10%) of the total combined voting power of all classes of outstanding capital
stock of the Company, or of any Parent corporation or Subsidiary corporation of
the Company, unless the exercise price (as provided in Section 5.1 hereof) is
not less than one hundred ten percent (110%) of the fair market value of the
Common Stock on the date the incentive stock option is granted and the period
within which the incentive stock option may be exercised (as provided in Section
5.2 hereof) does not exceed five (5) years from the date the incentive stock
option is granted. In determining stock ownership for purposes of this Section
4.2, the provisions of Section 422(b)(6) of the Internal Revenue Code shall
control. An employee shall be considered as owning the voting capital stock
owned, directly or indirectly, by or for his or her brothers and sisters,
spouse, ancestors and lineal descendants. Voting capital stock owned, directly
or indirectly, by or for a corporation, partnership, estate or trust shall be
considered as being owned proportionately by or for its stockholders, partners
or beneficiaries, as applicable. Additionally, for purposes of this Section 4.2,
outstanding capital stock shall include all capital stock actually issued and
outstanding immediately after the grant of the option to the employee.
Outstanding capital stock shall not include capital stock authorized for issue
under outstanding options held by the employee or by any other person.
Additionally, the aggregate fair market value (determined as of the date an
option is granted) of the Common Stock with respect to which incentive stock
options granted are exercisable for the first time by an employee during any one
calendar year (under this Plan and under all other incentive stock option plans
of the Company and of any Parent or Subsidiary corporation) shall not exceed One
Hundred Thousand Dollars ($100,000). If the aggregate fair market value
(determined as of the date an option is granted) of the Common Stock with
respect to which incentive stock options granted are exercisable for the first
time by an employee during any calendar year exceeds One Hundred Thousand
Dollars ($100,000), the options for the first One Hundred Thousand Dollars
($100,000) worth of shares of Common Stock to become exercisable in such
calendar year shall be incentive stock options and the options for the amount in
excess of One Hundred Thousand Dollars ($100,000) that become exercisable in
that calendar year shall be non-statutory stock options. In the event that the
Internal Revenue Code or the regulations promulgated thereunder are amended
after the effective date of the Plan to provide for a different limit on the
fair market value of shares of Common Stock permitted to be subject to incentive
stock options, such different limit shall be automatically incorporated herein
and shall apply to options granted after the effective date of such amendment.

4.3 DATE OF GRANT. The date on which an option shall be
granted shall be stated in each option agreement and shall be the date of the
Board's authorization of such grant or such later date as may be set by the
Board at the time such grant is authorized.

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1998 Employee Stock Option Plan
Page 4

5. TERMS AND PROVISIONS OF OPTION AGREEMENTS. Each option granted under
the Plan shall be evidenced by a stock option agreement between the person to
whom the option is granted and the Company. Each such agreement shall be subject
to the following terms and conditions, and to such other terms and conditions
not inconsistent herewith as the Board may deem appropriate in each case:

5.1 EXERCISE PRICE. The price to be paid for each share of
Common Stock upon the exercise of an option shall be determined by the Board at
the time the option is granted; provided however that (1) no incentive stock
option shall have an exercise price less than one hundred percent (100%) of the
fair market value of the Common Stock on the date the option is granted; and (2)
all incentive stock options granted to a ten percent (10%) stockholders shall
have the exercise price set at not less than one hundred ten percent (110%) of
fair market value at the date of the grant, as provided in Section 4.2 hereof;
and provided, further that the exercise price of any option may not be decreased
to below the par value of the shares. For all purposes of this Plan, the fair
market value of the Common Stock on any particular date shall be determined as
follows:

5.1.1 If such Common Stock is then quoted on the
Nasdaq National Market System, its last reported sale price on the Nasdaq
National Market System on the trading day next preceding that date or, if no
such reported sale takes place on the trading day next preceding such date, the
average of its closing bid and asked prices on the Nasdaq National Market System
on the trading day next preceding such date;

5.1.2 If such Common Stock is publicly traded and is
then listed on a national securities exchange, its last reported sale price on
the national securities exchange on which the Common Stock is then listed on the
trading day next preceding that date or, if no such reported sale takes place on
the trading day next preceding such date, the average of its closing bid and
asked prices on the national securities exchange on which the Common Stock is
then listed on the trading day next preceding such date; or

5.1.3 If none of the foregoing is applicable, by the
Board in good faith, with such determination being based upon past arms'-length
sales by the Company of its equity securities and other factors considered
relevant in determining the Company's fair value.

Notwithstanding anything to the contrary in this Section 5.1, any Option
Agreement may provide for alternative means of valuation for the purpose of
repurchase at fair market value of shares acquired.

5.2 TERM OF OPTIONS. The period or periods within which an
option may be exercised shall be determined by the Board at the time the option
is granted, but no exercise period shall exceed ten (10) years from the date the
option is granted (or five (5) years in the case of any incentive stock option
granted to a ten percent (10%) stockholder as described in Section 4.2 hereof).

5.3 EXERCISABILITY. Stock options granted under this Plan
shall be exercisable at such future time or times (or may be fully exercisable
upon grant), whether or not in installments, as shall be determined by the Board
and provided in the form of stock option agreement. Notwithstanding any other
provisions of this Plan, no option may be exercised after the expiration of ten
(10) years from

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1998 Employee Stock Option Plan
Page 5

the date of grant.

5.4 METHOD OF PAYMENT FOR COMMON STOCK UPON EXERCISE. Except
as otherwise provided in the applicable stock option agreement (subject to the
limitations of this Plan), the exercise price for each share of Common Stock
purchased under an option shall be paid in full in cash at the time of purchase
(or by check acceptable to the Board). At the discretion of the Board, the stock
option agreement may provide for (or the Board may permit) the exercise price to
be paid by one or more of the following additional alternative methods: (i) the
surrender of shares of the Company's Common Stock, in proper form for transfer,
owned by the person exercising the option and having a fair market value on the
date of exercise equal to the exercise price, provided that such shares (a) have
been outstanding for more than six (6) months and have been paid for within the
meaning of Rule 144 under the Securities Act (and, if such shares were purchased
from the Company by use of a promissory note, such note has been fully paid with
respect to such shares) or (b) were obtained by the optionee in the public
market, (ii) to the extent permitted under the applicable provisions of the
Delaware General Corporation Law, the delivery by the person exercising the
option of a full recourse promissory note executed by such person, bearing
interest at a per annum rate which is not less than the "test rate" as set by
the regulations promulgated under Sections 483 or 1274, as applicable, of the
Internal Revenue Code and as in effect on the date of exercise, or (iii) any
combination of cash, shares of Common Stock or promissory notes, so long as the
sum of the cash so paid, plus the fair market value of the shares of Common
Stock so surrendered and the principal amounts of the promissory notes so
delivered, is equal to the aggregate exercise price. Without limiting the
generality of the foregoing, the form of option agreement may provide (or the
Board may permit) that the option be exercised through a "net issue" exercise
procedure (cash-less exercise), whereby the optionee may elect to receive shares
of the Company's Common Stock having an aggregate fair market value at the date
of exercise equal to the net value of the portion of the option so exercised as
of the exercise date. For purposes of the foregoing, the net value of any option
(or portion thereof) as of such exercise date shall be equal to the aggregate
fair market value of the shares subject to the option (or portion thereof being
exercised) less the aggregate exercise price of the option (or portion thereof).
In such event the Company shall issue to the optionee a number of shares of the
Company's Common Stock having a fair market value as of the date of exercise
equal to the net value of the option (or portion thereof being exercised). No
share of Common Stock shall be issued under any option until full payment
therefor has been made in accordance with the terms of the stock option
agreement (and in compliance with the Plan). Notwithstanding the foregoing, an
Option may not be exercised by surrender to the Company of shares of the
Company's Common Stock to the extent such surrender of stock would constitute a
violation of the provisions of any law, regulation and/or agreement restricting
the redemption of the Company's Common Stock. Additionally, if permitted by the
form of stock option agreement, or at the Board's discretion, any such
promissory note may permit the payment of principal and interest accruing
thereunder by surrender of shares of the Company's Common Stock, in proper form
for transfer, and having a fair market value on the date of payment and
surrender equal to the dollar amount to be applied to principal and accrued
interest thereunder. No promissory note shall be permitted if the exercise of an
Option using a promissory note will be a violation of any law.

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1998 Employee Stock Option Plan
Page 6

provide for the assignability and subsequent exercise of non-statutory stock
options on such terms and conditions as the Board, in its sole discretion, may
from time to time determine consistent with applicable law and the purposes of
the Plan.

5.6 TERMINATION OF EMPLOYMENT PROVISIONS APPLICABLE TO STOCK
OPTIONS. Each stock option agreement shall comply with the following provisions
relating to early termination of the option based upon termination of the
optionee's service to the Company:

5.6.1 DEATH. If the optionee's employment with the
Company is terminated because of the death of the optionee, any stock option
which such optionee holds may be exercised, to the extent it was exercisable at
the date of death, within such period after the date of death as the Board shall
prescribe in the stock option agreement (not less than six (6) months after
death and such longer period of time as determined by the Board, in its sole
discretion), by the optionee's representative or by the person entitled thereto
under the optionee's will or the laws of intestate succession. If the option is
not so exercised in accordance with the foregoing, it shall terminate upon the
expiration of such prescribed period.

5.6.2 RETIREMENT. If the optionee's employment is
terminated by voluntary retirement at or after reaching sixty-five (65) years of
age, the optionee may, within three (3) months following such termination (or
such longer period of time as determined by the Board, in its sole discretion),
exercise the Option to the extent it was exercisable by the optionee on the date
of such termination unless the optionee dies prior thereto, in which event the
optionee shall be treated as though the optionee had died on the date of
retirement and the provisions of Section 5.6.1 hereof shall apply.

5.6.3 DISABILITY. If the optionee's employment with
the Company is terminated because of the disability of the optionee, any stock
option which the optionee holds may be exercised by the optionee or the
optionee's estate within such period after the date of termination of employment
resulting from such disability (not less than six (6) months after termination
by reason of disability and such longer period of time as determined by the
Board, in its sole discretion) as the Board shall prescribe in the stock option
agreement, to the extent such option would otherwise be exercisable on the date
of such termination. If the option is not so exercised in accordance with the
foregoing, it shall terminate upon the expiration of such prescribed period,
unless the optionee dies prior thereto, in which event the optionee shall be
treated as though his or her death occurred on the date of termination resulting
from such disability and the provisions of Section 5.6.1 hereof shall apply. The
term "disability" shall mean the inability of the optionee, in the opinion of a
qualified physician acceptable to the Company, to perform the major duties of
the optionee's position because of the illness or injury of the optionee.

5.6.4 CAUSE. If the optionee's employment is
terminated for "cause" as defined by the terms of the Plan, the option
agreement, a contract of employment or other service contract, or applicable
law, any option held by the optionee shall expire on the optionee's termination
date or at such later time and on such conditions as determined by the Board, in
its sole discretion. In the absence of any other provisions in the option
agreement, the term "cause" shall be defined as the willful breach or habitual
neglect of the duties which optionee is required to perform under his or her

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1998 Employee Stock Option Plan
Page 7

employment or other service agreement with Company, or any act of dishonesty,
fraud, misrepresentation or other acts of moral turpitude as would prevent the
effective performance of optionee's duties.

5.6.5 TRANSFER TO RELATED CORPORATION. In the event
that an optionee leaves the employ of the Company to become an employee of any
Parent or Subsidiary corporation of the Company, or if the optionee leaves the
employ of any such Parent or Subsidiary corporation to become an employee of the
Company or of another Parent or Subsidiary corporation, such optionee shall be
deemed to continue as an employee of the Company for all purposes of this Plan,
and any reference to employment by the Company shall also be deemed to refer to
employment with any Parent or Subsidiary of the Company. The optionee's
employment shall be deemed to have terminated upon an actual termination of
employment and upon such Parent or Subsidiary Corporation of the Company ceasing
to have such relationship with the Company.

5.6.6 OTHER SEVERANCE. In the event an optionee
leaves the employ of the Company for any reason other than as set forth above in
this Section 5.6, any stock option which such optionee holds must be exercised,
to the extent it was exercisable at the date such optionee left the employ of
the Company, not later than one (1) month after the date on which the optionee's
employment terminates (or such longer period of time as determined by the Board,
in its sole discretion). The stock option shall terminate upon the expiration of
such prescribed period. For purposes of this Section 5, the Company, in its sole
discretion, shall determine whether the optionee's employment has terminated and
the effective date of such termination.

5.6.7 EXTENSION IF EXERCISE PREVENTED BY LAW.
Notwithstanding the foregoing, if the exercise of an option within the
applicable time periods set forth above is prevented because the issuance of
shares upon such exercise would constitute a violation of any applicable
federal, state or foreign securities law or other law or regulation, the option
shall remain exercisable until three (3) months after the date the optionee is
notified by the Company that the option is exercisable, but in any event no
later than the expiration of ten (10) years from the date of grant.

5.6.8 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B).
Notwithstanding the foregoing, if a sale within the applicable time periods set
forth in this Section 5.6 of shares acquired upon the exercise of the option
would subject the optionee to liability under Section 16(b) of the Securities
Exchange Act of 1934, as amended, the option shall remain exercisable until the
earliest to occur of (i) the tenth (10th) day following the date on which a sale
of such shares by the optionee would no longer be subject to such liability,
(ii) the one hundred and ninetieth (190th) day after the optionee's termination
of service, or (iii) the option expiration date.

5.7 ALL OPTIONS SUBJECT TO TERMS OF THIS PLAN. In addition to
the provisions contained in any option agreement granted under this Plan, each
such stock option agreement shall provide that the same is subject to the terms
and conditions of this Plan and each optionee shall be given a copy of this
Plan. Further, any terms or conditions contained in any such stock option
agreement granted hereunder which are inconsistent in any respect with the
provisions of this Plan shall be disregarded and void, or shall be deemed
amended to the extent necessary to comply with the provisions of this Plan and
the intent of the Board.

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SmartDisk Corporation
1998 Employee Stock Option Plan
Page 8

5.8 OTHER PROVISIONS. Option agreements under the Plan shall
contain such other provisions, including, without limitation: (i) rights of
first refusal in favor of the Company (or its assignees) applicable to shares of
Common Stock acquired upon exercise of an option which are subsequently proposed
to be transferred by the optionee, (ii) lock-up agreements (applicable in the
event of the public offering of the Common Stock of the Company) restricting an
optionee from any sales or other transfers of option stock for a designated
period of time following the effective date of a registration statement under
the Securities Act, (iii) commitments to pay cash bonuses, make loans or
transfer other property to an optionee upon exercise of any option, and (iv)
restrictions required by federal and applicable state securities laws, all as
the Board shall deem necessary or advisable; provided that no such additional
provision shall be inconsistent with any other term or condition of this Plan or
applicable state law and no such additional provision shall cause any incentive
stock option granted pursuant to this Plan to fail to qualify as an incentive
stock option under Section 422 of the Internal Revenue Code. Without limiting
the generality of the foregoing, the Board may provide in the form of stock
option agreement that, (a) in lieu of an exercise schedule, the option may
immediately be exercisable in full and provide a "vesting schedule" with respect
to the stock so purchased, giving the Company (or its assignees) the right to
repurchase the shares of Common Stock at the exercise price to the extent such
shares have not become vested upon any termination of the optionee's employment
or other engagement with the Company, which vesting may depend upon continued
service to the Company pursuant to which the obligation to resell such shares to
the Company shall lapse; (b) optionee's service or employment with the Company
shall not be deemed to have terminated merely because of a change in the
capacity in which the optionee renders service, provided there is no
interruption or termination of the optionee's service; or (c) an exercise or
vesting schedule shall be accelerated upon the consummation of a "change in
control" or similar event.

6. SECURITIES LAW AND OTHER REGULATORY REQUIREMENTS. The Board shall
require any potential optionee, as a condition of the exercise of an option, to
represent and establish to the satisfaction of the Board that all shares of
Common Stock to be acquired upon the exercise of such option will be acquired
for investment and not for resale. No shares of Common Stock shall be issued
upon the exercise of any option unless and until: (i) the Company and the
optionee have satisfied all applicable requirements under the Securities Act of
1933 and the Securities Exchange Act of 1934, as amended, (ii) any applicable
listing requirement of any stock exchange on which the Company's Common Stock is
listed has been satisfied, and (iii) all other applicable provisions of state
and federal law have been satisfied. The Board shall cause such legends to be
placed on certificates evidencing shares of Common Stock issued upon exercise of
an option as, in the opinion of the Company's counsel, may be required by
federal and applicable state securities laws.

7. WITHHOLDING TAXES. The exercise of any option granted under this
Plan shall be conditioned upon the optionee's payment to the Company of all
amounts (in addition to the exercise price) required to meet federal, state,
local or foreign taxes of any kind required by law to be withheld with respect
to shares to be issued on exercise of such option. The Board, in its discretion,
may declare cash bonuses to an optionee to satisfy any such withholding
requirements or may incorporate provisions in the form of stock option agreement
allowing (or after grant of the option may permit, in its discretion) an
optionee to satisfy any such withholding obligations, in whole or in part, by
delivery of shares of the

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1998 Employee Stock Option Plan
Page 9

Company's Common Stock already owned by the optionee and which are not subject
to repurchase, forfeiture, vesting or other similar requirements or
restrictions. The fair market value of any such shares used to satisfy such
withholding obligations shall be determined as of the date the amount of tax to
be withheld is to be determined. The Company shall have the right at any time to
deduct from payments of any kind otherwise due to the optionee (whether shares
of Common Stock issuable upon exercise of an Option, regular salary,
commissions, or otherwise) any federal, state or local taxes of any kind
required by law to be withheld with respect to any shares issued upon exercise
of options granted under the Plan.

8. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.

8.1 STOCK SPLITS AND SIMILAR EVENTS; RECLASSIFICATIONS. The
number of shares of Common Stock covered by outstanding options granted under
this Plan and the exercise price thereof shall be proportionately adjusted for
any increase or decrease in the number of issued and outstanding shares of
Common Stock resulting from a subdivision or combination of such shares or the
payment of a stock dividend (but only on the Common Stock) or a recapitalization
or any other increase or decrease in the number of such outstanding shares of
Common Stock effected without the receipt of consideration by the Company;
provided, however, that the conversion of any convertible securities of the
Company shall not be deemed to have been "effected without receipt of
consideration." In the event that the shares of Common Stock covered by
outstanding options granted under this Plan are reclassified by the Company,
other than pursuant to a transaction described in Section 8.2, then such options
shall apply to the appropriate number of shares of newly classified Common Stock
designated by the Board.

8.2 MERGERS AND ACQUISITIONS. If the Company shall be a
constituent corporation in any merger or consolidation which results in the
holders of the outstanding voting securities of the Company (determined
immediately prior to such merger or consolidation) owning, directly or
indirectly, at least a majority of the beneficial interest in the outstanding
voting securities of the surviving corporation or its Parent corporation
(determined immediately after such merger or consolidation), the options granted
under this Plan shall pertain and apply to the securities or other property to
which a holder of the number of shares subject to the unexercised portion of
this Option would have been entitled. Any of (i) a dissolution or liquidation of
the Company; (ii) a sale of substantially all of the Company's business and
assets; or (iii) a merger or consolidation (in which the Company is a
constituent corporation) which results in the holders of the outstanding voting
securities of the Company (determined immediately prior to such merger or
consolidation) owning, directly or indirectly, less than a majority of the
beneficial interest in the outstanding voting securities of the surviving
corporation or its Parent corporation (determined immediately after such merger
or consolidation) will cause the Option to terminate, unless (a) the agreement
of such sale, merger, consolidation or other transaction otherwise provides or
(b) a sale on the day preceding the scheduled consummation of such event (the
"test date") of shares acquired upon the exercise of the option would subject
the optionee to liability under Section 16(b) of the Securities Exchange Act of
1934, as amended, in which event the option shall remain exercisable until the
earliest to occur of (i) the tenth (10th) day following the date on which a sale
of such shares by the optionee would no longer be subject to such liability,
(ii) the one hundred and ninetieth (190th) day after the test date, or (iii) the
option's expiration date.

8.3 BOARD'S DETERMINATION FINAL AND BINDING UPON OPTIONEES.
The foregoing

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SmartDisk Corporation
1998 Employee Stock Option Plan
Page 10

determinations and adjustments in this Section 8 relating to stock or securities
of the Company shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive. The Company shall give notice of any
such adjustment or action to each optionee; provided, however, that any such
adjustment or action shall be effective and binding for all purposes, whether or
not such notice is given or received.

8.4 NO FRACTIONS OF SHARES. Fractions of shares shall not be
issued by the Company. Instead, such fractions of shares shall either be paid in
cash at fair market value or shall be rounded up or down to the nearest share,
as determined by the Board.

8.5 NO RIGHTS EXCEPT AS EXPRESSLY STATED. Except as
hereinabove expressly provided in this Section 8, no additional rights shall
accrue to any optionee by reason of any subdivision or combination of shares of
the capital stock of any class or the payment of any stock dividend or any other
increase or decrease in the number of shares of any class or by reason of any
dissolution, liquidation, merger or consolidation or spin-off of assets or of
stock of another corporation, and any issue by the Company of shares of stock of
any class or of securities convertible into shares of stock of any class shall
not affect, and no adjustment by reason thereof shall be made with respect to,
the number or exercise price of shares subject to options granted hereunder.

8.6 NO LIMITATIONS ON COMPANY'S DISCRETION. The grant of
options under this Plan shall not affect in any way the right or power of the
Company to make adjustments, reclassifications, reorganizations or changes of
its capital or business structure or to merge or consolidate or to dissolve,
liquidate, sell or transfer all or any part of its business or assets.

9. NO ADDITIONAL EMPLOYMENT RELATED RIGHTS OR BENEFITS.

9.1 NO SPECIAL EMPLOYMENT RIGHTS. Nothing contained in this
Plan or in any option granted hereunder shall confer upon any optionee any right
with respect to the continuation of his or her employment by the Company or
interfere in any way with the right of the Company, subject to the terms of any
separate employment agreement to the contrary, at any time to terminate such
employment or to increase or decrease the compensation of any optionee. Whether
an authorized leave of absence, or absence in military or government service,
shall constitute termination of an optionee's employment shall be determined by
the Board.

9.2 OTHER EMPLOYEE BENEFITS. The amount of any compensation
deemed to be received by any employee as a result of the exercise of an option
or the sale of shares received upon such exercise will not constitute
compensation with respect to which any other employment (or other engagement)
related benefits of such optionee are determined, including, without limitation,
benefits under any bonus, pension, profit-sharing, life insurance or salary
continuation plan, except as otherwise specifically determined by the Board or
as expressly provided for in the option agreement. The granting of an option
shall impose no obligation upon the optionee to exercise such option.

10. RIGHTS AS A SHAREHOLDER AND ACCESS TO INFORMATION. No optionee and
no person claiming under or through any such optionee shall be, or have any of
the rights or privileges of, a

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SmartDisk Corporation
1998 Employee Stock Option Plan
Page 10

stockholder of the Company in respect of any of the shares issuable upon the
exercise of any option granted under this Plan, unless and until the option is
properly and lawfully exercised and a certificate representing the shares so
purchased is duly issued to the optionee or to his or her estate. No adjustment
shall be made for dividends or any other rights if the record date relating to
such dividend or other right is before the date the optionee became a
stockholder.

11. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. Subject to the
limitations of this Plan, the Board may modify, extend or renew outstanding
options granted under the Plan. Furthermore, the Board may, subject to the other
provisions of this Plan, upon the cancellation of previously granted options
having higher per share exercise prices, regrant options at a lower price;
provided, however, that no such modification or cancellation and regrant of an
option shall, without the written consent of the optionee, alter or impair any
rights of the optionee under any option previously granted under the Plan.

12. USE OF PROCEEDS. The proceeds received from the sale of shares of
the Common Stock upon exercise of options granted under the Plan shall be used
for general corporate purposes.

13. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of shares of its Common
Stock as shall be sufficient to satisfy the requirements of the Plan and all
options issued hereunder.

14. TERM OF PLAN.

14.1 EFFECTIVE DATES. The Plan became effective when adopted
by the Board, but no incentive stock option granted under the Plan shall become
exercisable unless and until the Plan shall have been approved by the Company's
stockholders by the vote of the holders of a majority of the outstanding shares
of the Company present and entitled to vote at a duly held meeting of the
Company's stockholders (or by consent of the holders of the outstanding shares
of the Company entitled to vote) in accordance with the requirements of the
Company's Bylaws and the Delaware General Corporation Law. If such stockholder
approval is not obtained within twelve (12) months after the date of the Board's
adoption of the Plan, any incentive stock options previously granted under the
Plan shall become non-statutory options and no further incentive stock options
shall be granted. Subject to the foregoing limitation, options may be granted
under the Plan at any time after the effective date and before the date fixed
for termination of the Plan.

14.2 TERMINATION. Unless sooner terminated in accordance with
Section 15, the Plan shall terminate upon the earlier of: (i) the close of
business on the last business day preceding the tenth (10th) anniversary of the
earlier of [a] the date of the Plan's adoption by the Board occurs or [b] the
date of the Plan's approval by the Company's stockholders, or (ii) the date on
which all shares available for issuance under the Plan shall have been issued
pursuant to options granted under the Plan and none of such shares shall remain
subject to contractual repurchase rights of the Company pursuant to "vesting" or
other similar provisions. If the date of termination is determined under clause
(i) above, then any options outstanding on such date shall continue to have
force and effect in accordance with the provisions of the option agreements
evidencing such options.

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1998 Employee Stock Option Plan
Page 12

15. EARLY TERMINATION AND AMENDMENT OF THE PLAN. The Board may from
time to time suspend or terminate the Plan or revise or amend it; provided,
however, that, without the approval of the Company's stockholders (except as to
15.1 below, which also requires the consent of the affected optionees) at a duly
held meeting of the Company's stockholders by the vote of a majority of the
shares present and entitled to vote (or by written consent of the holders
entitled to vote) in compliance with the requirements of the Company's Bylaws
and the Delaware General Corporation Law, no such action of the Board shall:

15.1 MODIFICATIONS OF OUTSTANDING OPTIONS. Without the consent
of each affected optionee, alter or impair any rights of an optionee under any
option previously granted under the Plan;

15.2 INCREASES IN NUMBER OF SHARES SUBJECT TO THE PLAN.
Increase the aggregate number of shares of the Common Stock which may be issued
upon exercise of options granted under the Plan (except for adjustments made
pursuant to Section 8 hereof);

15.3 CHANGES IN ELIGIBILITY. Change the designation
of employees eligible to receive incentive stock options under the Plan;

15.4 PLAN DURATION. Extend the termination date
beyond that provided in Section 14.2;

15.5 CHANGES NOT APPROVED BY LEGAL COUNSEL. Otherwise amend or
modify the Plan (or outstanding options) under circumstances where stockholder
approval is considered necessary in the opinion of legal counsel to the Company;
or

15.6 CHANGES TO THIS SECTION. Amend this Section 15 to defeat
its purposes.

Exhibit 10.2

SMARTDISK CORPORATION

1998 DIRECTORS AND CONSULTANTS STOCK OPTION PLAN
AS ADOPTED JANUARY 27, 1998

1. PURPOSE AND TYPES OF OPTIONS. This 1998 Directors and Consultants
Stock Option Plan (the "PLAN") is intended to increase the incentives of, and
encourage stock ownership by, officers, directors, consultants and other
independent contractors (including members of the Company's Board of Directors
who are not employees of the Company) providing services to SmartDisk
Corporation, a Delaware corporation (the "COMPANY"), or to corporations which
are or become subsidiary corporations of the Company. As used in this Plan, the
terms "PARENT CORPORATION" and "SUBSIDIARY CORPORATION" shall have the meanings
set forth in Sections 424(e) and (f), respectively, of the Internal Revenue Code
of 1986, as amended ("INTERNAL REVENUE CODE"). The Plan is intended to provide
such officers, directors, and consultants and other independent contractors with
a proprietary interest (or to increase their proprietary interest) in the
Company, and to encourage them to continue their engagement by the Company or
its subsidiaries. Options granted pursuant to the Plan do not qualify as
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code and are referenced herein as non-statutory stock options. This Plan
is intended to be a written compensatory benefit plan within the meaning of Rule
701 of the Securities Act of 1933, as amended ("SECURITIES ACT").

2. STOCK. The capital stock subject to the Plan shall be shares of the
Company's authorized but unissued Common Stock ("COMMON STOCK") or treasury
shares of Common Stock. Subject to adjustments pursuant to Section 8 hereof, the
maximum aggregate number of shares of Common Stock which may be issued under the
Plan is One Million (1,000,000). In the event that any outstanding option under
the Plan shall expire by its terms or is otherwise terminated for any reason (or
if shares of Common Stock of the Company which are issued upon exercise of an
option granted hereunder are subsequently reacquired by the Company pursuant to
contractual rights of the Company under the particular stock option agreement),
the shares of the Common Stock allocated to the unexercised portion of such
option (or the shares so reacquired by the Company pursuant to the terms of the
stock option agreement) shall again become available to be made subject to
options granted under the Plan. Notwithstanding any other provision of this
Plan, the aggregate number of shares of Common Stock subject to outstanding
options granted under this Plan at any given time, plus the aggregate number of
shares which have been issued upon exercise of all options granted under this
Plan and which remain outstanding, shall never be permitted to exceed the
maximum number of shares specified above in this Section 2 (subject to
adjustments under Section 8).

3. ADMINISTRATION. The Plan shall be administered by the Company's
Board of Directors ("BOARD"). The interpretation and construction by the Board
of any provision of this Plan, or of any option granted pursuant hereto, shall
be final, binding and conclusive. No member of the Board shall be liable to the
Company or to any Subsidiary or Parent corporation, or to the holder of any
option granted hereunder, for any action, inaction, determination or
interpretation made in good faith with respect to the Plan or any transaction
hereunder. Notwithstanding the foregoing, the Board shall have the authority to
delegate some or all of its duties to administer this Plan and to exercise its
powers hereunder to a committee ("COMMITTEE") appointed by the Board. For
purposes of this Plan, all references herein to "Board" shall be deemed to also
refer to any such Committee. Any Committee charged with administration of the
Plan shall have all the powers and protections provided to the Board under this
Plan until the Board shall revoke or restrict such powers or protections. More
specifically, the Board, subject to compliance with the remaining provisions of
this Plan, shall have the following powers and authority (which listing is
provided by way of example and is not intended to be comprehensive or limiting
to the extent of powers not included):

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SmartDisk Corporation
1998 Directors and Consultants Stock Option Plan
Page 2

3.1 SELECTION OF OPTIONEES. To determine the persons providing
services to the Company to whom, and the time or times at which, options to
purchase Common Stock of the Company shall be granted;

3.2 NUMBER OF OPTION SHARES. To determine the number of shares
of Common Stock to be subject to options granted to each such person;

3.3 EXERCISE PRICE. To determine the price to be paid for the
shares of Common Stock upon the exercise of each option;

3.4 TERM AND EXERCISE SCHEDULE. To determine the term and the
exercise schedule of each option;

3.6 INTERPRETATION OF PLAN. To interpret the Plan and to
prescribe, amend and rescind rules and regulations relating to the Plan;

3.7 AMENDMENT OF OPTIONS. With the consent of the holder
thereof, to modify or amend any option granted under the Plan; and

4. ELIGIBILITY AND AWARD OF OPTIONS.

4.1 AUTHORITY TO GRANT AND ELIGIBILITY. The Board shall have
full and final authority, in its discretion and at any time and from time to
time during the term of this Plan, to grant or authorize the granting of options
to such officers and directors of, and consultants and other independent
contractors retained by, the Company or its Subsidiary corporations as it may
select, and to determine the number of shares of Common Stock to be subject to
each option. Any individual who is eligible to receive a stock option under this
Plan shall be eligible to hold more than one option at any given time, in the
discretion of the Board. Persons selected by the Board who are prospective
consultants or other independent contractors to be retained by the Company or
its subsidiaries, including members of the Board, shall be eligible to receive
non-statutory stock options; provided, however, that in the case of such
prospective engagement, the exercisability of such options shall be subject in
each case to such person in fact becoming a Director, consultant or other
independent contractor, as applicable, of the Company or its subsidiaries.

4.2 DATE OF GRANT. The date on which an option shall be
granted shall be stated in each option agreement and shall be the date of the
Board's authorization of such grant or such later date as may be set by the
Board at the time such grant is authorized.

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SmartDisk Corporation
1998 Directors and Consultants Stock Option Plan
Page 3

5.1 EXERCISE PRICE. The price to be paid for each share of
Common Stock upon the exercise of an option shall be determined by the Board at
the time the option is granted; provided that the exercise price of any option
may not be decreased to below the par value of the shares. For all purposes of
this Plan, the fair market value of the Common Stock on any particular date
shall be determined as follows:

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SmartDisk Corporation
1998 Directors and Consultants Stock Option Plan
Page 4

promissory notes, so long as the sum of the cash so paid, plus the fair market
value of the shares of Common Stock so surrendered and the principal amounts of
the promissory notes so delivered, is equal to the aggregate exercise price.
Without limiting the generality of the foregoing, the form of option agreement
may provide (or the Board may permit) that the option be exercised through a
"net issue" exercise procedure (cash-less exercise), whereby the optionee may
elect to receive shares of the Company's Common Stock having an aggregate fair
market value at the date of exercise equal to the net value of the portion of
the option so exercised as of the exercise date. For purposes of the foregoing,
the net value of any option (or portion thereof) as of such exercise date shall
be equal to the aggregate fair market value of the shares subject to the option
(or portion thereof being exercised) less the aggregate exercise price of the
option (or portion thereof). In such event the Company shall issue to the
optionee a number of shares of the Company's Common Stock having a fair market
value as of the date of exercise equal to the net value of the option (or
portion thereof being exercised). No share of Common Stock shall be issued under
any option until full payment therefor has been made in accordance with the
terms of the stock option agreement (and in compliance with the Plan).
Notwithstanding the foregoing, an Option may not be exercised by surrender to
the Company of shares of the Company's Common Stock to the extent such surrender
of stock would constitute a violation of the provisions of any law, regulation
and/or agreement restricting the redemption of the Company's Common Stock.
Additionally, if permitted by the form of stock option agreement, or at the
Board's discretion, any such promissory note may permit the payment of principal
and interest accruing thereunder by surrender of shares of the Company's Common
Stock, in proper form for transfer, and having a fair market value on the date
of payment and surrender equal to the dollar amount to be applied to principal
and accrued interest thereunder. No promissory note shall be permitted if the
exercise of an Option using a promissory note will be a violation of any law.

5.5 NON-ASSIGNABILITY. No stock option granted under the Plan
shall be assignable or transferable by an optionee except by will or the laws of
descent and distribution and shall be exercisable only by the optionee during
his or her lifetime; provided, however, that the Board may provide for the
assignability and subsequent exercise of non-statutory stock options on such
terms and conditions as the Board, in its sole discretion, may from time to time
determine consistent with applicable law and the purposes of the Plan.

5.6 TERMINATION OF SERVICE PROVISIONS APPLICABLE TO STOCK
OPTIONS. Each stock option agreement shall comply with the following provisions
relating to early termination of the option based upon termination of the
optionee's service to the Company as an independent contractor or Director:

5.6.1 DEATH. If the optionee's service with the
Company is terminated because of the death of the optionee, any stock option
which such optionee holds may be exercised, to the extent it was exercisable at
the date of death, within such period after the date of death as the Board shall
prescribe in the stock option agreement (not less than six (6) months after
death and such longer period of time as determined by the Board, in its sole
discretion), by the optionee's representative or by the person entitled thereto
under the optionee's will or the laws of intestate succession. If the option is
not so exercised in accordance with the foregoing, it shall terminate upon the
expiration of such prescribed period.

5.6.2 RETIREMENT. If the optionee's service is
terminated by voluntary retirement at or after reaching sixty-five (65) years of
age, the optionee may, within three (3) months following such termination (or
such longer period of time as determined by the Board, in its sole discretion),
exercise the Option to the extent it was exercisable by the optionee on the date
of such termination unless the optionee dies prior thereto, in which event the
optionee shall be treated as though the optionee had died on the date of
retirement and the provisions of Section 5.6.1 hereof shall apply.

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SmartDisk Corporation
1998 Directors and Consultants Stock Option Plan
Page 5

5.6.3 DISABILITY. If the optionee's service with the
Company is terminated because of the disability of the optionee, any stock
option which the optionee holds may be exercised by the optionee or the
optionee's estate within such period after the date of termination of employment
resulting from such disability (not less than six (6) months after termination
by reason of disability and such longer period of time as determined by the
Board, in its sole discretion) as the Board shall prescribe in the stock option
agreement, to the extent such option would otherwise be exercisable on the date
of such termination. If the option is not so exercised in accordance with the
foregoing, it shall terminate upon the expiration of such prescribed period,
unless the optionee dies prior thereto, in which event the optionee shall be
treated as though his or her death occurred on the date of termination resulting
from such disability and the provisions of Section 5.6.1 hereof shall apply. The
term "disability" shall mean the inability of the optionee, in the opinion of a
qualified physician acceptable to the Company, to perform the major duties of
the optionee's position because of the illness or injury of the optionee.

5.6.4 CAUSE. If the optionee's service is terminated
for "cause" as defined by the terms of the Plan, the option agreement, or other
service contract, or applicable law, any option held by the optionee shall
expire on the optionee's termination date or at such later time and on such
conditions as determined by the Board, in its sole discretion. In the absence of
any other provisions in the option agreement, the term "cause" shall be defined
as the willful breach or habitual neglect of the duties which optionee is
required to perform under his or her employment or other service agreement with
Company, or any act of dishonesty, fraud, misrepresentation or other acts of
moral turpitude as would prevent the effective performance of optionee's duties.

5.6.5 TRANSFER TO RELATED CORPORATION. In the event
that an optionee leaves the service of the Company to become an employee,
independent contractor or Director of any Parent or Subsidiary corporation of
the Company, or if the optionee leaves the employ of any such Parent or
Subsidiary corporation to become an employee, independent contractor or Director
of the Company or of another Parent or Subsidiary corporation, such optionee
shall be deemed to continue as an employee, independent contractor or Director
of the Company for all purposes of this Plan, and any reference to employment by
or service with the Company shall also be deemed to refer to employment or
service with any Parent or Subsidiary of the Company. The optionee's service
shall be deemed to have terminated upon an actual termination of employment or
service and upon such Parent or Subsidiary Corporation of the Company ceasing to
have such relationship with the Company.

5.6.6 OTHER SEVERANCE. In the event an optionee
leaves the service of the Company for any reason other than as set forth above
in this Section 5.6, any stock option which such optionee holds must be
exercised, to the extent it was exercisable at the date such optionee left the
service of the Company, not later than one (1) month after the date on which the
optionee's service terminates (or such longer period of time as determined by
the Board, in its sole discretion). The stock option shall terminate upon the
expiration of such prescribed period. For purposes of this Section 5, the
Company, in its sole discretion, shall determine whether the optionee's service
has terminated and the effective date of such termination.

5.6.8 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B).
Notwithstanding the

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SmartDisk Corporation
1998 Directors and Consultants Stock Option Plan
Page 6

foregoing, if a sale within the applicable time periods set forth in this
Section 5.6 of shares acquired upon the exercise of the option would subject the
optionee to liability under Section 16(b) of the Securities Exchange Act of
1934, as amended, the option shall remain exercisable until the earliest to
occur of (i) the tenth (10th) day following the date on which a sale of such
shares by the optionee would no longer be subject to such liability, (ii) the
one hundred and ninetieth (190th) day after the optionee's termination of
service, or (iii) the option expiration date.

5.8 OTHER PROVISIONS. Option agreements under the Plan shall
contain such other provisions, including, without limitation: (i) rights of
first refusal in favor of the Company (or its assignees) applicable to shares of
Common Stock acquired upon exercise of an option which are subsequently proposed
to be transferred by the optionee, (ii) lock-up agreements (applicable in the
event of the public offering of the Common Stock of the Company) restricting an
optionee from any sales or other transfers of option stock for a designated
period of time following the effective date of a registration statement under
the Securities Act, (iii) commitments to pay cash bonuses, make loans or
transfer other property to an optionee upon exercise of any option, and (iv)
restrictions required by federal and applicable state securities laws, all as
the Board shall deem necessary or advisable; provided that no such additional
provision shall be inconsistent with any other term or condition of this Plan or
applicable state law. Without limiting the generality of the foregoing, the
Board may provide in the form of stock option agreement that, (a) in lieu of an
exercise schedule, the option may immediately be exercisable in full and provide
a "vesting schedule" with respect to the stock so purchased, giving the Company
(or its assignees) the right to repurchase the shares of Common Stock at the
exercise price to the extent such shares have not become vested upon any
termination of the optionee's employment or other engagement with the Company,
which vesting may depend upon continued service to the Company pursuant to which
the obligation to resell such shares to the Company shall lapse; (b) optionee's
service or employment with the Company shall not be deemed to have terminated
merely because of a change in the capacity in which the optionee renders
service, provided there is no interruption or termination of the optionee's
service; or (c) an exercise or vesting schedule shall be accelerated upon the
consummation of a "change in control" or similar event.

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SmartDisk Corporation
1998 Directors and Consultants Stock Option Plan
Page 7

issued on exercise of such option. The Board, in its discretion, may declare
cash bonuses to an optionee to satisfy any such withholding requirements or may
incorporate provisions in the form of stock option agreement allowing (or after
grant of the option may permit, in its discretion) an optionee to satisfy any
such withholding obligations, in whole or in part, by delivery of shares of the
Company's Common Stock already owned by the optionee and which are not subject
to repurchase, forfeiture, vesting or other similar requirements or
restrictions. The fair market value of any such shares used to satisfy such
withholding obligations shall be determined as of the date the amount of tax to
be withheld is to be determined. The Company shall have the right at any time to
deduct from payments of any kind otherwise due to the optionee (whether shares
of Common Stock issuable upon exercise of an Option, regular salary,
commissions, or otherwise) any federal, state or local taxes of any kind
required by law to be withheld with respect to any shares issued upon exercise
of options granted under the Plan.

8. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.

8.3 BOARD'S DETERMINATION FINAL AND BINDING UPON OPTIONEES.
The foregoing determinations and adjustments in this Section 8 relating to stock
or securities of the Company shall be made by the Board, whose determination in
that respect shall be final, binding and conclusive. The Company shall give

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SmartDisk Corporation
1998 Directors and Consultants Stock Option Plan
Page 8

notice of any such adjustment or action to each optionee; provided, however,
that any such adjustment or action shall be effective and binding for all
purposes, whether or not such notice is given or received.

9. NO ADDITIONAL EMPLOYMENT RELATED RIGHTS OR BENEFITS.

9.1 NO SPECIAL EMPLOYMENT RIGHTS. Nothing contained in this
Plan or in any option granted hereunder shall confer upon any optionee any right
with respect to the continuation of his or her employment or other engagement by
the Company or interfere in any way with the right of the Company, subject to
the terms of any separate employment or consulting agreement to the contrary, at
any time to terminate such employment or consulting or other relationship or to
increase or decrease the compensation of any optionee. Whether an authorized
leave of absence, or absence in military or government service, shall constitute
termination of an optionee's employment or other engagement shall be determined
by the Board.

9.2 OTHER EMPLOYEE BENEFITS. The amount of any compensation
deemed to be received by any employee or consultant as a result of the exercise
of an option or the sale of shares received upon such exercise will not
constitute compensation with respect to which any other employment (or other
engagement) related benefits of such optionee are determined, including, without
limitation, benefits under any bonus, pension, profit-sharing, life insurance or
salary continuation plan, except as otherwise specifically determined by the
Board or as expressly provided for in the option agreement. The granting of an
option shall impose no obligation upon the optionee to exercise such option.

10. RIGHTS AS A SHAREHOLDER AND ACCESS TO INFORMATION. No optionee and
no person claiming under or through any such optionee shall be, or have any of
the rights or privileges of, a stockholder of the Company in respect of any of
the shares issuable upon the exercise of any option granted under this Plan,
unless and until the option is properly and lawfully exercised and a certificate
representing the shares so purchased is duly issued to the optionee or to his or
her estate. No adjustment shall be made for dividends or any other rights if the
record date relating to such dividend or other right is before the date the
optionee became a stockholder.

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SmartDisk Corporation
1998 Directors and Consultants Stock Option Plan
Page 9

subject to the other provisions of this Plan, upon the cancellation of
previously granted options having higher per share exercise prices, regrant
options at a lower price; provided, however, that no such modification or
cancellation and regrant of an option shall, without the written consent of the
optionee, alter or impair any rights of the optionee under any option previously
granted under the Plan.

12. USE OF PROCEEDS. The proceeds received from the sale of shares of
the Common Stock upon exercise of options granted under the Plan shall be used
for general corporate purposes.

14. TERM OF PLAN.

15.1 MODIFICATIONS OF OUTSTANDING OPTIONS. Without the consent
of each affected optionee, alter or impair any rights of an optionee under any
option previously granted under the Plan;

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SmartDisk Corporation
1998 Directors and Consultants Stock Option Plan
Page 10

15.3 CHANGES IN ELIGIBILITY. Change the designation of
employees eligible to receive incentive stock options under the Plan;

15.4 PLAN DURATION. Extend the termination date beyond that
provided in Section 14.2;

15.6 CHANGES TO THIS SECTION. Amend this Section 15 to defeat
its purposes.

Exhibit 10.5

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT ("AGREEMENT") is entered into as of January
1, 1999, the "EFFECTIVE DATE") by and between SmartDisk Corporation, a Delaware
corporation ("COMPANY") and Michael S. Battaglia ("EMPLOYEE").

1. EMPLOYMENT RELATIONSHIP.

1.1 COMMENCEMENT AND TERM OF EMPLOYMENT. The Company employs
Employee and Employee accepts employment by the Company as of the Effective Date
on the terms and conditions set forth in this Agreement. The term of employment
("TERM OF EMPLOYMENT") shall commence as of the Effective Date and shall
continue thereafter for a period of thirty-six (36) months unless sooner
terminated pursuant to Section 5.

1.2 DUTIES. During the Term of Employment, Employee shall have
the title and perform and faithfully discharge the duties and responsibilities
of President and Chief Executive Officer of the Company. Employee shall use his
best efforts to perform and discharge such duties and responsibilities in such
manner as the Company's Board of Directors may reasonably prescribe to Employee
from time to time. Employee shall also use his best efforts to observe all
policies, procedures and other requirements not inconsistent with this Agreement
that may be implemented or revised by the Company during the Term of Employment.

1.3 COMMITMENT OF EMPLOYEE. Employee shall devote
substantially all of his productive business time, attention, knowledge and
skill exclusively to the performance of his duties hereunder throughout the Term
of Employment and shall at all times discharge his duties faithfully,
industriously and to the best of his ability, experience and talents.

2. COMPENSATION.

2.1 SALARY. For all of Employee's services during the Term of
Employment, Employee shall be paid a salary of Two Hundred Seventy Five Thousand
Dollars ($275,000.00) per year. Employee shall be eligible for merit increases
as determined by the Board of Directors after the first anniversary of the
Effective Date of this Agreement. Payment shall be made in periodic installments
in accordance with Company's payroll policies instituted from time to time. Upon
termination of this Agreement pursuant to Section 5, the Company shall have no
obligation to pay salary or other benefits to Employee except as may be provided
in Section 5.

<PAGE>

2.2 BONUS. Employee shall be entitled to an annual bonus
pursuant to Company's incentive plan set forth in EXHIBIT A (the "INCENTIVE
PLAN") attached hereto, or as the same may be amended by the Compensation
Committee of the Board of Directors. Upon attainment of one hundred percent
(100%) of the objective set forth in the Incentive Plan, Employee shall be
entitled to a bonus in the first year of One Hundred Twenty Five Thousand
Dollars ($125,000.00). Said bonus shall be payable on the dates established by
the Company for payment of quarterly and annual bonuses and shall be payable
only if Employee continues to remain in the employ of the Company on such date;
provided, however, that in the event the Company terminates Employee's
employment hereunder without cause pursuant to Section 5.4, Incentive Plan bonus
may be paid in accordance with Section 5.5.

2.3 EMPLOYEE BENEFITS. During the Term of Employment, Employee
shall be entitled to participate in the group medical, dental and disability
policies and other benefits maintained from time to time by the Company for the
benefit of senior officers of the Company. During the Term of Employment,
Employee shall be entitled to receive all other benefits, and to participate in
all other benefit plans, as are generally available to employees of the Company
on the same terms as other senior management employees. Employee shall be
entitled to reimbursement for all usual and customary business expenses in
reasonable amount incurred by Employee in the performance of his duties for the
Company in accordance with the Company's then current expense reimbursement
policies and guidelines.

2.4 STOCK OPTION. Employee shall receive an incentive stock
option in the form attached as EXHIBIT B-1 pursuant to which Employee shall be
entitled to purchase two hundred seventy-one thousand eight hundred fifty-eight
(271,858) shares of the Company's Common Stock at an exercise price of not more
than $1.20 per share and a non-statutory stock option in the form attached
hereto as EXHIBIT B-2 pursuant to which Employee shall be entitled to purchase
seventy-eight thousand one hundred forty-two (78,142) shares of the Company's
Common Stock at a price of not more than $1.20 per share.

3. VACATIONS. During the Term of Employment, Employee shall be entitled
to fifteen (15) days of paid vacation per year, plus a one-time carry-over of
the amount of accrued and unpaid vacation time and other personal time off from
Fischer International Systems Corporation ("FISC VACATION TIME"). Other than the
FISC Vacation Time, in no event shall Employee be entitled to accrue and carry
forward more than five (5) days of paid vacation from any calendar year to
another, and if Employee has reached this total, no further vacation days shall
accrue until the total of accrued but unused vacation days falls below such
maximum.

4. PLACE OF BUSINESS. During the Term of Employment, Employee shall
render services hereunder at the Company's principal executive offices in
Naples, Florida, or any successor principal office. Employee shall also be
available to travel for business purposes incident to the performance of his
duties, as required from time to time. Transportation, lodging and meal expenses
shall be incurred and reimbursed in accordance with the general policy of the
Company as adopted by the Company from time to time

5. EARLY TERMINATION.

<PAGE>

5.1 TERMINATION UPON PERMANENT DISABILITY OR DEATH. This
Agreement shall automatically terminate upon the permanent disability or death
of Employee, subject to the obligation of the Company to pay Employee or
Employee's personal representative or designated beneficiary, as the case may
be, (i) the balance of Employee's salary and other benefits for the remainder of
the month in which disability or death occurs, (ii) a pro rata portion of any
bonus to which Employee was otherwise entitled under Section 2.2 based upon the
ratio the number of months employed (calculated through the end of the then
current month) bears to the bonus period of twelve (12) months and (iii) any
other disability benefits described in this Section 5.1 to which Employee may be
entitled. The Company will continue to pay Employee his regular salary during
any period during which Employee is incapable of continuing the further
performance of Employee's normal employment activities with the Company because
of a mental, emotional or physical injury, sickness or disorder. However, when
such period exceeds an aggregate of sixty (60) business days (exclusive of any
accrued vacation within the limits set forth above) out of any three hundred
sixty-five (365) consecutive calendar days, Employee shall be deemed permanently
disabled. Employee shall also be deemed permanently disabled if so certified by
any two physicians, or upon the expiration of any elimination period under any
disability insurance policy purchased by the Company for the benefit of
Employee. Should Employee become permanently disabled, Employee or his personal
representative shall be entitled to receive his termination compensation set
forth in subsections (i), (ii) and (iii) above, as well as any disability
benefits maintained for Employee by the Company, if any, pursuant to the terms
and subject to the conditions of any such applicable disability benefit program
or policy.

5.2 TERMINATION FOR CAUSE. During the Term of Employment, the
Company may at any time, without giving notice to Employee, immediately
terminate this Agreement if Employee (a) commits any act of embezzlement, theft,
fraud or dishonesty; (b) engages in unfair competition with the Company or any
subsidiary of the Company whether or not wholly-owned; (c) is convicted of any
felony; (d) breaches any material provision of the Confidentiality Agreement
entered into by Employee pursuant to Section 6 of this Agreement; (e) uses
illegal drugs or other substances or (f) willfully breaches any other material
provision of this Agreement. If Employee materially breaches or habitually
neglects or fails in any material way to perform the usual and customary duties
of his job, or any other duties required to be performed under the terms of this
Agreement, or the policies of the Company, the Company may, at its option,
terminate this Agreement by giving written notice of termination to Employee.
Any termination pursuant to either of the two preceding sentences shall be
without prejudice to any other remedy to which the Company may be entitled
either at law, in equity, or under this Agreement. Before the Company may
terminate this Agreement by reason of Employee's habitual neglect of or failure
to perform the usual and customary duties of his job or policies of the Company,
the Company must first notify Employee in writing, setting forth in detail those
duties and/or policies which Employee has habitually neglected or failed to
perform, and provide Employee a reasonable period of time, not to exceed thirty
(30) days, in which to cure such neglect or failure. If Employee does not cure
the specified areas of neglect of failure, the Company may terminate this
Agreement immediately by giving Employee written notice. At the time of any
termination for cause, Employee shall be entitled to receive any salary and
employment benefits which shall have accrued prior to the date of termination,
but shall not be entitled to any bonus or severance payments, salary or
employment benefits relating to periods subsequent to the date of termination,
subject to Employee's rights to continue medical and dental coverage under the
Company's group policy, at Employee's expense, as may be provided by law.

<PAGE>

5.3 TERMINATION BY EMPLOYEE. This Agreement may be terminated
by Employee for any reason, or no reason, by giving thirty (30) days' written
notice of termination to the Company. Upon termination by Employee, all rights
accruing to Employee under the terms of this Agreement shall cease, and Employee
shall not be entitled to any bonus or severance payments, salary or employment
benefits, except to the extent earned and accrued prior to the termination date,
and subject to Employee's rights to continue medical and dental coverage under
the Company's group policy, at Employee's expense, as may be provided by law.

5.4 TERMINATION WITHOUT CAUSE. Employee's employment with the
Company during the Term of Employment may be terminated by the Company at any
time without cause, by the Company's giving thirty (30) days prior written
notice. A termination without cause, for purposes of this Agreement, means
termination by the Company other than as provided for in Sections 5.1 and 5.2.

5.5 SEVERANCE PAYMENTS. If Employee is terminated pursuant to
Section 5.4, Employee shall be entitled to severance pay in accordance with the
Company's normal payroll practices at the rate of Employee's salary for such
year set forth in Section 2.1 for a period of six (6) months following
termination together with fifty percent (50%) of the Incentive Plan target bonus
for such year, if any, described in Section 2.2. All bonuses shall be payable
only at the discretion of the Compensation Committee of the Board of Directors
and shall reflect Employee's performance to the date of termination. All
severance pay shall be payable in equal consecutive monthly installments on the
last day of each month following the effective date of Employee's termination
for the number of months of severance pay to which Employee is entitled
hereunder. Any pro rata bonus shall be payable on the effective date of
termination of employment. Employee understands and agrees that such payments
shall be his only entitlement as and for severance pay or severance
compensation. Upon termination pursuant to Section 5.4, except for the severance
payments stated above, all rights and obligations accruing to Employee under the
terms of this Agreement or otherwise shall cease, and Employee shall not be
entitled to any further salary or employment benefits, except to the extent
earned and accrued prior to such date, and subject to Employee's rights to
continue medical and dental coverage under the Company's group policy, at
Employee's expense, as may be provided by law.

6. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. Concurrently with the
execution and delivery of this Agreement, Employee agrees to enter into the
Company's Confidentiality Agreement for senior executive officers of the Company
in the form attached as EXHIBIT C (the "CONFIDENTIALITY AGREEMENT"). In the
event of any inconsistency between the terms and provisions of this Agreement
and those of the Confidentiality Agreement, the terms and provisions of this
Agreement shall prevail.

7. NON-COMPETITION.

7.1 AGREEMENT NOT TO COMPETE. Employee agrees that during the
Term of Employment and for the period thereafter specified in the next sentence,
Employee will not engage, directly or indirectly, either as principal, agent,
consultant, proprietor, stockholder, director, officer or Employee, or
participate in the ownership, management, operation or control of any other
business engaged in the type of business conducted by the Company. Such
agreement not to compete shall extend after the date of termination for one year
if employee voluntarily terminates his employment and for a period of six (6)
months if the Company involuntarily terminates Employee's employment. This

<PAGE>

Section 7.1 shall not apply to Employee's ownership of less than one percent
(1%) of the capital stock of any corporation having a class of capital stock
which is traded on any national stock exchange or in the over-the-counter
market.

7.2 SOLICITATION. During the Term of Employment, and for the
period of two (2) years thereafter, Employee agrees that he will not, without
the Company's prior written consent, solicit or encourage any of the employees
of the Company or Fischer International Systems Corporation ("FISC") to leave
the employ of the Company or FISC, or terminate or alter their contractual
relationships in a way that is adverse to the Company's or FISC's interest or,
during the period of Employee's employment, solicit business from any customer
of the Company on behalf of any competitor of the Company.

8. MISCELLANEOUS.

8.1 GOVERNING LAWS. It is the intention of the parties hereto
that the internal laws of the State of Florida (irrespective of its choice of
law principles) shall govern the validity of this Agreement, the construction of
its terms, and the interpretation and enforcement of the rights and duties of
the parties hereto.

8.2 BINDING UPON SUCCESSORS AND ASSIGNS. Subject to, and
unless otherwise provided in, this Agreement, each and all of the covenants,
terms, provisions, and agreements contained herein shall be binding upon, and
inure to the benefit of, the permitted successors, executors, heirs,
representatives, administrators and assigns of the parties hereto. Employee may
not assign this Agreement or any of Employee's rights hereunder except as
provided herein or with the prior written consent of the Company.

8.3 SEVERABILITY. If any provision of this Agreement, or the
application thereof, shall for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances shall be interpreted so as best to reasonably
effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision which will achieve, to the extent possible, the economic,
business and other purposes of the void or unenforceable provision.

8.4 ENTIRE AGREEMENT. This Agreement (together with the Option
and Confidentiality Agreement) constitutes the entire understanding and
agreement of the parties hereto with respect to the subject matter hereof and
thereof and supersede all prior and contemporaneous agreements or understanding,
inducements or conditions, express or implied, written or oral, between the
parties with respect hereto and thereto.

8.5 AMENDMENT AND WAIVERS. Any term or provision of this
Agreement may be amended, and the observance of any term of this Agreement may
be waived (either generally or in a particular instance and either retroactively
or prospectively) only by a writing signed by the party to be bound thereby. The
waiver by a party of any breach hereof or default in the performance hereof
shall not be deemed to constitute a waiver of any other default or any
succeeding breach or default.

<PAGE>

8.6 NO WAIVER. The failure of any party to enforce any of the
provisions hereof shall not be construed to be a waiver of the right of such
party thereafter to enforce such provisions.

8.7 NOTICES. Whenever any party hereto desires or is required
to give any notice, demand, or request with respect to this Agreement, each such
communication shall be in writing and shall be effective only if it is delivered
by personal service or mailed, United States certified mail, postage prepaid,
addressed as follows:

Company: 3506 Mercantile Avenue
Naples, Florida 43104-3310
Attn: Chairman of the Board

Employee: To the address set forth on the signature
page hereof

Such communications shall be effective when they are received
by the addressee thereof; but if sent by certified mail in the manner set forth
above, they shall be effective no later than five (5) days after being deposited
in the United States mail. Any party may change its address for such
communications by giving notice thereof to the other party in conformity with
this Section.

8.8 FURTHER ASSURANCES. Each party agrees to cooperate fully
with the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances, as may be reasonably
requested by any other party to better evidence and reflect the transactions
described herein and contemplated hereby and to carry into effect the intents
and purposes of this Agreement.

8.9 INSURABLE INTEREST. Employee hereby grants to the Company
an insurable interest in Employee's life, and agrees and understands that the
Company may at any time or from time to time during the Term of Employment
choose to purchase and maintain key man life insurance on Employee.

8.10 EMPLOYEE'S REPRESENTATIONS. Employee represents and
warrants that he is free to enter into this Employment Agreement and to perform
each of the terms and covenants of it. Employee represents and warrants that he
is not restricted or prohibited, contractually or otherwise, from entering into
and performing this Employment Agreement, and that his execution and performance
of this Employment Agreement is not a violation or breach of any other agreement
between Employee and any other person or entity.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first hereinabove written.

EMPLOYEE'S ADDRESS FOR NOTICE: EMPLOYEE:

<PAGE>

/s/ MICHAEL S. BATTAGLIA
---------------------------------------
Michael S. Battaglia

COMPANY:

SMARTDISK CORPORATION

By: /s/ MICHAEL R. MATTINGLY
------------------------------
Name: Michael R. Mattingly
Title: Chief Financial Officer

Exhibit 10.6

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT ("AGREEMENT") is entered into as of March 16,
1999, (the "EFFECTIVE DATE") by and between SmartDisk Corporation, a Delaware
corporation ("COMPANY") and Robert Protheroe ("EMPLOYEE").

1. EMPLOYMENT RELATIONSHIP.

1.2 DUTIES. During the Term of Employment, Employee shall have
the title and perform and faithfully discharge the duties and responsibilities
of Senior Vice President, Development and Engineering of the Company. Employee
shall use his best efforts to perform and discharge such duties and
responsibilities in such manner as the Company's Board of Directors or President
and Chief Executive Officer may reasonably prescribe to Employee from time to
time. Employee shall also use his best efforts to observe all policies,
procedures and other requirements not inconsistent with this Agreement that may
be implemented or revised by the Company during the Term of Employment.

2. COMPENSATION.

2.1 SALARY. For all of Employee's services during the Term of
Employment, Employee shall be paid a salary of One Hundred Eighty Thousand
Dollars ($180,000.00) per year ("BASE SALARY"). Employee shall be eligible for
merit increases in salary after the first anniversary of the Effective Date of
this Agreement, as determined by the Compensation Committee of the Company's
Board of Directors (the "COMPENSATION COMMITTEE"). Payment shall be made in
periodic installments in accordance with Company's payroll policies instituted
from time to time. Upon termination of this Agreement pursuant to Section 5, the
Company shall have no obligation to pay salary or other benefits to Employee
except as may be provided in Section 5.

2.2 BONUS. Employee shall be entitled to an annual bonus
("BONUS"). Upon attainment of one hundred percent (100%) of the bonus
objectives, Employee shall be entitled to a Bonus in calendar year 1999 of Sixty
Thousand Dollars ($60,000.00). Each year the parties shall agree on a mutually
acceptable Bonus objectives. Said Bonus shall be payable on the dates
established by the Company for payment of annual bonuses and shall be payable
only if Employee continues to remain in the employ of the Company on such date.

<PAGE>

SmartDisk Corporation
Employment Agreement
Page 2

2.4 RELOCATION AND OTHER ASSISTANCE. Employee shall be
reimbursed by Company up to a maximum amount of Forty Thousand Dollars
($40,000.00) for relocation costs all of which are set forth on EXHIBIT A.

2.5 STOCK OPTIONS. The Company shall recommend to the
Compensation Committee that Employee receive an incentive stock option in the
form attached as EXHIBIT B (the "OPTION") pursuant to which Employee shall be
entitled to purchase one hundred sixty thousand (160,000) shares of the
Company's Common Stock at an exercise price equal to the fair market value of
the Company's Common Stock on the date of the grant, which the Company
anticipates will be $1.20 per share, and shall vest twenty-five percent (25%)
one year after the Effective Date and then in twelve equal quarterly
installments, all as more fully provided in the Initial Option. To the extent
that the Option grant cannot be an incentive stock option, the balance of such
grant shall be a non-statutory option.

2.6 LOAN. The Company will extend to Employee a loan of Sixty
Thousand Dollars ($60,000). The loan will be evidenced by a Promissory Note in
the form attached hereto as EXHIBIT C.

3. VACATIONS. During the Term of Employment, Employee shall be entitled
to fifteen (15) days of paid vacation per year. In no event shall Employee be
entitled to accrue and carry forward more than five (5) days of paid vacation
from any calendar year to another, and if Employee has reached this total, no
further vacation days shall accrue until the total of accrued but unused
vacation days falls below such maximum.

5. EARLY TERMINATION.

<PAGE>

SmartDisk Corporation
Employment Agreement
Page 3

(iii) any other disability benefits described in this Section 5.1 to which
Employee may be entitled. The Company will continue to pay Employee his regular
Base Salary during any period during which Employee is incapable of continuing
the further performance of Employee's normal employment activities with the
Company because of a mental, emotional or physical injury, sickness or disorder.
However, when such period exceeds an aggregate of sixty (60) business days
(exclusive of any accrued vacation within the limits set forth above) out of any
three hundred sixty-five (365) consecutive calendar days, Employee shall be
deemed permanently disabled. Employee shall also be deemed permanently disabled
if so certified by any two physicians, or upon the expiration of any elimination
period under any disability insurance policy purchased by the Company for the
benefit of Employee. Should Employee become permanently disabled, Employee or
his personal representative shall be entitled to receive his termination
compensation, as well as any disability benefits maintained for Employee by the
Company, if any, pursuant to the terms and subject to the conditions of any such
applicable disability benefit program or policy.

5.2 TERMINATION FOR CAUSE. During the Term of Employment, the
Company may at any time, without giving notice to Employee, immediately
terminate this Agreement for Cause. As used herein, "Cause" shall mean if
Employee (a) commits any act of embezzlement, theft, fraud or dishonesty; (b)
engages in unfair competition with the Company or any subsidiary of the Company
whether or not wholly-owned; (c) is convicted of any felony; (d) breaches any
material provision of the Confidentiality Agreement entered into by Employee
pursuant to Section 6 of this Agreement; (e) uses illegal drugs or abuses other
substances or (f) willfully breaches any other material provision of this
Agreement. The Company may also terminate Employee for "Cause" if Employee
materially breaches or habitually neglects or fails in any material way to
perform the usual and customary duties of his job, or any other duties required
to be performed under the terms of this Agreement, or the policies of the
Company, in which case the Company may, at its option, terminate this Agreement
by giving written notice of termination to Employee. Any termination pursuant to
either of the two preceding sentences shall be without prejudice to any other
remedy to which the Company may be entitled either at law, in equity, or under
this Agreement. Before the Company may terminate this Agreement by reason of
Employee's habitual neglect of or failure to perform the usual and customary
duties of his job or policies of the Company, the Company must first notify
Employee in writing, setting forth in detail those duties and/or policies which
Employee has habitually neglected or failed to perform, and provide Employee a
reasonable period of time, not to exceed thirty (30) days, in which to cure such
neglect or failure. If Employee does not cure the specified areas of neglect of
failure, the Company may terminate this Agreement immediately by giving Employee
written notice. At the time of any termination for Cause, Employee shall be
entitled to receive any Base Salary and employment benefits which shall have
accrued prior to the date of termination, but shall not be entitled to any Bonus
or severance payments, salary or employment benefits relating to periods
subsequent to the date of termination, subject to Employee's rights to continue
medical and dental coverage under the Company's group policy, at Employee's
expense, as may be provided by law.

5.3 TERMINATION BY EMPLOYEE. This Agreement may be terminated
by Employee for any reason, or no reason, by giving thirty (30) days' written
notice of termination to the Company. Upon termination by Employee, all rights
accruing to Employee under the terms of this Agreement shall cease, and Employee
shall not be entitled to any Bonus or severance payments, Base Salary or
employment benefits, except to the extent earned and accrued prior to the
termination date, and subject to Employee's rights to continue medical and
dental coverage under the Company's group policy, at Employee's expense, as may
be provided by law.

<PAGE>

SmartDisk Corporation
Employment Agreement
Page 4

5.4 TERMINATION WITHOUT CAUSE. Employee's employment with the
Company during the Term of Employment may be terminated by the Company at any
time without Cause, by the Company's giving fifteen (15) days prior written
notice. A termination without Cause, for purposes of this Agreement, means
termination by the Company other than as provided for in Sections 5.1 and 5.2.

6. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. Concurrently with the
execution and delivery of this Agreement, Employee agrees to enter into the
Company's Confidentiality Agreement for senior executive officers of the Company
in the form attached as EXHIBIT D (the "CONFIDENTIALITY AGREEMENT"). In the
event of any inconsistency between the terms and provisions of this Agreement
and those of the Confidentiality Agreement, the terms and provisions of this
Agreement shall prevail.

7. NON-COMPETITION.

7.1 AGREEMENT NOT TO COMPETE. Employee agrees that during the
Term of Employment and for the period thereafter specified in the next sentence,
Employee will not engage, directly or indirectly, either as principal, agent,
consultant, proprietor, stockholder, director, officer or Employee, or
participate in the ownership, management, operation or control of any other
business engaged in the type of business conducted by the Company. Such
agreement not to compete shall extend after the date of termination for any
reason for one year. This Section 7.1 shall not apply to Employee's ownership of
less than one percent (1%) of the capital stock of any corporation having a
class of capital stock which is traded on any national stock exchange or in the
over-the-counter market.

7.2 SOLICITATION. During the Term of Employment, and for the
period of one (1) year thereafter, Employee agrees that he will not, without the
Company's prior written consent, solicit or encourage any of the employees of
the Company or Fischer International Systems Corporation ("FISC") to leave the
employ of the Company or FISC, or terminate or alter their contractual
relationships in a way that is adverse to the Company's or FISC's interest or,
during the period of Employee's employment, solicit business from any customer
of the Company on behalf of any competitor of the Company.

<PAGE>

SmartDisk Corporation
Employment Agreement
Page 5

8. MISCELLANEOUS.

8.6 NO WAIVER. The failure of any party to enforce any of the
provisions hereof shall not be construed to be a waiver of the right of such
party thereafter to enforce such provisions.

Company: 3506 Mercantile Avenue
Naples, Florida 34104-3310
Attn: Chief Executive Officer

Employee: To the address set forth on the signature page hereof

<PAGE>

SmartDisk Corporation
Employment Agreement
Page 6

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first hereinabove written.

EMPLOYEE'S ADDRESS FOR NOTICE: EMPLOYEE:

3506 MERCANTILE AVENUE
NAPLES, FL 34104

/s/ ROBERT PROTHEROE
------------------------------------
Robert Protheroe

COMPANY:

SMARTDISK CORPORATION

By: /s/ MICHAEL S. BATTAGLIA
---------------------------
Its: PRESIDENT

<PAGE>

SmartDisk Corporation
Employment Agreement
Page 7

EXHIBIT A

Relocation Assistance: Up to $40,000

- Relocation of household goods
- Closing costs and realtor's fees for sale of Employee's residence in Ohio
- House hunting travel and lodging expenses
- Other related expenses to purchasing a residence in Naples, Florida

Exhibit 10.7

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT ("AGREEMENT") is entered into as of May 4,
1998, (the "EFFECTIVE DATE") by and between SmartDisk Corporation, a Delaware
corporation ("COMPANY") and Quresh Sachee ("EMPLOYEE").

1. EMPLOYMENT RELATIONSHIP.

1.1 COMMENCEMENT AND TERM OF EMPLOYMENT. The Company employs
Employee and Employee accepts employment by the Company as of the Effective Date
on the terms and conditions set forth in this Agreement. The term of employment
("TERM OF EMPLOYMENT") shall commence as of the Effective Date and shall
continue thereafter for a period of twenty-four (24) months unless sooner
terminated pursuant to Section 5.

1.2 DUTIES. During the Term of Employment, Employee shall have
the title and perform and faithfully discharge the duties and responsibilities
of Vice President, Marketing of the Company. Employee shall use his best efforts
to perform and discharge such duties and responsibilities in such manner as the
Company's Board of Directors or President and Chief Executive Officer may
reasonably prescribe to Employee from time to time. Employee shall also use his
best efforts to observe all policies, procedures and other requirements not
inconsistent with this Agreement that may be implemented or revised by the
Company during the Term of Employment.

2. COMPENSATION.

2.1 SALARY. For all of Employee's services during the Term of
Employment, Employee shall be paid a salary of One Hundred Forty Thousand
Dollars ($140,000.00) per year. Employee shall be eligible for merit increases
in salary after the first anniversary of the Effective Date of this Agreement.
Payment shall be made in periodic installments in accordance with Company's
payroll policies instituted from time to time. Upon termination of this
Agreement pursuant to Section 5, the Company shall have no obligation to pay
salary or other benefits to Employee except as may be provided in Section 5.

2.2 BONUS. Employee shall be entitled to an annual bonus
pursuant to Company's incentive plan set forth in EXHIBIT A (the "INCENTIVE
PLAN") attached hereto, or as the same may be amended by Board of Directors,
Chief Executive Officer or President. Upon attainment of one hundred percent
(100%) of the objective set forth in the Incentive Plan, Employee shall be
entitled to a bonus in the first year of Forty Thousand Dollars ($40,000.00).
The parties agree that the columns "Percent Achievement" and "Quarterly Revenue"
shall be adjusted to reflect specific dollar targets rather than percent of
achievement of goals. The parties shall agree on a mutually acceptable targets.
Said bonus shall be payable on the dates established by the Company for payment
of quarterly and annual bonuses and shall be payable only if Employee continues
to remain in the employ of the Company on such date; provided, however, that in
the event the Company terminates Employee's employment hereunder without cause
pursuant to Section 5.4, Incentive Plan bonus may be paid in accordance with
Section 5.5.

2.3 EMPLOYEE BENEFITS. During the Term of Employment, Employee
shall be entitled to

<PAGE>

SmartDisk Corporation
Employment Agreement
Page 2

participate in the group medical, dental and disability policies and other
benefits maintained from time to time by the Company for the benefit of senior
officers of the Company. During the Term of Employment, Employee shall be
entitled to receive all other benefits, and to participate in all other benefit
plans, as are generally available to employees of the Company on the same terms
as other senior management employees. Employee shall be entitled to
reimbursement for all usual and customary business expenses in reasonable amount
incurred by Employee in the performance of his duties for the Company in
accordance with the Company's then current expense reimbursement policies and
guidelines.

2.4 RELOCATION AND OTHER ASSISTANCE. Employee shall be
reimbursed by Company or FISC up to a maximum amount of Forty Thousand Dollars
($40,000.00) for relocation costs all of which are set forth on EXHIBIT B.

2.5 NON QUALIFIED STOCK OPTION. Employee shall receive an
incentive stock option in the form attached as EXHIBIT C (the "OPTION") pursuant
to which Employee shall be entitled to purchase one hundred twenty thousand
(120,000) shares of the Company's Common Stock at an exercise price of not more
than $ 1.00 per share, and shall vest twenty-five percent (25%) one year after
the Effective Date and then in twelve equal quarterly installments (or such
other vesting schedule as is offered to other senior executives) all as more
fully provided in the Option.

5. EARLY TERMINATION.

<PAGE>

SmartDisk Corporation
Employment Agreement
Page 3

accrued vacation within the limits set forth above) out of any three hundred
sixty-five (365) consecutive calendar days, Employee shall be deemed permanently
disabled. Employee shall also be deemed permanently disabled if so certified by
any two physicians, or upon the expiration of any elimination period under any
disability insurance policy purchased by the Company for the benefit of
Employee. Should Employee become permanently disabled, Employee or his personal
representative shall be entitled to receive his termination compensation, as
well as any disability benefits maintained for Employee by the Company, if any,
pursuant to the terms and subject to the conditions of any such applicable
disability benefit program or policy.

5.4 TERMINATION WITHOUT CAUSE. Employee's employment with the
Company during the Term of Employment may be terminated by the Company at any
time without cause, by the Company's giving fifteen (15) days prior written
notice. A termination without cause, for purposes of this Agreement, means
termination by the Company other than as provided for in Sections 5.1 and 5.2.

<PAGE>

SmartDisk Corporation
Employment Agreement
Page 4

5.5 SEVERANCE PAYMENTS. If Employee is terminated pursuant to
Section 5.4, Employee shall be entitled to severance pay in accordance with the
Company's normal payroll practices at the rate of Employee's salary for such
year set forth in Section 2.1 for a period of six (6) months if Employee is
terminated pursuant to Section 5.4 during the first twelve months of employment,
or for a period of three (3) months if Employee is terminated pursuant to
Section 5.4 during the second twelve (12) months of employment, following
termination together with the Incentive Plan earned bonus for such year, if any,
described in Section 2.2 pro rated to the date of termination. All pro rated
bonuses shall be payable only at the discretion of the President or Chief
Executive Officer of the Company and shall reflect Employee's performance to the
date of termination. All severance pay shall be payable in equal consecutive
monthly installments on the last day of each month following the effective date
of Employee's termination for the number of months of severance pay to which
Employee is entitled hereunder. Any pro rata bonus shall be payable on the
effective date of termination of employment. Employee understands and agrees
that such payments shall be his only entitlement as and for severance pay or
severance compensation. Upon termination pursuant to Section 5.4, except for the
severance payments stated above, all rights and obligations accruing to Employee
under the terms of this Agreement or otherwise shall cease, and Employee shall
not be entitled to any further salary or employment benefits, except to the
extent earned and accrued prior to such date, and subject to Employee's rights
to continue medical and dental coverage under the Company's group policy, at
Employee's expense, as may be provided by law.

7. NON-COMPETITION.

<PAGE>

SmartDisk Corporation
Employment Agreement
Page 5

customer of the Company on behalf of any competitor of the Company.

8. MISCELLANEOUS.

8.6 NO WAIVER. The failure of any party to enforce any of the
provisions hereof shall not be construed to be a waiver of the right of such
party thereafter to enforce such provisions.

Company: 3506 Mercantile Avenue
Naples, Florida 34104-3310

<PAGE>

SmartDisk Corporation
Employment Agreement
Page 6

Attn: Chief Executive Officer

Employee: To the address set forth on the signature page
hereof

[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]

<PAGE>

SmartDisk Corporation
Employment Agreement
Page 7

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first hereinabove written.

EMPLOYEE'S ADDRESS FOR NOTICE: EMPLOYEE:

3506 Mercantile Avenue /s/ QURESH SACHEE
Naples, FL 34103 --------------------------
Quresh Sachee

COMPANY:

SMARTDISK CORPORATION

By: /s/ MICHAEL S. BATTAGLIA
--------------------------
Its: PRESIDENT AND CEO

<PAGE>

EXHIBIT B

Relocation Assistance: Up to $40,000

- Relocation of household goods
- Relocation of automobiles
- Closing costs in Georgia
- Closing costs in Florida
- Realtor Fees in Georgia
- Miscellaneous (House Repairs,
Auto Tags, etc. not to exceed $3,000)

Exhibit 10.9

OPERATING AGREEMENT

This Operating Agreement is made effective May 28, 1998 by and among
Fischer International Systems Corporation, a Florida corporation ("FISC") and
SmartDisk Corporation, a Delaware corporation ("SDC").

R E C I T A L S

A. FISC and SmartDiskette Limited, a private limited company registered
in England ("SDL") entered a Manufacturing License made the 20th day of April
1993 (the "MANUFACTURING LICENSE") whereby SDL licensed to FISC certain
technology (the "TECHNOLOGY").

B. On May 27, 1993 FISC assigned the Manufacturing License to SmartDisk
Security Corporation, a Florida corporation ("SDSC") pursuant to an Assignment
and Assumption Agreement in accordance with Section 4.5 of the Manufacturing
License.

C. SDSC and SDC have used and intend to use the Technology to make,
use, license and sell Crypto SmartDisk, SafeBoot, FlashPath, SmartDisk, and
Smarty ("PRODUCTS").

D. Effective January 1, 1996 FISC agreed to provide operations services
to SDSC to exploit the Technology and to enhance, manufacture and sell Products
pursuant to an Operating Agreement between SDSC and FISC. Such Operating
Agreement terminated effective January 1, 1998.

E. On January 1, 1998 certain of FISC's employees performing services
on behalf of SDSC became employees of SDC and FISC and SDC entered into an
Operating Agreement with SDSC for the provision of certain services by FISC and
SDC for SDSC. Such Operating Agreement terminated May 27, 1998.

F. SDC now wishes also to obtain operations services from FISC
commencing May 28, 1998.

A G R E E M E N T

NOW THEREFORE, in reliance on the foregoing recitals and in
consideration of the mutual covenants contained herein, the parties agree as
follows:

1. OPERATIONS. FISC agrees to provide for SDC all administrative
services necessary to operate

<PAGE>

Operating Agreement
Page 2

its business including without limiting the generality of the foregoing:
provision of marketing services, financial and accounting services, shipping and
receiving services (known internally to SDC as "distribution services"), product
documentation services, and all other functions necessary for the administration
and operation of SDC's business of manufacturing, enhancing and selling
Products.

2. REIMBURSEMENT. SDC shall pay to FISC for these services as set forth
on Exhibit "A."

3. TERM. This Agreement shall terminate upon notice from any party.

4. LICENSE. All activities of FISC undertaken in connection with this
Agreement are on behalf of SDC and as agent of SDC, to the extent necessary to
permit performance of such activities, SDC hereby grants to FISC a sub-license
under the Manufacturing License.

5. TITLE. All right, title and interest in all intellectual property
created by FISC, its employees, agents and subcontractors pursuant to this
Agreement shall belong to SDC and FISC agrees to execute and deliver appropriate
assignment documents in form and substance acceptable to SDC upon request and
hereby confirms that all such intellectual property was created as a work for
hire, and whether or not a work for hire, FISC hereby assigns all of its right,
title and interest in all such intellectual property to SDC.

6. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Delaware excluding its conflicts of law provisions.

<PAGE>

Operating Agreement
Page 3

IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective May 28, 1998.

FISCHER INTERNATIONAL SYSTEMS
CORPORATION

Dated: MAY 28, 1999 By: /s/ MICHAEL S. BATTAGLIA
------------------------
Michael S. Battaglia
President

SMARTDISK CORPORATION

Dated: MAY 28, 1999 By: /s/ TIMOTHY TOMLINSON
---------------------
Timothy Tomlinson
Secretary

<PAGE>

EXHIBIT A

Distribution Payroll @ 50% of Actual Approximately $3,000.00
Sales Payroll @ 25% of Actual Approximately $20,000.00
Accounting Payroll @ 50% of Actual Approximately $13,000.00
Marketing Payroll @ 35% of Actual Approximately $9,000.00
Documentation Payroll @ 50% of Actual Approximately $9,000.00
International Payroll @ 10% of Actual Approximately $5,000.00
Building Occupancy - Naples Actual $10,050.00
Telephone - Naples Approximately $5,500.00

TOTAL FISC ALLOCATIONS $74,550.00

<PAGE>

FIRST AMENDMENT TO

OPERATING AGREEMENT

BETWEEN

FISCHER INTERNATIONAL SYSTEMS CORPORATION

AND

SMARTDISK CORPORATION

This First Amendment to Operating Agreement between Fischer
International Systems Corporation ("FISC") and SmartDisk Corporation ("SDC") is
made effective the 1st day of January, 1999.

RECITALS

1. FISC and SDC executed an Operating Agreement effective May 28, 1998,
attached hereto as Exhibit "A" and incorporated herein by reference.

2. SDC agreed to reimburse FISC for certain administrative services
necessary to operate its business.

2. FISC continues to provide such administrative services to SDC.

3. SDC agrees to reimburse FISC for such administrative services.

AGREEMENT

NOW THEREFORE, in reliance on the foregoing and in consideration of mutual
covenants contained herein, the parties agree as follows:

1. REIMBURSEMENT. SDC shall pay to FISC for these services as set forth on
Exhibit "B", hereto;

2. RATIFICATION. FISC and SDC ratify the original terms and conditions of
the Operating Agreement, except as amended herein.

<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Amendment effective
January 1, 1999.

FISCHER INTERNATIONAL SYSTEMS CORPORATION

BY: /s/ JOHN W. WYNKOOP
-------------------
John W. Wynkoop
Corporate Secretary

SMARTDISK CORPORATION

BY: /s/ MICHAEL S. BATTAGLIA
------------------------
Michael S. Battaglia
President and Chief Executive Officer

<PAGE>

EXHIBIT B

Distribution Payroll @ 50% of Actual Approximately $ 4,000.00 per month
Documentation Payroll @ 50% of Actual Approximately $ 8,300.00 per month
Accounting Payroll Allocated Fee $ 3,000.00 per month
Administration Payroll Allocated Fee $ 2,100.00 per month
Information Services Allocated Fee $ 3,000.00 per month
Corporate Services Allocated Fee $ 2,000.00 per month
Telephone - Naples Allocated Fee $ 6,500.00 per month

Total FISC Allocations Approximately $28,900.00 per month

Exhibit 10.11

DISTRIBUTION AGREEMENT

THIS DISTRIBUTION AGREEMENT ("AGREEMENT") is made and entered into as
of the 28th day of May, 1998, by and between SmartDisk Corporation, a Delaware
corporation (the "COMPANY"), and Fischer International Systems Corporation, a
Florida corporation ("DISTRIBUTOR").

In consideration of the mutual promises herein contained and subject to
the following terms and provisions, the parties do hereby agree as follows:

1. APPOINTMENT AND ACCEPTANCE

The Company appoints Distributor as a non-exclusive
distributor for the Products in the Territory (as such terms are defined in
Section 2) and Distributor accepts such appointment. Distributor's distribution
rights include the right to combine the Products with other products to create
combined products ("COMBINED Products") for distribution and the right to
appoint, by written agreement only, subdistributors and dealers
("SUBDISTRIBUTORS") for distribution of Products and Combined Products; provided
that the Company's proprietary rights are as fully protected under each such
written appointment as they are under this Agreement. In addition, Distributor
shall have the right to solicit orders for Products to carry a label of a third
party Subdistributor ("PRIVATE LABEL PRODUCTS") pursuant to the procedure set
forth in Section 2.3 below.

2. PRODUCTS AND TERRITORY

2.1 PRODUCTS. Distributor shall be a distributor for those of
the Company's products listed on attached Exhibit A and all updates,
enhancements and modifications thereto (individually, a "PRODUCT" and
collectively, the "PRODUCTS"). The Company may from time to time, by written
notice to Distributor, make updates, enhancements and modifications to the
Products without otherwise affecting the terms of this Agreement although
Company may only do so upon sixty (60) calendar days written notice to
Distributor.

2.2 ADDITIONAL PRODUCTS. For any additional product
("ADDITIONAL PRODUCT") developed by the Company which contains substantially
similar functionality as the Products, but does not constitute an update,
enhancement or modification of any Product, the Company will discuss with, and
offer to Distributor in writing, the right to distribute such Additional Product
in the Territory at a purchase price specified by the Company and, unless
otherwise specified by the Company, upon such other terms as are set forth
herein with respect to the Products. For each Additional Product, the Company
shall commence such discussion and offer with Distributor no later than any
other discussion with or offer to any other distributor for such Additional
Product. Within thirty (30) days, or such longer period as the parties may agree
upon in writing, after receipt of any offer of appointment from the Company
pursuant to this Section 2.2, Distributor shall notify the Company in writing
whether Distributor elects to accept or reject such offer. Failure by
Distributor to give any notice within such period shall constitute a rejection
by Distributor of such offer. In the event Distributor accepts any such offer of
appointment, the Additional Product(s) accepted shall become Product(s) under
this Agreement and shall be governed by the terms and conditions hereof
applicable to the Products, except that the terms and conditions of the
Company's written offer shall govern to the extent they supplement or modify the
terms and conditions of this Agreement. In the event Distributor rejects any
Company offer of appointment, Distributor shall have no rights with respect to
the Additional Product covered by such rejected offer. The Company shall have no
obligation to make any further offer of appointment to Distributor for an
Additional Product for which Distributor has rejected an initial offer of
appointment, including at the time that any distribution arrangement with
another distributor for such Additional Product expires. Notwithstanding any of
the foregoing, and as an exception thereto, in the event that the Company offers
any such Additional Product to any other distributor or third party on terms or
conditions more favorable than those offered to Distributor, the Company shall
reoffer such Additional Product to Distributor on such more favorable terms and
conditions.

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The Company's obligation hereunder to offer Distributor the right to distribute
Additional Products shall only be applicable for such periods as Distributor is
in compliance with all of the terms and provisions of this Agreement.

2.3 PRIVATE LABEL PRODUCTS. In the event that a Subdistributor
desires to purchase Private Label Products, Distributor shall submit a written
notice to the Company (the "PLP NOTICE") which shall include the subject Product
and any modifications thereto requested by the Subdistributor, the proposed
private label name, a description of such Subdistributor's business and its
intended distribution of the Private Label Product. To the extent that such
Subdistributor meets the minimum purchase quantities and other conditions set
forth in the Company's Private Label Products Distributor Price List ("PLP PRICE
LIST") then in effect the Company agrees to accept and process all such Private
Label Products ordered by Distributor. All such Private Label Products shall
become Products under this Agreement and shall be governed by the terms and
conditions set forth in the PLP Price List then in effect and, to the extent not
in conflict with such PLP Price List, this Agreement as applicable to Products.

2.4 TERRITORY. Distributor shall sell and solicit orders for
the sale of the Products, and shall permit its Subdistributors to sell and
solicit orders for the sale of the Products only within the geographic area set
forth on Exhibit B (the "TERRITORY").

3. DISTRIBUTOR'S SALES DUTIES

During the term of this Agreement, Distributor shall be
responsible for the following:

3.1 REASONABLE COMMERCIAL EFFORTS. Distributor shall use its
reasonable commercial efforts to solicit orders and sell the Products within the
Territory and to develop the full sales potential for the Products within the
Territory consistent with ethical business practices and in a manner that will
reflect favorably on the Products and on the good will and reputation of the
Company.

3.2 SUPPORT AND TRAINING COMMITMENT. The Company hereby grants
Distributor the right and confers upon Distributor the obligation to pass
through to the end-user the warranty established by the Company for the
Products. The Company reserves the right to modify the form of Product warranty
from time to time upon written notice to Distributor. Distributor shall provide
all Subdistributor and end-user support, as well as Subdistributor training, for
the Products which Distributor distributes. The Company shall provide limited
engineering support directly to Distributor for those issues which Distributor
cannot, after reasonable efforts, manage through its own engineering efforts.
Notwithstanding anything set forth herein, Distributor shall encourage all
end-user customers to bring their claims for Product support and warranty to the
relevant Subdistributor, and shall instruct all Subdistributors to bring their
claims for Product support and warranty to Distributor.

3.3 SALES MATERIALS. Distributor shall create appropriate
sales promotion and advertising materials for the Products. Distributor's sales
promotion and advertising material shall be subject to the Company's prior
written consent which shall not be unreasonably withheld. Distributor shall
provide the Company with not less than fourteen (14) calendar days prior
delivery of copies of the sales promotion and advertising material to be
approved by the Company. Failure of the Company to accept or reject such
materials on or before the fourteenth (14th) calendar day after receipt by the
Company thereof shall be deemed acceptance of such materials.

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3.4 GOVERNMENTAL REGULATIONS AND REGULATORY COMPLIANCE.
Distributor shall comply with all laws, regulations and orders of government,
and with all other governmental requirements applicable to its sales activities
with respect to the Products in the Territory. The Company shall furnish
Distributor with such assistance and cooperation as may reasonably be requested
in connection with compliance with such governmental requirements. All
registrations and permits required for the sale and distribution of the Products
shall be filed by Distributor in the name of, for the benefit of and at the
expense of the Company. In the event any registration or permit must be filed in
the name of any entity other than the Company because of requirements of
applicable law, Distributor agrees promptly upon termination or expiration of
this Agreement to assign or cause to be assigned to the Company or its designee,
without charge, every such registration or permit to the fullest extent
assignable. Distributor shall also obtain, at its own expense, any import
license, foreign exchange license, foreign exchange permit, or other permit or
approval it may need for the performance of its obligations under this
Agreement. Distributor further agrees to maintain and to provide the Company
with such records and reports as the Company deems necessary or advisable to
enable the Company to satisfy and conform to all regulatory requirements
relating to the sale of the Products. In particular, Distributor agrees to
maintain and to provide the Company with product liability and traceability,
quality assurance and defect incident reports in such form as may be requested
by the Company from time to time. Distributor will immediately report to the
Company all defects in the Products discovered by or reported to Distributor in
sufficient detail to enable the Company to take corrective action.

4. PRICE AND TERMS OF SALE

4.1 PRICE. All purchases of Products, or Private Label
Products, by Distributor shall be at the prices then in effect pursuant to the
Company's Distributors Price List ("DISTRIBUTORS PRICE LIST") or PLP Price List,
as appropriate. The Company may adjust its Distributors Price List and PLP Price
List from time to time upon giving Distributor written notice thereof at least
sixty (60) calendar days in advance of the effective date of any such change and
the new prices will be effective as to all Product orders accepted by the
Company after the effective date as specified in such notice and to all orders
accepted by the Company prior to the effective date to the extent of any
Products specified to be shipped more than ninety (90) days after the effective
date of such price change.

4.2 PLACEMENT OF ORDERS. Distributor shall place orders with
the Company by facsimile, e-mail or airmail. All orders for the purchase of
Products from the Company hereunder are subject to approval and acceptance by
the Company at the Company's home office. The Company may fill any order it
accepts in whole or partial shipments.

4.3 ACCEPTANCE OF ORDERS. Upon receipt of a purchase order,
the Company shall check the contents of the order and notify Distributor of the
Company's acceptance or rejection within ten (10) calendar days of receipt
thereof specifying, with respect to each accepted order, the estimated shipment
date for each Product with respect to each accepted order. In the event the
Company does not notify Distributor of rejection of an order within such ten
(10) day period, the order shall be deemed accepted.

4.4 PURCHASE ORDER FORMS. It is understood that Distributor
may use its standard purchase order forms with respect to its purchase of
Products for resale hereunder, which purchase orders may specify, among other
things, the description and quantities of the Products ordered, the method of
shipment, the requested shipment dates, and the destination to which such
Products shall be shipped. Such forms shall be used for convenience only and any
terms or provisions thereof which are inconsistent with or in addition to

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those contained in this Agreement shall have no force or effect whatsoever as
between the parties hereto, irrespective of whether or not the Company might
otherwise be deemed to have accepted such form by reason of its execution or
acknowledgment thereof.

4.5 PAYMENTS. All payments due to the Company by Distributor
under this Agreement shall be payable in accordance with the terms set forth in
the Distributors Price List then in effect.

4.6 TAXES AND ASSESSMENTS. In addition to payments for
Products and other charges, Distributor assumes and agrees to pay (or provide
the Company with a certificate of exemption acceptable to the appropriate taxing
authorities prior to shipment) and to indemnify and hold the Company harmless
from all export charges and import duties and any and all sales, use, excise or
other taxes or assessments imposed upon or applicable to any sale to Distributor
hereunder by any governmental authority. If any taxes or assessments are
required to be withheld from payments to the Company, Distributor will pay the
Company an amount which, after such withholding, equals the original amount due
under this Agreement, and will provide the Company with official tax receipts or
other evidence of payment of such withheld taxes or assessments sufficient to
substantiate a claim by the Company for credit against United States federal
income tax.

4.7 SHIPMENT; TITLE AND RISK OF LOSS. All sales of Products to
Distributor will be F.O.B. the Company's manufacturing facility in the
Philippines or any other manufacturing facility designated by the Company, and
Distributor agrees to pay all costs and charges for transportation, brokerage,
handling and insurance of the Products from the point of shipment. Title to
Products will pass to Distributor upon delivery to a common carrier. Delivery of
bills of lading before or after the Products arrive at the initial delivery
point will not affect the place of delivery of the Products. Upon delivery of
the Products to a common carrier, risk of loss or damage to the Products shall
pass to Distributor. All Products will be drop-shipped at Distributor's expense
to Distributor's customers as indicated in Distributor's purchase orders.

5. TERM OF AGREEMENT AND TERMINATION

5.1 TERM. Subject to earlier termination as provided in this
Section 5, the term of this Agreement shall extend from the date hereof through
December 31, 2001. This Agreement shall be automatically renewed for successive
periods of twelve (12) months thereafter unless either party hereto sends a
written notice to the other not less than sixty (60) calendar days before the
expiration of the initial term of this Agreement or any renewal thereof stating
that such party is not renewing this Agreement.

5.2 TERMINATION BY EITHER PARTY. Either party may terminate
this Agreement as follows:

5.2.1 In the event of a material default by either
party in the performance of its duties, obligations or undertakings under this
Agreement, the non-defaulting party shall have the right to give written notice
to the defaulting party advising such party of the specific default involved
and, if within thirty (30) calendar days after such notice, the defaulting party
shall not have remedied such default, the other party shall have the
unconditional right, in addition to any other rights and remedies it may have,
to terminate this Agreement immediately upon giving written notice to the
defaulting party.

5.2.2 At any time by giving written notice of such
termination in the event the other party becomes insolvent or institutes or
permits to be instituted against it any proceedings seeking receivership,
trusteeship, bankruptcy, reorganization, arrangement, readjustment of debt,
assignment for the benefit of

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creditors, or other similar proceedings under any applicable law.

5.3 TERMINATION OF RIGHTS AND OBLIGATIONS. Upon termination of
this Agreement for any reason:

5.3.1 All amounts owed by Distributor to the Company
shall become immediately due, except in the case of expiration of the term of
this Agreement, in which case all amounts owed shall be paid in accordance with
Section 4.7, and all unfilled orders of Products for purchase by Distributor
specifying shipment dates beyond sixty (60) days after termination shall be
deemed terminated without liability on the part of either party;

5.3.2 The right of Distributor to act as a
distributor for the Company shall cease, and Distributor shall immediately
discontinue all use of the Company's trade names and trademarks, and Distributor
shall return to the Company all price lists, catalogs, sales literature,
operating and service manuals, advertising literature and other materials
relating to the Products, except that, notwithstanding the foregoing,
Distributor shall have the right, for a reasonable period not to exceed ninety
(90) days, to sell any Products remaining in inventory;

5.3.3 Except to the extent of selling its remaining
inventory of Products as permitted by Section 5.3.2, Distributor shall not
thereafter represent or hold itself out as being an authorized distributor for
the Company's Products or engage in any practices which might make it appear
that Distributor is still such an authorized distributor; and

5.3.4 Distributor shall transfer to the Company any
rights it may have to any trademarks or trade names of the Company and
Distributor shall assign to the Company, or its nominee, any registrations or
other governmental permits with respect to the Products except to the extent a
Combined Product carries a trademark which is distinct from the Products, or if
such assignment is not permitted by law, Distributor shall cooperate in the
cancellation of such registrations and permits standing in its name and the
reissuance thereof to the Company or its nominee.

5.4 NO REVIVAL OR WAIVER. The acceptance by the Company of
orders after notice of termination is given hereunder shall be separate
transactions and shall not operate as a renewal or revival of this Agreement or
as a waiver of any provision hereof.

5.5 NO LIABILITY. The Company shall have no obligation to
Distributor by reason of the expiration or termination, in compliance with the
provisions of Section 5.2, of this Agreement or the Company's non-renewal of
this Agreement at the expiration of the initial term or any extension thereof,
and Distributor hereby agrees not to assert any claim by reason of such
expiration or termination of this Agreement. Neither party, by reason of the
termination of this Agreement, shall be liable to the other because of any loss
of anticipated sales or prospective profits or because of expenditures or
investments related to the performance of this Agreement or the goodwill created
in the course of performance hereunder.

5.6 NO RELEASE. No termination of this Agreement shall in any
manner whatsoever release, or be construed as releasing, any party from any
liability to the other arising out of or in connection with a party's breach of,
of failure to perform, any covenant, agreement, duty or obligation contained
herein.

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5.7 SURVIVAL. The provisions of Sections 3.5, 4.5, 4.6, 4.7,
4.8, 4.9, 5, 6, 7.2, 7.4, 8, 9, 10, 11 and 12 will survive the expiration or
termination of this Agreement.

6. WARRANTIES

6.1 PRODUCT WARRANTY. Products shall be covered by the
Company's standard product warranty then in effect for each such Product. The
Company may change its product warranty for a Product from time to time upon
giving Distributor written notice thereof at least thirty (30) days in advance
of the effective date of any change together with a copy of the new product
warranty which will be effective as to all subject Products shipped after the
effective date specified in such notice. Distributor shall not make any product
warranty to its customers of the Products other than the Company's product
warranty then in effect with respect to such Product. Distributor shall pass the
Company's warranty through to its customers as set forth in Section 3.2 above.

6.2 THE COMPANY OPTION. The Company shall, at its option,
replace, repair or issue credit to Distributor for any confirmed defective
Products sold by the Company to Distributor under this Agreement and covered
under the warranty period.

6.3 EXCLUSIVE REMEDY. In case of breach of the product
warranties issued by the Company in accordance with Section 6.1 above,
Distributor's or its customers' exclusive remedy against the Company, and the
Company's sole liability, shall be, as set forth in Section 6.2. Distributor or
its customers shall prepay return transportation charges to the Company's
designated site. If the returned Product is found defective by the Company under
the terms of the warranty and the Company elects to repair or replace the
defective Product, the Company will prepay return transportation charges to
Distributor or its customers, as appropriate. The Company shall have a
reasonable time to make repairs, replace or issue credit with respect to
Products found to be defective. All replaced parts will become the property of
the Company on an exchange basis. Any replacement or spare parts will be new or
equivalent parts which, at the time of installation, meet the Company functional
specifications then applicable to new parts.

6.4 LIMITATION. The Company's warranty will not apply to a
Product if its correction, repair or replacement is required due to: (i) natural
disasters, including fire, smoke, water, wind, earthquakes or lightning, (ii)
electric power failures, (iii) the failure to maintain appropriate environmental
conditions, (iv) the neglect, misuse or other than the ordinary use of the
Product, or (v) attempted repairs or alterations by persons other than those
employed by the Company. Under these circumstances, the Company may charge
Distributor or its customers for the correction, repair or replacement on a
time-and-materials basis at the Company's then-current rates.

6.5 DISCLAIMER. EXCEPT AS EXPRESSLY PROVIDED IN THIS SECTION
6, ALL WARRANTIES, CONDITIONS, REPRESENTATIONS, INDEMNITIES AND GUARANTEES,
WHETHER EXPRESS OR IMPLIED, ARISING BY LAW, CUSTOM, PRIOR ORAL OR WRITTEN
STATEMENTS BY THE COMPANY OR OTHERWISE (INCLUDING, BUT NOT LIMITED TO, ANY
WARRANTY OF MERCHANTABILITY OR FITNESS FOR PARTICULAR PURPOSE OR OF
UNINTERRUPTED USE) ARE HEREBY OVERRIDDEN, EXCLUDED AND DISCLAIMED.

6.6 NO CONSEQUENTIAL DAMAGES. THE COMPANY WILL NOT BE LIABLE
TO DISTRIBUTOR OR ITS CUSTOMERS AND DISTRIBUTOR WILL NOT BE LIABLE TO THE

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COMPANY FOR ANY CONSEQUENTIAL, INDIRECT, PUNITIVE, SPECIAL OR INCIDENTAL
DAMAGES, WHETHER FORESEEABLE OR UNFORESEEABLE, BASED ON CLAIMS OF DISTRIBUTOR,
OR ITS CUSTOMERS, OR THE COMPANY, AS THE CASE MAY BE, (INCLUDING, BUT NOT
LIMITED TO, CLAIMS FOR LOSS OF GOODWILL, PROFITS, INVESTMENTS, USE OF MONEY,
LOSS OF USE OF THE COMPANY'S PRODUCTS; INTERRUPTION IN USE, STOPPAGE OF OTHER
WORK OR IMPAIRMENT OF OTHER ASSETS, OR LABOR CLAIMS), ARISING OUT OF BREACH OF
EXPRESS OR IMPLIED WARRANTY, BREACH OF CONTRACT, MISREPRESENTATION, NEGLIGENCE,
STRICT LIABILITY IN TORT OR OTHERWISE, EXCEPT ONLY IN THE CASE OF DEATH OR
PERSONAL INJURY WHERE AND SOLELY TO THE EXTENT THAT APPLICABLE LAW REQUIRES SUCH
LIABILITY.

6.7 DISTRIBUTOR INDEMNITY. If Distributor makes any warranty
or representation inconsistent with or in addition to the warranties stated in
this Section 6, Distributor shall, at its own expense, defend, indemnify and
hold the Company harmless from any claim to the extent it is based upon such
inconsistent or additional warranty or representation.

7. TRADEMARKS AND TRADE NAMES

7.1 VALIDITY AND DISTRIBUTOR REGISTRATION. Distributor
recognizes the validity of the Company's trademarks and trade names as set forth
on Exhibit C attached hereto, (the "COMPANY TRADEMARKS"), acknowledges that the
same are the property of the Company, and agrees not to infringe upon, harm or
contest the rights of the Company in the Company Trademarks. Distributor further
agrees, if requested by the Company and at the Company's expense, to register or
otherwise obtain protection in the Territory for the Company Trademarks on
behalf and for the benefit of the Company.

7.2 OWNERSHIP. All Company Trademarks are and will remain the
exclusive property of the Company, whether or not specifically recognized or
registered under applicable law. Distributor will not take any action that
jeopardizes the proprietary rights of or acquire any right to the Company
Trademarks, except the limited use rights specified in this Section 7.
Distributor will not register, directly or indirectly, any trademark, service
mark, trade name, copyright, company name or other proprietary or commercial
right which is identical or confusingly similar to the Company Trademarks.

7.3 USE. Distributor shall have the right to use in the
Territory all the Company Trademarks as well as other trademarks which are or
may be owned by the Company during the term of this Agreement in connection with
the Products for the exclusive purpose of advertising and promoting the Products
in the Territory. All advertisements and promotional materials will (i) clearly
identify the Company as the owner of its trademarks, (ii) conform to the
Company's then-current trademark and logotype guidelines and (iii) otherwise
comply with any local applicable notice or marking requirement. Before
publishing or disseminating any advertisement or promotional materials bearing a
trademark of the Company, Distributor will deliver a copy of the advertisement
or promotional materials in the English language to the Company for approval,
which approval shall not be unreasonably withheld. If the Company gives
Distributor written notice that the proposed use of its trademark is
inappropriate within ten (10) calendar days from the date of submission by
Distributor, Distributor will not place the advertisement or promotional
materials in circulation.

7.4 RETURN OF MATERIALS. Distributor agrees that upon
termination of this Agreement for any reason it will destroy or return to the
Company any advertising, stationery or other materials bearing any

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of the Company's trade names or trademarks.

7.5 INFRINGEMENT. Distributor will immediately notify the
Company if it learns (i) of any potential infringement of a Company trademark by
a third party or (ii) that the use of a the Company trademark may infringe the
proprietary rights of a third party. The Company will determine the steps to be
taken under these circumstances in accordance with Section 8.2 below.

8. INTELLECTUAL PROPERTY RIGHTS

8.1 COMPANY'S RIGHTS. The Company is the sole author and
exclusive owner, or authorized licensee of the Products and all intellectual
property rights therein. The Products do not and will not throughout the term of
this Agreement infringe upon any patent, copyright, trade secret or other
proprietary right held by any third party and there is no such claim or pending
or threatening action with respect thereto.

8.2 COMPANY'S OBLIGATIONS. The Company will indemnify and hold
harmless Distributor from and against all claims, actions, damages, costs and
expenses (including attorneys fees) arising out of any actual or threatened
claim of infringement of any proprietary right, including copyrights,
trademarks, patent rights and trade secrets, arising out of the Products (but
not attributable to any product with which a Product is combined to form a
Combined Product.) This obligation will be subject to the following terms and
conditions:

(i) The obligation will arise only if Distributor gives the
Company prompt notice of the infringement claim and grants the Company, in
writing, exclusive control over its defense and settlements;

(ii) This obligation will cover the Products only in the form
as shipped to Distributor by the Company or its agents, and will not cover any
correction, modification, improvement, enhancement or addition to any Product
made by anyone other than the Company without the Company's prior written
authorization;

(iii) This obligation will not cover any claim that any
Product infringes any third party's rights as used in combination with any
hardware or software not supplied by the Company if that claim could have been
avoided by the use of that Product in combination with other hardware or
software;

(iv) Without limiting the Company's general obligation of
indemnification, and in addition thereto, if an infringement claim is asserted,
or if the Company believes one likely, the Company will have the right and the
obligation to do any of the following: (a) procure a license from the person(s)
claiming or likely to claim infringements; or (b) modify the Product to avoid
the claim of infringement; or (c) suspend the Agreement with respect to such
Product until the infringement claim has otherwise been resolved. If the Company
modifies any Product to avoid a claim of infringement, the Company will have no
obligation to indemnify Distributor with respect to unmodified Products
distributed by Distributor after the Company has supplied the modification to
Distributor; and

THE FOREGOING STATES THE COMPANY'S EXCLUSIVE AND ENTIRE OBLIGATION WITH RESPECT
TO ANY CLAIMS OF INFRINGEMENT OF PROPRIETARY RIGHTS OF ANY KIND.

8.3 DISTRIBUTOR'S INDEMNIFICATION. Distributor will indemnify
and hold harmless the Company from and against all claims, actions, damages,
costs and expenses (including attorneys fees) arising out of any actual or
threatened claim of infringement of any proprietary right, including copyrights,

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trademarks, patent rights and trade secrets, arising out of the inclusion of any
product not supplied by the Company and combined with the Product for
distribution as a Combined Product. Distributor's obligation to indemnify the
Company will arise if the Company gives Distributor prompt notice of the claim
and cooperates and consults fully with Distributor in its defense and/or
settlement. If such an infringement claim is asserted, or if Distributor
believes one likely, Distributor will have the right, but no obligation, to
procure a license from the person claiming or likely to claim infringement.

9. RECALL. In the event of a recall of any of the Products, Distributor
shall cooperate fully with the Company in promptly contacting any purchasers
that the Company desires to be contacted and promptly communicating to such
purchasers the information and instructions the Company desires to be
transmitted. Costs related to the shipment or replacement of the Products
incurred in connection with such recall shall be borne by the Company.

10. CONFIDENTIAL INFORMATION. Each party agrees that it will treat
accordingly all verbal and written communications from the other party which are
designated, or which should reasonably be regarded in the normal commercial
view, as constituting business secrets or proprietary information, and will
impose upon its employees and agents the same obligations with respect to the
other party's proprietary information as it employs with respect to its own
confidential information, but in no event less than a reasonable degree of care.
The provisions of this Section shall survive the termination of this Agreement.

11. INDEPENDENT CONTRACTOR.

11.1 NO AUTHORIZATION. Distributor shall be an independent
contractor hereunder. Distributor is not authorized to: (i) enter into
agreements for or on behalf of the Company; (ii) create any obligation or
responsibility, express or implied, for or on behalf of the Company; (iii)
accept payment of any obligation due or owed to the Company; (iv) accept service
of process for the Company; or (v) bind the Company in any manner whatsoever,
except for Distributor's right to pass to its customers and end-users the
Company's product warranties for the Products as set forth herein. Distributor
shall not list, print, or display the Company's name in such manner as to
indicate or imply that there is an employer-employee or a principal-agent
relationship between the Company and Distributor.

11.2 CONTROL OF DISTRIBUTOR. Subject to its compliance with
all applicable laws and regulations and except as otherwise provided herein,
Distributor shall have control over the manner and means of performing its
obligations under this Agreement. All expenses incurred by Distributor in
connection with the performance of its obligations hereunder shall be borne
solely by Distributor. Distributor shall be responsible for appointing its own
employees, agents and representatives, who shall be compensated by Distributor.

12. MISCELLANEOUS PROVISIONS.

12.1 SALES AND LICENSES. All Products delivered hereunder are
licensed as provided herein. All references in this Agreement to the "sale" or
"purchase" of Products signify only the delivery of the Product in question
subject to the terms set forth in this Agreement. Distributor shall acquire no
rights with respect to the Products other than the right to distribute such
Products and provide related support, as provided herein.

12.2 MOST FAVORED NATIONS. In no event shall the Company offer
any other distributor or

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third party customer any terms or conditions more favorable than those set forth
in this Agreement.

12.3 GOVERNING LAWS. The internal laws of the State of
Delaware, U.S.A., regardless of any choice of law principles, shall govern the
validity of this Agreement, the construction of its terms and the interpretation
and enforcement of the rights and duties of the parties. THE PARTIES AGREE THAT
THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS
SHALL NOT APPLY TO THIS AGREEMENT AND ITS APPLICATION IS HEREBY EXPRESSLY
EXCLUDED.

12.4 SUCCESSORS AND ASSIGNS. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
permitted successors and assigns of the parties. Nothing in this Agreement,
express or implied, is intended to confer upon any party, other than the parties
hereto or their respective permitted successors and assigns, any rights,
remedies, obligations or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.

12.5 SEVERABILITY. If any provision of this Agreement, or the
application thereof, shall for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances shall be interpreted so as best to reasonably
effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision which will achieve, to the extent possible, the economic,
business and other purposes of the void or unenforceable provision.

12.6 ENTIRE AGREEMENT. This Agreement, the exhibits hereto,
the documents referenced herein and the exhibits thereto, constitute the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and thereof and supersede all prior and contemporaneous agreements
or understandings, inducements or conditions, express or implied, written or
oral, between the parties with respect hereto and thereto. The express terms
hereof control and supersede any course of performance or usage of the trade
inconsistent with any of the terms hereof.

12.7 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be an original as against any party
whose signature appears thereon, and all of which together shall constitute one
and the same instrument.

12.8 OTHER REMEDIES. Any and all remedies herein expressly
conferred upon a party shall be deemed cumulative with, and not exclusive of,
any other remedy conferred hereby or by law on such party, and the exercise of
any one remedy shall not preclude the exercise of any other.

12.9 AMENDMENT AND WAIVERS. Any term or provision of this
Agreement may be amended, and the observance of any term of this Agreement may
be waived (either generally or in a particular instance and either retroactively
or prospectively), only by a writing signed by the parties. The waiver by a
party of any breach hereof for default in payment of any amount due hereunder or
default in the performance hereof shall not be deemed to constitute a waiver of
any other default or succeeding breach or default.

12.10 ATTORNEYS' FEES. Should suit be brought to enforce or
interpret any part of this Agreement, the prevailing party shall be entitled to
recover, as an element of the costs of suit and not as damages, reasonable
attorneys' fees to be fixed by the court (including, without limitation, costs,
expenses and

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SmartDisk Corporation/Fischer International Systems Corporation
Distribution Agreement
Page 11

fees on any appeal). The prevailing party shall be the party entitled to recover
its costs of suit, regardless of whether such suit proceeds to final judgment. A
party not entitled to recover its costs shall not be entitled to recover
attorneys' fees. No sum for attorneys' fees shall be counted in calculating the
amount of a judgment for purposes of determining if a party is entitled to
recover costs or attorneys' fees.

12.11 NOTICES. Whenever any party hereto desires or is
required to give any notice, demand or request with respect to this Agreement,
each such communication shall be in writing and shall be given or made by
telecopy, telegraph, cable, mail or other delivery and telecopied, telegraphed,
cabled, mailed or delivered to the intended recipient at the addresses specified
below:

If to the Company: SmartDisk Corporation
3506 Mercantile Avenue
Naples, FL 34104
Facsimile: (941) 436-2509
Attn: Michael S. Battaglia

with a copy to: Baker & McKenzie
660 Hansen Way
Palo Alto, CA 94304
Facsimile: (650) 856-9299
Attn: J. Pat Powers, Esq.

If to Distributor: Fischer International Systems Corporation
3506 Mercantile Avenue
Naples, FL 34104
Facsimile: (941) 436-2509
Attn: John W. Wynkoop

with a copy to: Tomlinson Zisko Morosoli & Maser LLP
200 Page Mill Road, Second Floor
Palo Alto, CA 94306
Facsimile: (650) 324-1808
Attn: Jill E. Fishbein, Esq.

Except as may be otherwise provided in this Agreement, all such communications
shall be deemed to have been duly given when transmitted by telecopier with
verified receipt by the receiving telecopier, when personally delivered, four
(4) days after being delivered to an overnight air courier (E.G. DHL, or Federal
Express) upon proof of delivery, or, in the case of a mailed notice, five (5)
days after being deposited in the United States mail certified or registered
mail, postage prepaid. Either party may change its address for such
communications by giving notice thereof to the other party in conformance with
this section.

12.12 CONSTRUCTION OF AGREEMENT. This Agreement has been
negotiated by the respective parties hereto and their attorneys and the language
hereof shall not be construed for or against any party. A reference in this
Agreement to any Section shall include a reference to every Section the number
of which begins with the number of the Section to which reference is
specifically made (E.G., a reference to Section 5.8 shall include a reference to
Sections 5.8.1 and 5.8.1.1). The titles and headings herein are for reference

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SmartDisk Corporation/Fischer International Systems Corporation
Distribution Agreement
Page 12

purposes only and shall not in any manner limit the construction of this
Agreement which shall be considered as a whole. A reference to a Schedule,
Exhibit or Section means a Schedule, Exhibit or Section of this Agreement,
unless the context expressly otherwise requires.

12.13 PRONOUNS. All pronouns and any variations thereof shall
be deemed to refer to the masculine, feminine or neuter, singular or plural, as
the identity of the person, persons, entity or entities may require.

12.14 FURTHER ASSURANCES. Each party agrees to cooperate fully
with the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances as may be reasonably
requested by any other party to better evidence and reflect the transactions
described herein and contemplated hereby, and to carry into effect the intents
and purposes of this Agreement.

12.15 ABSENCE OF THIRD PARTY BENEFICIARY RIGHTS. No provisions
of this Agreement are intended nor shall be interpreted to provide or create any
third party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, shareholder or partner of any party hereto, or any other
person, unless specifically provided otherwise herein and, except as so
provided, all provisions hereof shall be personal solely between the parties to
this Agreement.

12.16 FORCE MAJEURE. Except as to the timely payment by
Distributor of the purchase price of Products purchased by it hereunder for
which the Company shall have the right to terminate this Agreement in accordance
with Section 6.2 or invoice Distributor for same, no failure or omission to
carry out or observe any of the terms, provisions or conditions of this
Agreement shall give rise to any claim by one party against the other or be
deemed to be a breach of this Agreement if the same is caused by or arises out
of one or more of the following conditions: acts of God; acts, regulations or
laws of any government; war; civil commotion; destruction of production
facilities or materials by fire, earthquake or storm; labor disturbances;
epidemic; failure of public utilities or of suppliers; or any other event,
matter or thing wherever occurring and whether or not of the same class or kind
as those set forth above, which is not reasonably within the control of the
party affected thereby. However, the parties hereto shall endeavor to avoid,
remove or cure all such conditions. Any party temporarily excused from
performance hereunder by such conditions shall resume performance promptly when
such conditions are removed or cured. Any party claiming any such conditions as
an excuse for delay in performance hereunder shall give prompt notice in writing
thereof to the other party.

12.17 COMPLIANCE WITH LAWS. The parties acknowledge and agree
that this Agreement and the rights and obligations of the parties hereunder are
subject to all applicable laws and regulations of governmental entities having
jurisdiction over any aspects of this Agreement.

12.18 ASSIGNMENT. Except as provided in this Section, neither
party to this Agreement shall assign or otherwise transfer any of its rights or
obligations under this Agreement to any third party, and any such attempt at
assignment shall be void. However, the Company shall have the right to assign
this Agreement, without the prior approval of Distributor, to any successor of
all or substantially all of its business and assets at the time of assignment,
provided that such successor undertakes to fulfill all the obligations of the
Company under this Agreement. Additionally, both the Company and Distributor
shall have the right to assign this Agreement or delegate its obligations
hereunder to any affiliate by giving written notice, provided that such party
guarantees the obligations to be performed by such affiliate. For purposes of
this Agreement, the term "AFFILIATE" shall mean any corporation or business
entity controlled by, controlling or under common control

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SmartDisk Corporation/Fischer International Systems Corporation
Distribution Agreement
Page 13

with the Company or Distributor.

12.19 FOREIGN RESHIPMENT LIABILITY. THIS AGREEMENT IS
EXPRESSLY MADE SUBJECT TO ANY LAWS, REGULATIONS, ORDERS OR OTHER RESTRICTIONS ON
THE EXPORT FROM THE UNITED STATES OF AMERICA OF TECHNICAL INFORMATION OR
PRODUCTS WHICH MAY BE IMPOSED FROM TIME TO TIME BY THE GOVERNMENT OF THE UNITED
STATES OF AMERICA. NOTWITHSTANDING ANYTHING CONTAINED IN THIS AGREEMENT TO THE
CONTRARY, DISTRIBUTOR SHALL NOT EXPORT OR REEXPORT, DIRECTLY OR INDIRECTLY, ANY
TECHNICAL INFORMATION OR PRODUCTS TO ANY COUNTRY OR DESTINATION OR PERMIT ITS
TRANSHIPMENT TO ANY COUNTRY OR DESTINATION FOR WHICH SUCH GOVERNMENT OR ANY
AGENCY THEREOF REQUIRES AN EXPORT LICENSE OR OTHER GOVERNMENTAL APPROVAL AT THE
TIME OF EXPORT WITHOUT FIRST OBTAINING SUCH LICENSE OR APPROVAL.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the day and year first above written.

SMARTDISK CORPORATION FISCHER INTERNATIONAL SYSTEMS
CORPORATION

By: /s/ TIMOTHY TOMLINSON By: /s/ MICHAEL S. BATTAGLIA
--------------------- ------------------------
Name: TIMOTHY TOMLINSON Name: MICHAEL S. BATTAGLIA
Title: SECRETARY Title: PRESIDENT

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SmartDisk Corporation/Fischer International Systems Corporation
Distribution Agreement
Page 14

EXHIBIT A

LIST OF PRODUCTS

NAME OF PRODUCT

FlashPath

Smarty

<PAGE>

SmartDisk Corporation/Fischer International Systems Corporation
Distribution Agreement
Page 15

EXHIBIT B

TERRITORY

WORLDWIDE EXCEPT:

Australia
Burma/Myanmar
China/Hong Kong
Indonesia
Japan
Korea
Laos
Malaysia
Micronesia
New Zealand
Papua/New Guinea
Philippines
Singapore
Taiwan
Thailand
Vietnam

<PAGE>

SmartDisk Corporation/Fischer International Systems Corporation
Distribution Agreement
Page 16

EXHIBIT C

COMPANY TRADEMARKS

FlashPath

Smarty

SmartDisk

Exhibit 10.12

SMARTDISK CORPORATION

INVESTORS' RIGHTS AGREEMENT

THIS INVESTORS' RIGHTS AGREEMENT (the "AGREEMENT") is made as of the 22 day
of May, 1998, by and among SmartDisk Corporation, a Delaware corporation (the
"COMPANY"), and each of the investors (the "INVESTORS") listed on Exhibit A
hereto.

R E C I T A L S

A. The Company and the Investors have entered into a Founders' Subscription
Agreement of even date herewith as amended by Amendment Number One to Founders'
Subscription Agreement of even date herewith (collectively the "PURCHASE
AGREEMENT") pursuant to that certain Joint Venture Agreement by and among
Phoenix House Investments, L.L.C., a Delaware limited liability company
("PHOENIX"), Toshiba Corporation ("TOSHIBA") and the Company dated February 24,
1998, (the "JOINT VENTURE AGREEMENT").

B. Under the Purchase Agreement, Investors' wish to purchase and the
Company wishes to sell shares of the Company's Common Stock.

C. The Joint Venture Agreement contains as a condition to the Investors'
obligations under the Purchase Agreement that the Company and the Investors
enter into this Agreement in order to provide the Investors with (i) certain
rights to register shares of the Company's Common Stock and (ii) certain rights
to receive or inspect information pertaining to the Company.

D. The Company desires to induce the Investors to purchase shares of Common
Stock pursuant to the Purchase Agreement by agreeing to the terms and conditions
set forth herein.

NOW THEREFORE, in reliance on the foregoing recitals and in consideration
of the mutual covenants contained herein, in the Joint Venture Agreement and the
Purchase Agreement the parties hereto agree as follows:

A G R E E M E N T

1. REGISTRATION RIGHTS. The Company and the Investors covenant and agree as
follows:

1.1 DEFINITIONS. For purposes of this Section 1:

1.1.1 The terms "REGISTER," "REGISTERED," and "REGISTRATION"
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act of 1933, as
amended (the "ACT"), and the declaration or ordering of effectiveness of such
registration statement or document.

1.1.2 The term "REGISTRABLE SECURITIES" means (i) the shares of Common
Stock purchased by Investors under the Purchase Agreement (such shares of Common
Stock are collectively referred to hereinafter as the "STOCK"), and (ii) any
other shares of Common Stock or other securities of the Company issued as (or
issuable upon the conversion or exercise of any warrant, right or other security
which is issued as) a dividend or other distribution with respect to, or in
exchange for or in replacement of, the Stock, provided that the foregoing
definition shall exclude in all cases any Registrable Securities sold by a
person in a transaction in which his or her rights under this Agreement are not
assigned. Notwithstanding the foregoing, Common Stock or other securities shall
only be treated as Registrable Securities if and so long as they have not been
(A) sold to

<PAGE>
SmartDisk Corporation
Investors' Rights Agreement
Page 2

or through a broker or dealer or underwriter in a public distribution or a
public securities transaction, or (B) sold in a transaction exempt from the
registration and prospectus delivery requirements of the Act under Section 4(1)
thereof so that all transfer restrictions, and restrictive legends with respect
thereto, if any, are removed upon the consummation of such sale.

1.1.3 The number of shares of "REGISTRABLE SECURITIES THEN
OUTSTANDING" shall be determined by the number of shares of Common Stock
outstanding which are, and the number of shares of Common Stock issuable
pursuant to then exercisable or convertible securities which are, Registrable
Securities.

1.1.4 The term "HOLDER" means any person owning or having the
right to acquire Registrable Securities or any assignee thereof in accordance
with Section 1.13 hereof.

1.1.5 The term "FORM S-3" means such form under the Act as in
effect on the date hereof or any successor form under the Act.

1.1.6 The term "SEC" means the Securities and Exchange Commission.

1.1.7 The term "EXCHANGE ACT" shall mean the Securities Exchange Act
of 1934, as amended.

1.2 REQUEST FOR REGISTRATION.

1.2.1 If the Company shall receive at any time after the earlier of:
(i) six (6) months after the effective date of the first registration statement
for a public offering of securities of the Company (other than a registration
statement relating either to the sale of securities to employees of the Company
pursuant to a stock option, stock purchase or similar plan or an SEC Rule 145
transaction) or (ii) three (3) years from the date hereof, a written request
from Toshiba, Phoenix or from the Holders of a majority of the Registrable
Securities then outstanding that the Company file a registration statement under
the Act covering the registration of at least twenty percent (20%) of the
Registrable Securities then outstanding (or a lesser percent if the anticipated
aggregate offering price, net of underwriting discounts and commissions, would
exceed Ten Million Dollars ($10,000,000)), then the Company shall, within ten
(10) days of the receipt thereof, give written notice of such request to all
Holders and shall, subject to the limitations of subsection 1.2.2, use its best
efforts to effect as soon as practicable, and in any event within 60 days of the
receipt of such request, the registration under the Act of all Registrable
Securities which the Holders request to be registered within twenty (20) days of
the mailing of such notice by the Company in accordance with Section 3.5.

1.2.2 If the Holders initiating the registration request hereunder
("INITIATING HOLDERS") intend to distribute the Registrable Securities covered
by their request by means of an underwriting, they shall so advise the Company
as a part of their request made pursuant to this Section 1.2 and the Company
shall include such information in the written notice referred to in subsection
1.2.1. The underwriter will be selected by a majority in interest of the
Initiating Holders and shall be reasonably acceptable to the Company. In such
event, the right of any Holder to include his Registrable Securities in such
registration shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting (unless otherwise mutually agreed by a majority in interest of the
Initiating Holders and such Holder) to the extent provided herein. All Holders
proposing to distribute their securities through such underwriting shall
(together with the Company as provided in subsection 1.4.5 enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by a majority in interest of the Initiating
Holders. Notwithstanding any other provision of this Section 1.2, if the
underwriter advises the Initiating Holders in writing that marketing factors
require a limitation of the number of shares to be underwritten, then the
Initiating Holders shall so advise all Holders of Registrable Securities which
would otherwise be underwritten pursuant hereto, and the number of shares of
Registrable Securities that may be

<PAGE>
SmartDisk Corporation
Investors' Rights Agreement
Page 3

included in the underwriting shall be allocated among all Holders thereof,
including the Initiating Holders, in proportion (as nearly as practicable) to
the amount of Registrable Securities of the Company owned by each Holder;
provided, however, that the number of shares of Registrable Securities to be
included in such underwriting shall not be reduced unless all other securities
are first entirely excluded from the underwriting.

1.2.3 Notwithstanding the foregoing, if the Company shall
furnish to Holders requesting a registration statement pursuant to this Section
1.2 a certificate signed by the President of the Company stating that in the
good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company and its shareholders for such registration
statement to be filed and it is therefore essential to defer the filing of such
registration statement, the Company shall have the right to defer such filing
for a period of not more than one hundred fifty (150) days after receipt of the
request of the Initiating Holders; provided, however, that the Company may not
utilize this right more than once in any twelve (12)-month period.

1.2.4 In addition, the Company shall not be obligated to effect, or to
take any action to effect, any registration pursuant to this Section 1.2:

1.2.4.1 After the Company has effected three (3) registrations
pursuant to this Section 1.2 and such registrations have been declared or
ordered effective; or

1.2.4.2 During the period starting with the date sixty (60) days
prior to the Company's good faith estimate of the date of filing of, and ending
on a date one hundred eighty (180) days after the effective date of, a
registration subject to Section 1.3 hereof; provided that the Company is
actively employing in good faith all reasonable efforts to cause such
registration statement to become effective.

1.3 COMPANY REGISTRATION. If (but without any obligation to do so) the
Company proposes to register (including for this purpose a registration effected
by the Company for shareholders other than the Holders) any of its stock under
the Act in connection with the public offering of such securities solely for
cash (other than a registration relating solely to the sale of securities to
participants in a Company stock plan or a transaction covered by Rule 145 under
the Act, a registration in which the only stock being registered is Common Stock
issuable upon conversion of debt securities which are also being registered, or
any registration on any form which does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of the Registrable Securities), the Company shall, at such
time, promptly give each Holder written notice of such registration. Upon the
written request of each Holder given within twenty (20) days after mailing of
such notice by the Company in accordance with Section 3.5, the Company shall,
subject to the provisions of Section 1.8, cause to be registered under the Act
all of the Registrable Securities that each such Holder has requested to be
registered.

1.4 OBLIGATIONS OF THE COMPANY. Whenever required under this Section 1 to
effect the registration of any Registrable Securities, the Company shall, as
expeditiously as reasonably possible:

1.4.1 Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder, keep
such registration statement effective for up to ninety (90) days.

1.4.2 Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Act with respect to the disposition of all securities covered by such
registration statement for up to ninety (90) days.
<PAGE>
SmartDisk Corporation
Investors' Rights Agreement
Page 4

1.4.3 Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may reasonably request
in order to facilitate the disposition of Registrable Securities owned by them.

1.4.4 Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.

1.4.5 In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering, including,
without limitation, participating in investor presentations on any "road show"
undertaken in connection with the marketing of the offering of the Registrable
Securities. Each Holder participating in such underwriting shall also enter into
and perform its obligations under such an agreement.

1.4.6 Notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing, such
obligation to continue for ninety (90) days.

1.4.7 Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar securities
issued by the Company are then listed or to be listed on the Nasdaq National
Market, if not listed on a securities exchange, if eligible.

1.4.8 Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration.

1.4.9 Use its best efforts to furnish, at the request of any
Holder requesting registration of Registrable Securities pursuant to this
Section 1, on the date that such Registrable Securities are delivered to the
underwriters for sale in connection with a registration pursuant to this Section
1, if such securities are being sold through underwriters, or, if such
securities are not being sold through underwriters, on the date that the
registration statement with respect to such securities becomes effective, (i) an
opinion, dated such date, of the counsel representing the Company for the
purposes of such registration, in form and substance as is customarily given to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities and
(ii) a letter dated such date, from the independent certified public accountants
of the Company, in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering,
addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities.

1.5 FURNISH INFORMATION. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 1 with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Holder's Registrable
Securities. The Company shall have no obligation with respect to any
registration requested pursuant to Section 1.2 or Section 1.12 of this Agreement
if, as a result of the application of the preceding sentence, the number of
shares or the anticipated aggregate offering price of the Registrable Securities
to be included in the registration does not equal or exceed the number of shares
or the anticipated

<PAGE>
SmartDisk Corporation
Investors' Rights Agreement
Page 5

aggregate offering price required to originally trigger the Company's obligation
to initiate such registration as specified in subsection 1.2.1 or subsection
1.12.2(2), whichever is applicable.

1.6 EXPENSES OF DEMAND REGISTRATION. All expenses other than underwriting
discounts and commissions incurred in connection with registrations, filings or
qualifications pursuant to Section 1.2, including (without limitation) all
registration, filing and qualification fees, printers' and accounting fees, fees
and disbursements of counsel for the Company, and the reasonable fees and
disbursements of one counsel for the selling Holders shall be borne by the
Company; provided, however, that the Company shall not be required to pay for
any expenses of any registration proceeding begun pursuant to Section 1.2 if the
registration request is subsequently withdrawn at the request of the Holders of
a majority of the Registrable Securities to be registered (in which case all
participating Holders shall bear such expenses), unless the Holders of a
majority of the Registrable Securities agree to forfeit their right to one
demand registration pursuant to Section 1.2, provided further, however, that if
at the time of such withdrawal, the Holders have learned of a material adverse
change in the condition, business, or prospects of the Company from that known
to the Holders at the time of their request and have withdrawn the request with
reasonable promptness following disclosure by the Company of such material
adverse change, then the Holders shall not be required to pay any of such
expenses and shall retain their rights pursuant to Section 1.2.

1.7 EXPENSES OF COMPANY REGISTRATION. The Company shall bear and pay all
expenses incurred in connection with any registration, filing or qualification
of Registrable Securities with respect to the registrations pursuant to Section
1.3 for each Holder (which right may be assigned as provided in Section 1.13),
including (without limitation) all registration, filing, and qualification fees,
printers' and accounting fees relating or apportionable thereto and the
reasonable fees and disbursements of one counsel for the selling Holders
selected by them with the approval of the Company, which approval shall not be
unreasonably withheld, but excluding underwriting discounts and commissions
relating to Registrable Securities.

1.8 UNDERWRITING REQUIREMENTS. In connection with any offering involving an
underwriting of shares of the Company's capital stock, the Company shall not be
required under Section 1.3 to include any of the Holders' securities in such
underwriting unless they accept the terms of the underwriting as agreed upon
between the Company and the underwriters selected by it (or by other persons
entitled to select the underwriters), and then only in such quantity as the
underwriters determine in their sole discretion will not jeopardize the success
of the offering by the Company. If the total amount of securities, including
Registrable Securities, requested by shareholders to be included in such
offering exceeds the amount of securities sold other than by the Company that
the underwriters determine in their sole discretion is compatible with the
success of the offering, then the Company shall be required to include in the
offering only that number of such securities, including Registrable Securities,
which the underwriters determine in their sole discretion will not jeopardize
the success of the offering (the securities so included to be apportioned pro
rata among the selling shareholders according to the total amount of securities
entitled to be included therein owned by each selling shareholder or in such
other proportions as shall mutually be agreed to by such selling shareholders)
but in no event shall (i) the amount of securities of the selling Holders
included in the offering be reduced below thirty percent (30%) of the total
amount of securities included in such offering, unless such offering is the
initial public offering of the Company's securities in which case the selling
shareholders may be excluded if the underwriters make the determination
described above and no other shareholder's securities are included or (ii)
notwithstanding (i) above, any shares being sold by a shareholder exercising a
demand registration right similar to that granted in Section 1.2 be excluded
from such offering. For purposes of the preceding parenthetical concerning
apportionment, for any selling shareholder which is a Holder of Registrable
Securities and which is a partnership or corporation, the partners, retired
partners and shareholders of such Holder, or the estates and family members of
any such partners and retired partners and any trusts for the benefit of any of
the foregoing persons shall be deemed to be a single "SELLING SHAREHOLDER," and
any pro-rata reduction with respect to such

<PAGE>
SmartDisk Corporation
Investors' Rights Agreement
Page 6

"selling shareholder" shall be based upon the aggregate amount of shares
carrying registration rights owned by all entities and individuals included in
such "selling shareholder," as defined in this sentence.

1.9 DELAY OF REGISTRATION. No Holder shall have any right to obtain or seek
an injunction restraining or otherwise delaying any such registration as the
result of any controversy that might arise with respect to the interpretation or
implementation of this Section 1.

1.10 INDEMNIFICATION. In the event any Registrable Securities are included
in a registration statement under this Section 1:

1.10.1 To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, any underwriter (as defined in the Act) for such
Holder and each person, if any, who controls such Holder or underwriter within
the meaning of the Act or the Exchange Act, against any losses, claims, damages,
or liabilities (joint or several) to which they may become subject under the
Act, the Exchange Act or other federal or state law, insofar as such losses,
claims, damages, or liabilities (or actions in respect thereof) arise out of or
are based upon any of the following statements, omissions or violations
(collectively a "VIOLATION"): (i) any untrue statement or alleged untrue
statement of a material fact contained in such registration statement, including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Act, the Exchange Act, any state securities law
or any rule or regulation promulgated under the Act, the Exchange Act or any
state securities law; and the Company will pay to each such Holder, underwriter
or controlling person, as incurred, any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability, or action; provided, however, that the indemnity
agreement contained in this subsection 1.10.1 shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld), nor shall the Company be liable in any such case
for any such loss, claim, damage, liability, or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by any such Holder, underwriter or controlling person.

1.10.2 To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Act, any underwriter, any other
Holder selling securities in such registration statement and any controlling
person of any such underwriter or other Holder, against any losses, claims,
damages, or liabilities (joint or several) to which any of the foregoing persons
may become subject, under the Act, the Exchange Act or other federal or state
law, insofar as such losses, claims, damages, or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished by such Holder expressly
for use in connection with such registration; and each such Holder will pay, as
incurred, any legal or other expenses reasonably incurred by any person intended
to be indemnified pursuant to this subsection 1.10.2, in connection with
investigating or defending any such loss, claim, damage, liability, or action;
provided, however, that the indemnity agreement contained in this subsection
1.10.2 shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the consent
of the Holder, which consent shall not be unreasonably withheld; provided, that,
in no event shall any indemnity under this subsection 1.10.2 exceed the net
proceeds from the offering received by such Holder, except in the case of
willful fraud by such Holder.

<PAGE>
SmartDisk Corporation
Investors' Rights Agreement
Page 6

1.10.3 Promptly after receipt by an indemnified party under
this Section 1.10 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.10, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the reasonable fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.10, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.10.

1.10.4 If the indemnification provided for in this Section
1.10 is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, liability, claim, damage, or expense
referred to therein, then the indemnifying party, in lieu of indemnifying such
indemnified party hereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such loss, liability, claim, damage, or
expense in such proportion as is appropriate to reflect the relative fault of
the indemnifying party on the one hand and of the indemnified party on the other
in connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations; provided, that, in no event shall any contribution by a Holder
under this subsection 1.10.4 exceed the net proceeds from the offering received
by such Holder, except in the case of willful fraud by such Holder. The relative
fault of the indemnifying party and of the indemnified party shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact relates to
information supplied by the indemnifying party or by the indemnified party and
the parties' relative intent, knowledge, access to information, and opportunity
to correct or prevent such statement or omission.

1.10.5 Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.

1.10.6 The obligations of the Company and Holders under this
Section 1.10 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 1, and otherwise.

1.11 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making
available to the Holders the benefits of Rule 144 promulgated under the Act and
any other rule or regulation of the SEC that may at any time permit a Holder to
sell securities of the Company to the public without registration or pursuant to
a registration on Form S-3, the Company agrees to:

1.11.1 make and keep public information available, as those
terms are understood and defined in SEC Rule 144, at all times after ninety (90)
days after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public so long as the
Company remains subject to the periodic reporting requirements under Sections 13
or 15(d) of the Exchange Act;

<PAGE>
SmartDisk Corporation
Investors' Rights Agreement
Page 8

1.11.2 take such action, including the voluntary registration
of its Common Stock under Section 12 of the Exchange Act, as is necessary to
enable the Holders to utilize Form S-3 for the sale of their Registrable
Securities, such action to be taken as soon as practicable after the end of the
fiscal year in which the first registration statement filed by the Company for
the offering of its securities to the general public is declared effective;

1.11.3 file with the SEC in a timely manner all reports and
other documents required of the Company under the Act and the Exchange Act; and

1.11.4 furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144 (at
any time after ninety (90) days after the effective date of the first
registration statement filed by the Company), the Act and the Exchange Act (at
any time after it has become subject to such reporting requirements), or that it
qualifies as a registrant whose securities may be resold pursuant to Form S-3
(at any time after it so qualifies), (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company, and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such form.

1.12 FORM S-3 REGISTRATION. In case the Company shall receive from any
Holder or Holders of not less than twenty percent (20%) of the Registrable
Securities then outstanding a written request or requests that the Company
effect a registration on Form S-3 and any related qualification or compliance
with respect to all or a part of the Registrable Securities owned by such Holder
or Holders, the Company will:

1.12.1 promptly give written notice of the proposed registration, and
any related qualification or compliance, to all other Holders; and

1.12.2 as soon as practicable, effect such registration and
all such qualifications and compliances as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Holder's Registrable Securities as are specified in such request, together with
all or such portion of the Registrable Securities of any other Holder or Holders
joining in such request as are specified in a written request given within
fifteen (15) days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to effect any such
registration, qualification or compliance, pursuant to this Section 1.12: (1) if
Form S-3 is not available for such offering by the Holders; (2) if the Holders,
together with the holders of any other securities of the Company entitled to
inclusion in such registration, propose to sell Registrable Securities and such
other securities (if any) at an aggregate price to the public (net of any
underwriters' discounts or commissions) of less than Five Hundred Thousand
Dollars ($500,000); (3) if the Company shall furnish to the Holders a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its shareholders for such Form S-3 Registration
to be effected at such time, in which event the Company shall have the right to
defer the filing of the Form S-3 registration statement for a period of not more
than one hundred fifty (150) days after receipt of the request of the Holder or
Holders under this Section 1.12; provided, however, that the Company shall not
utilize this right more than once in any twelve month period; (4) if the Company
has already effected two registrations on Form S-3 for the Holders pursuant to
this Section 1.12; or (5) in any particular jurisdiction in which the Company
would be required to qualify to do business or to execute a general consent to
service of process in effecting such registration, qualification or compliance.

1.12.3 Subject to the foregoing, the Company shall file a
registration statement covering

<PAGE>
SmartDisk Corporation
Investors' Rights Agreement
Page 9

the Registrable Securities and other securities so requested to be registered as
soon as practicable after receipt of the request or requests of the Holders. All
expenses incurred in connection with a registration requested pursuant to
Section 1.12, including (without limitation) all registration, filing,
qualification, printers' and accounting fees and the reasonable fees and
disbursements of counsel for the selling Holder or Holders and counsel for the
Company, but excluding any underwriters' discounts or commissions associated
with Registrable Securities, shall be borne by the Company. Registrations
effected pursuant to this Section 1.12 shall not be counted as demands for
registration or registrations effected pursuant to Sections 1.2 or 1.3,
respectively.

1.13 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to
register Registrable Securities pursuant to this Section 1 may be assigned (but
only with all related obligations) by a Holder to a transferee or assignee of at
least one hundred thousand (100,000) shares of such securities as presently
constituted, provided the Company is, within a reasonable time after such
transfer, furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned; and provided, further, that such
assignment shall be effective only if immediately following such transfer the
further disposition of such securities by the transferee or assignee is
restricted under the Act. For the purposes of determining the number of shares
of Registrable Securities held by a transferee or assignee, the holdings of
transferees and assignees of a partnership or limited liability company who are
partners, members or retired partners or members of such partnership or limited
liability company (including spouses and ancestors, lineal descendants and
siblings of such partners, members or spouses who acquire Registrable Securities
by gift, will or intestate succession) shall be aggregated together and with the
partnership or limited liability company; provided that all assignees and
transferees who would not qualify individually for assignment of registration
rights shall have a single attorney-in-fact for the purpose of exercising any
rights, receiving notices or taking any action under Section 1.

1.14 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after the date
of this Agreement, the Company shall not, without the prior written consent of
the Holders of a majority of the outstanding Registrable Securities, enter into
any agreement with any holder or prospective holder of any securities of the
Company which would allow such holder or prospective holder (a) to include such
securities in any registration filed under Section 1.2 hereof, unless under the
terms of such agreement, such holder or prospective holder may include such
securities in any such registration only to the extent that the inclusion of his
securities will not reduce the amount of the Registrable Securities of the
Holders which is included or (b) to make a demand registration which could
result in such registration statement being declared effective prior to the
earlier of either of the dates set forth in subsection 1.2.1 or within one
hundred twenty (120) days of the effective date of any registration effected
pursuant to Section 1.2.

1.15 "MARKET STAND-OFF" AGREEMENT.

1.15.1 Each Holder hereby agrees that, during the period of duration
(up to, but not exceeding, one hundred eighty (180) days) specified by the
Company and an underwriter of Common Stock or other securities of the Company,
following the date of the final prospectus distributed in connection with a
registration statement of the Company filed under the Act, it shall not, to the
extent requested by the Company and such underwriter, directly or indirectly
sell, offer to sell, contract to sell (including, without limitation, any short
sale), grant any option to purchase or otherwise transfer or dispose of (other
than to donees who agree to be similarly bound) any securities of the Company
held by it at any time during such period except Common Stock included in such
registration; provided, however, that: (i) such agreement shall be applicable
only to the first such registration statement of the Company which covers Common
Stock (or other securities) to be sold on its behalf to the public in an
underwritten offering; and (ii) all officers and directors of the Company, all
five percent (5%) security holders, except for pension funds, mutual funds and
other similar investment vehicles, and all other persons with registration
rights (whether or not pursuant to this Agreement) enter into similar

<PAGE>
SmartDisk Corporation
Investors' Rights Agreement
Page 10

agreements.

1.15.2 In order to enforce the foregoing covenant, the Company may
impose stop-transfer instructions with respect to the Registrable Securities of
each Holder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period, and each Holder agrees
that, if so requested, such Holder will execute an agreement in the form
provided by the underwriter containing terms which are essentially consistent
with the provisions of this Section 1.15.

1.15.3 Notwithstanding the foregoing, the obligations described in
this Section 1.15 shall not apply to a registration relating solely to employee
benefit plans on Form S-1 or Form S-8 or similar forms which may be promulgated
in the future, or a registration relating solely to an SEC Rule 145 transaction
on Form S-4 or similar forms which may be promulgated in the future.

1.16 TERMINATION OF REGISTRATION RIGHTS. No Holder shall be entitled to
exercise any right provided for in this Section 1 after such time as Rule 144 or
another similar exemption under the Act is available for the sale of all of such
Holder's shares during a three (3)-month period without registration.

2. COVENANTS OF THE COMPANY.

2.1 DELIVERY OF FINANCIAL STATEMENTS. The Company shall deliver to each
Investor holding, and to transferees of, at least one hundred thousand (100,000)
shares of Registrable Securities as presently constituted:

2.1.1 as soon as practicable, but in any event within one
hundred (100) days after the end of each fiscal year of the Company, an income
statement for such fiscal year, a balance sheet of the Company and statement of
shareholder's equity as of the end of such year, and a statement of cash flows
for such year, such year-end financial reports to be in reasonable detail,
prepared in accordance with generally accepted accounting principles ("GAAP"),
and audited and certified by an independent public accounting firm selected by
the Company;

2.1.2 as soon as practicable, but in any event within forty-five (45)
days after the end of each of the first three (3) quarters of each fiscal year
of the Company, an unaudited profit or loss statement, a statement of cash flows
for such fiscal quarter and an unaudited balance sheet as of the end of such
fiscal quarter;

2.2 INSPECTION. The Company shall permit each Investor who holds not less
than one hundred thousand (100,000) shares of Registrable Securities, at such
Investor's expense, to visit and inspect the Company's properties, to examine
its books of account and records and to discuss the Company's affairs, finances
and accounts with its officers, all at such reasonable times as may be requested
by the Investor; provided, however, that the Company shall not be obligated
pursuant to this Section 2.2 to provide access to any information which it
reasonably considers to be a trade secret or similar confidential information.

2.3 TERMINATION OF INFORMATION AND INSPECTION COVENANTS. The covenants set
forth in Sections 2.1 and 2.2 shall terminate as to Investors and be of no
further force or effect when the sale of securities pursuant to a registration
statement filed by the Company under the Act in connection with the firm
commitment underwritten offering of its securities to the general public is
consummated or when the Company first becomes subject to the periodic reporting
requirements of Sections 13 or 1 5(d) of the Exchange Act, whichever event shall
first occur.

3. MISCELLANEOUS.

<PAGE>
SmartDisk Corporation
Investors' Rights Agreement
Page 11

3.1 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the terms
and conditions of this Agreement shall inure to the benefit of and be binding
upon the respective successors and assigns of the parties (including transferees
of the Common Stock). Nothing in this Agreement, express or implied, is intended
to confer upon any party other than the parties hereto or their respective
successors and assigns any rights, remedies, obligations, or liabilities under
or by reason of this Agreement, except as expressly provided in this Agreement.

3.2 GOVERNING LAW. This Agreement and all acts and transactions pursuant
hereto shall be governed, construed and interpreted in accordance with the laws
of the State of Delaware, without giving effect to principles of conflicts of
laws.

3.3 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument

3.4 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.

3.5 NOTICES. Unless otherwise provided, any notice required or permitted by
this Agreement shall be in writing and shall be deemed sufficient upon delivery,
when delivered personally or by overnight courier or sent by telegram or fax, or
forty-eight (48) hours after being deposited in the U.S. mail, as certified or
registered mail, with postage prepaid, and addressed to the party to be notified
at such party's address as set forth below or on Exhibit A hereto or as
subsequently modified by written notice.

3.6 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and
the observance of any term of this Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively), only with
the written consent of the Company, Toshiba and the Holders of a majority of the
Registrable Securities then outstanding. Any amendment or waiver effected in
accordance with this paragraph shall be binding upon each Holder of any
Registrable Securities then outstanding, each future Holder of all such
Registrable Securities, and the Company.

3.7 SEVERABILITY. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, the parties agree to renegotiate such
provision in good faith. In the event that the parties cannot reach a mutually
agreeable and enforceable replacement for such provision, then (x) such
provision shall be excluded from this Agreement, (y) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (z) the
balance of the Agreement shall be enforceable in accordance with its terms.

3.8 AGGREGATION OF STOCK. All shares of the Preferred Stock held or
acquired by affiliated entities or persons shall be aggregated together for the
purpose of determining the availability of any rights under this Agreement.

[Signature Page Follows]

<PAGE>
SmartDisk Corporation
Investors' Rights Agreement
Page 12

The parties have executed this Investors' Rights Agreement as of the date
first above written.

<TABLE>
<S> <C>
COMPANY: INVESTORS:

SMARTDISK CORPORATION FISCHER INTERNATIONAL
SYSTEMS CORPORATION

By: /S/ MICHAEL S. BATTAGLIA By: /S/ MICHAEL S. BATTAGLIA
--------------------------- ------------------------
Michael S. Battaglia, President Michael S. Battaglia, President

Address: 3506 Mercantile Avenue Address: 3506 Mercantile Avenue
Naples, Florida 34104-3310 Naples, Florida 34104-3310

TOSHIBA CORPORATION

By: /S/ MASAICHI KOGA
-----------------
Its: SENIOR EXECUTIVE VICE PRESIDENT

Address: 1-1, Shibaura 1-Chome
Minato-ku, Tokyo 105-01
Japan

PHOENIX HOUSE INVESTMENTS, L.L.C.

By: /S/ ADDISON M. FISCHER
----------------------
Addison M. Fischer, General Manager

Address: 400 West King Street
Carson City, Nevada 89703
</TABLE>

<PAGE>
SmartDisk Corporation
Investors' Rights Agreement
Page 13

EXHIBIT A

INVESTORS

- -------------------------------------------------------------------------------
NAME ADDRESS NO. OF SHARES
- -------------------------------------------------------------------------------
Toshiba Corporation 1-1, Shibaura 1-Chome 9,950,000
Minato-ku, Tokyo 105-01
Japan
- -------------------------------------------------------------------------------
Phoenix House Investments, 400 West King Street 29,400,000
L.L.C. Carson City, Nevada 89703
- -------------------------------------------------------------------------------
Fischer International Systems 3506 Mercantile Avenue 600,000
Corporation Naples, Florida 34104-3310
- -------------------------------------------------------------------------------

- -------------------------------------------------------------------------------

Exhibit 10.16

FORM OF
INDEMNIFICATION AGREEMENT

THIS AGREEMENT (the "Agreement") is made and entered into as of
___________, 1999 between SmartDisk Corporation, a Delaware corporation ("the
Company"), and _____________________ ("Indemnitee"). Certain capitalized terms
are defined in Section 13.

WITNESSETH THAT:

WHEREAS, Indemnitee performs a valuable service for the Company; and

WHEREAS, the Board of Directors of the Company has adopted Bylaws (the
"Bylaws") providing for the indemnification of the officers and directors of the
Company to the maximum extent authorized by law; and

WHEREAS, the Bylaws by their nonexclusive nature, permit contracts
between the Company and the officers or directors of the Company with respect to
indemnification of such officers or directors; and

WHEREAS, in accordance with the authorization as provided by the
Bylaws, the Company may purchase and maintain a policy or policies of directors'
and officers' liability insurance ("D & O Insurance"), covering certain
liabilities which may be incurred by its officers or directors in the
performance of their obligations to the Company; and

WHEREAS, in order to induce Indemnitee to continue to serve as an
officer or director of the Company, the Company has determined and agreed to
enter into this contract with Indemnitee;

NOW, THEREFORE, in consideration of Indemnitee's service as an officer
or director after the date hereof, the parties hereto agree as follows:

SECTION 1. INDEMNITY OF INDEMNITEE. The Company hereby agrees to hold
harmless and indemnify Indemnitee to the full extent authorized or permitted by
law, as such may be amended from time to time, and the Bylaws, as such may be
amended. In furtherance of the foregoing indemnification, and without limiting
the generality thereof:

(a) PROCEEDINGS OTHER THAN PROCEEDINGS BY OR IN THE RIGHT OF
THE COMPANY. Indemnitee shall be entitled to the rights of indemnification
provided in this Section l(a) if, by reason of his Corporate Status, he is, or
is threatened to be made, a party to or participant in any Proceeding other than
a Proceeding by or in the right of the Company. Pursuant to this Section 1(a),
Indemnitee shall be indemnified against all Expenses, judgments, penalties,
fines and amounts paid in settlement actually and reasonably incurred by him or
on his behalf in connection with such Proceeding or any claim, issue or matter
therein, if he acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the

<PAGE>

Company and, with respect to any criminal Proceeding, had no reasonable cause to
believe his conduct was unlawful.

(b) PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. Indemnitee
shall be entitled to the rights of indemnification provided in this Section 1(b)
if, by reason of his Corporate Status, he is, or is threatened to be made, a
party to or participant in any Proceeding brought by or in the right of the
Company. Pursuant to this Section 1(b), Indemnitee shall be indemnified against
all Expenses actually and reasonably incurred by him or on his behalf in
connection with such Proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company; provided, however, that, if applicable law so provides, no
indemnification against such Expenses shall be made in respect of any claim,
issue or matter in such Proceeding as to which Indemnitee shall have been
adjudged to be liable to the Company unless and to the extent that the Court of
Chancery of the State of Delaware shall determine that such indemnification may
be made.

(c) INDEMNIFICATION FOR EXPENSES OF A PARTY WHO IS WHOLLY OR
PARTLY SUCCESSFUL. Notwithstanding any other provision of this Agreement, to the
extent that Indemnitee is, by reason of his Corporate Status, a party to and is
successful, on the merits or otherwise, in any Proceeding, he shall be
indemnified to the maximum extent permitted by law against all Expenses actually
and reasonably incurred by him or on his behalf in connection therewith. If
Indemnitee is not wholly successful in such Proceeding but is successful, on the
merits or otherwise, as to one or more but less than all claims, issues or
matters in such Proceeding, the Company shall indemnify Indemnitee against all
Expenses actually and reasonably incurred by him or on his behalf in connection
with each successfully resolved claim, issue or matter. For purposes of this
Section and without limitation, the termination of any claim, issue or matter in
such a Proceeding by dismissal, with or without prejudice, shall be deemed to be
a successful result as to such claim, issue or matter.

SECTION 2. ADDITIONAL INDEMNITY. In addition to, and without regard to
any limitations on, the indemnification provided for in Section 1, the Company
shall and hereby does indemnify and hold harmless Indemnitee against all
Expenses, judgments, penalties, fines and amounts paid in settlement actually
and reasonably incurred by him or on his behalf if, by reason of his Corporate
Status, he is, or is threatened to be made, a party to or participant in any
Proceeding (including a Proceeding by or in the right of the Company),
including, without limitation, all liability arising out of the negligence or
active or passive wrongdoing of Indemnitee. The only limitation that shall exist
upon the Company's obligations pursuant to this Agreement shall be that the
Company shall not be obligated to make any payment to Indemnitee that is finally
determined (under the procedures, and subject to the presumptions, set forth in
Sections 6 and 7 hereof) to be unlawful under law.

SECTION 3. CONTRIBUTION IN THE EVENT OF JOINT LIABILITY.

(a) Whether or not the indemnification provided in Sections 1
and 2 hereof is available, in respect of any threatened, pending or completed
action, suit or proceeding in which Company is jointly liable with Indemnitee
(or would be if joined in such action, suit or proceeding), Company shall pay,
in the first instance, the entire amount of any judgment or

2
<PAGE>

settlement of such action, suit or proceeding without requiring Indemnitee to
contribute to such payment and Company hereby waives and relinquishes any right
of contribution it may have against Indemnitee. Company shall not enter into any
settlement of any action, suit or proceeding in which Company is jointly liable
with Indemnitee (or would be if joined in such action, suit or proceeding)
unless such settlement provides for a full and final release of all claims
asserted against Indemnitee.

(b) Without diminishing or impairing the obligations of the
Company set forth in the preceding subparagraph, if, for any reason, Indemnitee
shall elect or be required to pay all or any portion of any judgment or
settlement in any threatened, pending or completed action, suit or proceeding in
which Company is jointly liable with Indemnitee (or would be if joined in such
action, suit or proceeding), Company shall contribute to the amount of expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred and paid or payable by Indemnitee in proportion
to the relative benefits received by the Company and all officers, directors or
employees of the Company other than Indemnitee who are jointly liable with
Indemnitee (or would be if joined in such action, suit or proceeding), on the
one hand, and Indemnitee, on the other hand, from the transaction from which
such action, suit or proceeding arose; provided, however, that the proportion
determined on the basis of relative benefit may, to the extent necessary to
conform to law, be further adjusted by reference to the relative fault of
Company and all officers, directors or employees of the Company other than
Indemnitee who are jointly liable with Indemnitee (or would be if joined in such
action, suit or proceeding), on the one hand, and Indemnitee, on the other hand,
in connection with the events that resulted in such expenses, judgments, fines
or settlement amounts, as well as any other equitable considerations which the
law may require to be considered. The relative fault of Company and all
officers, directors or employees of the Company other than Indemnitee who are
jointly liable with Indemnitee (or would be if joined in such action, suit or
proceeding), on the one hand, and Indemnitee, on the other hand, shall be
determined by reference to, among other things, the degree to which their
actions were motivated by intent to gain personal profit or advantage, the
degree to which their liability is primary or secondary, and the degree to which
their conduct is active or passive.

(c) Company hereby agrees to fully indemnify and hold
Indemnitee harmless from any claims of contribution which may be brought by
officers, directors or employees of the Company other than Indemnitee who may be
jointly liable with Indemnitee.

SECTION 4. INDEMNIFICATION FOR EXPENSES OF A WITNESS. Notwithstanding
any other provision of this Agreement, to the extent that Indemnitee is, by
reason of his Corporate Status, a witness in any Proceeding to which Indemnitee
is not a party, he shall be indemnified against all Expenses actually and
reasonably incurred by him or on his behalf in connection therewith.

SECTION 5. ADVANCEMENT OF EXPENSES. Notwithstanding any other provision
of this Agreement, the Company shall advance all Expenses incurred by or on
behalf of Indemnitee in connection with any Proceeding by reason of Indemnitee's
Corporate Status within ten days after the receipt by the Company of a statement
or statements from Indemnitee requesting such advance or advances from time to
time, whether prior to or after final disposition of such Proceeding. Such
statement or statements shall reasonably evidence the Expenses incurred by

3
<PAGE>

Indemnitee and shall include or be preceded or accompanied by an undertaking by
or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately
be determined that Indemnitee is not entitled to be indemnified against such
Expenses. Any advances and undertakings to repay pursuant to this Section 5
shall be unsecured and interest free. Notwithstanding the foregoing, the
obligation of the Company to advance Expenses pursuant to this Section 5 shall
be subject to the condition that, if, when and to the extent that the Company
determines that Indemnitee would not be permitted to be indemnified under
applicable law, the Company shall be entitled to be reimbursed, within thirty
(30) days of such determination, by Indemnitee (who hereby agrees to reimburse
the Company) for all such amounts theretofore paid; provided, however, that if
Indemnitee has commenced or thereafter commences legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee should be
indemnified under applicable law, any determination made by the Company that
Indemnitee would not be permitted to be indemnified under applicable law shall
not be binding and Indemnitee shall not be required to reimburse the Company for
any advance of Expenses until a final judicial determination is made with
respect thereto (as to which all rights of appeal therefrom have been exhausted
or lapsed).

SECTION 6. PROCEDURES AND PRESUMPTIONS FOR DETERMINATION OF ENTITLEMENT
TO INDEMNIFICATION. It is the intent of this Agreement to secure for Indemnitee
rights of indemnity that are as favorable as may be permitted under the law.
Accordingly, the parties agree that the following procedures and presumptions
shall apply in the event of any question as to whether Indemnitee is entitled to
indemnification under this Agreement:

(a) To obtain indemnification (including, but not limited to,
the advancement of Expenses and contribution by the Company) under this
Agreement, Indemnitee shall submit to the Company a written request, including
therein or therewith such documentation and information as is reasonably
available to Indemnitee and is reasonably necessary to determine whether and to
what extent Indemnitee is entitled to indemnification. The Secretary of the
Company shall, promptly upon receipt of such a request for indemnification,
advise the Board of Directors in writing that Indemnitee has requested
indemnification.

(b) Upon written request by Indemnitee for indemnification
pursuant to the first sentence of Section 6(a) hereof, a determination, if
required by applicable law, with respect to Indemnitee's entitlement thereto
shall be made in the specific case by one of the following three methods, which
shall be at the election of Indemnitee: (1) by a majority vote of the
disinterested directors, even though less than a quorum, or (2) by independent
legal counsel in a written opinion, or (3) by the stockholders.

(c) If the determination of entitlement to indemnification is
to be made by Independent Counsel pursuant to Section 6(b) hereof, the
Independent Counsel shall be selected as provided in this Section 6(c). The
Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall
request that such selection be made by the Board of Directors). Indemnitee or
the Company, as the case may be, may, within ten days after such written notice
of selection shall have been given, deliver to the Company or to Indemnitee, as
the case may be, a written objection to such selection; provided, however, that
such objection may be asserted only on the ground that the Independent Counsel
so selected does not meet the requirements of

4
<PAGE>

"Independent Counsel" as defined in Section 13 of this Agreement, and the
objection shall set forth with particularity the factual basis of such
assertion. Absent a proper and timely objection, the person so selected shall
act as Independent Counsel. If a written objection is made and substantiated,
the Independent Counsel selected may not serve as Independent Counsel unless and
until such objection is withdrawn or a court has determined that such objection
is without merit. If, within 20 days after submission by Indemnitee of a written
request for indemnification pursuant to Section 6(a) hereof, no Independent
Counsel shall have been selected and not objected to, either the Company or
Indemnitee may petition the Court of Chancery of the State of Delaware or other
court of competent jurisdiction for resolution of any objection which shall have
been made by the Company or Indemnitee to the other's selection of Independent
Counsel and/or for the appointment as Independent Counsel of a person selected
by the court or by such other person as the court shall designate, and the
person with respect to whom all objections are so resolved or the person so
appointed shall act as Independent Counsel under Section 6(b) hereof. The
Company shall pay any and all reasonable fees and expenses of Independent
Counsel incurred by such Independent Counsel in connection with acting pursuant
to Section 6(b) hereof, and the Company shall pay all reasonable fees and
expenses incident to the procedures of this Section 6(c), regardless of the
manner in which such Independent Counsel was selected or appointed.

(d) In making a determination with respect to entitlement to
indemnification hereunder, the person or persons or entity making such
determination shall presume that Indemnitee is entitled to indemnification under
this Agreement if Indemnitee has submitted a request for indemnification in
accordance with Section 6(a) of this Agreement. Anyone seeking to overcome this
presumption shall have the burden of proof and the burden of persuasion, by
clear and convincing evidence.

(e) Indemnitee shall be deemed to have acted in good faith if
Indemnitee's action is based on the records or books of account of the
Enterprise, including financial statements, or on information supplied to
Indemnitee by the officers of the Enterprise in the course of their duties, or
on the advice of legal counsel for the Enterprise or on information or records
given or reports made to the Enterprise by an independent certified public
accountant or by an appraiser or other expert selected with reasonable care by
the Enterprise. In addition, the knowledge and/or actions, or failure to act, of
any director, officer, agent or employee of the Enterprise shall not be imputed
to Indemnitee for purposes of determining the right to indemnification under
this Agreement. Whether or not the foregoing provisions of this Section 6(e) are
satisfied, it shall in any event be presumed that Indemnitee has at all times
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company. Anyone seeking to overcome this
presumption shall have the burden of proof and the burden of persuasion, by
clear and convincing evidence.

(f) If the person, persons or entity empowered or selected
under Section 6 to determine whether Indemnitee is entitled to indemnification
shall not have made a determination within thirty days after receipt by the
Company of the request therefor, the requisite determination of entitlement to
indemnification shall be deemed to have been made and Indemnitee shall be
entitled to such indemnification, absent (i) a misstatement by Indemnitee of a
material fact, or an omission of a material fact necessary to make Indemnitee's
statement not

5
<PAGE>

materially misleading, in connection with the request for indemnification, or
(ii) a prohibition of such indemnification under applicable law; provided,
however, that such thirty day period may be extended for a reasonable time, not
to exceed an additional fifteen days, if the person, persons or entity making
the determination with respect to entitlement to indemnification in good faith
requires such additional time for the obtaining or evaluating documentation
and/or information relating thereto; and provided, further, that the foregoing
provisions of this Section 6(g) shall not apply if the determination of
entitlement to indemnification is to be made by the stockholders pursuant to
Section 6(b) of this Agreement and if (A) within fifteen days after receipt by
the Company of the request for such determination the Board of Directors or the
Disinterested Directors, if appropriate, resolve to submit such determination to
the stockholders for their consideration at an annual meeting thereof to be held
within 75 days after such receipt and such determination is made thereat, or (B)
a special meeting of stockholders is called within fifteen days after such
receipt for the purpose of making such determination, such meeting is held for
such purpose within 60 days after having been so called and such determination
is made thereat.

(g) Indemnitee shall cooperate with the person, persons or
entity making such determination with respect to Indemnitee's entitlement to
indemnification, including providing to such person, persons or entity upon
reasonable advance request any documentation or information which is not
privileged or otherwise protected from disclosure and which is reasonably
available to Indemnitee and reasonably necessary to such determination. Any
Independent Counsel, member of the Board of Directors, or stockholder of the
Company shall act reasonably and in good faith in making a determination under
the Agreement of the Indemnitee's entitlement to indemnification. Any costs or
expenses (including attorneys' fees and disbursements) incurred by Indemnitee in
so cooperating with the person, persons or entity making such determination
shall be borne by the Company (irrespective of the determination as to
Indemnitee's entitlement to indemnification) and the Company hereby indemnifies
and agrees to hold Indemnitee harmless therefrom.

(h) The Company acknowledges that a settlement or other
disposition short of final judgment may be successful if it permits a party to
avoid expense, delay, distraction, disruption and uncertainty. In the event that
any action, claim or proceeding to which Indemnitee is a party is resolved in
any manner other than by adverse judgment against Indemnitee (including, without
limitation, settlement of such action, claim or proceeding with or without
payment of money or other consideration) it shall be presumed that Indemnitee
has been successful on the merits or otherwise in such action, suit or
proceeding. Anyone seeking to overcome this presumption shall have the burden of
proof and the burden of persuasion, by clear and convincing evidence.

SECTION 7. REMEDIES OF INDEMNITEE.

(a) In the event that (i) a determination is made pursuant to
Section 6 of this Agreement that Indemnitee is not entitled to indemnification
under this Agreement, (ii) advancement of Expenses is not timely made pursuant
to Section 5 of this Agreement, (iii) no determination of entitlement to
indemnification shall have been made pursuant to Section 6(b) of this Agreement
within 90 days after receipt by the Company of the request for indemnification,
(iv) payment of indemnification is not made pursuant to this Agreement within
ten days after

6
<PAGE>

receipt by the Company of a written request therefor, or (v) payment of
indemnification is not made within ten days after a determination has been made
that Indemnitee is entitled to indemnification or such determination is deemed
to have been made pursuant to Section 6 of this Agreement, Indemnitee shall be
entitled to an adjudication in an appropriate court of the State of Delaware, or
in any other court of competent jurisdiction, of his entitlement to such
indemnification. Indemnitee shall commence such proceeding seeking an
adjudication within 180 days following the date on which Indemnitee first has
the right to commence such proceeding pursuant to this Section 7(a). The Company
shall not oppose Indemnitee's right to seek any such adjudication.

(b) In the event that a determination shall have been made
pursuant to Section 6(b) of this Agreement that Indemnitee is not entitled to
indemnification, any judicial proceeding commenced pursuant to this Section 7
shall be conducted in all respects as a de novo trial, on the merits and
Indemnitee shall not be prejudiced by reason of that adverse determination under
Section 6(b).

(c) If a determination shall have been made pursuant to
Section 6(b) of this Agreement that Indemnitee is entitled to indemnification,
the Company shall be bound by such determination in any judicial proceeding
commenced pursuant to this Section 7, absent a prohibition of such
indemnification under applicable law.

(d) In the event that Indemnitee, pursuant to this Section
7, seeks a judicial adjudication of his rights under, or to recover damages for
breach of, this Agreement, or to recover under any directors' and officers'
liability insurance policies maintained by the Company, the Company shall pay on
his behalf, in advance, any and all expenses (of the types described in the
definition of Expenses in Section 13 of this Agreement) actually and reasonably
incurred by him in such judicial adjudication, regardless of whether Indemnitee
ultimately is determined to be entitled to such indemnification, advancement of
expenses or insurance recovery.

(e) The Company shall be precluded from asserting in any
judicial proceeding commenced pursuant to this Section 7 that the procedures and
presumptions of this Agreement are not valid, binding and enforceable and shall
stipulate in any such court that the Company is bound by all the provisions of
this Agreement.

SECTION 8. NON-EXCLUSIVITY; SURVIVAL OF RIGHTS; INSURANCE; SUBROGATION.

(a) The rights of indemnification as provided by this
Agreement shall not be deemed exclusive of any other rights to which Indemnitee
may at any time be entitled under applicable law, the certificate of
incorporation of the Company, the Bylaws, any agreement, a vote of stockholders
or a resolution of directors, or otherwise. No amendment, alteration or repeal
of this Agreement or of any provision hereof shall limit or restrict any right
of Indemnitee under this Agreement in respect of any action taken or omitted by
such Indemnitee in his Corporate Status prior to such amendment, alteration or
repeal. To the extent that a change in the law, whether by statute or judicial
decision, permits greater indemnification than would be afforded currently under
the Bylaws and this Agreement, it is the intent of the parties hereto that
Indemnitee shall enjoy by this Agreement the greater benefits so afforded by
such change. No right or remedy herein conferred is intended to be exclusive of
any other right or remedy, and

7
<PAGE>

every other right and remedy shall be cumulative and in addition to every other
right and remedy given hereunder or now or hereafter existing at law or in
equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other right or remedy.

(b) To the extent that the Company maintains an insurance
policy or policies providing liability insurance for directors, officers,
employees, or agents or fiduciaries of the Company or of any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
which such person serves at the request of the Company, Indemnitee shall be
covered by such policy or policies in accordance with its or their terms to the
maximum extent of the coverage available for any such director, officer,
employee or agent under such policy or policies.

(c) In the event of any payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and take all
action necessary to secure such rights, including execution of such documents as
are necessary to enable the Company to bring suit to enforce such rights.

(d) The Company shall not be liable under this Agreement to
make any payment of amounts otherwise indemnifiable hereunder if and to the
extent that Indemnitee has otherwise actually received such payment under any
insurance policy, contract, agreement or otherwise.

SECTION 9. EXCEPTION TO RIGHT OF INDEMNIFICATION. Notwithstanding any
other provision of this Agreement, Indemnitee shall not be entitled to
indemnification under this Agreement with respect to any Proceeding brought by
Indemnitee, or any claim therein, unless (a) the bringing of such Proceeding or
making of such claim shall have been approved by the Board of Directors of the
Company or (b) such Proceeding is being brought by the Indemnitee to assert,
interpret or enforce his rights under this Agreement.

SECTION 10. DURATION OF AGREEMENT. All agreements and obligations of
the Company contained herein shall continue during the period Indemnitee is an
officer or director of the Company (or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise) and shall continue
thereafter so long as Indemnitee shall be subject to any Proceeding (or any
proceeding commenced under Section 7 hereof) by reason of his Corporate Status,
whether or not he is acting or serving in any such capacity at the time any
liability or expense is incurred for which indemnification can be provided under
this Agreement. This Agreement shall be binding upon and inure to the benefit of
and be enforceable by the parties hereto and their respective successors
(including any direct or indirect successor by purchase, merger, consolidation
or otherwise to all or substantially all of the business or assets of the
Company), assigns, spouses, heirs, executors and personal and legal
representatives. This Agreement shall continue in effect regardless of whether
Indemnitee continues to serve as an officer or director of the Company or any
other Enterprise at the Company's request.

8
<PAGE>

SECTION 11. SECURITY. To the extent requested by the Indemnitee and
approved by the Board of Directors of the Company, the Company may at any time
and from time to time provide security to the Indemnitee for the Company's
obligations hereunder through an irrevocable bank line of credit, funded trust
or other collateral. Any such security, once provided to the Indemnitee, may not
be revoked or released without the prior written consent of the Indemnitee.

SECTION 12. ENFORCEMENT.

(a) The Company expressly confirms and agrees that it has
entered into this Agreement and assumed the obligations imposed on it hereby in
order to induce Indemnitee to serve as an officer or director of the Company,
and the Company acknowledges that Indemnitee is relying upon this Agreement in
serving as an officer or director of the Company.

(b) This Agreement constitutes the entire agreement between
the parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings, oral, written and implied, between the
parties hereto with respect to the subject matter hereof.

SECTION 13. DEFINITIONS. For purposes of this Agreement:

(a) "Corporate Status" describes the status of a person who is
or was a director, officer, employee or agent or fiduciary of the Company or of
any other corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise which such person is or was serving at the express written
request of the Company.

(b) "Disinterested Director" means a director of the Company
who is not and was not a party to the Proceeding in respect of which
indemnification is sought by Indemnitee.

(c) "Enterprise" shall mean the Company and any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise of which Indemnitee is or was serving at the express written request
of the Company as a director, officer, employee, agent or fiduciary.

(d) "Expenses" shall include all reasonable attorneys' fees,
retainers, court costs, transcript costs, fees of experts, witness fees, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees, and all other disbursements or expenses of the
types customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating, participating, or being or preparing to
be a witness in a Proceeding.

(e) "Independent Counsel" means a law firm, or a member of a
law firm, that is experienced in matters of corporation law and neither
presently is, nor in the past five years has been, retained to represent: (i)
the Company or Indemnitee in any matter material to either such party (other
than with respect to matters concerning the Indemnitee under this Agreement, or
of other indemnitees under similar indemnification agreements), or (ii) any
other party to the Proceeding giving rise to a claim for indemnification
hereunder. Notwithstanding the

9
<PAGE>

foregoing, the term "Independent Counsel" shall not include any person who,
under the applicable standards of professional conduct then prevailing, would
have a conflict of interest in representing either the Company or Indemnitee in
an action to determine Indemnitee's rights under this Agreement. The Company
agrees to pay the reasonable fees of the Independent Counsel referred to above
and to fully indemnify such counsel against any and all Expenses, claims,
liabilities and damages arising out of or relating to this Agreement or its
engagement pursuant hereto.

(f) "Proceeding" includes any threatened, pending or completed
action, suit, arbitration, alternate dispute resolution mechanism,
investigation, inquiry, administrative hearing or any other actual, threatened
or completed proceeding, whether brought by or in the right of the Company or
otherwise and whether civil, criminal, administrative or investigative, in which
Indemnitee was, is or will be involved as a party or otherwise, by reason of the
fact that Indemnitee is or was a director of the Company, by reason of any
action taken by him or of any inaction on his part while acting as an officer or
director of the Company, or by reason of the fact that he is or was serving at
the request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other Enterprise; in each case
whether or not he is acting or serving in any such capacity at the time any
liability or expense is incurred for which indemnification can be provided under
this Agreement; including one pending on or before the date of this Agreement;
and excluding one initiated by an Indemnitee pursuant to Section 7 of this
Agreement to enforce his rights under this Agreement.

SECTION 14. SEVERABILITY. If any provision or provisions of this
Agreement shall be held by a court of competent jurisdiction to be invalid,
void, illegal or otherwise unenforceable for any reason whatsoever: (a) the
validity, legality and enforceability of the remaining provisions of this
Agreement (including without limitation, each portion of any section of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that is not itself invalid, illegal or unenforceable) shall not
in any way be affected or impaired thereby and shall remain enforceable to the
fullest extent permitted by law; and (b) to the fullest extent possible, the
provisions of this Agreement (including, without limitation, each portion of any
section of this Agreement containing any such provision held to be invalid,
illegal or unenforceable, that is not itself invalid, illegal or unenforceable)
shall be construed so as to give effect to the intent manifested thereby.

SECTION 15. MODIFICATION AND WAIVER. No supplement, modification,
termination or amendment of this Agreement shall be binding unless executed in
writing by both of the parties hereto. No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a waiver of any other
provisions hereof (whether or not similar) nor shall such waiver constitute a
continuing waiver.

SECTION 16. NOTICE BY INDEMNITEE. Indemnitee agrees promptly to notify
the Company in writing upon being served with any summons, citation, subpoena,
complaint, indictment, information or other document relating to any Proceeding
or matter which may be subject to indemnification covered hereunder. The failure
to so notify the Company shall not relieve the Company of any obligation which
it may have to the Indemnitee under this

10
<PAGE>

Agreement or otherwise unless and only to the extent that such failure or delay
materially prejudices the Company.

SECTION 17. NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if (i) delivered by hand and receipted for by the party to whom said
notice or other communication shall have been directed, or (ii) mailed by
certified or registered mail with postage prepaid, on the third business day
after the date on which it is so mailed:

(a) If to Indemnitee, to the address set forth below
Indemnitee signature hereto.

(b) If to the Company, to:

SmartDisk Corporation
3506 Mercantile Avenue
Naples, Florida 34104

or to such other address as may have been furnished to Indemnitee by the Company
or to the Company by Indemnitee, as the case may be.

SECTION 18. IDENTICAL COUNTERPARTS. This Agreement may be executed in
one or more counterparts, each of which shall for all purposes be deemed to be
an original but all of which together shall constitute one and the same
Agreement. Only one such counterpart signed by the party against whom
enforceability is sought needs to be produced to evidence the existence of this
Agreement.

SECTION 19. HEADINGS. The headings of the paragraphs of this Agreement
are inserted for convenience only and shall not be deemed to constitute part of
this Agreement or to affect the construction thereof.

SECTION 20. GOVERNING LAW. The parties agree that this Agreement shall
be governed by, and construed and enforced in accordance with, the laws of the
State of Delaware without application of the conflict of laws principles
thereof.

SECTION 21. GENDER. Use of the masculine pronoun shall be deemed to
include usage of the feminine pronoun where appropriate.

SECTION 22. TERMINATION OF PRIOR INDEMNIFICATION AGREEMENTS. Upon the
effectiveness of this Agreement, any prior Indemnification Agreements between
the parties hereto shall terminate and be of no further force and effect, and
shall be superseded and replaced in its entirety by this Agreement.

11
<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the day and year first above written.

SMARTDISK CORPORATION

By: _________________________________
Name: ___________________________

Address:
___________________________
___________________________
___________________________

EXHIBIT 23.2

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated June 21, 1999, in the Registration Statement (Form
S-1) and related Prospectus of SmartDisk Corporation for the registration of
shares of its common stock.

/s/ Ernst & Young LLP

Miami, Florida
July 12, 1999

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