UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-KSB

[ X ]    ANNUAL  REPORT  PURSUANT  TO  SECTION  13 OR  15(D)  OF THE  SECURITIES
         EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

[   ]    TRANSITION  REPORT  PURSUANT  TO SECTION 13 OR 15(D) OF THE  SECURITIES
         EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO

                         COMMISSION FILE NUMBER 0-28008

                             SMARTSERV ONLINE, INC.
                 ----------------------------------------------
                 (Name of Small Business Issuer in its Charter)


            Delaware                                         13-3750708
-----------------------------------------          -----------------------------
(State or other jurisdiction of                          (I.R.S. employer
 incorporation or organization)                          identification no.)

One Station Place, Stamford, Connecticut                       06902
-----------------------------------------          -----------------------------
(Address of principal executive offices)                     (Zip Code)

Issuer's telephone number, including area code (203) 353-5950
                                               --------------

Securities registered pursuant to Section 12(b) of the Exchange Act:  None
                                                                      ----

Securities registered pursuant to Section 12(g) of the Exchange Act:

                               Title of each class
                          Common Stock, $0.01 Par Value
                         Common Stock Purchase Warrants


Check whether the issuer:  (1) filed all reports required to be filed by Section
13 or 15(d) of the  Securities  Exchange  Act  during the past 12 months (or for
such shorter period that the issuer was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days.

          Yes       No  X
             ----      ----

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this Form, and no disclosure  will be contained,  to
the best of the  registrant's  knowledge,  in  definitive  proxy or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB.___

Issuer's revenues for the fiscal year ended December 31, 2002.      $195,817
                                                                    --------

The aggregate market value of the voting and non-voting  common equity (based on
the  closing   price  of  such  stock  on  NASDAQ   SmallCap   System)  held  by
non-affiliates of the issuer as of April 18, 2003 was approximately  $9,920,500.
All  officers  and  directors  of the issuer  have been  deemed,  solely for the
purpose of the foregoing calculation, to be "affiliates" of the issuer.

There were 12,007,912 shares of Common Stock outstanding at April 18, 2003.

TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT        YES           NO    X
                                                         ------       ------

                 DOCUMENTS INCORPORATED BY REFERENCE IN PART III

The Company's definitive proxy statement to be filed in connection with the 2003
Annual Meeting of Stockholders.


<PAGE>

                                TABLE OF CONTENTS

                                     PART I

Item                                                                       Page
----                                                                       ----

1.          Description of Business                                           1
2.          Description of Property                                           7
3.          Legal Proceedings                                                 7
4.          Submission of Matters to a Vote of Security Holders               8


                                     PART II

5.          Market for Common Equity and Related Stockholder Matters          9
6.          Management's Discussion and Analysis of Financial Condition
            and Results of Operations                                        15
7.          Financial Statements                                             28
8.          Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure                                         57


                                    PART III

9.          Directors, Executive Officers, Promoters and Control Persons:
            Compliance with Section 16(a) of the Exchange Act                57
10.         Executive Compensation                                           57
11.         Security Ownership of Certain Beneficial Owners and Management   57
12.         Certain Relationships and Related Transactions                   57
13.         Exhibits and Reports on Form 8-K                                 58
14.         Controls and Procedures                                          60



                                      -i-
<PAGE>



                                     PART I

ITEM 1.     DESCRIPTION OF BUSINESS
------

COMPANY OVERVIEW
----------------
SmartServ  Online,  Inc.  commenced  operations on August 20, 1993,  and had its
initial  public  offering on March 21,  1996.  We offer  wireless  applications,
development and hosting services that allow wireless carriers, content providers
and  financial  services  firms to  deliver  content  to their  work  forces and
customers. Our products can deliver proprietary information,  as well as delayed
and real-time  financial market data,  business and financial news, national and
local weather  reports and other  business and  entertainment  information  in a
user-friendly manner.

Our mobile data solutions are designed to generate additional revenue,  increase
operating  efficiency,   and  extend  brand  awareness  for  wireless  carriers,
enterprises and content providers and are delivered via J2ME, BREW, WAP and SMS,
as well as RIM Blackberry and Pocket PC devices.

SmartServ has established customer and distribution relationships with a growing
network of strategic partners and wireless carriers, including Verizon Wireless,
AT&T Wireless, Nextel, ALLTEL Wireless, U.S. Cellular, QUALCOMM and Motorola, as
well as  content  providers,  including  BusinessWeek  Online,  Forbes.com,  S&P
Comstock and The Wall Street Journal Online (Dow Jones).

Our plan of operation focuses on licensing our applications and related services
to wireless  carriers,  content  providers and  financial  services  firms.  For
wireless carriers, we deliver data and a broad array of branded content that can
increase wireless data revenue and customer retention. For content providers, we
provide an added source of revenue by  distributing  their  content and brand to
wireless  users.  For financial  services  firms,  we offer  solutions  that can
increase  productivity  and customer  retention  through the mobile  delivery of
proprietary  data and other market data.  Management  believes that  SmartServ's
primary  source  of  revenues  will  be  derived  from  revenue-share  licensing
contracts  with wireless  carriers,  content  providers  and financial  services
customers.

Due to the substantial  expenses and negative cash flows from operations that we
have incurred,  our auditors, in their report contained in our December 31, 2002
financial  statements,  have indicated that there is substantial doubt about our
ability to continue as a going concern.  The Company has earned limited revenues
and has incurred net losses of $8,037,173  and  $14,819,860  for the years ended
December  31, 2002 and 2001,  respectively,  and net losses of  $30,993,559  and
$7,124,126   for  the  years  ended  June  30,  2000  and  1999,   respectively.
Additionally,  the Company had an accumulated deficit of $72,859,006 at December
31, 2002.  Although the Company's  financial  statements have been prepared on a
going  concern  basis,  which  contemplates  the  realization  of assets and the
settlement  of  liabilities  and  commitments  in the normal course of business,
unless  we are able to  increase  revenue  and  raise  additional  capital  from
investors, we will not be able to support our operations.

INDUSTRY OVERVIEW
-----------------
SmartServ  believes  that the  wireless  data market is  evolving.  The changing
business  needs  of  wireless   carriers,   financial   institutions  and  other
enterprises  combined with advances in wireless technology have created a market
for the types of data  applications  offered by SmartServ  and other  companies.
Furthermore,  consumers  have  shown  a  willingness  to pay  for  well-targeted
wireless data  applications  that make use of the mobility  benefits provided by
existing wireless devices.

Wireless  carriers are working to increase  average  revenue per unit (ARPU) and
enhance their return on  investment  for the billions of dollars they have spent
and continue to spend on network upgrades and spectrum licenses.  These carriers
have  identified  wireless  data  applications  as a way to  improve  both their
top-line


                                      -1-
<PAGE>

revenue and profitability. Wireless data applications can improve ARPU, increase
customer  loyalty  through  the use of branded  data  services  and  financially
justify the large investments in data networks.

Carriers  have  adopted  wireless  data  platforms  that allow users to download
applications  to  their  mobile  phones   facilitating  a  better  overall  user
experience than WAP (Wireless  Application Protocol) browsers can provide. As an
example,  Verizon  Wireless  has adopted BREW (Binary  Runtime  Environment  for
Wireless) while AT&T Wireless and Sprint PCS have adopted the J2ME (Java 2 Micro
Edition)  platform.  Both  platforms  allow  the  carriers  and the  application
developers  to generate  subscription,  download and usage revenue from wireless
subscribers.  SmartServ develops its client-side  applications for both BREW and
J2ME environments.

STRATEGY
--------
SmartServ  is taking  the  following  steps to drive the  business  and meet its
growth objectives:

     o    SmartServ  will  continue to focus its direct sales efforts on leading
          enterprises and wireless  carriers,  in order to take advantage of the
          demand for robust mobile  applications.  In 2002,  SmartServ  targeted
          both the financial  services  industry and wireless  carriers  because
          they have been among the early adopters of wireless technology.

              Carrier Solutions  Wireless:  SmartServ provides solutions to help
              wireless carriers and handset  manufacturers  deliver products and
              services  to  their  customers.  The  Company's  applications  are
              designed to drive network revenues by increasing airtime usage and
              reducing  customer churn.  These  applications may be purchased by
              end users through the carrier's web site, directly from the user's
              wireless phone, or pre-installed on phones by the manufacturer.

              Financial Services  Solutions:  SmartServ offers solutions to both
              institutional  and  retail  financial  services  enterprises  that
              leverage  our  transaction  routing  engine  and W2W  MiddlewareTM
              platform  with a  suite  of  applications  designed  to  meet  the
              rigorous  demands of the financial  community.  Customers have the
              ability to choose an entire suite of transaction  and  information
              services or select only those  products that are relevant to their
              particular business needs.

              Retail Solutions:  SmartServ offers solutions to increase wireless
              phone and service plan sales,  provide  wireless  carrier  product
              differentiation  at the retail sales  location  and increase  user
              adoption of data services. SmartServ offers data services that can
              be purchased at retail outlets or bundled by wireless carriers and
              handset  manufacturers  with wireless phone and service plan sales
              promotions.

     o    In 2003, SmartServ is focusing on leveraging the reach of carriers and
          technology  partners to penetrate the broader  enterprise and consumer
          wireless data markets.  SmartServ  believes that its  applications can
          increase  the  enterprise  sales  opportunities  of  its  carrier  and
          technology partners.

     o    Although we have eliminated our international sales offices, SmartServ
          recognizes the varying appetites for wireless  applications  worldwide
          and will continue to monitor opportunities unique to each market.

     o    SmartServ's  team of engineers  will  continue to develop new wireless
          applications to meet the demands of its target markets.


                                      -2-
<PAGE>

THE SMARTSERV SOLUTION
----------------------
SmartServ offers application  development,  hosting and distribution services to
its customers.  By developing fully  integrated  solutions,  SmartServ  provides
companies  with the ability to leverage  both the Internet and their own content
for  deployment  via  wireless  networks and devices.  SmartServ  maintains  the
systems while making sure the technology made available to its customers remains
state-of-the-art.

Our products provide the following benefits:

     o    Wireless  carriers  can  generate  incremental  revenues  and increase
          customer retention and ARPU with data applications and brands that are
          hosted in SmartServ's data center,

     o    Content  providers  can  broaden  the  reach of their  brand  into new
          consumer distribution channels with SmartServ's applications,

     o    Enterprises can extend their  proprietary  data to employees,  thereby
          boosting productivity and operating efficiency with SmartServ's custom
          application development and hosting, and

     o    End-user  consumers can access reliable and useful  information  right
          from their mobile devices.

SMARTSERV PRODUCTS
------------------
The core functionality of SmartServ's products includes:

     o    Stock quotes
     o    Stock watch lists
     o    Branded news and information services
     o    Stock charts (daily, weekly, monthly, quarterly, historical)
     o    Alerts for quotes (periodic, price, volume, percentage) and news
     o    Lifestyle news and information
     o    Weather reports
     o    Lottery results

SmartServ's products consist of the following applications:

     MOBILEMARKETS(R).  MobileMarkets  provides access to financial  market data
     from  virtually any wireless  device.  This  financial  application  can be
     customized  to include  stock  quotes,  news,  time and sales  data,  stock
     charts, watch lists, currency conversions and market indices. MobileMarkets
     has been  integrated  into a RIM based  wireless  version of Salomon  Smith
     Barney's  GEO  (Global  Equities  Online)  and  is  being  provided  to the
     Institutional Equities and Prime Brokerage groups.

     SMARTSERVQ(TM).  SmartServQ  provides  access to stock  quotes  from  major
     exchanges  and delivers  wireless  alerts and  messages.  With  SmartServQ,
     parameters  for  customized  alerts are  user-set  and  triggered by any of
     several specific  events:  stock price or percentage  fluctuation,  volume,
     symbol-based news, or time intervals. SmartServQ also provides snap quotes,
     news headlines and symbol  look-up  retrieval via  Mobile-Originated  Short
     Message  Service  (MOSMS) on CDMA and GSM networks.  SmartServQ  alerts are
     currently  offered by Verizon  Wireless to its  subscribers  as part of its
     V-text messaging platform.

     FORBES.COM   WIRELESS.   Forbes.com   Wireless  is  a  wireless   financial
     application  designed to work on BREW and J2ME enabled  mobile  phones.  It
     provides access to financial  market data including stock quotes,  indices,
     news headlines and full news stories.  Additional features include a symbol
     search tool and a customizable watchlist feature that allows subscribers to
     track a portfolio of up to ten stocks.  Forbes.com Wireless is available to
     Verizon Wireless,  ALLTEL Wireless and U.S. Cellular  subscribers with BREW
     enabled mobile phones.  Additionally,  Forbes.com  Wireless is available to
     AT&T Wireless and Nextel subscribers with J2ME enabled mobile phones.


                                      -3-
<PAGE>


     BUSINESSWEEK   ONLINE.   BusinessWeek   Online  is  a  wireless   financial
     application  that  provides  news  stories  and  proprietary  content  from
     BusinessWeek  Online,  while also  providing  stock  quotes,  company news,
     watchlists and stock day charts.

     THE WALL STREET JOURNAL ONLINE. The Wall Street Journal Online allows users
     to tap the resources of one of the world's most trusted sources of business
     news and information.  Users can see news headlines, summaries and complete
     stories on their mobile phones.

     ASTROCOM ZODIAC.  AstroCom Zodiac delivers daily romance,  career,  family,
     life, health and inspirational readings.  Horoscopes are written by leading
     astrologers,  including  Maritha  Pottinger,  Maria Kay  Simms  and  Steven
     Forrest.

     AREA WEATHER.  Area Weather has animated  forecast icons and is easy to use
     and  customize.  Users can save  forecast  preferences  to make reports for
     their  favorite  places  available   instantly.   Content  is  provided  by
     Meteorlogix,  formed by the consolidation of three weather-service leaders:
     b2b provider DTN Weather Services,  broadcast media weather graphics expert
     Kavouras,  and long-range forecaster and climate predictor Weather Services
     Corporation.

     LOTTERY  USA.  Lottery USA  provides the latest  lottery  results,  jackpot
     updates and drawing dates.  The user can set his personal  preferences  and
     see the results of favorite games  automatically or he may search by state,
     game and date.

STRATEGIC RELATIONSHIPS
-----------------------
SmartServ  continuously  seeks to improve  product  performance  and broaden its
distribution   by  maintaining  and  building  upon  its  network  of  strategic
relationships.  SmartServ has developed  strategic  relationships  with wireless
equipment  manufacturers,  carriers,  other  value-added  service  providers and
potential corporate  partners.  By combining its applications and infrastructure
products  with the core  competencies  of these  strategic  partners,  SmartServ
offers a packaged  solution for extending  content to the wireless  environment.
Additionally,  we believe these strategic  relationships  will provide  valuable
distribution for our products. SmartServ's strategic relationships include:

     MOTOROLA.  Motorola  and  SmartServ  have signed a  distribution  agreement
     covering North and South America.  Motorola will assist  SmartServ with the
     delivery of its applications through three distribution  channels:  (1) the
     promotion  by Motorola  of  SmartServ  applications  to  carriers,  (2) the
     availability  of  SmartServ  applications  for  download  on  the  Motorola
     Application Distribution Server Internet portal, and (3) Motorola's ability
     to embed SmartServ J2ME applications on its mobile phones.

     HEWLETT-PACKARD.  Hewlett-Packard  ("HP") and SmartServ have entered into a
     joint sales, marketing and account development agreement and SmartServ is a
     strategic level partner within HP's Service Provider Program.

     QUALCOMM.  SmartServ is a Select BREW  Developer  and  certified  True BREW
     application  provider.  SmartServ  works with QUALCOMM on both software and
     business  development  fronts  with the goal of  driving  data usage on the
     millions  of  BREW  enabled  mobile  phones  projected  to  be  in  the  US
     marketplace.


                                      -4-
<PAGE>


BRAND AND CONTENT RELATIONSHIPS
-------------------------------
SmartServ believes that having familiar, highly respected brands associated with
its wireless  applications  is the best way to achieve high  consumer  adoption.
SmartServ has formed sales and marketing  relationships  with key companies that
allow  SmartServ to develop  applications  that take advantage of the companies'
consumer brand credibility and their related proprietary content. SmartServ also
believes that  establishing  successful  relationships  with the key brands in a
given niche will give SmartServ a sustainable  competitive  advantage over other
wireless  application  developers who attempt to offer similar  applications  to
wireless subscribers without the credibility afforded by a name brand.

     FORBES.COM.  Forbes.com,  one of the most respected brand names in business
     news  and  information,  has  licensed  its  brand  to  SmartServ  for  its
     Forbes.com Wireless financial application.

     BUSINESSWEEK  ONLINE.  BusinessWeek  Online, also one of the most respected
     brand names in business  news and  information,  has licensed its brand and
     news content to SmartServ for its wireless application  containing business
     news, stock information and a portfolio calculator.

     THE WALL STREET JOURNAL ONLINE. The Wall Street Journal Online, also one of
     the most  respected  brand  names in  business  news and  information,  has
     licensed  its brand and news content to  SmartServ  for a branded  wireless
     application.

DISTRIBUTION
------------
SmartServ has signed contracts with the following companies:

     VERIZON WIRELESS.  SmartServ  currently  provides Verizon Wireless with its
     SmartServQ SMS application (offered via the V-text Portal),  providing news
     and  stock  quote  alerts,  and a  variety  of  BREW-enabled  applications,
     including  Forbes.com Wireless,  The Wall Street Journal,  Area Weather and
     AstroCom Zodiac.

     AT&T  WIRELESS.  AT&T  Wireless  currently  provides its  subscribers  with
     Forbes.com  Wireless,  AstroCom Zodiac,  BusinessWeek  Online, and The Wall
     Street Journal Online.

     ALLTEL.  With the  recent  launch of  AXcess,  the  market  facing  name of
     ALLTEL's  BREW  offering,   SmartServ  provides  a  host  of  applications,
     including Forbes.com Wireless, The Wall Street Journal Online, BusinessWeek
     Online, Area Weather and AstroCom Zodiac.

     SALOMON SMITH BARNEY.  SmartServ  currently  provides  Salomon Smith Barney
     with  customized  versions  of  its  MobileMarkets  product,  incorporating
     Salomon Smith Barney's  proprietary  research data, to its Global  Equities
     and Prime Brokerage units.

     U.S. CELLULAR (TRIAL).  U.S. Cellular has selected SmartServ to provide its
     Forbes.com Wireless and The Wall Street Journal Online applications as part
     of its BREW trial that is currently underway.

     NEXTEL.  Nextel  currently  offers a J2ME version of  Forbes.com  Wireless,
     BusinessWeek Online, The Wall Street Journal and AstroCom Zodiac.

     MOTOROLA.  Motorola  plans  to  offer  SmartServ's  J2ME  applications  for
     download  from  its  Internet  portal  and by  embedding  SmartServ's  J2ME
     applications on new Motorola mobile phones.

     WIRELESS RETAIL.  Through  Wireless Retail, a leading national  retailer of
     wireless phones and services, SmartServ offers prepaid wireless data cards,
     allowing  consumers to purchase  wireless data at the retail point of sale.
     These cards are intended to be offered by wireless carriers as an incentive
     for consumers to purchase their phones and service plans.


                                      -5-
<PAGE>

COMPETITION
-----------

The market for wireless  information  services and  application  development  is
highly competitive and subject to rapid technological change,  shifting consumer
preferences   and  frequent  new  service   introductions.   The  Company  faces
competition  from a number of businesses that deliver similar  services  through
personal  computers and mobile devices in three major  categories:  (1) wireless
application  service providers  targeting  enterprise  businesses,  (2) wireless
application developers targeting wireless carrier subscribers,  and (3) wireless
infrastructure   solution  providers   targeting  wireless  carriers.   Wireless
application service providers such as Aether Systems, Inc., 724 Solutions,  Inc.
and Semotus  Solutions compete with SmartServ in developing and hosting wireless
applications  for  enterprise  businesses and financial  institutions.  Wireless
application  developers such as InfoSpace,  HillCast  Technologies,  and Digital
Orchid offer competing  finance,  news and content  applications using WAP, Java
and/or BREW to  subscribers  of  wireless  carriers  for access on their  mobile
phones. Infrastructure providers such as Cellmania, ActiveSky and Mforma provide
platform  solutions  to wireless  carriers  enabling the carriers to more easily
provide content applications, games and ringtones to their subscribers.

SmartServ expects competition to increase from existing competitors and from new
competitors,   possibly   including   telecommunications   companies.   Most  of
SmartServ's  competitors and potential  competitors have  substantially  greater
financial,  marketing and technical  resources than it has.  SmartServ  believes
that potential new  competitors,  including  large  multimedia  and  information
system  companies,   are  increasing  their  focus  on  transaction  processing.
Increased  competition  in the market for  SmartServ's  services could limit its
ability to expand and materially and adversely affect its results of operations.

The  information   content   provided  through   SmartServ's   applications  and
infrastructure  is  generally  purchased  through   non-exclusive   distribution
agreements.  While the Company is not  dependent  on any one  content  provider,
existing and  potential  competitors  may enter into  agreements  with these and
other  such  providers  and  thereby  acquire  the  ability  to  deliver  online
information and transactional  services  substantially similar to those provided
by SmartServ.  Additionally,  there are a relatively small number of information
providers that control pricing and access to information.

The  principal  competitive  factors  in both  the Web and  wireless  industries
include  content,   product  features  and  quality,  ease  of  use,  access  to
distribution  channels,  brand recognition,  reliability and price.  SmartServ's
strategy of  establishing  alliances with strategic  marketing  partners and its
ability to provide  what the  Company  believes  to be unique  applications  and
infrastructure should enable the Company to compete effectively.

PROPRIETARY RIGHTS
------------------
Although  SmartServ does not currently  hold any patents,  it has filed a patent
application  seeking a patent  for its own  "device  agnostic"  information  and
transaction  platform,  made up of its W2W  MiddlewareTM  and  its  content  and
processing engines. This platform is comprised of the W2W MiddlewareTM, based on
the  Windows  NT  operating  system  and  the  authorization,  quote,  news  and
transaction  engines,  based on Hewlett-Packard  Company's Unix operating system
and Oracle Corp.'s version 9i parallel server database. This platform supports a
wide array of browsers  operating on wireless and wired  networks and seamlessly
integrates  real-time  data and  transaction  capabilities,  such as stock trade
order routing and m-commerce services, into a user-friendly services interface.

SmartServ  relies upon a combination  of contract  provisions  and trade secret,
patent,  trademark and copyright  laws to protect its  proprietary  rights.  The
Company licenses the use of its services under agreements that contain terms and
conditions  prohibiting the unauthorized use or reproduction of its software and
services. Although SmartServ intends to protect its rights vigorously, there can
be no assurance that any of the foregoing measures will be successful.


                                      -6-
<PAGE>

SmartServ  believes that none of its products,  services,  trademarks,  or other
proprietary rights infringe on the proprietary rights of third parties. However,
there can be no assurance that third parties will not assert infringement claims
against the Company  with  respect to current  features,  content or services or
that any such  assertion  may not  require  the  Company to enter  into  royalty
arrangements or result in litigation.

GOVERNMENT REGULATION
---------------------
SmartServ is not currently  subject to direct  regulation other than federal and
state regulation  generally  applicable to businesses.  However, the current and
future  regulatory  environment  relating  to the  telecommunications  and media
industry could have an effect on  SmartServ's  business,  including  transborder
data flow  regulations,  regulatory  changes which directly or indirectly affect
telecommunication  costs or increase the likelihood or scope of competition from
regional  telephone   companies.   Additionally,   legislative   proposals  from
international,  federal  and state  governmental  bodies in the areas of content
regulation,  intellectual  property and privacy  rights,  as well as federal and
state tax issues could impose  additional  regulations and obligations  upon all
service  providers.  SmartServ  cannot  predict  the  likelihood  that  any such
legislation will pass, or the financial impact, if any, the resulting regulation
or taxation may have on SmartServ.

Moreover,  the  relevance to  application  service  providers  of existing  laws
governing  issues such as intellectual  property  ownership,  libel and personal
privacy  is  uncertain.  The use of the  Internet  for  illegal  activities  has
increased  public focus and could lead to increased  pressure on legislatures to
impose regulations on application  service providers such as SmartServ.  The law
relating to the liability of online service companies for information carried on
or disseminated through their systems is currently unsettled.  If an action were
to be initiated against SmartServ, the costs incurred as a result of such action
could have a material adverse effect on its business.

EMPLOYEES
---------
As of March 31, 2003,  SmartServ employed  thirty-five  people, all of whom were
employed in the United States. All but two were full-time  employees.  SmartServ
does  not   anticipate   that   staffing   requirements   associated   with  the
implementation  of its plan of operation will require the addition of any people
during the year ending December 31, 2003. No SmartServ  employee is covered by a
collective bargaining agreement,  and the Company believes that its relationship
with its employees is satisfactory.

ITEM 2.     DESCRIPTION OF PROPERTY
------

The Company  occupies  approximately  10,300  square  feet in a leased  facility
located in Stamford, Connecticut. The lease expires in October 2010.

ITEM 3.     LEGAL PROCEEDINGS
------

On or about June 4, 1999,  Michael Fishman,  our former Vice President of Sales,
commenced  an action  against us and  certain  directors  and  officers,  in the
Connecticut  Superior  Court for the Judicial  District of  Stamford/Norwalk  at
Stamford  (Michael Fishman v. SmartServ  Online,  Inc., et al.). On February 11,
2003,  we received a favorable  trial  decision in this matter.  This  decision,
entered after a trial in the Superior Court of  Connecticut,  found no liability
by SmartServ or the individual  defendants on any of Mr. Fishman's  claims.  Mr.
Fishman's time to appeal has expired.

On or about February 29, 2000, Commonwealth  Associates,  L.P.  ("Commonwealth")
filed a  complaint  against  us in the  Supreme  Court of the State of New York,
County of New York. The complaint  alleged that in August of 1999,  Commonwealth
and  SmartServ   entered  into  an   engagement   letter  that  provided  for  a
nonrefundable  fee to Commonwealth of $15,000 payable in cash or common stock at
SmartServ's  option. The complaint alleged


                                      -7-
<PAGE>

that  SmartServ  elected to pay the fee in stock and, as a result,  Commonwealth
sought  13,333  shares  of common  stock or at least  $1,770,000  together  with
interest and costs.  In our defense,  we denied that we elected to pay in stock.
On March 4, 2003, SmartServ received a favorable decision in this matter after a
trial held in the Supreme  Court of the State of New York.  The  decision  holds
that,  consistent  with  SmartServ's  defense,  SmartServ  is  required  to  pay
Commonwealth  a retainer fee of only $13,439,  plus interest and certain  costs.
Commonwealth's time to appeal has not yet expired.

While  we  intend  to  vigorously  defend  any  appeal  to the  decision  in the
Commonwealth  matter,  the  unfavorable  outcome of such an appeal  could have a
material  adverse effect on our financial  condition,  results of operations and
cash flows.

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

NONE



                                      -8-
<PAGE>

                                     PART II

ITEM 5.     MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
------

On August 20, 2002,  SmartServ's common stock, $.01 par value, commenced trading
on the Nasdaq SmallCap Market as SSOL. On that date, our Redeemable Common Stock
Purchase  Warrants,  or public  warrants,  also commenced  trading on the Nasdaq
SmallCap Market as SSOLW.

SmartServ's securities traded on the Nasdaq National Market from May 15, 2000 to
August 19, 2002.

The following  table sets forth the high and low prices for the common stock and
public warrants during the periods  indicated as reported by the Nasdaq National
Market and the Nasdaq SmallCap Market, as applicable.

<TABLE>
<CAPTION>


                                                      COMMON STOCK                      WARRANTS
                                                   HIGH          LOW               HIGH            LOW
<S>                                            <C>             <C>              <C>              <C>
Year Ending December 31, 2003
-----------------------------

First Quarter                                  $    1.740      $    0.810       $    0.700       $  0.010
Second Quarter through April 18, 2003               1.250           0.810           --             --

Year Ended December 31, 2002
----------------------------

First Quarter                                  $    7.100      $    4.830       $    2.190       $  0.110
Second Quarter                                      6.250           0.670            0.990          0.150
Third Quarter                                       2.260           0.600            0.250          0.010
Fourth Quarter                                      2.060           1.060            0.130          0.010

Year Ended December 31, 2001
----------------------------

First Quarter                                  $   14.187      $    4.156       $    6.250       $  1.530
Second Quarter                                     11.650           5.391            4.250          1.750
Third Quarter                                       9.550           4.260            3.700          0.320
Fourth Quarter                                      9.020           4.170            3.050          1.000
</TABLE>


As of April 18, 2003, we had 12,007,912  shares of common stock outstanding held
by  121  record  holders.   We  estimate  that  our  common  stock  is  held  by
approximately 8,000 beneficial holders.

We have never paid a cash dividend on our common stock. It is our present policy
to retain  earnings,  if any,  to  finance  the  development  and  growth of our
business.  Accordingly,  we do not  anticipate  that cash dividends will be paid
until our earnings and financial condition justify such dividends, and there can
be no assurance that we can achieve such earnings.

EQUITY COMPENSATION PLAN INFORMATION

The table below sets forth certain  information as of the Company's  fiscal year
ended  December  31, 2002  regarding  the shares of the  Company's  common stock
available for grant or granted under stock option plans that (i) were adopted by
the  Company's   stockholders  and  (ii)  were  not  adopted  by  the  Company's
stockholders.


                                      -9-
<PAGE>

<TABLE>
<CAPTION>

                                                                                      NUMBER OF SECURITIES REMAINING
                                                                                       AVAILABLE FOR FUTURE ISSUANCE
                               NUMBER OF SECURITIES TO BE        WEIGHTED-AVERAGE        UNDER EQUITY COMPENSATION
                                 ISSUED UPON EXERCISE OF        EXERCISE PRICE OF     PLANS (EXCLUDING SECURITIES IN
                                   OUTSTANDING OPTIONS         OUTSTANDING OPTIONS    THE FIRST COLUMN OF THIS TABLE)
                                   -------------------         -------------------    -------------------------------
<S>                                         <C>                         <C>                          <C>
Equity compensation plans
approved by security
holders                                       392,533                  $1.41                 1,500,000

Equity compensation plans
not approved by security
holders                                     1,510,450                   1.64                        -0-
                                            ---------                                        ----------

Total                                       1,902,983                   1.59                 1,500,000
                                            =========                                        ==========
</TABLE>


DESCRIPTION OF PLANS NOT ADOPTED BY STOCKHOLDERS

The  aggregate  number of shares of the Common  Stock for which  options  may be
granted under the 1999 Stock Option Plan ("1999 Plan") is 400,000.  Such options
may be issued to key employees,  officers who are key  employees,  directors and
consultants  of the  Company.  The 1999  Plan is  administered  by the  Board of
Directors.  The Board of Directors  may grant only  non-qualified  stock options
(options  which do not comply with section 422 of the  Internal  Revenue Code of
1986, as amended) under the 1999 Plan. The 1999 Plan permits the  administrators
of the plan,  in their  sole  discretion,  to allow  the  cashless  exercise  of
options.  As of December 31, 2002 there were options to purchase  266,200 shares
of common stock issued and  outstanding  and -0- available for grant pursuant to
the 1999 Plan.

On January 1, 1999,  the Board of  Directors  of the Company  granted each board
member an option  to  purchase  10,000  shares of common  stock  (for a total of
50,000  shares) at an exercise  price of $2.3438 per share.  Such options vested
immediately and expire on December 31, 2003. As of December 31, 2002, there were
options to purchase 20,000 shares of common stock issued and outstanding.

On December 28, 1999,  the Board of  Directors  of the Company  granted  Stephen
Lawler,  a Director,  an option to purchase  20,000 shares of common stock at an
exercise price of $17.007 per share. Such option vested  immediately and expires
on December 27, 2004. As of December 31, 2002, such option remained outstanding.

The  aggregate  number of shares of the common  stock for which  options  may be
granted  under the 2000 Stock  Option  Plan  ("2000  Plan") is  1,350,000.  Such
options  may be  issued  to key  employees,  officers  who  are  key  employees,
directors and  consultants of the Company.  The 2000 Plan is administered by the
Board of Directors.  The Board of Directors may grant only  non-qualified  stock
options  (options  which do not comply with section 422 of the Internal  Revenue
Code of 1986,  as  amended)  under  the 2000  Plan.  The 2000 Plan  permits  the
administrators  of the plan,  in their sole  discretion,  to allow the  cashless
exercise of  options.  As of  December  31, 2002 there were  options to purchase
1,204,250 shares of common stock issued and outstanding and -0- shares of common
stock available for grant pursuant to the 2000 Plan.

Footnote  13 to the  Company's  financial  statements,  included  in this Annual
Report on Form  10-KSB for the fiscal year ended  December  31,  2002,  contains
additional information regarding each of the stock option plans described above.


                                      -10-
<PAGE>


RECENT SALES OF UNREGISTERED SECURITIES

At the time of issuance,  each investor or recipient of unregistered  securities
was either an accredited investor or a sophisticated investor. Each investor had
access to  SmartServ's  most recent Form  10-KSB,  all  quarterly  and  periodic
reports filed subsequent to such Form 10-KSB and the Company's most recent proxy
materials.

In September  1998, we issued  warrants to purchase 3,000 shares of common stock
to Data Transmission Network Corporation, an accredited investor, for prepayment
of certain  guaranteed  payments in  accordance  with the  Software  License and
Service  Agreement  between the parties dated April 23, 1998. Such warrants were
exercisable   at  $3.00  per  share  of  common  stock.   In  January  2000,  in
consideration of the receipt of $324,000, we issued to Data Transmission Network
warrants  for the  purchase of 300,000  shares of our common  stock at $8.60 per
share.   These  warrants  were  issued  in  reliance  upon  the  exemption  from
registration  provided  by  Section  4 (2)  of  the  Securities  Act.  No  sales
commissions were paid in connection with such transaction.  In June and November
2000, we issued an aggregate of 303,000 shares of common stock upon the exercise
of the warrants. Proceeds from the exercise of the warrants were $2,589,000. The
warrants  and the  shares  were  issued  in  reliance  upon the  exemption  from
registration  provided  by  Section  4 (2) of the  Securities  Act of 1933  (the
"Securities Act").

During  November 1998 through  January 1999,  we issued  convertible  promissory
notes in the amount of  $550,000  and  warrants to  purchase  916,666  shares of
common  stock  to 7  accredited  investors  for  $550,000.  Such  warrants  were
exercisable  at $.60 per share.  Spencer Trask  Securities,  Inc., the placement
agent,  received a commission of $55,000 and an unaccountable  expense allowance
of $16,500 in connection with such transaction. Additionally, we issued warrants
to purchase 183,334 shares of common stock to Spencer Trask  exercisable at $.72
per share.  These promissory notes and warrants were issued in reliance upon the
exemption from  registration  provided by Section 4 (2) of the  Securities  Act.
During the year ended June 30, 2000, we issued  1,015,176 shares of common stock
upon exercise of these  warrants.  Proceeds from the exercise of these  warrants
were $572,000.

Between  January 2000 and December  2002, an aggregate of 1,489 of the Company's
Prepaid Common Stock Purchase Warrants ("Prepaid  Warrants") were converted into
an aggregate of 937,404 shares of our common stock.  No sales  commissions  were
paid in  connection  with such  conversions.  The shares were issued in reliance
upon the  exemption  from  registration  provided  by  Section  3 (a) (9) of the
Securities Act.

In October 1999, we entered into a consulting  agreement with Steven Rosner,  an
accredited investor. As consideration for such services, we granted Mr. Rosner a
warrant to  purchase  100,000  shares of common  stock at an  exercise  price of
$2.625 per share and a warrant to  purchase  100,000  shares of common  stock at
$3.625 per share.  In  consideration  of $125,000  and the issuance of warrants,
expiring on July 2, 2003,  to purchase  8,000  shares of common stock at $18.375
per share, we extended this agreement for a two-year period  commencing  October
24, 2000. In July 2000, we issued  200,000  shares of common stock to Mr. Rosner
upon exercise of warrants to purchase such shares. Proceeds from the exercise of
the warrants were $625,000.  No sales  commissions  were paid in connection with
such transactions.  The warrants and the shares were issued in reliance upon the
exemption from registration provided by Section 4 (2) of the Securities Act.

In December  1999, we issued a warrant to purchase an aggregate of 10,000 shares
of common  stock at an exercise  price of $2.50 per share to the Andrew  Seybold
Group LLC, a sophisticated investor. Thereafter, these warrants were transferred
by Andrew Seybold LLC to Andrew  Seybold and Barney Dewey,  principals of Andrew
Seybold  LLC and  sophisticated  investors.  This  warrant was issued as partial
consideration for marketing consulting services provided to SmartServ.  No sales
commissions were paid in connection with such  transaction.  These warrants were
issued in reliance upon the exemption  from  registration  provided by Section 4
(2) of the  Securities  Act. In December 2001, we issued 5,000 shares to each of
Messrs.  Seybold and Dewey upon  exercise  of the  warrants.  Proceeds  from the
exercise of the warrants were $25,000.


                                      -11-
<PAGE>

In December 1999, we issued to Brauning  Associates,  a sophisticated  investor,
warrants  to  purchase  an  aggregate  of 50,000  shares  of common  stock at an
exercise price of $3.00 per share.  Thereafter,  these warrants were transferred
by  Brauning  Associates  to  Michael  Silva and Todd  Peterson,  principals  of
Brauning Associates and sophisticated  investors.  These warrants were issued as
partial  consideration for marketing  consulting services provided to SmartServ.
No sales  commissions  were  paid in  connection  with such  transaction.  These
warrants were issued in reliance upon the exemption from  registration  provided
by Section 4 (2) of the Securities  Act. In August and September 2001, we issued
an aggregate of 50,000 shares to Messrs. Silva and Peterson upon exercise of the
warrants. Proceeds from the exercise of the warrants were $150,000.

In May  2000,  we  issued to  Lindquist  Global  Advisors,  LLC,  an  accredited
investor,  a warrant to purchase  50,000  shares of common  stock at an exercise
price of $49.50 per share. This warrant was issued as partial  consideration for
financial  consulting  services to be provided to SmartServ and expires on April
30, 2003. No sales  commissions  were paid in connection with such  transaction.
This  warrant  was  issued in  reliance  upon the  exemption  from  registration
provided by Section 4 (2) of the Securities Act.

In May  2000,  we issued  353,535  shares of our  common  stock to 3  accredited
investors.  Gross proceeds from this transaction amounted to $17,500,000.  Chase
Securities,  Inc.,  the placement  agent,  received a commission of $700,000 and
reimbursement of direct expenses of $17,700 in connection with this transaction.
In  December  2002,  the  Company  issued  252,824  shares  of  common  stock to
TecCapital  Ltd, an investor,  pursuant to the  antidilution  provisions  of the
stock purchase agreement between TecCapital Ltd and the Company. The shares were
issued in reliance upon the exemption  from  registration  provided by Section 4
(2) of the Securities Act.

In May 2000, we entered into a Business Alliance Agreement with  Hewlett-Packard
Company ("HP"), an accredited investor,  whereby the companies agreed to jointly
market their  respective  products and services and to work on the  build-out of
SmartServ's domestic and international  infrastructure.  In furtherance of these
objectives HP, an accredited  investor,  provided us with a line of credit of up
to $20,000,000 for the acquisition of approved hardware,  software and services.
As of September 28, 2001, the expiration  date of the facility,  HP had advanced
us $6,723,156  thereunder.  The debt was evidenced by a secured note, bearing an
interest rate of 11% per annum,  with a three year maturity and was  convertible
into our common stock at $33.56 per share. In September 2002, the Company and HP
amended the terms of the promissory note to provide for, among other things, the
issuance by SmartServ  of a warrant for the purchase of 50,000  shares of common
stock.  In February  2003, the Company and HP amended the terms of their amended
promissory  note  to  provide  for the  settlement  of  SmartServ's  outstanding
obligation of $530,800,  inclusive of interest of $30,800,  in  consideration of
the payment by the  Company of  $225,000.  The warrant has an exercise  price of
$1.166 and  expires on  September  9, 2005.  No sales  commissions  were paid in
connection  with  such  transaction.  The note and the  warrant  were  issued in
reliance upon the exemption from  registration  provided by Section 4 (2) of the
Securities Act.

Between May and August 2000,  we issued an  aggregate  of 102,615  shares of our
common stock to Wireless Acquisition Partners, LLC, a sophisticated investor, at
prices  ranging  from $4.70 to $7.69 per share  upon the  cashless  exercise  of
warrants to purchase such shares.  No sales  commissions were paid in connection
with such  transaction.  The shares were issued in reliance  upon the  exemption
from registration provided by Section 4 (2) of the Securities Act.

Between June and September  2000, we issued an aggregate of 59,996 shares of our
common stock to Wireless Acquisition  Partners,  LLC, a sophisticated  investor,
upon exercise of warrants to purchase such shares. Proceeds from the exercise of
these warrants were $915,000.  No sales commissions were paid in connection with
such  transaction.  The shares were issued in reliance upon the  exemption  from
registration provided by Section 4 (2) of the Securities Act.


                                      -12-
<PAGE>

In April 2001,  we issued a warrant to purchase an  aggregate of 2,000 shares of
common  stock  to  Randy  Granovetter,  a  sophisticated  investor,  as  partial
consideration for consulting services to be provided to SmartServ as a member of
its Advisory  Board.  The warrant is  exercisable  after one year at an exercise
price of $9.36 per share and  expires on April 15,  2005.  No sales  commissions
were paid in  connection  with such  transaction.  This  warrant  was  issued in
reliance upon the exemption from  registration  provided by Section 4 (2) of the
Securities Act.

Between  August and December  2001,  we issued  57,643 shares of common stock to
Bruno  Guazzoni,  an  accredited  investor,  upon the  exercise  of  warrants to
purchase such shares.  No sales  commissions  were paid in connection  with such
transactions.  The  shares  were  issued in  reliance  upon the  exemption  from
registration  provided by Section 4 (2) of the Securities Act. Proceeds from the
exercise of the warrants were $250,000.

In April 2002,  SmartServ  issued a warrant to purchase  an  aggregate  of 5,000
shares of common stock to Pertti Johansson, a sophisticated investor, as partial
consideration for consulting  services to be provided to SmartServ.  The warrant
is  exercisable  at an exercise  price of $5.38 per share,  vests equally on the
first and second  anniversaries  of issuance,  and expires on April 29, 2005. In
May 2002, SmartServ issued a warrant to purchase an aggregate of 2,000 shares of
common stock to Mr. Johansson as partial  consideration for consulting  services
to be provided to SmartServ as a member of its  Advisory  Board.  The warrant is
exercisable  at an  exercise  price of $5.01 per share and  expires on April 29,
2005. In February  2003, the Company issued 10,714 shares of common stock to Mr.
Johansson in full satisfaction of a $15,000  obligation for services rendered to
the  Company.   No  sales   commissions   were  paid  in  connection  with  such
transactions.  The shares  and the  warrant  were  issued in  reliance  upon the
exemption from registration provided by Section 4 (2) of the Securities Act.

In April 2002,  SmartServ  issued a warrant to purchase an  aggregate  of 10,000
shares of common stock to Jeffrey Braile, a sophisticated  investor,  as partial
consideration for consulting  services to be provided to SmartServ.  The warrant
is  exercisable at an exercise price of $5.01 per share and expires on April 29,
2005. No sales commissions were paid in connection with such  transaction.  This
warrant was issued in reliance upon the exemption from registration  provided by
Section 4 (2) of the Securities Act.

In June 2002,  SmartServ  issued units  consisting  of 785,714  shares of common
stock and  warrants to purchase  common stock to two  accredited  investors at a
purchase  price of $1.40 per unit.  Gross  proceeds  from the  issuance of these
units were $1,100,000.  The investors received warrants,  callable under certain
conditions, for the purchase of an aggregate of 1,428,571 shares of common stock
at an exercise price of $1.40 per share through the  expiration  date on June 5,
2007,  as well as  non-callable  warrants  for the  purchase of an  aggregate of
196,429 shares of common stock,  subject to  antidilution  adjustments  upon the
occurrence of certain  events,  at an exercise  price of $1.47 per share through
June 5, 2007.  In August 2002,  pursuant to the terms of the callable  warrants,
the Company  provided the investors  with a notice,  calling such  warrants.  In
September  2002,  the  callable  warrants  expired  unexercised.   First  Albany
Securities  Corporation,  the placement agent,  received a commission of $66,000
and  reimbursement  of  direct  expenses  of  $2,000  in  connection  with  this
transaction.  In September  2002,  the Company  issued  169,853 shares of common
stock upon the exercise,  by Bonanza Master Fund,  Ltd., an investor in the June
2002 financing,  of noncallable  warrants to purchase such shares at an exercise
price, after  antidilution  adjustments,  of $0.85 per share.  Proceeds from the
issuance were  $144,375.  In December  2002, the Company issued 35,000 shares of
common stock to Vertical Ventures Investments, LLC, an investor in the June 2002
financing,  upon the exercise of warrants to purchase such shares. Proceeds from
the exercise of these warrants were $31,850.  No sales  commissions were paid in
connection with these  transactions.  The shares and the warrants were issued in
reliance upon the exemption from  registration  provided by Section 4 (2) of the
Securities Act.

In September 2002, the Company  authorized the issuance of a warrant to purchase
7,500 shares of common stock to Brian Meek, a sophisticated investor, as partial
compensation in connection with his  termination.  The warrant is exercisable at
an  exercise  price of $1.75 per share and  expires on July 31,  2004.  No sales


                                      -13-
<PAGE>

commissions  were paid in  connection  with such  transaction.  This warrant was
issued in reliance upon the exemption  from  registration  provided by Section 4
(2) of the Securities Act.

In September 2002,  SmartServ issued units consisting of 3,884,209 shares of its
common  stock  and  warrants  to  purchase  1,942,109  shares  of  common  stock
exercisable  at $0.85  per share  through  September  8,  2007 to 22  accredited
investors  at a purchase  price of $0.9125 per unit.  Gross  proceeds  from this
transaction  amounted to  $3,544,346.  Steven B.  Rosner,  a  consultant  to the
Company,  received a finder's fee of $192,500,  representing 7% of the aggregate
purchase price of the shares purchased by investors introduced to the Company by
Mr. Rosner,  an  unaccountable  expense  allowance of $25,000 in connection with
such  transaction and warrants to purchase 301,370 shares of our common stock at
an exercise price of $0.85 per share.  America First Associates Corp. received a
finder's fee of $7,550,  representing 8% of the aggregate  purchase price of the
shares  purchased  in the  offering by  investors  introduced  to the Company by
America  First  Associates  Corp.  and warrants to purchase  5,170 shares of our
common stock at an exercise price of $0.85 per share.  Alpine Capital  Partners,
Inc.  received a  finder's  fee of  $49,000,  representing  7% of the  aggregate
purchase price of the shares  purchased in the offering by investors  introduced
to the Company by Alpine Capital Partners, Inc. and warrants to purchase 131,507
shares of our common stock at an exercise  price of $0.85 per share.  In January
2003, the Company  issued  219,178  shares of common stock to Robert Gorman,  an
accredited  investor  in the  September  2002  financing,  upon the  exercise of
warrants to purchase such shares.  Proceeds from the exercise of these  warrants
were  $186,301.   No  sales  commissions  were  paid  in  connection  with  such
transaction.  In February 2003, the Company issued 35,295 shares of common stock
to Frazier Investments,  an accredited investor in the September 2002 financing,
upon the  exercise  of  warrants  to purchase  such  shares.  Proceeds  from the
exercise of these  warrants  were  $30,000.  No sales  commissions  were paid in
connection  with such  transaction.  In March 2003,  the Company  issued 129,089
shares of common stock to Frazier  Investments,  an  accredited  investor in the
September 2002 financing, upon the exercise of warrants to purchase such shares.
Proceeds from the exercise of these warrants were $109,726. No sales commissions
were paid in connection with such transaction. In April 2003, the Company issued
58,824  shares of common stock to Joel  Rotter,  an  accredited  investor in the
September 2002 financing, upon the exercise of warrants to purchase such shares.
Proceeds from the exercise of these warrants were $50,000.  No sales commissions
were paid in connection  with such  transaction.  These shares and warrants were
issued in reliance upon the exemption  from  registration  provided by Section 4
(2) of the Securities Act.

In December 2002, the Company entered into a consulting agreement with Steven B.
Rosner, an accredited investor. As consideration for such services,  the Company
granted Mr.  Rosner a warrant to purchase  250,000  shares of common stock at an
exercise price of $1.28 per share. No sales  commissions were paid in connection
with such  transaction.  The warrant was issued in reliance  upon the  exemption
from registration provided by Section 4 (2) of the Securities Act.

In  February  2003,  the Company  issued a  convertible  note to Global  Capital
Funding Group, LP ("Global") in consideration for the receipt of $1 million. The
note bears interest at the rate of 10% per annum and is secured by the Company's
assets,  exclusive  of its  internally  developed  software  products.  The note
matures on February 14, 2004, contains certain antidilution provisions,  and may
be  converted  into  shares of  SmartServ  common  stock at $1.10 per share.  As
additional  consideration,  the Company issued Global a warrant for the purchase
of 200,000  shares of its common stock at an exercise  price of $1.61 per share.
The warrant contains certain antidilution provisions and expires on February 14,
2006.  Alpine  Capital  Partners,  Inc.  received  a  finder's  fee of  $70,000,
representing  7% of the aggregate  purchase  price of the  convertible  note and
warrants to purchase  91,000 shares of common stock at $1.61 per share  expiring
on February 14, 2006 in connection  with this  transaction.  In April 2003,  the
Company and Global amended the convertible note in consideration for the receipt
of $250,000.  As additional  consideration,  the Company issued Global a warrant
for the purchase of 20,000  shares of its common  stock at an exercise  price of
$1.20 per share.  The  warrant  contains  certain  antidilution  provisions  and
expires on February 14, 2006.  The amended note and the warrants  were issued in
reliance upon the exemption from  registration  provided by Section 4 (2) of the
Securities Act.


                                      -14-
<PAGE>

In February  2003,  the Company  issued  25,647  shares of common stock to G. S.
Schwartz & Company, a sophisticated  investor, in full satisfaction of a $33,854
obligation to G. S. Schwartz & Company for services rendered to the Company.  No
sales commissions were paid in connection with such transaction. The shares were
issued in reliance upon the exemption  from  registration  provided by Section 4
(2) of the Securities Act.

In February 2003, the Company issued 62,500 shares of common stock to Vox, Inc.,
an accredited  investor,  in full satisfaction of an $82,500  obligation to Vox,
Inc. for services  rendered to the Company.  No sales  commissions  were paid in
connection  with such  transaction.  The shares were issued in reliance upon the
exemption from registration provided by Section 4 (2) of the Securities Act.

In February  2003,  the Company issued 12,576 shares of common stock to Creative
Management Services dba MC2, an accredited  investor,  in full satisfaction of a
$16,600  obligation  to MC2 for  services  rendered  to the  Company.  No  sales
commissions  were paid in  connection  with such  transaction.  The shares  were
issued in reliance upon the exemption  from  registration  provided by Section 4
(2) of the Securities Act.

In February  2003,  the Company  issued  12,100 shares of common stock to NexVue
Information   Systems  in  satisfaction  of  a  $15,953   obligation  to  NexVue
Information  Systems,  a sophisticated  investor,  for services  rendered to the
Company. No sales commissions were paid in connection with such transaction. The
shares were issued in reliance upon the exemption from registration  provided by
Section 4 (2) of the Securities Act.

ITEM 6.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------     RESULTS OF OPERATIONS

SmartServ  Online,  Inc.  commenced  operations on August 20, 1993,  and had its
initial  public  offering on March 21,  1996.  We offer  wireless  applications,
development and hosting services that allow wireless carriers, content providers
and  financial  services  firms to  deliver  content  to their  work  forces and
customers. Our products can deliver proprietary information,  as well as delayed
and real-time  financial market data,  business and financial news, national and
local weather  reports and other  business and  entertainment  information  in a
user-friendly manner.

Our mobile data solutions are designed to generate additional revenue,  increase
operating  efficiency,   and  extend  brand  awareness  for  wireless  carriers,
enterprises and content providers and are delivered via J2ME, BREW, WAP and SMS,
as well as RIM Blackberry and Pocket PC devices.


                                      -15-
<PAGE>


SmartServ has established customer and distribution relationships with a growing
network of strategic partners and wireless carriers, including Verizon Wireless,
AT&T Wireless, Nextel, ALLTEL Wireless, U.S. Cellular, QUALCOMM and Motorola, as
well as  content  providers,  including  BusinessWeek  Online,  Forbes.com,  S&P
Comstock and The Wall Street Journal Online (Dow Jones).

Due to the substantial  expenses and negative cash flows from operations that we
have incurred,  our auditors, in their report contained in our December 31, 2002
financial  statements,  have indicated that there is substantial doubt about our
ability to continue as a going concern.  The Company has earned limited revenues
and has incurred net losses of $8,037,173  and  $14,819,860  for the years ended
December  31, 2002 and 2001,  respectively,  and net losses of  $30,993,559  and
$7,124,126   for  the  years  ended  June  30,  2000  and  1999,   respectively.
Additionally,  the Company had an accumulated deficit of $72,859,006 at December
31, 2002.  Although the Company's  financial  statements have been prepared on a
going  concern  basis,  which  contemplates  the  realization  of assets and the
settlement  of  liabilities  and  commitments  in the normal course of business,
unless  we are able to  increase  revenue  and  raise  additional  capital  from
investors, we will not be able to support our operations.

Our plan of operation to eliminate  the  uncertainty  surrounding  the Company's
ability to continue as a going concern focuses on licensing our applications and
related  services to wireless  carriers and  financial  services  firms.  Such a
strategy  provides access to a large number of potential  subscribers and allows
SmartServ to leverage its market reach at minimal  operating costs. For wireless
carriers,  we deliver data and branded  content that can increase  wireless data
revenue  and  customer  retention.  For content  providers,  we provide an added
source of revenue by distributing their content and brand to the wireless users.
For financial services firms, we offer solutions that can increase  productivity
and customer  retention through the mobile delivery of proprietary data, as well
as market data and other useful content.  SmartServ has the ability to customize
the  information  package to be offered to each  customer by device.  Management
believes  that  SmartServ's  primary  source of  revenues  will be derived  from
revenue-share   licensing  contracts  with  its  technology  partners,   content
providers and wireless carrier and financial services customers.

As an example, the Company has launched several products on the Verizon Wireless
network.  Our financial  content  products have been launched on Verizon's  BREW
(Binary Runtime  Environment for Wireless) network under both the Forbes.com and
Wall Street  Journal Online brand names,  while our SMS (Short Message  Service)
financial   alert  product  has  been  launched  on  Verizon's   V-text  portal.
Additionally,  the Company has launched its AreaWeather  and AstroCom  Horoscope
lifestyle  products  on  Verizon's  BREW  network.  Similarly,  the  Company has
launched its Forbes.com  branded  application on AT&T Wireless'  m-Mode network.
Salomon Smith Barney,  in conjunction  with  SmartServ,  has launched a wireless
version of its GEO (Global  Equities  Online)  product.  GEO combines  Salomon's
proprietary  data, such as morning call notes,  with SmartServ's  financial data
products to form a fully integrated  financial tool.  While management  believes
that these  relationships are important to the Company's  success,  no assurance
can be given that these customers will be successful in their marketing  efforts
or that  the  Company's  products  and  services  will be well  received  in the
marketplace.

As of March 31, 2003,  SmartServ employed  thirty-five  people, all of whom were
employed in the United States. All but two were full-time  employees.  SmartServ
does  not   anticipate   that   staffing   requirements   associated   with  the
implementation  of its plan of operation will require the addition of any people
during the year ending December 31, 2003.


                                      -16-
<PAGE>

RESULTS OF OPERATIONS

In October  2000,  we  announced  the change of our year end from a fiscal  year
ending on June 30th to a  calendar  year  ending  on  December  31st in order to
conform to standard industry  practice.  This change in our fiscal year end gave
rise to a six month  transition  period ended  December 31, 2000.  The financial
statements for the six month period ended December 31, 2000 have been audited by
the Company's independent auditors.

SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>


                                                                                        SIX MONTHS ENDED             YEAR ENDED
                                             YEAR ENDED DECEMBER 31                        DECEMBER 31                 JUNE 30
                                         2002           2001          2000              2000           1999              2000
                                     -------------- ------------- -------------     -------------- -------------     --------------
                                                                 (unaudited)                     (unaudited)
<S>                                   <C>             <C>              <C>            <C>             <C>             <C>
  Revenues                            $    195,817    $  3,297,806     $,4,207,696    $  2,232,476    $  1,720,913    $  3,696,133
                                      ------------    ------------    ------------    ------------    ------------    ------------
  Costs and expenses


     Operating costs                   (13,713,110)    (16,737,549)    (11,481,107)     (8,028,220)     (1,882,608)     (5,335,495)
     Stock based compensation               80,295      (1,260,125)       (471,226)      8,164,779     (21,635,019)    (30,271,024)
                                      ------------    ------------    ------------    ------------    ------------    ------------


  Total costs and expenses             (13,632,815)    (17,997,674)    (11,952,333)        136,559     (23,517,627)    (35,606,519)
                                      ------------    ------------    ------------    ------------    ------------    ------------


  Income (loss) from operations        (13,436,998)    (14,699,868)     (7,744,637)      2,369,035     (21,796,714)    (31,910,386)
                                      ------------    ------------    ------------    ------------    ------------    ------------

  Net  interest  income (expense)
     and other financing costs            (279,436)       (119,992)        784,900         568,556         700,483         916,827

  Gain from extinguishment of debt       5,679,261              --              --              --              --              --
                                      ------------    ------------    ------------    ------------    ------------    ------------

  Net income (loss)                   $ (8,037,173)   $(14,819,860)   $ (6,959,737)   $  2,937,591    $(21,096,231)   $(30,993,559)
                                      ============    ============    ============    ============    ============    ============

  Basic earnings (loss) per share     $      (1.00)   $      (2.52)   $      (1.56)   $       0.54    $     (15.19)   $     (11.42)
                                      ============    ============    ============    ============    ============    ============

  Diluted earnings (loss) per share   $      (1.00)   $      (2.52)   $      (1.56)   $       0.34    $     (15.19)   $     (11.42)
                                      ============    ============    ============    ============    ============    ============

  Weighted average shares
     outstanding - basic                 8,020,038       5,891,244       4,466,836       5,433,577       1,388,546       2,712,931

  Weighted average shares
     outstanding- diluted                8,020,038       5,891,244       4,466,836       8,697,917       1,388,546       2,712,931
                                      ============    ============    ============    ============    ============    ============

  BALANCE SHEET DATA:

  Total assets                        $  3,351,925    $ 12,461,064    $ 24,041,876    $ 24,041,876    $  2,459,843    $ 26,702,824
  Note payable                        $    500,000    $  6,723,156    $  1,446,256    $         --    $         --    $         --
  Accumulated deficit                 $(72,859,006)   $(64,821,833)   $(50,001,973)   $(50,001,973)   $(43,042,236)   $(52,939,564)
  Stockholders' equity (deficiency)   $    173,299    $  3,713,669    $ 16,780,970    $ 16,780,970    $ (3,826,746)   $ 19,981,937
</TABLE>


YEAR ENDED DECEMBER 31, 2002 VERSUS YEAR ENDED DECEMBER 31, 2001

During the year ended  December 31, 2002, we recorded  revenues of $195,817.  Of
such revenues, $181,800 were earned through our licensing agreement with Salomon
Smith Barney.  During the year ended December 31, 2001, we recorded  revenues of
$3,297,806.  Of such  revenues,  $3,244,300  were earned  through our  licensing
agreement with Data  Transmission  Network  Corporation while $6,600 were earned
through our


                                      -17-
<PAGE>

licensing  agreement  with Salomon Smith Barney.  During the year ended December
31, 2001, we recognized  $2,577,000 from the amortization of deferred  revenues,
and $667,000 in  connection  with fees earned for  maintenance  and  operational
support associated with the Data Transmission Network Corporation agreement.

During the year ended  December  31,  2002,  we  incurred  costs of  services of
$5,620,994,  a decrease of 19.7% over the year ended December  2001.  Such costs
decreased primarily due to reductions in consulting costs incurred in connection
with the  development of the Company's  systems'  architecture  and  application
platform and the reduction of  amortization  costs  associated with the software
applications  licensed to Data Transmission Network  Corporation.  Components of
the costs of service category consist primarily of information and communication
costs  ($509,700),  personnel  costs  ($2,652,100),  computer  hardware  leases,
depreciation  and  maintenance  costs  ($1,773,500),  facilities  ($315,700) and
amortization   expenses  relating  to  capitalized  software  development  costs
($271,700).  During the year ended  December  31,  2001,  we  incurred  costs of
services  of  $6,998,425.  Components  of these  costs  consisted  primarily  of
information and communication  costs ($393,900),  personnel costs  ($2,435,800),
systems  consultants  ($1,023,000),  computer hardware leases,  depreciation and
maintenance costs ($1,753,400),  facilities ($426,300) and amortization expenses
relating to capitalized software  development costs ($874,500).  During the year
ended  December  31,  2002 and  2001,  we  capitalized  $185,895  and  $429,487,
respectively,  of  development  costs in accordance  with Statement of Financial
Accounting  Standards  ("SFAS")  No. 86,  "Accounting  for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed" ("Statement No. 86").

During the year  ended  December  31,  2002,  we  incurred  sales and  marketing
expenses of  $3,003,834,  a decrease of 37.9% over the year ended December 2001.
Such costs decreased primarily due to travel and personnel reductions associated
with the  closing  of the  Company's  Hong Kong and  London  sales  offices,  US
personnel reductions and reductions in marketing consultants' costs.  Components
of the sales  and  marketing  category  consist  primarily  of  personnel  costs
($1,698,200),  marketing  consultants  ($209,600),  advertising  ($613,500)  and
travel  ($247,700).  During  the year  ended  December  31,  2001,  we  incurred
advertising  and  marketing  expenses of  $4,838,034.  Components of these costs
consisted primarily of marketing consultants ($714,600), personnel ($2,814,100),
travel ($473,500) and advertising ($479,600).

During the year ended December 31, 2002, we incurred general and  administrative
expenses of  $4,423,642,  a decrease of 9.7% over the year ended  December 2001.
Such costs  decreased  primarily  due to a reduction in personnel  costs and the
termination of litigation. Components of the general and administrative category
consist   primarily  of  personnel   costs   ($1,463,100),   professional   fees
($1,329,400),  facilities  ($527,600),  insurance ($530,500),  computer hardware
leases,  depreciation  and maintenance  costs  ($183,100),  travel ($99,100) and
communications  costs  ($62,800),  as  well  as a  credit  of  $165,800  for the
successful resolution of litigation. During the year ended December 31, 2001, we
incurred general and administrative expenses of $4,901,090.  Components of these
costs  consisted   primarily  for  personnel  costs   ($1,671,200),   facilities
($519,000),  insurance  ($525,100),  computer hardware leases,  depreciation and
maintenance costs ($182,700),  professional fees ($1,371,400), travel ($134,700)
and communications costs ($60,000).

During the  quarter  ended  December  2002,  the  Company  recorded a  valuation
allowance of $664,640 in connection with the potential uncollectibility of loans
made to Mr.  Sebastian  Cassetta,  the  Company's  Chairman and Chief  Executive
Officer.  While these loans do not mature until  December 2003 and January 2004,
Mr.  Cassetta's  ability to repay these loans is highly contingent on the market
value of his investment in the Company.

During the year ended December 31, 2002, the net noncash credit for  stock-based
compensation  amounted to $80,295 compared to a net noncash charge of $1,260,125
during the year ended  December 31, 2001.  Such  noncash  amounts are  primarily
related  to  the  valuation  of  stock-based  compensation  in  accordance  with
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees"  ("APB No. 25").  Certain  employee  stock options are subject to the
variable plan requirements of APB No. 25, as they were repriced,  and therefore,
compensation  expense is recognized  for changes in the fair value of our common
stock.  Noncash charges for consulting  services for the year ended December 31,
2002 and 2001 were $597,396 and


                                      -18-
<PAGE>

$1,202,720,  respectively, resulting primarily from the amortization of deferred
costs associated with the prior issuance of warrants to purchase common stock to
various financial, marketing and technical consultants.

Interest  income for the year  ended  December  31,  2002 and 2001  amounted  to
$266,118 and $512,138, respectively. Such amounts were earned primarily from our
investments  in highly liquid  commercial  paper,  money fund accounts and notes
receivable  from  officers.  During the year ended  December  31, 2002 and 2001,
interest and other  financing  costs were $525,165 and  $599,379,  respectively.
During the year ended December 31, 2002 and 2001,  interest and other  financing
costs were incurred in connection  with the $20 million line of credit  facility
with HP. Foreign exchange losses amounted to $20,389 for the year ended December
31, 2002 compared to $32,751 for the year ended December 31, 2001.

During the quarter  ended  September  30,  2002,  the Company and HP amended the
terms of a  promissory  note  issued  by  SmartServ  for the  acquisition  of HP
products to provide for the (i) reduction of SmartServ's  aggregate  outstanding
principal and accrued  interest amount of $7,045,000 to $1,000,000,  (ii) return
of certain  unused  hardware by  SmartServ,  (iii)  issuance by  SmartServ  of a
warrant for the purchase of 50,000 shares of common stock and (iv)  repayment of
$500,000  of the  amended  obligation  on  September  10,  2002.  In  connection
therewith, the Company recorded a charge to earnings of $38,000 representing the
fair value of the warrant as  determined in  accordance  with the  Black-Scholes
model and recognized a net gain of $5,679,261  from the  extinguishment  of this
obligation.

Basic and diluted loss per share was $1.00 for the year ended  December 31, 2002
compared  to a basic and  diluted  loss per  share of $2.52  for the year  ended
December  31,  2001.  The  weighted  average  shares  outstanding  increased  to
8,020,038 for the year ended December 31, 2002 from 5,891,244  weighted  average
shares outstanding for the year ended December 31, 2001.

YEAR ENDED DECEMBER 31, 2001 VERSUS YEAR ENDED DECEMBER 31, 2000

During the years  ended  December  31, 2001 and 2000,  we  recorded  revenues of
$3,297,806 and $4,207,696, respectively. Substantially all of such revenues were
earned  through  our  licensing   agreement  with  Data   Transmission   Network
Corporation.  During the year ended  December 31, 2001 and 2000,  we  recognized
$2,577,000  and  $2,392,900,  respectively,  from the  amortization  of deferred
revenues,  and $667,000 and  $333,000,  respectively,  in  connection  with fees
earned for maintenance and operational support associated with this agreement.

During the year ended  December  31,  2001,  we  incurred  costs of  services of
$6,998,425,  an increase of 73.4% over the year ended  December 31,  2000.  Such
costs  increased  primarily  due to  increases  in  personnel  costs  and  costs
associated with computer  hardware leases,  depreciation and maintenance  costs.
Components of the costs of service category consist primarily of information and
communication   costs   ($393,900),   personnel  costs   ($2,435,800),   systems
consultants ($1,023,000), computer hardware leases, depreciation and maintenance
costs ($1,753,400),  facilities ($424,900) and amortization expenses relating to
capitalized  software  development  costs  ($874,500).  During  the  year  ended
December 31, 2000, we incurred  costs of services of  $4,035,481.  Components of
these costs consist primarily of information and communication costs ($218,500),
personnel costs ($992,700), systems consultants ($1,394,200),  computer hardware
leases, depreciation and maintenance costs ($575,000), facilities ($124,900) and
amortization   expenses  relating  to  capitalized  software  development  costs
($601,500).  During the year ended  December 31, 2001 and 2000,  we  capitalized
$429,487 and $902,356,  respectively,  of development  costs in accordance  with
Statement No. 86.

During the year  ended  December  31,  2001,  we  incurred  sales and  marketing
expenses of  $4,838,034,  an increase of 72.9% over the year ended  December 31,
2000.  Such costs  increased  primarily  due to  increases  in  personnel  costs
resulting  from the  establishment  of sales offices in Hong Kong and London and
severance  benefits  paid in  connection  with the closure of a sales  office in
Zurich, as well as increases in advertising  costs.  Components of the sales and
marketing category consist primarily of personnel costs ($2,814,100),  marketing


                                      -19-
<PAGE>

consultants ($714,600), advertising ($479,600) and travel ($473,500). During the
year ended December 31, 2000, we incurred  advertising and marketing expenses of
$2,798,038. Components of these costs consist primarily of marketing consultants
($740,900),   personnel   ($1,180,300),   advertising   ($285,300)   and  travel
($320,100).

During the year ended December 31, 2001, we incurred general and  administrative
expenses of  $4,901,090,  an increase of 5.4% over the year ended  December  31,
2000. Such costs increased  primarily due to increases in insurance,  facilities
and computer costs, offset by a reduction in personnel costs.  Components of the
general and  administrative  costs category consist primarily of personnel costs
($1,671,200),  professional fees ($1,371,400),  facilities ($519,000), insurance
($525,100),   communications   costs   ($60,000),   computer   hardware  leases,
depreciation and maintenance costs ($182,700) and travel ($134,700).  During the
year ended December 31, 2000, we incurred general and administrative expenses of
$4,647,588.  Components  of these costs  consist  primarily of  personnel  costs
($1,946,900),  facilities  ($324,900),  insurance ($243,100),  professional fees
($1,456,300), communications costs ($84,800) and travel ($122,995).

During the year ended December 31, 2001, the net noncash charge for  stock-based
compensation amounted to $1,260,125 compared to a net noncash charge of $471,226
during the year ended  December 31, 2000.  Such  noncash  amounts are  primarily
related to the valuation of stock-based  compensation in accordance with APB No.
25. Certain employee stock options are subject to the variable plan requirements
of APB No.25,  as they were  repriced,  and therefore,  compensation  expense is
recognized  for changes in the fair value of our common stock.  Noncash  charges
for  consulting  services  for the year ended  December  31,  2001 and 2000 were
$1,202,720  and   $1,331,120,   respectively,   resulting   primarily  from  the
amortization of deferred costs associated with the prior issuance of warrants to
purchase common stock to various financial, marketing and technical consultants.

Interest  income for the years  ended  December  31,  2001 and 2000  amounted to
$512,138 and $849,785, respectively. Such amounts were earned primarily from our
investments in highly liquid  commercial  paper and money fund accounts.  During
the years ended December 31, 2001 and 2000,  interest and other  financing costs
were  $599,379 and  $64,885,  respectively.  During the year ended  December 31,
2001,  interest and other  financing  costs were incurred in connection with the
$20 million line of credit  facility with HP. During the year ended December 31,
2000,  interest and other financing costs were primarily  related to the partial
redemption of our Prepaid Warrants.  Foreign exchange losses amounted to $32,751
for the year ended  December 31, 2001 compared to $0 for the year ended December
31, 2000.

Basic and diluted loss per share was $2.52 for the year ended  December 31, 2001
compared  to a basic and  diluted  loss per  share of $1.56  for the year  ended
December  31,  2000.  The  weighted  average  shares  outstanding  increased  to
5,891,244 for the year ended December 31, 2001 from 4,466,836  weighted  average
shares outstanding for the year ended December 31, 2000.

SIX MONTHS ENDED  DECEMBER  31, 2000 VERSUS SIX MONTHS  ENDED  DECEMBER 31, 1999

During the six months ended  December 31, 2000 and 1999 we recorded  revenues of
$2,232,476 and $1,720,913, respectively. Substantially all of such revenues were
earned  through  our  licensing   agreement  with  Data   Transmission   Network
Corporation.  During  the six  months  ended  December  31,  2000 and  1999,  we
recognized  $1,564,598  and $828,312,  respectively,  from the  amortization  of
deferred revenues associated with this agreement.

During the six months ended  December 31, 2000, we incurred costs of services of
$3,278,025,  an increase of 465.5% over the six months ended  December 31, 1999.
Such costs increased  primarily due to the commencement of the Company's efforts
to  build a  secure  data  center  and  complete  the  development  of its  data
applications and communications  architecture,  including increases in costs for
systems consultants,  personnel,  facilities,  computer hardware maintenance and
amortization of capitalized software development costs.


                                      -20-
<PAGE>

Components of the costs of service category consist primarily of information and
communication  costs ($123,800),  personnel costs ($815,900),  computer hardware
leases and maintenance ($380,300), systems consultants ($1,363,000),  facilities
($124,900) and amortization expense relating to capitalized software development
costs  ($392,100).  During the six months ended  December 31, 1999,  we incurred
costs of services of $579,634.  Components of these costs  consist  primarily of
information and  communication  costs ($87,300),  personnel costs ($137,000) and
computer  hardware  leases  and  maintenance  ($161,300),   systems  consultants
($73,200) and amortization  expense relating to capitalized software development
costs  ($120,700).  During the six months ended  December 31, 2000 and 1999,  we
capitalized  $333,648  and  $553,295,  respectively,  of  development  costs  in
accordance with Statement No. 86. Product  development costs consisted primarily
of the amortization of capitalized software development costs.

During the six months ended  December 31, 2000, we incurred  sales and marketing
expenses of $2,077,002, an increase of 844.6% over the six months ended December
1999.  Such costs  increased  primarily  due to increases  in  personnel  costs,
marketing  consultants,  advertising  and  travel.  Components  of the sales and
marketing  category consist primarily of personnel costs  ($968,600),  marketing
consultants ($502,700), advertising ($285,300) and travel ($196,100). During the
six months ended December 31, 1999, we incurred sales and marketing  expenses of
$219,878.  Components  of these  costs  consist  primarily  of  personnel  costs
($60,500), marketing consultants ($52,400) and travel ($51,300).

During  the six  months  ended  December  31,  2000,  we  incurred  general  and
administrative expenses of $2,673,193, an increase of 146.8% over the six months
ended  December  1999.  Such  costs  increased  primarily  due to  increases  in
personnel  costs,  insurance,  travel and professional  fees.  Components of the
general  and  administrative  category  consist  primarily  of  personnel  costs
($928,400),  professional  fees  ($851,200),  facilities  ($231,700),  insurance
($187,600), travel ($123,000) and communications costs ($30,800). During the six
months ended December 31, 1999, we incurred general and administrative  expenses
of $1,083,096.  Components of these costs consist  primarily of personnel  costs
($522,800),   professional  fees  ($347,800),  facilities  ($97,100),  insurance
($30,200) and communications costs ($33,800).

During the six months ended December 31, 2000, noncash stock-based  compensation
amounted to income of $8,164,779  compared to an expense of  $21,635,019  during
the six months  ended  December 31, 1999.  Such  noncash  amounts are  primarily
related to the valuation of stock-based  compensation in accordance with APB No.
25. Certain employee stock options are subject to the variable plan requirements
of APB No. 25, as they were  repriced,  and therefore,  compensation  expense is
recognized  for changes in the fair value of our common stock.  Noncash  charges
for  professional  fees for the six months ended December 31, 2000 and 1999 were
$643,710 and $682,510,  respectively,  resulting primarily from the amortization
of deferred  costs  associated  with the prior  issuance of warrants to purchase
common stock to various  financial,  marketing  and technical  consultants.  The
value of  substantially  all of such common  stock  purchase  warrants  has been
recorded in accordance with the Black-Scholes pricing methodology.

Interest  income for the six months ended December 31, 2000 amounted to $621,416
versus  $13,033 for the six months ended  December  31, 1999.  Such amounts were
earned  primarily from our investments in highly liquid  commercial  paper.  The
increase in interest  income  resulted from the  availability  of funds from our
January and May 2000 equity placements.  Interest costs for the six months ended
December  31,  2000  and  1999  were  $2,860  and  $30,250,  respectively.  Debt
origination  and other  financing  costs were  $50,000 for the six months  ended
December 31, 2000.  Such amounts were incurred in connection  with a $20 million
line of credit  facility with HP. During the six months ended December 31, 1999,
the Company recorded a credit of $717,700 as a reversal of penalties pursuant to
the default provision of the Prepaid Warrants.

Basic  earnings were $0.54 per share for the six months ended  December 31, 2000
versus a loss of $15.19 per share for the six months  ended  December  31, 1999.
Diluted earnings per share for the six months ended December 31, 2000 were $0.34
per share  versus a loss of $15.19 per share for the six months  ended  December
31, 1999.


                                      -21-
<PAGE>

CAPITAL RESOURCES AND LIQUIDITY

At  December  31,  2002,  2001 and  2000,  the  Company  had  cash of  $154,800,
$6,532,323  and  $19,172,118,  respectively.  Net cash  used in  operations  was
$9,839,000 for the year ended  December 31, 2002 compared to $12,507,000  during
the year ended  December 31, 2001  compared to  $4,938,000  during the six-month
transition  period ended December 31, 2000  ("Transition  Period").  The primary
reasons for this  reduction in 2002 are the  Company's  initiative  to close the
Hong Kong and United  Kingdom  sales  offices  and adjust its US  personnel  and
operations to focus its resources on meeting the growing demand for its products
and services  throughout North America.  During the year ended December 31, 2001
and  the  Transition  Period,  cash  was  used to fund  the  Company's  software
development  efforts,  its  sales  and  marketing  capabilities,  as well as its
expansion  into  Europe  and Asia.  These  costs were  partially  offset by cash
revenues  received  from DTN in the  amount of  $665,300  during  the year ended
December  31, 2001 and  $660,600  during the  Transition  Period.  Additionally,
during the year ended December 31, 2001 and the Transition  Period,  the Company
incurred  consulting costs of $1,492,000 and $562,200,  respectively,  that were
funded by the line of credit provided by HP.

Other uses of cash during the year ended  December 31, 2002 were  primarily  for
the partial  repayment of our  obligation  to HP in the amount of $500,000,  the
purchase of computer  equipment  and related  software in the amount of $166,700
and the capitalization of software  development costs in the amount of $186,000.
This compares to $558,400 for computer equipment and related software,  $429,500
for software development costs and $500,000 for a loan to the Company's Chairman
and Chief Executive  Officer during the year ended December 31, 2001. During the
Transition   Period,   the  Company  purchased   equipment  for  $1,399,000  and
capitalized  software  development  costs  amounting to $333,600.  Additionally,
during both the year ended  December  31, 2001 and the  Transition  Period,  the
Company  purchased  computer  hardware and software  amounting to $2,923,000 and
$884,600, respectively, that was funded by the line of credit provided by HP.

In January 2000,  America First Associates Corp.,  acting as placement agent for
SmartServ,  completed a private  placement of 233,000  shares of common stock at
$15.00  per  share.  The  Company  also  completed  a  private  placement  of an
additional  100,000  shares of  common  stock at $15.00  per share  without  the
services of a placement agent. In May 2000,  Chase  Securities  Inc.,  acting as
placement agent for SmartServ,  completed a private  placement of 353,535 shares
of common  stock at $49.50 a share.  The net  proceeds  of these  placements  of
$21,465,400 were used for general working capital requirements.

In May 2000, we entered into a Business  Alliance  Agreement with HP whereby the
companies agreed to jointly market their respective products and services and to
work on the build-out of SmartServ's domestic and international  infrastructure.
In furtherance of these objectives HP provided us with a line of credit of up to
$20,000,000 for the acquisition of approved hardware,  software and services. As
of September 28, 2001, the expiration  date of the facility,  HP had advanced us
$6,723,156  thereunder.  In September 2002, the Company and HP amended the terms
of the promissory note to provide for the (i) reduction of SmartServ's aggregate
outstanding  principal and accrued  interest amount of $7,045,000 to $1,000,000,
(ii) return of certain unused hardware by SmartServ, (iii) issuance by SmartServ
of a  warrant  for the  purchase  of  50,000  shares  of  common  stock and (iv)
repayment  of $500,000 of the amended  obligation  on September  10,  2002.  The
remaining  obligation was evidenced by a note,  bearing an interest rate of 11%,
to be repaid as follows:  $200,000 on December 31, 2002, $200,000 on January 28,
2003 and $100,000 on February 27, 2003. The warrant expires on September 9, 2005
and has an exercise  price of $1.166 per share.  In  connection  therewith,  the
Company recorded a charge to earnings of $38,000  representing the fair value of
the  warrant  as  determined  in  accordance  with  the   Black-Scholes   model.
Additionally, the Company recognized a net gain of $5,679,261 resulting from the
extinguishment of this obligation.  In February 2003, the Company and HP amended
the terms of their  amended  promissory  note to provide for the  settlement  of
SmartServ's outstanding obligation of $530,800, inclusive of accrued interest of
$30,800, in consideration of the payment by SmartServ of $225,000.  As a result,
the Company will  recognize an additional  gain of $305,800,  resulting from the
extinguishment of this obligation,  in its financial  statements for the quarter
ending March 31, 2003.


                                      -22-
<PAGE>

In June 2002, First Albany Corporation, acting as placement agent for SmartServ,
completed a private  placement of units  consisting of 785,714  shares of common
stock and warrants to purchase common stock in  consideration of $1.40 per unit.
The net  proceeds  of  $823,500  from the  issuance of these units were used for
general working capital requirements.  The investors received warrants, callable
under certain  conditions,  for the purchase of an aggregate of 1,428,571 shares
of common stock at an exercise  price of $1.40 per share through the  expiration
date on June 5, 2007,  as well as  non-callable  warrants for the purchase of an
aggregate  of  196,429   shares  of  common  stock,   subject  to   antidilution
adjustments,  upon the  occurrence of certain  events,  at an exercise  price of
$1.47 per share through June 5, 2007.  In August 2002,  pursuant to the terms of
the callable warrants,  the Company provided the investors with a notice calling
such warrants.  In September 2002, the callable  warrants  expired  unexercised.
Subsequent to June 2002,  warrants for the purchase of 204,853  shares of common
stock were exercised. Proceeds from such exercises were $176,500.

In September 2002,  SmartServ issued units consisting of 3,884,209 shares of its
common  stock and  warrants  to  purchase  1,942,109  shares  of  common  stock,
exercisable at $0.85 through September 8, 2007, to 22 accredited  investors at a
purchase  price of  $0.9125  per unit.  Gross  proceeds  from  this  transaction
amounted to $3,544,346.  SmartServ agreed to pay fees consisting of $249,050, an
expense allowance of $25,000,  and warrants to purchase 438,046 shares of common
stock at an exercise price of $0.85 per share, expiring on September 8, 2007, as
compensation  to  certain  individuals  and  entities  that  acted  as  finders.
Additionally, the Company incurred costs and other fees of $28,000 in connection
with this transaction.  While the warrants to purchase common stock represent an
additional source of capital, they expire in September 2007 and are not callable
by the  Company.  Therefore,  they  cannot be relied  upon by the  Company  as a
definite  source of capital.  The  warrantholders  may choose to exercise  their
warrants if the market price of the Company's  common stock exceeds the exercise
price of the warrant. Subsequent to December 31, 2002, warrants for the purchase
of 442,386 shares of common stock were  exercised.  Proceeds from such exercises
were $376,000.

During the period January 1, 2000 through December 31, 2002, we issued 2,065,000
shares of common  stock to  investors  upon the exercise of warrants to purchase
such shares.  Proceeds  from the  exercise of these  warrants  were  $6,014,600.
Substantially  all of these warrants were  exercised  during the 12 months ended
December  31,  2000 when the  market  value of the  Company's  common  stock was
significantly greater that it is currently.

During the  quarter  ended  December  2002,  the  Company  recorded a  valuation
allowance of $664,640 in connection with the potential uncollectibility of loans
made to Mr.  Sebastian  Cassetta,  the  Company's  Chairman and Chief  Executive
Officer.  While these loans do not mature until  December 2003 and January 2004,
Mr.  Cassetta's  ability to repay these loans is highly contingent on the market
value of his investment in the Company.

At December 31,  2002,  we had  1,725,000  public  warrants  (SSOLW) and 300,000
warrants with terms identical to the public warrants outstanding. These warrants
were convertible into our common stock at the ratio of two warrants per share of
common  stock at an  exercise  price of $10.50 per share.  These  warrants  were
redeemable  by  SmartServ  on not  less  than  30  days  written  notice  at the
redemption  price of  $0.10  per  warrant,  provided  the  average  closing  bid
quotation of the common stock as reported on the Nasdaq Stock Market has been at
least  187.5% of the current  exercise  price of the warrants for a period of 20
consecutive  trading  days ending on the third day prior to the date on which we
give notice of redemption. These warrants expired on March 20, 2003.


                                      -23-
<PAGE>

In January 2003, the Company issued a note to Steven B. Rosner in  consideration
of $70,000.  Proceeds from the note were used for working capital.  The debt was
evidenced by an unsecured note bearing an interest rate of 12% per annum and was
repaid in February 2003.

In  February  2003,  the Company  issued a  convertible  note to Global  Capital
Funding Group, LP ("Global") in consideration for the receipt of $1 million. The
note  bears  interest  at the  rate  of 10% per  annum,  and is  secured  by the
Company's assets,  exclusive of its internally developed software products.  The
note matures on February 14, 2004, contains certain antidilution provisions, and
may be converted  into shares of SmartServ  common stock at $1.10 per share.  As
additional  consideration,  the Company issued Global a warrant for the purchase
of 200,000  shares of its common stock at an exercise  price of $1.61 per share.
In  April  2003,  the  Company  and  Global  amended  the  convertible  note  in
consideration  of the receipt of  $250,000.  As  additional  consideration,  the
Company  issued Global a warrant for the purchase of 20,000 shares of its common
stock at an  exercise  price of $1.20 per share.  The warrant  contains  certain
antidilution provisions and expires on February 14, 2006. Proceeds from the note
were used for working capital purposes.

In February 2003, the Company issued 123,537 shares of common stock to 5 vendors
in  settlement  of the  Company's  obligations,  aggregating  $164,000,  to such
vendors.

The Company's financial  statements have been prepared on a going concern basis,
which  contemplates  the realization of assets and the settlement of liabilities
and  commitments  in the normal course of business.  The Company has,  since its
inception,  earned limited revenue and incurred substantial  recurring operating
losses,  including net losses of $8,037,173 and  $14,819,860 for the years ended
December  31, 2002 and 2001,  respectively,  and net losses of  $30,993,559  and
$7,124,126   for  the  years  ended  June  30,  2000  and  1999,   respectively.
Additionally, it had an accumulated deficit of $72,859,006 at December 31, 2002.
These conditions raise substantial doubt about the Company's ability to continue
as a going  concern.  Such concern was expressed by our auditors,  Ernst & Young
LLP, in their audit report  regarding the financial  statements  included in our
Form 10-KSB for the year ended  December 31, 2002.  The financial  statements do
not  include  any  adjustments  to reflect the  possible  future  effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of these uncertainties.

The  economic  downturn  in  general,  and its impact on the  telecommunications
industry in  particular,  has caused  telecommunications  service  providers  to
reduce   capital   spending,   personnel  and  debt,  as  well  as  new  service
introductions.  This has  resulted  in delays  in the  build-out  of  high-speed
carrier data networks and availability of data-enabled wireless devices, causing
the market for SmartServ's financial data, lifestyle and transaction services to
be lackluster.  In addition,  many  financial  services firms have curtailed new
product  development to focus on data security and recovery.  Consequently,  the
potential demand for the Company's  products and services has been significantly
delayed.  Such  delays  have  had a very  detrimental  effect  on the  Company's
operations  and have  resulted  in the  Company's  inability  to  implement  its
business plan and related marketing strategies.  Consequently,  in May 2002, the
Company commenced an effort to realign its  infrastructure  and related overhead
to  correlate  with  reductions  in projected  revenue.  As part of this effort,
management closed the Company's UK and Hong Kong sales offices and downsized its
domestic  operations  through staff  reductions to a level sufficient to support
the Company's projected operations through the remainder of 2002. In March 2003,
the  Company  again  reduced  its cost  structure  through  the  termination  of
additional  personnel.  Personnel headcount has been reduced from 66 in May 2002
to the current  level of 35. These  efforts have reduced the  Company's  average
monthly  operating  expenses from  approximately  $1,090,000 to $712,000 through
February  2003 to $550,000,  commencing  March 2003.  As a result of the factors
identified  above,  the  Company is in need of  additional  capital to enable it
continue as a going  concern.  The following  chart  provides an analysis of the
Company's capital requirements for the year ending


                                      -24-
<PAGE>

December 31, 2003 based on projected revenues of $6,900,000:

                             % OF             CAPITAL
                         REVENUE GOAL         REQUIRED
                         -------------------------------------

                             100           $    2,750,000

                              50                4,000,000

                               0                5,300,000

However,  no  assurance  can be given  that the  Company  will be able  meet its
revenue  projections,  maintain its cost structure as presently  configured,  or
raise additional capital on satisfactory  terms. Should the Company be unable to
raise additional debt or equity financing, it will be forced to seek a merger or
cease operations.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The preparation of the  consolidated  financial  statements,  in conformity with
accounting  principles  generally  accepted in the United States,  requires that
management make critical decisions  regarding  accounting policies and judgments
concerning their  application.  Materially  different  amounts could be reported
under different circumstances and conditions.

Revenue Recognition
-------------------
The Company  recognizes  revenue  from the use of its  products  and services in
accordance with the American Institute of Certified Public Accountants ("AICPA")
Statement of Position ("SOP") 97-2,  "Software Revenue  Recognition",  SOP 98-9,
"Modification   of  SOP  97-2,   "Software   Recognition  with  Respect  Certain
Transactions",   and  the  SEC  Staff  Accounting  Bulletin  No.  101,  "Revenue
Recognition in Financial Statement". Specifically, there must be (1) evidence of
an arrangement, (2) delivery of SmartServ's products and services, (3) fixed and
determinable fees, and (4) probable  collectibility of such fees.  Multi-element
revenue agreements are recognized based on vendor-specific objective evidence of
the fair value of individual  components  or if the elements in the  arrangement
cannot be separated,  all revenues from the  arrangement  are deferred until the
earlier of (1) the existence of  vendor-specific  objective  evidence or (2) all
elements of the arrangement have been delivered.

The contract  elements vary by both product and industry.  The wireless  carrier
market is dominated by the "data portal" concept,  whereby a SmartServ developed
application  is made  available  to a  mobile  customer  through  the  carrier's
wireless data portal.  The  Company's  wireless  carrier model  provides for the
delivery of a software  license and related data, such as stock quotes,  lottery
results,  horoscopes  and  weather  reports  to the  customers  of the  carrier.
SmartServ's  products  offer the carrier a new revenue stream and the ability to
augment the carrier's efforts to increase customer retention.  However, the mere
placement of  SmartServ's  applications  in the  carrier's  data portal does not
result in revenue to SmartServ.  SmartServ earns revenue based upon a percentage
of the carrier's  monthly  subscription fee only after the subscriber  downloads
the SmartServ  application onto his or her mobile phone.  SmartServ continues to
earn a  monthly  subscription  fee  only  as long  as it  provides  subscription
services to the subscriber and the subscription has not been cancelled.

SmartServ's  wireless  products  provide the  financial  services  industry with
applications  that can  increase  productivity  and customer  retention  through
mobile  delivery  of an  institution's  proprietary  data  in  combination  with
SmartServ's market data.


                                      -25-
<PAGE>

SmartServ's  agreements with customers in the financial  services  industry will
generally contain multiple revenue elements. Such elements may include:

     o    Subscription  service fees consisting of fixed or variable charges for
          usage of  SmartServ's  products.  Such fees are based on the number of
          users having access to SmartServ's products.
     o    Development and  integration  fees for the development and integration
          of software applications that integrate SmartServ's  applications with
          a customer's proprietary data and legacy systems.
     o    Professional  service  revenues that emanate from consulting  services
          provided  to  customers,  and
     o    Hosting services whereby SmartServ  provides the services necessary to
          cache and deliver a customer's proprietary data.

Paragraph no. 10 of SOP 97-2 states that "if an  arrangement  includes  multiple
elements,  the  fee  should  be  allocated  to the  various  elements  based  on
vendor-specific  objective  evidence of fair value,  regardless  of any separate
prices  stated  in the  contract  for each  element.  Vendor-specific  objective
evidence of fair value is limited to the following:

     o    The price charged when the same element is sold separately,
     o    For an element not yet being sold separately, the price established by
          management having the relevant authority; it must be probable that the
          price,  once   established,   will  not  change  before  the  separate
          introduction of the element into the marketplace".

Paragraph 12 of SOP 97-2 requires deferral of all revenues from multiple element
arrangements that are not accounted for using long-term  contract  accounting if
sufficient  vendor-specific objective evidence does not exist for the allocation
of revenue to the  various  elements of the  arrangement.  In  situations  where
vendor-specific   objective  evidence  exists  for  those  elements  yet  to  be
delivered,  but vendor-specific  objective evidence of fair value does not exist
for one or more of the delivered elements in the arrangement, the fees should be
recognized using the residual method.

Impairment of Property and Equipment
------------------------------------
SmartServ   reports  its  property  and  equipment  at  cost  less   accumulated
depreciation.  On an ongoing basis,  SmartServ reviews the future recoverability
of its property  and  equipment  for  impairment  whenever  events or changes in
circumstances  indicate that the carrying  amounts may not be recoverable.  When
such  events or  changes  in  circumstances  do  occur,  an  impairment  loss is
recognized if the undiscounted future cash flows expected to be generated by the
asset are less than its carrying value. The impairment loss reduces the asset to
its fair value.

Capitalized Software Development Costs
--------------------------------------
In  connection  with certain  contracts  entered into between  SmartServ and its
customers,  as well as other development projects, the Company capitalized costs
related  to  certain   product   enhancements   and   application   development.
Specifically,  all software development costs are charged to expense as incurred
until   technological   feasibility  has  been   established  for  the  product.
Thereafter,   additional   costs  incurred  for  development  are   capitalized.
Capitalization  ceases when the  product is  available  for  general  release to
customers.   Amortization  of  software  development  costs  is  provided  on  a
product-by-product  basis over the economic life, not to exceed three years,  of
the product using the straight-line method. Amortization of capitalized software
development costs commences with the products' general release to customers. The
Company has entered  into several  contracts  with  wireless  telecommunications
carriers  which will need to  generate  revenues  for the Company to support the
carrying amount of capitalized  software development costs. The determination of
estimated  useful  economic  lives and whether or not these  assets are impaired
involves  significant  judgments.  Changes in strategy and/or market  conditions
could  significantly  impact these judgments and require adjustments to recorded
asset balances.


                                      -26-
<PAGE>

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
----------------------------------------------

Forward-looking  statements in this document and those made from time-to-time by
our  employees  are  made  under  the  safe  harbor  provisions  of the  Private
Securities Litigation Reform Act of 1995.  Forward-looking statements concerning
future plans or results are necessarily  only estimates and actual results could
differ  materially  from  expectations.  Certain  factors  that  could  cause or
contribute  to such  differences  include,  but are not  limited  to,  potential
fluctuations in quarterly results, the size and timing of awards and performance
on contracts,  dependence on large  contracts and a limited number of customers,
dependence on wireless and/or  internet  networks of  third-parties  for certain
products and services, lengthy sales and implementation cycles, availability and
cost of key  components,  market  acceptance  of new or  enhanced  products  and
services,   proprietary   technology   and  changing   technology,   competitive
conditions, system performance,  management of growth, the risk that our current
and future  products and services may contain errors or be affected by technical
problems that would be difficult and costly to detect and correct, dependence on
key personnel and general  economic and political  conditions  and other factors
affecting spending by customers, and other risks described in this Annual Report
on  Form  10-KSB  and  our  other  filings  with  the  Securities  and  Exchange
Commission.


                                      -27-
<PAGE>



ITEM 7.     FINANCIAL STATEMENTS
------


                                                                        PAGE
                                                                        ----

Report of Independent Auditors                                           29

Consolidated  Balance  Sheets as of  December  31,
    2002, 2001 and 2000                                                  30

Consolidated  Statements  of  Operations  for  the
    years ended  December  31, 2002 and 2001,  the six
    months  ended  December  31, 2000 and for the year
    ended June 30, 2000                                                  32

Consolidated  Statement  of  Stockholders'  Equity
    (Deficiency) for the years ended December 31, 2002
    and 2001,  the six months ended  December 31, 2000
    and for the year ended June 30, 2000                                 34

Consolidated  Statements  of  Cash  Flows  for the
    years ended  December  31, 2002 and 2001,  for the
    six months  ended  December  31,  2000 and for the
    year ended June 30, 2000                                             37

Notes to Consolidated Financial Statements                               38


                                      -28-
<PAGE>


                         REPORT OF INDEPENDENT AUDITORS

Stockholders and Board of Directors
SmartServ Online, Inc.

We have  audited  the  accompanying  consolidated  balance  sheets of  SmartServ
Online,  Inc.  as  of  December  31,  2002,  2001  and  2000,  and  the  related
consolidated  statements of operations,  stockholders' equity (deficiency),  and
cash flows for the years ended  December 31, 2002 and 2001, the six months ended
December 31, 2000, and the year ended June 30, 2000. 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 auditing standards generally accepted
in the United States. 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
SmartServ Online, Inc. at December 31, 2002, 2001 and 2000, and the consolidated
results of its  operations  and its cash flows for the years ended  December 31,
2002 and 2001,  the six months ended  December 31, 2000, and the year ended June
30, 2000, in conformity with  accounting  principles  generally  accepted in the
United States.

The accompanying  consolidated  financial statements have been prepared assuming
that  SmartServ  Online,  Inc. will continue as a going  concern.  As more fully
described  in Note 1, the  Company  has earned  limited  revenues  and  incurred
recurring  operating losses which raise  substantial  doubt about its ability to
continue  as a going  concern.  The  financial  statements  do not  include  any
adjustments  to reflect the possible  future effects on the  recoverability  and
classification  of assets or the amounts and  classification of liabilities that
may result from the outcome of this uncertainty.

/S/ ERNST & YOUNG LLP

New York, New York
April 23, 2003


                       -29-
<PAGE>


                             SMARTSERV ONLINE, INC.

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                                           DECEMBER 31
                                                                   ------------------------------------------------------------
                                                                         2002                  2001                 2000
                                                                   ------------------    -----------------    -----------------
<S>                                                                 <C>                   <C>                     <C>
ASSETS
Current assets
    Cash and cash equivalents                                       $       154,759       $    6,532,323          $19,172,118
    Accounts receivable                                                      55,907               40,798              149,016
    Accrued interest receivable                                              50,658                   --                   --
    Prepaid compensation                                                    117,500                   --                   --
    Prepaid expenses                                                        164,258              531,028              294,809
                                                                   ------------------    -----------------    -----------------
Total current assets                                                        543,082            7,104,149           19,615,943

Property and equipment, net                                               1,573,978            3,408,776            2,658,808

Other assets

   Capitalized software  development
     costs, net of accumulated  amortization
     of $208,681, $268,619 and $804,345 at
     December 31, 2002, 2001 and 2000.                                      888,467              973,594            1,416,751
    Security deposits                                                       238,690              474,545              200,374
    Note receivable from officer, net of an allowance for
     uncollectibility of $664,640 at December 31, 2002                          --              500,000                   --
   Prepaid compensation                                                     107,708                   --              150,000
                                                                   ------------------    -----------------    -----------------
                                                                          1,234,865            1,948,139            1,767,125
                                                                   ------------------    -----------------    -----------------

Total Assets                                                        $     3,351,925       $   12,461,064          $24,041,876
                                                                   ==================    =================    =================
</TABLE>

See accompanying notes.


                       -30-
<PAGE>


                             SMARTSERV ONLINE, INC.

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                                         DECEMBER 31

                                                                 ------------------------------------------------------------
                                                                       2002                  2001                 2000
                                                                 ------------------    -----------------    -----------------
<S>                                                               <C>                   <C>                               <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities

   Accounts payable                                               $     1,307,342       $    1,329,105           $1,880,399
   Accrued liabilities                                                    476,346              533,558            1,357,270
   Accrued salaries                                                       295,437                   --                   --
   Note payable                                                           500,000                   --                   --
                                                                 ------------------    -----------------    -----------------
Total current liabilities                                               2,579,125            1,862,663            3,237,669

Deferred revenues                                                         193,294                   --            2,576,981
Deferred lease costs                                                      242,300              161,576                   --
Accounts payable - noncurrent                                             163,907                   --                   --

Note payable                                                                   --            6,723,156            1,446,256

Commitments and Contingencies - Note 11

STOCKHOLDERS' EQUITY
Preferred stock - $0.01 par value
   Authorized - 1,000,000 shares
   Issued and outstanding - None                                               --                   --                   --
Common Stock - $0.01 par value
   Authorized - 40,000,000 shares
   Issued and outstanding - 11,436,240 shares at 2002,
     6,263,783 shares at 2001, 5,973,140 shares at 2000                   114,362               62,638               59,731
Additional paid-in capital                                             73,527,939           69,680,059           69,116,627
Notes receivable from officers                                           (609,996)            (666,841)            (666,841)
Unearned compensation                                                          --             (540,354)          (1,726,574)
Accumulated deficit                                                   (72,859,006)         (64,821,833)         (50,001,973)
                                                                 ------------------    -----------------    -----------------
Total stockholders' equity                                                173,299            3,713,669           16,780,970
                                                                 ------------------    -----------------    -----------------

Total Liabilities and Stockholders' Equity                        $     3,351,925       $   12,461,064          $24,041,876
                                                                 ==================    =================    =================
</TABLE>

See accompanying notes.


                       -31-
<PAGE>


                                               SMARTSERV ONLINE, INC.

                                        CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

                                                                                       SIX MONTHS ENDED       YEAR ENDED
                                                      YEAR ENDED DECEMBER 31              DECEMBER 31          JUNE 30
                                              ---------------------------------------  ------------------  -----------------
                                                     2002                2001                2000                2000
                                              -------------------  ------------------  ------------------  -----------------

<S>                                            <C>                 <C>                 <C>                 <C>
Revenues                                       $       195,817     $     3,297,806     $     2,232,476         $ 3,696,133
                                              -------------------  ------------------  ------------------  ------------------

Costs and expenses
   Cost of services                                 (5,620,994)         (6,998,425)         (3,278,025)         (1,337,090)
   Sales and marketing expenses                     (3,003,834)         (4,838,034)         (2,077,002)           (940,914)
   General and administrative expenses              (4,423,642)         (4,901,090)         (2,673,193)         (3,057,491)
   Provision for losses on loans to officer           (664,640)                 --                  --                  --
   Stock-based compensation                             80,295          (1,260,125)          8,164,779         (30,271,024)
                                              -------------------  ------------------  ------------------  ------------------

Total costs and expenses                           (13,632,815)        (17,997,674)            136,559         (35,606,519)
                                              -------------------  ------------------  ------------------  ------------------

Income (loss) from operations                      (13,436,998)        (14,699,868)          2,369,035         (31,910,386)
                                              -------------------  ------------------  ------------------  ------------------

Other income (expense):
     Interest income                                   266,118             512,138             621,416             241,402
     Interest expense                                 (525,165)           (449,379)             (2,860)             (2,275)
     Gain from extinguishment of debt                5,679,261                  --                  --                  --
     Debt origination and other
     financing costs                                        --            (150,000)            (50,000)            677,700
     Foreign exchange loss                             (20,389)            (32,751)                 --                  --
                                              -------------------  ------------------  ------------------  ------------------
                                                     5,399,825            (119,992)            568,556             916,827
                                              -------------------  ------------------  ------------------  ------------------
Net income (loss)                              $    (8,037,173)    $   (14,819,860)    $     2,937,591     $   (30,993,559)
                                              ===================  ==================  ==================  ==================
Basic earnings (loss) per share                $         (1.00)    $          (2.52)   $          0.54     $         (11.42)
                                              ===================  ==================  ==================  ==================
Diluted earnings (loss) per share              $         (1.00)    $          (2.52)   $          0.34     $         (11.42)
                                              ===================  ==================  ==================  ==================
Weighted average shares outstanding - basic          8,020,038            5,891,244          5,433,577           2,712,931
                                              ===================  ==================  ==================  ==================
Weighted average shares outstanding - diluted        8,020,038            5,891,244          8,697,917           2,712,931
                                              ===================  ==================  ==================  ==================
</TABLE>


                       -32-
<PAGE>


The  following  table   illustrates  the  amount  of  stock-based   compensation
(charges)/credits  that  would  have  been  recorded  in the  categories  of the
statement of operations had stock-based  compensation not been separately stated
therein:

<TABLE>
<CAPTION>


                                                                                       SIX MONTHS ENDED        YEAR ENDED
                                                      YEAR ENDED DECEMBER 31              DECEMBER 31           JUNE 30
                                             ----------------------------------------  ------------------  ------------------
                                                    2002                  2001               2000               2000
                                             --------------------  ------------------  ------------------  ------------------
<S>                                          <C>                   <C>                   <C>               <C>
Costs of services                            $        184,726      $       (79,272)      $   2,231,811     $     (2,749,997)

Sales and marketing                                   (50,542)               9,670             722,964             (187,712)

General and administrative                            (53,889)          (1,190,523)          5,210,004          (27,333,315)
                                             --------------------  ------------------  ------------------  ------------------
                                             $         80,295      $    (1,260,125)      $   8,164,779     $    (30,271,024)
                                             ====================  ==================  ==================  ==================
</TABLE>

See accompanying notes.


                       -33-
<PAGE>


                             SMARTSERV ONLINE, INC.

           CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
                                  (Continued)

<TABLE>
<CAPTION>

                                                                             NOTES
                                        COMMON STOCK                       RECEIVABLE     ADDITIONAL
                                                   PAR      COMMON STOCK      FROM         PAID-IN        UNEARNED      ACCUMULATED
                                     SHARES       VALUE      SUBSCRIBED     OFFICERS       CAPITAL      COMPENSATION      DEFICIT
                                   -----------------------  ------------- -------------  -------------  -------------- ------------
<S>                                <C>         <C>            <C>             <C>             <C>             <C>             <C>
Balances at June 30, 1999          1,199,787   $ 11,998   $ 1,812,554   $(1,812,554)   $ 20,679,611    $ (3,452,904)   $(21,946,005)

Issuance of Common Stock in
   settlement of obligations
   to a Prepaid Warrant
   holder                            180,000      1,800            --            --         266,895              --              --

Issuance of Common Stock
   upon exercise of employee
   stock options                      47,808        478            --            --          80,290              --              --

Issuance of warrants to
   purchase 334,000 shares
   of Common Stock for
   various consulting
   services                               --         --            --            --         137,300         (77,400)             --

Conversion of 1,357 Prepaid
   Common Stock Purchase
   Warrants into Common Stock        810,785      8,107            --            --          (8,107)             --              --

Issuance of Common Stock in
   connection with Officers'
   Restricted Stock Purchase
   and Employment Agreements       1,103,137     11,031    (1,812,554)    1,145,713       3,997,821              --              --

Issuance of Common Stock
   upon exercise of warrants
   to purchase Common Stock        1,548,842     15,489            --            --       3,465,006              --              --

Amortization of unearned
   compensation                           --         --            --            --              --       1,220,020              --

Issuance of Common Stock and
   warrants to purchase 18,640
   shares of Common Stock
   in connection with private
   placements, net
   of direct costs of
   $1,073,900                        686,535      6,865            --            --      21,414,438              --              --

Change in market value of
  employee stock options and
  stock subscriptions                     --         --            --            --      25,809,604              --              --

Net loss for the year                     --         --            --            --              --              --     (30,993,559)
                                ------------   --------   -----------    ----------    ------------    ------------    ------------

Balances at June 30, 2000          5,576,894   $ 55,768   $        --    $ (666,841)   $ 75,842,858    $ (2,310,284)   $(52,939,564)
                                ------------   --------   -----------    ----------    ------------    ------------    ------------

See accompanying notes.


                       -34-
<PAGE>

                             SMARTSERV ONLINE, INC.

           CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
                                   (Continued)

                                                                            NOTES
                                        COMMON STOCK                      RECEIVABLE    ADDITIONAL
                                                   PAR     COMMON STOCK      FROM        PAID-IN       UNEARNED      ACCUMULATED
                                     SHARES       VALUE     SUBSCRIBED     OFFICERS      CAPITAL     COMPENSATION      DEFICIT
                                     --------------------- ------------- ------------- ------------- -------------- --------------

  Balances at June 30, 2000          5,576,894   $   55,768   $  --   $   (666,841)   $ 75,842,858    $ (2,310,284)  $(52,939,564)

  Amortization of unearned
     compensation                           --           --      --             --              --         643,710              --

  Issuance of Common Stock
     upon exercise of warrants
     to purchase Common Stock          337,946        3,380      --             --       1,984,414              --              --

  Issuance of warrants to
     purchase 50,000 shares of
     Common Stock for                       --           --      --             --          60,000         (60,000)             --
     consulting services

  Change in market value of
    employee stock options                  --           --      --             --      (8,808,489)             --              --

  Issuance of Common Stock
     upon exercise of employee
     stock options                      36,871          369      --             --          38,058              --              --

  Conversion of 30 Prepaid
     Common Stock Purchase
     Warrants into Common Stock         21,429          214      --             --            (214)             --              --

  Net income for the period                 --           --      --             --              --              --       2,937,591
                                  ------------   ----------   -----   ------------    ------------    ------------    ------------

  Balances at December 31, 2000      5,973,140       59,731      --       (666,841)     69,116,627      (1,726,574)    (50,001,973)

  Issuance of Common Stock
    upon exercise of employee
    stock options                       65,142          651      --             --          66,783              --              --

  Conversion of 151 Prepaid
    Common Stock Purchase
    Warrants into Common Stock         107,858        1,079      --             --          (1,079)             --              --

  Issuance of warrants to
    purchase Common Stock as
    compensation for services               --           --      --             --          16,500              --              --

  Issuance of Common Stock
    upon exercise of warrants          117,643        1,177      --             --         423,823              --              --

  Amortization of unearned
     compensation over the
     terms of consulting                    --           --      --             --              --       1,186,220              --
     agreement

  Change in market value of
    employee stock options                  --           --      --             --          57,405              --              --

  Net loss for the year                     --           --      --             --              --              --     (14,819,860)
                                  ------------   ----------   -----   ------------    ------------    ------------    ------------
  Balances at December 31, 2001      6,263,783   $   62,638   $  --   $   (666,841)   $ 69,680,059    $   (540,354)  $ (64,821,833)
                                  ------------   ----------   -----   ------------    ------------    ------------    ------------

See accompanying notes.


                       -35-
<PAGE>

                             SMARTSERV ONLINE, INC.

           CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
                                   (Continued)

                                                                             NOTES
                                        COMMON STOCK                       RECEIVABLE     ADDITIONAL
                                                   PAR      COMMON STOCK      FROM         PAID-IN        UNEARNED      ACCUMULATED
                                     SHARES       VALUE      SUBSCRIBED     OFFICERS       CAPITAL      COMPENSATION      DEFICIT
                                   -----------------------  ------------- -------------  -------------  -------------- ------------

  Balances at December 31, 2001      6,263,783   $     62,638   $ --   $   (666,841)   $ 69,680,059    $   (540,354)   $(64,821,833)

  Issuance of common stock
    upon exercise of employee
    stock options                       17,000            170     --             --          15,652              --              --

  Conversion of 39 prepaid
    common stock purchase
    warrants into common stock          27,857            278     --             --            (278)             --              --

  Issuance of common stock
    through private placements
    of securities                    4,669,923         46,699     --             --       4,018,365              --              --

  Issuance of common stock
     upon exercise of warrants         204,853          2,049     --             --         174,110              --              --

  Amortization of unearned
     compensation over the
     terms of consulting
     agreements                             --             --     --             --              --         540,354              --

  Warrants issued to
    consultants as
    compensation for services               --             --     --             --         282,250              --              --

  Issuance of common stock
    pursuant to the
    antidilution provisions of
    the May 2000 stock
    purchase agreement                 252,824          2,528     --             --          (2,528)             --              --

  Warrants issued as
    compensation to a former
    employee                                --             --     --             --           1,500              --              --

  Warrants to purchase common
    stock issued as a
    condition of debt
    extinguishment                          --             --     --             --          38,000              --              --

  Change in market value of
    employee stock options                  --             --     --             --        (679,191)             --              --

  Repayment of note receivable
    from officer                            --             --     --         56,845              --              --              --

  Net loss for the year                     --             --     --             --              --              --      (8,037,173)
                                  ------------   ------------   ----   ------------    ------------    ------------    ------------

  Balances at December 31, 2002     11,436,240   $    114,362   $ --   $   (609,996)   $ 73,527,939             $--    $(72,859,006)
                                  ============   ============   ====   ============    ============    ============    ============
</TABLE>


See accompanying notes.


                       -36-
<PAGE>

                             SMARTSERV ONLINE, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                                         SIX MONTHS
                                                                                            ENDED        YEAR ENDED
                                                            YEAR ENDED DECEMBER 31       DECEMBER 31,     JUNE 30,
                                                            2002               2001         2000            2000
                                                            ----               ----         ----            ----
<S>                                                    <C>             <C>             <C>             <C>
OPERATING ACTIVITIES
    Net income (loss)                                  $ (8,037,173)   $(14,819,860)   $  2,937,591    $(30,993,559)
    Adjustments  to  reconcile  net income
      (loss) to net cash used for operating
      activities:
        Gain from extinguishment of debt                 (5,679,261)             --              --              --
        Provision for losses on loans to officer            664,640              --              --              --
        Depreciation and amortization                     1,944,515       2,429,486         703,541         560,472
        Provision for losses on receivables                   2,228              --          24,133              --
        Noncash debt origination and other
    financing costs                                              --         150,000          50,000        (717,670)
        Noncash compensation costs                         (677,690)         57,405      (8,808,489)     28,991,104
        Noncash consulting services                         597,396       1,202,720         643,710       1,279,920
        Amortization of unearned revenues                   (16,706)     (2,576,981)     (1,564,598)     (1,656,632)
        Changes in operating assets and liabilities:
           Accounts receivable                              (17,337)        108,218          63,349         111,780
           Accrued interest receivable                     (215,298)             --              --              --
           Prepaid expenses                                 366,770        (236,219)        (80,853)       (163,806)
           Accounts payable and accrued liabilities         783,169       1,452,653       1,220,564       1,057,632
           Deferred revenues                                210,000              --              --              --
           Security deposits                                235,855        (274,171)       (127,000)          1,460
                                                       ------------    ------------    ------------    ------------

    Net cash used for operating activities               (9,838,892)    (12,506,749)     (4,938,052)     (1,529,299)
                                                       ------------    ------------    ------------    ------------

    INVESTING ACTIVITIES

    Capitalization of software development costs           (185,895)       (429,487)       (333,648)     (1,122,003)
    Purchase of equipment                                  (166,666)       (558,366)     (1,398,748)       (419,335)
    Note receivable from officer                                 --        (500,000)             --              --
                                                       ------------    ------------    ------------    ------------
    Net cash used for investing activities                 (352,561)     (1,487,853)     (1,732,396)     (1,541,338)
                                                       ------------    ------------    ------------    ------------

  FINANCING ACTIVITIES

  Proceeds from the issuance of warrants                         --              --              --          24,746
  Proceeds from the issuance of common stock              4,836,392         492,434       2,026,221      26,031,723
  Proceeds from the issuance of common stock to
  officers                                                       --              --              --           9,012
  Proceeds from the issuance of notes                            --         862,373              --              --
  Repayment of note payable                                (500,000)             --              --              --
  Repayment of capital lease obligation                          --              --              --         (70,147)
  Repayment of note receivable from officer                  56,845              --              --              --
  Costs of issuing securities                              (579,348)             --        (200,000)     (1,073,903)
                                                       ------------    ------------    ------------    ------------
  Net cash provided by financing activities               3,813,889       1,354,807       1,826,221      24,921,431
                                                       ------------    ------------    ------------    ------------

  Increase (decrease) in cash and cash equivalents       (6,377,564)    (12,639,795)     (4,844,227)     21,850,794
  Cash and cash equivalents - beginning of period         6,532,323      19,172,118      24,016,345       2,165,551
                                                       ------------    ------------    ------------    ------------
  Cash and cash equivalents - end of period            $    154,759    $  6,532,323    $ 19,172,118    $ 24,016,345
                                                       ============    ============    ============    ============
</TABLE>

See accompanying notes.


                       -37-
<PAGE>

                             SMARTSERV ONLINE, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.      NATURE OF BUSINESS

SmartServ Online, Inc.  ("SmartServ" or the "Company")  commenced  operations on
August 20, 1993,  and had its initial  public  offering on March 21,  1996.  The
Company offers  wireless  applications,  development  and hosting  services that
allow  wireless  carriers,  content  providers and financial  services  firms to
deliver  content to their work forces and  customers.  SmartServ's  products can
deliver  proprietary  information,  as well as delayed and  real-time  financial
market data, business and financial news, national and local weather reports and
other business and entertainment information in a user-friendly manner.

The Company's mobile data solutions are designed to generate additional revenue,
increase operating efficiency, and extend brand awareness for wireless carriers,
enterprises and content providers and are delivered via J2ME, BREW, WAP and SMS,
as well as RIM Blackberry and Pocket PC devices.

SmartServ has established customer and distribution relationships with a growing
network of strategic partners and wireless carriers, including Verizon Wireless,
AT&T Wireless, Nextel, ALLTEL Wireless, U.S. Cellular, QUALCOMM and Motorola, as
well as  content  providers,  including  BusinessWeek  Online,  Forbes.com,  S&P
Comstock and The Wall Street Journal Online (Dow Jones).

The  economic  downturn  in  general,  and its impact on the  telecommunications
industry in  particular,  have caused  telecommunications  service  providers to
reduce   capital   spending,   personnel  and  debt,  as  well  as  new  service
introductions.  This has  resulted  in delays  in the  build-out  of high  speed
carrier data networks and availability of data-enabled wireless devices, causing
the  market  for  SmartServ's  financial  data and  transaction  services  to be
lackluster.  In addition,  many  financial  services  firms have  curtailed  new
product  development to focus on data security and recovery.  Consequently,  the
potential demand for the Company's  products and services has been significantly
delayed.  Such  delays  have  had a very  detrimental  effect  on the  Company's
operations  and have  resulted  in the  Company's  inability  to  implement  its
business plan and related marketing strategies.  Consequently,  in May 2002, the
Company commenced an effort to realign its  infrastructure  and related overhead
to  correlate  with  reductions  in projected  revenue.  As part of this effort,
management closed the Company's UK and Hong Kong sales offices and downsized its
domestic  operations  through staff  reductions to a level sufficient to support
the Company's projected operations through the remainder of 2002. In March 2003,
the  Company  again  reduced  its cost  structure  through  the  termination  of
additional  personnel.  Personnel headcount has been reduced from 66 in May 2002
to the current  level of 35. These  efforts have reduced the  Company's  average
monthly  operating  expenses from  approximately  $1,090,000 to $712,000 through
February 2003 to approximately $550,000 commencing March 2003, excluding noncash
stock compensation and depreciation and amortization. As a result of the factors
identified  above,  the  Company is in need of  additional  capital to enable it
continue as a going  concern.  The following  chart  provides an analysis of the
Company's  capital  requirements  for the year ending December 31, 2003 based on
projected revenues of $6,900,000:

                             % OF             CAPITAL
                         REVENUE GOAL         REQUIRED
                         ------------- -----------------------
                             100           $    2,750,000
                              50                4,000,000
                               0                5,300,000

However,  no  assurance  can be given  that the  Company  will be able  meet its
revenue  projections,  maintain its cost structure as presently  configured,  or
raise additional capital on satisfactory  terms. Should the Company be unable to
raise additional debt or equity financing, it will be forced to seek a merger or
cease operations.

The Company's financial  statements have been prepared on a going concern basis,
which  contemplates  the realization of assets and the settlement of liabilities
and  commitments  in the normal course of business.  The Company has,  since its
inception,  earned limited revenues and incurred substantial recurring operating
losses,  including net losses of $8,037,173 and  $14,819,860 for the years ended
December  31, 2002 and 2001,  respectively,  and net losses of  $30,993,559  and
$7,124,126   for  the  years  ended  June  30,  2000  and  1999,   respectively.
Additionally, it had an accumulated deficit of $72,859,006 at December 31, 2002.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The financial

                                      -38-
<PAGE>

statements do not include any adjustments to reflect the possible future effects
on  the   recoverability  and  classification  of  assets  or  the  amounts  and
classification  of  liabilities  that  may  result  from  the  outcome  of these
uncertainties.

SmartServ's  plan of operation  to eliminate  the  uncertainty  surrounding  its
ability to continue as a going concern focuses on licensing its applications and
related services to wireless carriers and financial services firms. For wireless
carriers,  the Company  delivers  data and  branded  content  that can  increase
wireless data revenue and customer retention. For content providers, the Company
provides an added source of revenue by  distributing  their content and brand to
the wireless users.  For financial  services firms, the Company offers solutions
that can  increase  productivity  and  customer  retention  through  the  mobile
delivery of proprietary  data, as well as market data and other useful  content.
Management  believes that SmartServ's primary source of revenues will be derived
from revenue-share  licensing  contracts with its technology  partners,  content
providers and wireless carrier and financial services customers.

As an example,  SmartServ has launched  several products on the Verizon Wireless
network.  The  Company's  financial  content  products  have  been  launched  on
Verizon's BREW (Binary Runtime  Environment for Wireless) network under both the
Forbes.com  and Wall Street  Journal  Online brand  names,  while its SMS (Short
Message  Service)  financial alert product has been launched on Verizon's V-text
portal.  Additionally,  the Company has  launched its  AreaWeather  and AstroCom
Horoscope lifestyle products on Verizon's BREW network.  Similarly,  the Company
has  launched  its  Forbes.com  branded  application  on AT&T  Wireless'  m-Mode
network.  Salomon Smith Barney,  in conjunction  with SmartServ,  has launched a
wireless  version of its GEO (Global  Equities  Online)  product.  GEO  combines
Salomon's  proprietary  data,  such as  morning  call  notes,  with  SmartServ's
financial  data  products  to  form a fully  integrated  financial  tool.  While
management  believes  that these  relationships  are  important to the Company's
success,  no assurance can be given that these  customers  will be successful in
their marketing efforts or that the Company's products and services will be well
received in the marketplace.

2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION
---------------------
The  accompanying  consolidated  financial  statements  have  been  prepared  in
conformity with accounting principles generally accepted in the United States.

In October 2000, the Company  announced the change of its year end from a fiscal
year ending on June 30th to a calendar  year ending on December 31st in order to
conform to standard industry practice.  This change in fiscal year end gave rise
to the six month transition  period ended December 31, 2000. The new fiscal year
commenced on January 1, 2001.

PRINCIPLES OF CONSOLIDATION
---------------------------
The consolidated  financial  statements  include the accounts of the Company and
its  subsidiaries,  all of  which  are  wholly-owned.  Significant  intercompany
accounts and transactions have been eliminated in consolidation.

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

REVENUE RECOGNITION
-------------------
The Company  recognizes  revenue  from the use of its  products  and services in
accordance with American  Institute of Certified Public  Accountants'  ("AICPA")
Statement of Position ("SOP") 97-2,  "Software Revenue  Recognition",  SOP 98-9,
"Modification  of SOP  97-2,  Software  Recognition,  With  Respect  to  Certain
Transactions",   and  the  SEC  Staff  Accounting   Bulletin  No.101,   "Revenue
Recognition in Financial Statements".  Specifically,  there must be (1) evidence
of an  arrangement,  (2) delivery of our products  and  services,  (3) fixed and
determinable fees and (4) probable  collectibility  of such fees.  Revenues from
multi-element  revenue  agreements  are  recognized  based  on  vendor  specific
objective  evidence  of  individual  components  or,  if  the  elements  in  the
arrangement cannot be separated, as has been the situtation to date,  recognized
as one element ratably over the term of the agreement.


                                      -39-
<PAGE>

Subscription Revenue
--------------------
Subscription revenue consists of fixed and variable charges for the usage of the
Company's products and services provided through its relationships with wireless
telecommunications  carriers and a financial  services company.  Such revenue is
recognized as the services are provided on a monthly basis.

Development and Integration Revenue
-----------------------------------
Development   and   integration   fees  are  charged  for  the   development  of
private-labeled  applications for customers that incorporate  their  proprietary
data into SmartServ's  products and services.  Such fees are recognized  ratably
over the term of the agreement.

Service Revenue
---------------
Service revenue is derived from  consulting or by providing  other  professional
services  to  customers.  Revenue  from  the  performance  of such  services  is
recognized when the services are performed.  Losses,  if any, from  professional
services  contracts  are  recognized  at the time such  losses  are  identified.
Maintenance  and  support  fees  paid  in  advance  are  nonrefundable  and  are
recognized ratably over the term of the agreement, generally 12 months.

Hosting Services
----------------
Hosting service arrangements are based on a flat monthly fee or on the number of
users and may include a one-time setup fee. The one-time setup fee is recognized
over the term of the hosting  arrangement,  and the hosting  services revenue is
recognized monthly as earned on a fixed fee or variable rate basis.

Deferred  revenues,  resulting  from  customer  prepayments,  are  recognized as
services are provided  throughout  the term of the agreement with the respective
customer.  Deferred revenues resulting from the agreement with Data Transmission
Network  Corporation  ("DTN") were amortized over the anticipated future revenue
stream, a period of 42 months,  commencing June 1, 1999. The Company amended its
agreement with DTN such that,  effective September 1, 2000,  SmartServ performed
maintenance  and  enhancement   services  through  December  2000  and  provided
operational  support  through August 2001.  Therefore,  commencing  September 1,
2000,  deferred revenues were amortized to income on a straight-line  basis over
the period through August 2001.

EARNINGS PER SHARE
------------------
Basic  earnings per share is computed on the weighted  average  number of common
shares  outstanding;  however,  it does not  include  the  unvested  portion  of
restricted shares in accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share".  Diluted earnings per share reflects the
increase in the weighted  average  common shares  outstanding  that would result
from the assumed  exercise of  outstanding  stock options  calculated  using the
treasury stock method when dilutive.

CAPITALIZED SOFTWARE DEVELOPMENT COSTS
--------------------------------------
In  connection  with certain  contracts  entered into between  SmartServ and its
customers,  as well as other development  projects,  the Company has capitalized
costs related to certain product  enhancements  and  application  development in
accordance with SFAS No. 86,  "Accounting for the Costs of Computer  Software to
be Sold, Leased or Otherwise Marketed."  Specifically,  all software development
costs are charged to expense as incurred  until  technological  feasibility  has
been  established  for the product.  Thereafter,  additional  costs incurred for
development  are  capitalized.  The Company  ceased  capitalizing  such costs in
connection with its current product  offering during the quarter ended September
2002 when the  products  became  available  for  general  release to  customers.
Amortization  of  capitalized  software  development  costs  commences  with the
products'  general release to customers and is provided on a  product-by-product
basis over the economic  life,  not to exceed three years,  using the greater of
the straight-line or a flow of revenue method.

On an  ongoing  basis,  SmartServ  reviews  the  future  recoverability  of  its
capitalized software development costs for impairment whenever events or changes
in circumstances indicate that the carrying amounts may not be recoverable. When
such  events or  changes  in  circumstances  do  occur,  an  impairment  loss is
recognized if the undiscounted future cash flows expected to be generated by the
asset are less than its carrying value. The impairment loss reduces the asset to
its fair value.


                                      -40-
<PAGE>


FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The carrying amounts of our financial instruments  approximate fair value due to
their terms and maturities.

SUPPLEMENTAL CASH FLOW DATA
---------------------------
The Company  considers  all highly  liquid  investments  with a maturity date of
three months or less when purchased to be cash equivalents.

During the year ended December 31, 2001, the Company  satisfied an obligation to
Hewlett-Packard  Company  ("HP") for the purchase of fixed assets and consulting
services of $2,922,903 and $1,491,624, respectively, by issuing HP a note in the
amount of $4,414,527.  In December 2000, the Company  satisfied an obligation to
HP for the  purchase of fixed  assets and  consulting  services of $884,053  and
$562,203,  respectively, by issuing HP a note in the amount of $1,446,256. These
transactions  are  considered  non-cash  transactions  for the  purposes  of the
Statement of Cash Flows.

Interest, debt origination and other financing costs paid during the years ended
December  31,  2002 and 2001 were  $373,339  and  $261,750,  respectively.  Such
amounts paid during the six month  period  ended  December 31, 2000 and the year
ended June 30, 2000 were $202,860 and $2,275, respectively.

CONCENTRATION OF CREDIT RISK
----------------------------
Financial  instruments that potentially  subject  SmartServ to concentrations of
credit risk  consist  solely of accounts  receivable.  At December  31, 2002 and
2001,  accounts  receivable consist  principally of amounts due from a financial
services  company.  The Company  performs  periodic  credit  evaluations  of its
customers  and,  if  applicable,  provides  for credit  losses in the  financial
statements.

PROPERTY AND EQUIPMENT
----------------------
Property and  equipment  are stated at cost,  net of  accumulated  depreciation.
Equipment  purchased  under a capital  lease is recorded at the present value of
the future minimum lease payments at the date of  acquisition.  Depreciation  is
computed using the straight-line  method over estimated useful lives of three to
ten years.

On an ongoing basis, SmartServ reviews the future recoverability of its property
and  equipment  for  impairment  whenever  events or  changes  in  circumstances
indicate that the carrying  amounts may not be recoverable.  When such events or
changes in  circumstances  do occur,  an  impairment  loss is  recognized if the
undiscounted  future cash flows  expected to be  generated by the asset are less
than its  carrying  value.  The  impairment  loss  reduces the asset to its fair
value.

ADVERTISING COSTS
-----------------
Advertising costs are expensed as incurred and were  approximately  $280,000 and
$85,300 for the years ended December 31, 2002 and 2001, respectively. Such costs
were  approximately  $54,000 and $91,700 for the six month period ended December
31, 2000 and the fiscal year ended June 30, 2000, respectively.

STOCK BASED COMPENSATION
------------------------
Employee Stock Option Plans
---------------------------
The Company  maintains  several  stock option plans for  employees and directors
that  provide  for the  granting of stock  options for a fixed  number of common
shares with an exercise  price equal to the fair value of the shares at the date
of grant.  The Company  accounts for such grants in accordance  with  Accounting
Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to  Employees"
("APB No. 25").  Accordingly,  compensation  expense is recognized to the extent
that the fair value of the stock exceeds the exercise price of the option at the
measurement date. Certain options,  which have been repriced, are subject to the
variable plan  requirements  of APB No. 25, which requires the Company to record
compensation expense for changes in the fair value of its common stock.


                                      -41-
<PAGE>


Non-Employee Compensation
-------------------------
The  Company  has issued  warrants  to  purchase  common  stock to  non-employee
consultants  as  compensation  for  services  rendered  or to be rendered to the
Company. The warrants are recorded in accordance with the provisions of SFAS No.
123, Accounting for Stock-Based Compensation,  and are valued in accordance with
the Black-Scholes pricing methodology.

The Company  adopted the disclosure  provisions of SFAS No. 148,  Accounting for
Stock-Based Compensation - Transition and Disclosure, which amends SFAS No. 123.
SFAS No. 148 provides  alternative  methods of transition for a voluntary change
to  the  fair  value  based  method  of  accounting  for  stock-based   employee
compensation,  which was  originally  provided  under SFAS No. 123. SFAS No. 148
also improves the timeliness of  disclosures by requiring the  information to be
included  in interim as well as annual  financial  statements.  The  adoption of
these  disclosure  provisions had no impact on the Company's  2002  consolidated
results of operations, financial position or cash flows.

SFAS No. 123 requires companies to recognize  compensation  expense based on the
respective  fair  values of the  options  at the date of grant.  Companies  that
choose not to adopt such rules will  continue to apply the  existing  accounting
rules  contained  in APB No.  25, but are  required  to  disclose  the pro forma
effects on net income (loss) and earnings (loss) per share, as if the fair value
based method of accounting had been applied.

For purposes of pro forma  disclosures,  the estimated fair value of the options
is amortized to expense over the options' vesting period. As such, the pro forma
net earnings  (loss) and earnings  (loss) per share are not indicative of future
years.

SmartServ's pro forma information is as follows:

<TABLE>
<CAPTION>

                                                                                        SIX MONTHS ENDED
                                                        YEAR ENDED                        DECEMBER 31          YEAR ENDED
                                                       DECEMBER 31                                              JUNE 30,
                                         -----------------------------------------     ------------------- --------------------
                                                 2002                 2001                    2000                2000
                                         --------------------- -------------------     ------------------- --------------------
<S>                                           <C>               <C>                      <C>                 <C>
  Net income (loss) as reported               $   (8,037,173)   $   (14,819,860)         $      2,937,591    $(30,993,559)

  Employee stock-based
    compensation included in net
    income (loss)                                   (677,690)            57,405                (8,808,489)      7,123,744

  Employee stock-based
    compensation pursuant to
    SFAS 123                                      (4,278,214)        (4,561,992)               (4,295,222)     (1,379,888)
                                              --------------    ---------------          ----------------    ------------

  Proforma net income (loss)                  $  (12,993,077)   $   (19,324,447)         $    (10,166,120)   $(25,249,703)
                                              ==============    ===============          ================    ============

  Basic earnings (loss) per share             $        (1.00)   $         (2.52)         $           0.54    $     (11.42)
                                              ==============    ===============          ================    ============
  Diluted earnings (loss)
   per share                                  $        (1.00)   $        (2.52)          $           0.34    $     (11.42)
                                              ==============    ===============          ================    ============
  Proforma basic earnings (loss)
    per share                                 $        (1.62)   $         (3.28)         $          (1.87)   $      (9.31)
                                              ==============    ===============          ================    ============
  Proforma diluted earnings
    (loss) per share                          $        (1.62)   $         (3.28)         $          (1.87)   $      (9.31)
                                              ==============    ===============          ================    ============
</TABLE>

                                      -42-
<PAGE>

FOREIGN CURRENCY TRANSLATION
----------------------------
The financial  statements of the Company's foreign subsidiaries whose functional
currencies  are  other  than the U.S.  dollar,  have been  translated  into U.S.
dollars  in  accordance  with SFAS No. 52,  Foreign  Currency  Translation.  All
balance sheet accounts have been  translated  using the exchange rates in effect
at the balance sheet date.  Income statement  amounts have been translated using
the average rate for the year.  Gains and losses  resulting  from the changes in
exchange  rates  from year to year  have  been  reported  in  accumulated  other
comprehensive income.

RECLASSIFICATIONS
-----------------
Certain amounts reported in the financial statements for the year ended December
31, 2001, the six-month transition period ended December 31, 2000 and the fiscal
year  ended  June  30,  2000  have  been  reclassified  to  conform  to the 2002
presentation.

RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which provides a single accounting
model for measuring  impairment  of  long-lived  assets and the disposal of such
assets. The adoption of SFAS No. 144 had no impact on the Company's consolidated
results of operations, financial position or cash flows.

In April 2002,  the Financial  Accounting  Standards  Board issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and  Technical  Corrections".  The Company has early  adopted  SFAS No. 145.
Accordingly,  the Company's gain on  extinguishment of debt has been recorded in
"Other income" in the consolidated financial statements.

In July 2002,  the  Financial  Accounting  Standards  Board issued SFAS No. 146,
"Accounting for Costs  Associated with an Exit or Disposal  Activity".  SFAS No.
146 revises the  accounting  for exit and  disposal  activities  under  Emerging
Issues Task Force ("EITF") Issue No. 94-3,  "Liability  Recognition  for Certain
Employee  Termination  Benefits  and Other Costs to Exit an Activity  (Including
Certain Costs Incurred in a  Restructuring)",  by potentially  spreading out the
reporting  of  expenses  related to  restructuring  activities.  SFAS No. 146 is
effective prospectively for exit or disposal activities initiated after December
31, 2002.  The Company will adopt SFAS No. 146 on January 1, 2003,  as required,
and does not believe that the adoption of this new standard will have a material
effect on its  consolidated  results of operations,  financial  position or cash
flows.

3.      PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

                                                  DECEMBER 31
                                   --------------------------------------------
                                      2002            2001          2000
                                   -------------- ---------------   -----------
  Data processing equipment        $ 4,842,941     $5,279,709      3,468,044
  Office furniture and equipment       151,263        151,263        172,452
  Display equipment                     71,335         71,335         71,335
  Leasehold improvements                69,852         55,570         54,462
                                   -----------    -----------    -----------

                                     5,135,391      5,557,877      3,766,293

  Accumulated depreciation          (3,561,413)    (2,149,101)    (1,107,485)
                                   -----------    -----------    -----------
                                   $ 1,573,978     $3,408,776      2,658,808
                                   ===========    ===========    ===========


                                      -43-
<PAGE>

4.      NOTE RECEIVABLE FROM OFFICER

In December 2000, the Company's Board of Directors  authorized the issuance of a
line of credit to Sebastian Cassetta,  SmartServ's Chief Executive Officer,  for
an amount not to exceed  $500,000.  Such amount bears interest at the prime rate
and matures on March 20, 2004.  Pursuant to the terms of the note,  interest for
the period  January 2, 2001 to June 30, 2002 has been  accrued and is payable at
maturity.  Commencing  July 1, 2002 until  maturity,  interest  shall be payable
semi-annually in arrears on January 1st and July 1st.

The financial  statements at December 31, 2002 contain a valuation allowance for
a potential loss of $552,467,  relating to the  collectibility of Mr. Cassetta's
note and the interest accrued thereon through June 30, 2002.  Additionally,  the
financial  statements  contain a valuation  allowance  for a  potential  loss of
$112,173,  relating to interest earned by the Company pursuant to the restricted
stock purchase agreement between the Company and Mr. Cassetta.

5.      NOTE PAYABLE

In May 2000,  the  Company  entered  into a  Business  Alliance  Agreement  with
Hewlett-Packard  Company ("HP")  whereby the companies  agreed to jointly market
their  respective  products  and  services,  and to  work  on the  build-out  of
SmartServ's domestic and international  infrastructure.  In furtherance of these
objectives,  HP provided the Company with a line of credit of up to  $20,000,000
for the acquisition of approved  hardware,  software and services.  On September
10, 2002, the Company and HP amended the terms of the promissory note to provide
for the (i) reduction of SmartServ's aggregate outstanding principal and accrued
interest  amount of  $7,045,000  to  $1,000,000,  (ii) return of certain  unused
hardware by SmartServ, (iii) issuance by SmartServ of a warrant for the purchase
of 50,000  shares of common stock and (iv)  repayment of $500,000 of the amended
obligation  on  September  10,  2002.  The  remaining  $500,000  obligation  was
evidenced by a note,  bearing an interest rate of 11%,  secured by the Company's
assets  exclusive  of  its  internally  developed  software  products,  and  was
satisfied  through a  partial  repayment  in  February  2003 (See Note 15).  The
warrant  expires  on  September  9, 2005 and has an  exercise  price of  $1.166,
determined as 110% of the average  closing bid price of the common stock for the
five trading days prior to September  10, 2002.  In  connection  therewith,  the
Company recorded a charge to earnings of $38,000  representing the fair value of
the warrant as determined in accordance  with the  Black-Scholes  pricing model.
The  restructuring of the obligation  resulted in a net gain of $5,679,261 which
has been recorded as "Other income" in the consolidated financial statements.

6.      EQUITY TRANSACTIONS

In  December  1998,  the  Company's  Board of  Directors  approved  the terms of
restricted  stock purchase  agreements  for Sebastian E. Cassetta,  Chairman and
Chief  Executive  Officer,  and Mario F.  Rossi,  Executive  Vice  President  of
Technology.  In connection  with Mr.  Cassetta's  purchase of 618,239  shares of
restricted stock,  SmartServ received cash in the amount of $6,182 and a 5 year,
non-recourse  promissory note in the amount of $457,497.  In connection with Mr.
Rossi's purchase of 206,080 shares of restricted stock,  SmartServ received cash
in the amount of $2,061 and a 5 year, non-recourse promissory note in the amount
of $152,499. The notes are secured by the stock and bear interest at the rate of
7.50% per annum. The stock purchase  agreements  provide  SmartServ with certain
repurchase  options and provide Messrs.  Cassetta and Rossi with a put option in
the event of the termination of their employment. Through December 31, 1999, the
restricted  stock purchase  agreements were variable plan awards pursuant to APB
No. 25 and accordingly, SmartServ was required to recognize compensation expense
for the changes in the market value of its common  stock.  As a result  thereof,
the Company recorded a charge to compensation expense of $15,636,300, as well as
a  corresponding  increase to additional  paid-in  capital during the year ended
June 30, 2000. The restricted  stock purchase  agreements with Messrs.  Cassetta
and Rossi were amended to provide for certain recourse against them in the event
of their default on their obligations the Company.  Commencing  January 1, 2000,
the restricted  stock awards are no longer  variable plan awards pursuant to APB
No. 25.


                                      -44-
<PAGE>

The delisting of the Company's  common stock from the Nasdaq Small Cap Market in
May 1998 caused it to default on certain  terms and  conditions of the Company's
previously issued Prepaid Common Stock Purchase Warrants  ("Prepaid  Warrants").
Such default  obligated  SmartServ  to pay  financial  penalties,  as well as to
redeem the outstanding  Prepaid Warrants at a 43% premium.  The Company had been
unable to obtain appropriate  waivers from holders of $1,994,000 of such Prepaid
Warrants.  Accordingly, a charge was recorded in the results from operations for
the year ended June 30, 1999 for debt  origination  and other financing costs in
the amount of $986,365,  representing the potential  penalties due such holders.
During the year ended June 30,  2000,  the  Company  reversed  $717,000  of such
unpaid penalties upon the conversion by the holders of the Prepaid Warrants into
SmartServ common stock.

In October 1999, SmartServ entered into a restricted stock agreement with Robert
Pearl, the former Senior Vice President Business Development,  providing for the
sale to Mr. Pearl of 76,818 shares of common stock at a purchase  price of $0.75
per  share.  SmartServ  received  cash  in the  amount  of  $768  and a 5  year,
promissory  note in the amount of  $56,845.  The note was  secured by the common
stock, bore an interest rate of 7.50% and contained certain recourse  provisions
in connection  with the payment of such interest.  The stock purchase  agreement
provided SmartServ with certain repurchase options and provided Mr. Pearl with a
put option in the event of the  termination of his employment  without cause. In
August 2002, this loan was repaid.

In October 1999, SmartServ entered into an agreement for consulting services. As
consideration for such services, the Company granted this consultant warrants to
purchase 100,000 shares of common stock at an exercise price of $2.625 per share
and warrants to purchase  100,000 shares of common stock at $3.625 per share. In
January  2000,  in  consideration  of $125,000  and the  issuance of warrants to
purchase 8,000 shares of common stock at $18.375 per share, the Company extended
this agreement for the two-year period commencing October 24, 2000. The warrants
expire on October 24, 2004. A noncash charge of $62,400 was recorded in the year
ended June 30, 2000 for the fair value of the warrants to unearned  compensation
that was  amortized to income over the term of the  agreement.  In July 2000, we
issued  200,000 shares of our common stock to this  consultant  upon exercise of
warrants to purchase such shares. Proceeds from the exercise were $625,000.

In December  1999,  the Company issued 202,000 shares of common stock to Messrs.
Cassetta and Rossi in satisfaction of its bonus  obligations to them under their
employment contracts.  The Company has recorded a charge to compensation expense
of  $3,181,500  for the change in fair value of our common stock between the due
date of the obligation and the grant date of the common stock.

During the year ended June 30,  2000,  the Company  issued  warrants to purchase
126,000  shares  of  its  common  stock  to  various   marketing  and  technical
consultants as partial  compensation for services rendered and to be rendered to
SmartServ.  The warrants  have  exercise  prices of between $2.50 and $49.50 and
expire  through  April 30,  2003.  The  Company  recorded  $74,000  as  unearned
compensation which has been amortized to income over the terms of the consulting
agreements.

In January  2000,  the Company  completed  an offering of 333,000  shares of its
common stock to accredited investors.  Gross proceeds from the offering amounted
to  $4,995,000 or $15.00 per share of common  stock.  America  First  Associates
Corp. received a commission of $279,600,  an unaccountable  expense allowance of
$25,000 and  warrants to purchase  18,640  shares of common  stock at $15.00 per
share through January 18, 2005 as  compensation  for services as placement agent
for the offering.

During the year ended June 30,  2000,  the Company  issued  1,288,342  shares of
common stock to certain  other  investors at prices  ranging from $.60 to $24.00
per share upon exercise of warrants to purchase  such shares.  Proceeds from the
exercise of these warrants were $1,630,764.

During the year ended June 30,  2000,  holders of 1,357 of  SmartServ's  Prepaid
Warrants converted such warrants into 810,785 shares of common stock at exercise
prices ranging from $1.40 to $8.40 per share.


                                      -45-
<PAGE>

In May 2000,  the Company  completed an offering of 353,535 shares of its common
stock to accredited  investors.  Gross  proceeds  from the offering  amounted to
$17,500,000 or $49.50 per share of common stock. Chase Securities,  Inc., acting
as  placement  agent for the  offering,  received a  commission  of $700,000 and
reimbursement for $17,700 of expenses.

In August 2000,  the Company  issued  warrants to purchase  50,000 shares of its
common stock to a financial consultant as partial  consideration for services to
be rendered to  SmartServ.  The  warrants  have an exercise  price of $49.50 and
expire on April 30,  2003.  During the six months ended  December 31, 2000,  the
Company  recorded  a charge to  earnings  of $60,000  in  connection  with these
warrants.

During the six month period ended  December 31, 2000, the Company issued 337,946
shares of common stock to certain other  investors at prices  ranging from $2.63
to $14.64 per share upon  exercise  of warrants to  purchase  such  shares.  Net
proceeds from the exercise of these warrants were $1,997,200.

In December 2000, holders of 30 of the Company's Prepaid Warrants converted such
warrants  into 21,429  shares of common stock at an exercise  price of $1.40 per
share.

During the six month period ended  December 31, 2000,  the Company issued 36,871
shares of common stock to employees  pursuant to the exercise of employee  stock
options.  The options were  exercised at prices  ranging from $0.94 to $1.29 per
share. Proceeds from the exercise of these options were $38,427.

In April 2001,  the Company  issued a warrant to purchase an  aggregate of 2,000
shares of common stock to a member of the  Company's  Advisory  Board as partial
consideration  for  services  to be provided  to  SmartServ  as a member of such
Board.  The warrant is exercisable  after one year at an exercise price of $9.36
per share,  expires on April 15, 2005,  and has been  recorded in the  financial
statements based on the Black-Scholes pricing methodology.

During the year ended  December 31, 2001,  the Company  issued 117,643 shares of
common stock to various  financial  and marketing  consultants  upon exercise of
warrants to purchase such shares.  Proceeds from the exercise of these  warrants
were $425,000.

During the year ended  December 31, 2001,  the Company  issued  65,142 shares of
common stock to employees  pursuant to the exercise of employee  stock  options.
The options  were  exercised  at prices  ranging  from $0.94 to $1.29 per share.
Proceeds from the exercise of these options were $67,434.

During the year ended  December 31, 2001,  151 Prepaid  Warrants were  converted
into an  aggregate of 107,858  shares of  SmartServ  common stock at an exercise
price of $1.40 per share.

In June 2002,  SmartServ issued units consisting of 785,714 shares of its common
stock and warrants,  callable under certain  conditions,  for the purchase of an
aggregate of 1,428,571  shares of common stock at an exercise price of $1.40 per
share  through  the  expiration  date on June 5, 2007,  as well as  non-callable
warrants for the purchase of an  aggregate  of 196,429  shares of common  stock,
subject to antidilution adjustments upon the occurrence of certain events, at an
exercise  price  of $1.47  per  share  through  June 5,  2007 to two  accredited
investors at a purchase price of $1.40 per share. The callable warrants provided
that upon exercise the investors  would  receive  non-callable  warrants for the
purchase of an aggregate of 357,143  shares of common stock at an exercise price
of $1.47  per  share.  In August  2002,  pursuant  to the terms of the  callable
warrants,  the  Company  provided  the  investors  with a notice,  calling  such
warrants.  In September 2002, the callable warrants expired  unexercised.  Gross
proceeds from this transaction  amounted to $1,100,000.  First Albany Securities
Corporation, the placement agent, received a commission of $66,000 in connection
with this transaction.  Additionally,  the Company incurred costs and other fees
of $80,500 in connection with this transaction. Each of the investors received a
fee of $65,000 in connection  with the  performance of due diligence  related to
their  investment in the Company.  In September 2002,  SmartServ  issued 169,853
shares of common stock upon the exercise, by Bonanza Master Fund, Ltd., an


                                      -46-
<PAGE>

investor in the June 2002  financing,  of warrants to purchase such shares at an
exercise price, after  antidilution  adjustments,  of $0.85 per share.  Proceeds
from the issuance were  $144,375.  In December  2002,  the Company issued 35,000
shares of common stock to Vertical Ventures Investments, LLC, an investor in the
June 2002  financing,  upon the  exercise of warrants to purchase  such  shares.
Proceeds from the exercise of these warrants were $31,850.

In September 2002,  SmartServ issued units consisting of 3,884,209 shares of its
common  stock  and  warrants  to  purchase  1,942,109  shares  of  common  stock
exercisable  at $0.85  per share  through  September  8,  2007 to 22  accredited
investors  at a purchase  price of $0.9125 per unit.  Gross  proceeds  from this
transaction amounted to $3,544,346.  SmartServ paid fees consisting of $249,050,
an expense allowance of $25,000,  and issued warrants to purchase 438,046 shares
of common stock at an exercise  price of $0.85 per share,  expiring on September
8, 2007,  as  compensation  to certain  individuals  and entities  that acted as
finders.  Additionally,  the Company incurred costs and other fees of $28,800 in
connection with this transaction.

In December 2002, the Company entered into a consulting agreement with Steven B.
Rosner.  As  consideration  for such services,  the Company granted Mr. Rosner a
warrant to purchase 250,000 shares of common stock at an exercise price of $1.28
per share.  The warrants have been valued in accordance  with the  Black-Scholes
pricing   methodology,   recorded  in  the  financial   statements  as  deferred
compensation  and are being amortized as consulting costs over the two-year term
of the agreement.

During the year ended December 31, 2002, the Company issued warrants to purchase
267,000  shares  of  our  common  stock  to  certain   financial  and  marketing
consultants as partial  compensation for services rendered and to be rendered to
SmartServ. The warrants have exercise prices ranging from $1.28 to $5.44, expire
in April and December 2005, and have been recorded in the consolidated financial
statements  at  fair  market  value  as   determined  in  accordance   with  the
Black-Scholes pricing model.

At December 31, 2002,  the Company has  1,725,000  public  warrants  (SSOLW) and
300,000  warrants with terms  identical to the public warrants  outstanding.  In
February  2002,  the  Company's  Board of  Directors  modified the terms of, and
extended  such  warrants  which  were due to  expire on March  20,  2002.  These
warrants,  which  had an  exercise  formula  requiring  the  surrender  of 1.933
warrants and the payment of $7.731 for each share of common stock, were modified
to provide for the  surrender of 2.5 warrants and the payment of $10.50 for each
share of common stock. The modified warrants expired on March 20, 2003.

At December 31, 2002, there were 1,903,000 shares reserved for issuance upon the
exercise of options  granted to employees and 5,080,000  shares reserved for the
exercise of  warrants to purchase  common  stock  granted to  investors  in, and
consultants  to the  Company.  The range of exercise  prices of the  warrants to
purchase common stock are as follows:

                              EXERCISE PRICE RANGE        UNDERLYING SHARES
                           ---------------------------- ----------------------
                                 $0.60 to $2.50                  3,376,400
                                 $2.51 to $5.00                    803,500
                                   Above $5.00                     900,100
                                                             -----------------
                                                                 5,080,000
                                                             =================

The Company's  failure to timely file its Form 10-KSB has affected the following
registration  rights held by some of its shareholders  and warrant holders.  The
Company is working expeditiously to cure these deficiencies:

Obligations to Maintain Effective Registration Statements:
----------------------------------------------------------
Vertical  Ventures  Investments,  LLC holds a warrant to  purchase up to 134,853
shares of common stock that is subject to registration  rights. The Registration
Statement  covering the shares  underlying this warrant is no longer  effective.
The Company has until May 14, 2003 to cause the Registration  Statement to again
become  effective.  If the Company  fails to do so by May 14,  2003,  it will be
required to pay a fee of $8,250 for the first month of the  deficiency and a fee
of $16,500 for each month thereafter until the shares underlying the warrant are
registered.



                                      -47-
<PAGE>

Accredited investors in the Company's September 2002 equity placement hold up to
an aggregate of 3,701,943  shares of common stock and warrants to purchase up to
an aggregate of 1,499,723  shares of common stock,  all subject to  registration
rights requiring the Company to use its commercially  reasonable best efforts to
maintain the effectiveness of the Registration  Statement covering the shares of
common stock and the shares underlying the warrants.  The Registration Statement
is no longer effective.

Obligation to File a Registration Statement:
--------------------------------------------
Global  Capital  Funding  Group,  L.P.  holds warrants to purchase up to 220,000
shares of common stock and a convertible  note convertible into 1,136,364 shares
of common  stock.  The Company was  required  to file a  Registration  Statement
covering  all such shares on April 14,  2003.  The Company has not yet filed the
Registration Statement, and may be subject to a penalty fee equal to $20,000 for
each month that this  deficiency  remains  uncured.  The Company expects to cure
this deficiency prior to incurring a second month of penalty fees.

7.      STOCK-BASED COMPENSATION

In  connection  with the grant of  certain  stock  options,  warrants  and other
compensation arrangements, the Company has recorded charges to earnings that are
noncash  in nature.  Certain of these  stock  option  grants are  subject to the
variable  plan  requirements  of APB No. 25 that  require  the Company to record
compensation expense for changes in the fair value of its common stock.

As more fully  described  in Note 13 to the  financial  statements,  stock-based
compensation  for the years ended  December  31, 2002 and 2001,  and for the six
months ended December 31, 2000,  consisted primarily of the impact of changes in
the  market  value of the  Company's  common  stock on the value of  options  to
purchase common stock issued to employees and the amortization of deferred costs
associated  with the prior  issuance of warrants  to  purchase  common  stock to
various  consultants.  During the fiscal year ended June 30,  2000,  stock-based
compensation  consisted  primarily  of the  above,  as well as the  compensation
issues  related to the  issuance of  restricted  stock to Messrs.  Cassetta  and
Rossi, as more fully described in Note 6 to the financial statements.




                                      -48-
<PAGE>

8.      EARNINGS PER SHARE

The following  table sets forth the  computation  of basic and diluted  earnings
(loss) per share:

<TABLE>
<CAPTION>

                                                                                         SIX MONTHS
                                                                                            ENDED            YEAR ENDED
                                                   YEAR ENDED DECEMBER 31                DECEMBER 31          JUNE 30
                                           ----------------------------------------   ----------------   -----------------
                                                 2002                 2001                  2000               2000
                                           ------------------   -------------------   ----------------   -----------------
<S>                                        <C>                  <C>                   <C>                <C>
Numerator
   Net earnings (loss)                     $    (8,037,173)     $   (14,819,860)      $     2,937,591    $  (30,993,559)
                                           ==================   ===================   ================   =================

Denominator
   Denominator for basic earnings (loss)
   per share - weighted average shares
                                                 8,020,038            5,891,244             5,433,577         2,712,931

   Dilutive effect of warrants to
   purchase common stock                                --                   --             2,214,176                --

   Dilutive effect of employee stock
   options and restricted shares                        --                   --             1,050,164                --
                                           ------------------   -------------------   ----------------   -----------------

   Denominator for diluted earnings
   (loss) per share                              8,020,038            5,891,244             8,697,917         2,712,931
                                           ==================   ===================   ================   =================

Basic earnings (loss) per common share     $         (1.00)     $         (2.52)      $          0.54     $      (11.42)
                                           ==================   ===================   ================   =================

Diluted earnings (loss) per common share   $         (1.00)     $         (2.52)      $          0.34     $      (11.42)
                                           ==================   ===================   ================   =================
</TABLE>

Outstanding  employee  stock options and other warrants to purchase an aggregate
of  6,983,000,  4,400,000,  518,000  and  4,568,000  shares of  common  stock at
December 31, 2002, 2001, 2000 and June 30, 2000, respectively, were not included
in the  computation  of diluted  earnings per share  because  either the Company
reported a loss for the period or their  exercise  prices were  greater than the
average market price of the common stock and therefore would be antidilutive.



                                      -49-
<PAGE>

9.      INCOME TAXES

At December  31,  2002,  2001 and 2000,  SmartServ  has  deferred  tax assets as
follows:

<TABLE>
<CAPTION>

                                                                       DECEMBER 31

                                                -----------------------------------------------------------
                                                      2002                 2001                 2000
                                                -----------------     ----------------     ----------------
<S>                                             <C>                   <C>                   <C>
     Capitalized start-up costs                 $            --       $            --       $      198,000
     Net operating loss carryforwards                33,100,000            31,250,000           25,694,000
                                                -----------------     ----------------     ----------------
                                                $    33,100,000       $    31,250,000       $   25,892,000
                                                =================     ================     ================
</TABLE>

In accordance with SFAS No. 109,  "Accounting for Income Taxes," the Company has
established a valuation allowance to fully reserve the future income tax benefit
of these deferred tax assets due to uncertainty about their future  realization.
The valuation  allowances  were  $33,100,000,  $31,250,000  and  $25,892,000  at
December 31, 2002, 2001 and 2000, respectively.

At December 31,  2002,  the Company has net  operating  loss  carryforwards  for
Federal  income tax purposes of  approximately  $83,800,000  which expire in the
years 2009 through 2022. As a result of ownership changes,  pursuant to Internal
Revenue  Code  Section  382,  the  utilization  of net  operating  losses may be
limited.

10.     LEASES

SmartServ leases office space for its Stamford, Connecticut headquarters under a
noncancelable  lease.  The lease includes  escalation  clauses for items such as
real estate taxes, building operation and maintenance expenses,  and electricity
usage.

Rent  expense  amounted  to  approximately  $642,000,  $644,700,  $266,490,  and
$267,800 for the years ended  December  31, 2002 and 2001,  the six month period
ended December 31, 2000, and the year ended June 30, 2000, respectively.

Minimum future rental payments at December 31, 2002 are as follows:

YEAR ENDING DECEMBER 31
-----------------------

         2003                     475,500
         2004                     485,900
         2005                     496,300
         2006                     506,800
         2007                     517,200
         Thereafter             1,526,800
                            -----------------
                              $ 4,008,500
                            =================

11.     COMMITMENTS AND CONTINGENCIES

On or about June 4, 1999, Michael Fishman,  SmartServ's former Vice President of
Sales,  commenced  an action  against  the Company  and  certain  directors  and
officers,  in the  Connecticut  Superior  Court  for the  Judicial  District  of
Stamford/Norwalk  at Stamford  (Michael  Fishman v. SmartServ  Online,  Inc., et
al.). On


                                      -50-
<PAGE>

February  11,  2003,  the Company  received a favorable  trial  decision in this
matter.  This  decision,  entered  after  a  trial  in  the  Superior  Court  of
Connecticut, found no liability by SmartServ or the individual defendants on any
of Mr. Fishman's claims. Mr. Fishman's time to appeal has expired.

On or about February 29, 2000, Commonwealth  Associates,  L.P.  ("Commonwealth")
filed a  complaint  against  us in the  Supreme  Court of the State of New York,
County of New York. The complaint  alleged that in August of 1999,  Commonwealth
and  SmartServ   entered  into  an   engagement   letter  that  provided  for  a
nonrefundable  fee to Commonwealth of $15,000 payable in cash or common stock at
SmartServ's  option. The complaint alleged that SmartServ elected to pay the fee
in stock and, as a result,  Commonwealth sought 13,333 shares of common stock or
at least $1,770,000  together with interest and costs. In our defense, we denied
that we  elected  to pay in  stock.  On  March 4,  2003,  SmartServ  received  a
favorable decision in this matter after a trial held in the Supreme Court of the
State of New York. The decision holds that, consistent with SmartServ's defense,
SmartServ is required to pay  Commonwealth a retainer fee of only $13,439,  plus
interest and certain costs. Commonwealth's time to appeal has not yet expired.

While the Company intends to vigorously defend any appeal to the decision in the
Commonwealth  matter,  the  unfavorable  outcome of such an appeal  could have a
material  adverse effect on our financial  condition,  results of operations and
cash flows.

12.     SIGNIFICANT RELATIONSHIPS

During the year ended  December 31,  2002,  substantially  all of the  Company's
revenues were earned through its licensing agreement with Salomon Smith Barney.

In April 1998,  the Company  entered  into an agreement  with Data  Transmission
Network Corporation whereby Data Transmission Network Corporation  purchased the
exclusive right to market three of its Internet products:  SmartServ Pro, a real
time stock quote product;  TradeNet, an online trading vehicle for the customers
of small and medium sized brokerage companies,  and BrokerNet, an administrative
reporting package for brokers of small and medium sized brokerage companies.  In
June 1999,  SmartServ  and Data  Transmission  Network  Corporation  amended the
agreement  such that in  consideration  of the  receipt  of $5.175  million,  we
granted Data Transmission  Network  Corporation an exclusive perpetual worldwide
license to our Internet-based (i) SmartServ Pro, (ii) TradeNet, (iii) BrokerNet,
and (iv) an order  entry/routing  system.  Additionally,  the  Company  received
$324,000 in exchange  for an  agreement  to issue  warrants to purchase  300,000
shares of its common stock at an exercise price of $8.60 per share.  In November
2000, the License  Agreement was amended to provide that in consideration  for a
copy of the  application  source code,  Data  Transmission  Network  Corporation
returned both the domestic and  international  marketing  rights of the software
applications  to  SmartServ.  Pursuant to this  amendment,  SmartServ  performed
maintenance  and  enhancement  services  through  December  2000,  and  provided
operational support through August 2001. Revenues received by SmartServ pursuant
to this amendment were $83,000 per month through August 2001.

During the year ended December 31, 2001, the six month period ended December 31,
2000 and the year ended June 30, 2000, the relationship  with Data  Transmission
Network Corporation accounted for substantially all of the Company's revenues.

13.     EMPLOYEE STOCK OPTION PLANS

In April 1996, the Company's Board of Directors approved the establishment of an
Employee  Stock Option Plan ("1996  Plan")  authorizing  stock option  grants to
directors, key employees and consultants. The options are intended to qualify as
incentive  stock  options  within the  meaning of  Section  422 of the  Internal
Revenue Code of 1986, as amended,  or as  nonqualified  stock options.  The 1996
Plan provided for the issuance of up to 250,000 of such options at not less than
the fair  value of the stock on the date of grant.  The  options  are


                                      -51-
<PAGE>

partially  exercisable after one year from date of grant and expire on the tenth
anniversary of the date of grant. In connection with the stockholders'  approval
of the Company's 2002 Stock Option Plan, at the Annual  Meeting of  Stockholders
on December 13, 2002,  the Board of Directors  amended all  previously  existing
stock  option  plans by reducing the size of such plans to the number of options
issued  and  outstanding  at that  date.  Additionally,  the Board of  Directors
amended such plans so that options that are  terminated  or forfeited may not be
re-granted.  As of  December  31, 2002 there were  options to  purchase  186,300
shares of common  stock  issued  and  outstanding  and -0-  available  for grant
pursuant to the 1996 Plan.

In October 1999, the Board of Directors authorized the establishment of the 1999
Employee  Stock  Option  Plan  ("1999  Plan").  The 1999 Plan  provided  for the
issuance of options to employees  and directors for the purchase of a maximum of
400,000 shares of the Company's common stock. The Board of Directors  authorized
the issuance of 400,000 of such options to both  employees  and directors at the
fair value of the  common  stock on that date.  The 1999 Plan  provides  for the
issuance of such  options at not less than the fair value of the common stock on
the date of grant.  As of  December  31,  2002  there were  options to  purchase
266,200  shares of common stock issued and  outstanding  and -0-  available  for
grant pursuant to the 1999 Plan.

In May 2000,  the Board of Directors  authorized the  establishment  of the 2000
Employee  Stock  Option  Plan ("2000  Plan").  In  November  2000,  the Board of
Directors  increased the number of shares  available for issuance under the 2000
Plan by  600,000  to a maximum  of  1,350,000.  The 2000 Plan  provides  for the
issuance of such  options at not less than the fair value of the common stock on
the date of grant. The Board of Directors has authorized the issuance of options
to purchase  1,204,250  shares of common  stock to  employees  and  directors at
exercise prices equal to the fair value on the dates of grant.  The stockholders
approved  the  repricing of options to purchase  797,250  shares of common stock
with exercise  prices ranging between $5.97 and $49.50 to $1.42 per share at the
Annual Meeting of  Stockholders  on December 13, 2002. In connection  therewith,
the Company recorded a charge to earnings of  approximately  $42,600 in the year
ended  December 31, 2002 for the  increase in the market value of the  Company's
common stock between the date the repricing was  authorized by the Board and the
date it was  approved by the  stockholders.  As of December  31, 2002 there were
options to purchase  1,204,250 shares of common stock issued and outstanding and
-0- shares of common stock available for grant pursuant to the 2000 Plan.

In  November  2000,  the Board of  Directors  granted  non-qualified  options to
purchase  150,000  shares of common stock to  Sebastian E.  Cassetta and granted
non-qualified  options to  purchase  56,250  shares of common  stock to Mario F.
Rossi, subject to stockholder approval, which was received at the Annual Meeting
of Stockholders held on December 8, 2000. The options were exercisable at $19.00
per  share and  expire on  November  3,  2010.  The  stockholders  approved  the
repricing  of  such  options  to  $1.42  per  share  at the  Annual  Meeting  of
Stockholders on December 13, 2002.

In September  2001, the Board of Directors  voted to cancel certain  outstanding
employee  options and reissue options to employees at an exercise price not less
than the fair value at the date of grant.  Officers of the Company were required
to surrender 20% of such options to receive the new options.  The exercise price
of the  options  reissued to  employees  was $8.40 per share.  The  stockholders
approved the repricing of such options to $1.42 per share at the Annual  Meeting
of Shareholders on December 13, 2002.

At the Annual Meeting of  Stockholders  on December 13, 2002,  the  stockholders
approved the  establishment  of the Company's  2002  Employee  Stock Option Plan
("2002  Plan").  The 2002 Plan provides for the issuance of options to employees
and directors for the purchase of a maximum of 1,500,000  shares of common stock
at an  exercise  price not less than the fair value of the  common  stock on the
date of grant. No options have been granted pursuant to the 2002 Plan.


                                      -52-
<PAGE>

Information  concerning  stock options for the Company is presented  below.  The
Company has shown the repricings of options  previously granted to employees and
directors of the Company as both a cancellation a grant of options.

                                                               AVERAGE
                                                               EXERCISE
                                         OPTIONS                PRICE
                                   -------------------- -----------------------
Balance at June 30, 1999                   285,901                 1.54

     Granted                             1,091,000                31.10
     Exercised                             (47,810)                1.69
     Cancelled                              (6,310)                1.40
                                   -------------------- -----------------------
Balance at June 30, 2000                 1,322,781                25.92

     Granted                               862,250                19.48
     Exercised                             (36,871)                1.01
     Cancelled                            (282,326)               43.19
                                   -------------------- -----------------------
Balance at December 31, 2000             1,865,834                20.82

     Granted                               513,000                 8.82
     Exercised                             (65,142)                1.02
     Cancelled                            (483,008)               43.56
                                   -------------------- -----------------------
Balance at December 31, 2001             1,830,684             $  12.16

     Granted                             1,429,500                 1.51
     Exercised                             (17,000)                0.97
     Cancelled                          (1,340,201)               16.62
                                   -------------------- -----------------------
Balance at December 31, 2002             1,902,983             $   1.59
                                   ==================== =======================


The  following  table  summarizes   information  about  employee  stock  options
outstanding as of December 31, 2002.

<TABLE>
<CAPTION>

                                          OPTIONS OUTSTANDING                             OPTIONS EXERCISABLE
                            -------------------------------------------------      -----------------------------------
                                                                   AVERAGE
                                                   AVERAGE        REMAINING                                AVERAGE
         RANGE OF              NUMBER OF           EXERCISE      CONTRACTUAL            NUMBER OF         EXERCISE
     EXERCISE PRICES            OPTIONS             PRICE        LIFE (YEARS)            OPTIONS            PRICE
--------------------------- -----------------   --------------- ---------------      ---------------- ------------------
<S>                            <C>               <C>                  <C>               <C>              <C>
    $0.94 to $1.62             1,702,983         $    1.34            7.6               1,017,534        $   1.29
    $2.25 to $2.34               180,000              2.26            9.4                  20,000            2.34
        $17.00                    20,000             17.00            7.0                  20,000           17.00
                            -----------------                                        ---------------
                               1,902,983                                                1,057,534
                            =================                                        ===============
</TABLE>

The pro forma  information  regarding  net income  (loss) and income  (loss) per
share  required  by SFAS No. 123,  as more fully  disclosed  in Note 2, has been
determined  as if SmartServ  had  accounted  for its employee  stock option plan
under the fair  value  methods  described  in SFAS No.  123.  The fair  value of
options granted under the Company's employee stock option plans was estimated at
the date of grant using the Black-Scholes option pricing model.



                                      -53-
<PAGE>


Pertinent  assumptions  with  regard to the  determination  of fair value of the
options are as follows:

<TABLE>
<CAPTION>

                                                                                           SIX MONTHS        YEAR ENDED
                                                                                         ENDED DECEMBER        JUNE 30
                                                        YEAR ENDED DECEMBER 31                 31
                                                   ---------------------------------    -----------------    ------------
                                                        2002               2001               2000              2000
                                                   ----------------     ------------    -----------------    ------------
<S>                                                                      <C>               <C>                 <C>
  Weighted  average  dividend  yield
       for options granted                              0.0%                 0.0%             0.0%                 0.0%

  Weighted average expected life in years               3.0                  3.0              3.0                  5.0

  Weighted average volatility                          84.0%               101.5%           160.5%               159.1%

  Risk-free interest rate                               3.0%                5.56%            6.18%                5.41%

  Weighted average fair value
       of options granted                            $ 0.66              $ 14.99           $ 18.61             $  25.07
</TABLE>


                                      -54-
<PAGE>


14.     COMPARATIVE FINANCIAL INFORMATION (UNAUDITED)

The  comparative  consolidated  statements  of  operations  for the years  ended
December  31, 2001 and 2000 and for the six months  ended  December 31, 2000 and
1999 are as follows:

<TABLE>
<CAPTION>

                                               YEAR ENDED DECEMBER 31          SIX MONTHS ENDED DECEMBER 31
                                            -----------------------------   --------------------------------
                                                2001             2000           2000           1999
                                                ----             ----           ----           ----
<S>                                        <C>             <C>             <C>             <C>
  Revenues                                 $  3,297,806    $  4,207,696    $  2,232,476    $  1,720,913
                                           ------------    ------------    ------------    ------------
  Costs and expenses
     Cost of services                        (6,998,425)     (4,035,481)     (3,278,025)       (579,634)
     Sales and marketing expenses            (4,838,034)     (2,798,038)     (2,077,002)       (219,878)
     General and administrative expenses
                                             (4,901,090)     (4,647,588)     (2,673,193)     (1,083,096)
     Stock-based compensation                (1,260,125)       (471,226)      8,164,779     (21,635,019)
                                           ------------    ------------    ------------    ------------
  Total costs and expenses                  (17,997,674)    (11,952,333)        136,559     (23,517,627)
                                           ------------    ------------    ------------    ------------
  Income (loss) from operations             (14,699,868)     (7,744,637)      2,369,035     (21,796,714)
                                           ------------    ------------    ------------    ------------

  Other income (expense):
     Interest income                            512,138         849,785         621,416          13,033
     Interest expense and other
       financing costs                         (632,130)        (64,885)        (52,860)        687,450
                                           ------------    ------------    ------------    ------------
                                               (119,992)        784,900         568,556         700,483
                                           ------------    ------------    ------------    ------------
  Net income (loss)                        $(14,819,860)   $ (6,959,737)   $  2,937,591    $(21,096,231)
                                           ============    ============    ============    ============
  Basic earnings (loss) per share          $      (2.52)   $      (1.56)   $       0.54    $     (15.19)
                                           ============    ============    ============    ============
  Diluted earnings (loss) per share        $      (2.52)   $      (1.56)   $       0.34    $     (15.19)
                                           ============    ============    ============    ============
  Weighted average shares outstanding -
     basic                                    5,891,244       4,466,836       5,433,577       1,388,546
                                           ============    ============    ============    ============
  Weighted average shares outstanding -
     diluted                                  5,891,244       4,466,836       8,697,917       1,388,546
                                           ============    ============    ============    ============
</TABLE>

15.     SUBSEQUENT EVENTS (UNAUDITED)

In  February  2003,  the Company  issued a  convertible  note to Global  Capital
Funding Group, LP ("Global") in consideration for the receipt of $1 million. The
note  bears  interest  at the  rate  of 10% per  annum,  and is  secured  by the
Company's assets,  exclusive of its internally developed software products.  The
note matures on February 14, 2004, contains certain antidilution provisions, and
may be converted  into shares of SmartServ  common stock at $1.10 per share.  As
additional  consideration,  the Company issued Global a warrant for the purchase
of 200,000  shares of its common stock at an exercise  price of $1.61 per share.
Alpine Capital Partners,  Inc. received a finder's fee of $70,000,  representing
7% of the  aggregate  purchase  price of the


                                      -55-
<PAGE>

convertible  note and a warrant  to  purchase  91,000  shares  of  common  stock
exercisable at $1.61 per share, expiring on February 14, 2005 in connection with
this transaction.  In April 2003, the Company and Global amended the convertible
note in consideration of the receipt of $250,000.  As additional  consideration,
the Company  issued  Global a warrant for the  purchase of 20,000  shares of its
common  stock at an  exercise  price of $1.20 per share.  The  warrants  contain
certain antidilution provisions and expire on February 14, 2006.

During the period  January 1 through April 11, 2003,  the Company issued 442,386
shares of common  stock to  investors  upon the exercise of warrants to purchase
such shares. Proceeds from the exercise of these warrants were $376,000.

In February 2003, the Company issued 123,537 shares of common stock to 5 vendors
in  settlement  of the  Company's  obligations,  aggregating  $164,000,  to such
vendors.

The Company and HP amended the terms of their amended promissory note to provide
for the settlement of SmartServ's outstanding obligation of $530,800,  inclusive
of  interest  of  $30,800,  in  consideration  of the  payment by the Company of
$225,000. The Company recorded a gain of $305,800 upon payment of such amount in
February 2003.


                                      -56-
<PAGE>

ITEM 8.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------     FINANCIAL DISCLOSURE

None.

                                    PART III

ITEM 9.    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
------     COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

The  information  called  for by  this  Item  is set  forth  under  the  caption
"Directors and Executive Officers of the Company" in the Proxy Statement for the
2003 Annual Meeting of Stockholders, and is incorporated herein by reference.

ITEM 10.   EXECUTIVE COMPENSATION
-------

The  information  called  for by  this  Item  is set  forth  under  the  caption
"Executive  Compensation"  in the Proxy Statement for the 2003 Annual Meeting of
Stockholders, and is incorporated herein by reference.

ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-------

The information called for by this Item is set forth under the caption "Security
Ownership of Certain  Beneficial  Owners and  Management" in the Proxy Statement
for the 2003  Annual  Meeting of  Stockholders,  and is  incorporated  herein by
reference.

ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------

The information  called for by this Item is set forth under the caption "Certain
Relationships  and Related  Transactions"  in the Proxy  Statement  for the 2003
Annual Meeting of Stockholders, and is incorporated herein by reference.


                                      -57-
<PAGE>

ITEM 13.   EXHIBITS AND REPORTS ON FORM 8-K
-------

(A)        INDEX TO EXHIBITS

EXHIBIT    DESCRIPTION
-------    -----------

3.1        Amended   and   Restated   Certificate   of   Incorporation   of  the
           Company*******
3.2        Certificate  of Amendment to the Amended and Restated  Certificate of
           Incorporation filed on June 1, 1998 ******
3.3        Certificate  of Amendment to the Amended and Restated  Certificate of
           Incorporation filed on October 16, 1998 ******
3.4        By-laws of the Company, as amended *******
4.1        Specimen Certificate of the Company's Common Stock *******
4.2        Stock Purchase Agreement, dated May 12, 2000, between the Company and
           TecCapital,  Ltd.,  The  Abernathy  Group  and  Conseco  Equity
           Fund **********
4.3        Convertible  Note,  dated February 14, 2003,  between the Company and
           Global Capital Funding Group, LP*
4.4        Security  Agreement dated February 14, 2003,  between the Company and
           Global Capital Funding Group, LP*
4.5        Amendment  No. 1 to the  Convertible  Note  between  the  Company and
           Global Capital Funding Group, LP +
4.6        Amendment  No. 2 to the  Convertible  Note  between  the  Company and
           Global Capital Funding Group, LP +
4.7        Amendment  No. 1 to the  Security  Agreement  between the Company and
           Global Capital Funding Group, LP +
4.8        Amendment  No. 2 to the  Security  Agreement  between the Company and
           Global Capital Funding Group, LP +
10.1       Information  Distribution License Agreement dated as of July 18, 1994
           between the Company and S&P ComStock, Inc. *******
10.2       New York Stock Exchange, Inc. Agreement for Receipt and Use of Market
           Data dated as of August 11, 1994 between the Company and the New York
           Stock Exchange, Inc. *******
10.3       The Nasdaq Stock Market,  Inc.  Vendor  Agreement for Level 1 Service
           and Last Sale  Service  dated as of  September  12, 1994  between the
           Company and The Nasdaq Stock Exchange, Inc. ("Nasdaq") *******
10.4       Amendment  to Vendor  Agreement  for  Level 1  Service  and Last Sale
           Service  dated as of October 11, 1994  between the Company and Nasdaq
           *******
10.5       Lease  Agreement  dated as of March 4, 1994,  between the Company and
           One  Station   Place,   L.P.   regarding  the   Company's   Stamford,
           Connecticut, offices *******
10.6       Lease Modification and Extension  Agreement,  dated February 6, 1996,
           between  the  Company  and One  Station  Place,  L.P.  regarding  the
           Company's Stamford, Connecticut, offices ********
10.7       Second Lease  Modification  and Extension  Agreement,  dated June 29,
           2000,  between the Company and One Station Place, L.P.  regarding the
           Company's Stamford, Connecticut, offices *****
10.8       License   Agreement   between  SmartServ  and  Salomon  Smith  Barney
           (Confidential  treatment has been  requested  with respect to certain
           portions of this agreement) ***
10.9       1996 Stock Option Plan *********##
10.10      1999 Stock Option Plan **********##
10.11      2000 Stock Option Plan *****##
10.12      2002 Stock Option Plan **##
10.13      Amended and Restated  Employment  Agreement between SmartServ Online,
           Inc. and Sebastian E. Cassetta, dated January 1, 1999 ******##
10.14      Restricted Stock Purchase  Agreement between  SmartServ Online,  Inc.
           and Sebastian E. Cassetta, dated December 29, 1999 ******##
10.15      Employment  Agreement  between  SmartServ  Online,  Inc. and Mario F.
           Rossi, dated January 1, 1999 ******##


                                      -58-
<PAGE>

10.16      Restricted Stock Purchase  Agreement between  SmartServ Online,  Inc.
           and Mario F. Rossi, dated December 29, 1999 ******##
10.17      Amended Restricted Stock Purchase Agreement between SmartServ Online,
           Inc. and Sebastian E. Cassetta, dated December 31, 1999 **********##
10.18      Amended Promissory Note between SmartServ Online,  Inc. and Sebastian
           E. Cassetta, dated January 4, 2000 **********##
10.19      Amended  Security  Agreement  between  SmartServ  Online,   Inc.  and
           Sebastian E. Cassetta, dated January 4, 2000 **********##
10.20      Promissory Note,  dated January 2, 2001,  between  SmartServ  Online,
           Inc. and Sebastian E. Cassetta ****##
10.21      Promissory Note, dated March 20, 2001, between SmartServ Online, Inc.
           and Sebastian E. Cassetta ****##
10.22      Amended Restricted Stock Purchase Agreement between SmartServ Online,
           Inc. and Mario F. Rossi, dated December 31, 1999 **********##
10.23      Amended  Promissory Note between SmartServ Online,  Inc. and Mario F.
           Rossi, dated January 4, 2000 **********##
10.24      Amended Security  Agreement between SmartServ Online,  Inc. and Mario
           F. Rossi, dated January 4, 2000 **********##
21         List of Subsidiaries ****
23.1       Consent of Ernst & Young LLP +
99.1       Certification  Pursuant to Section 906 of the  Sarbanes-Oxley  Act of
           2002 +


+          Filed herewith

*          Filed as an exhibit to Form 8-K, dated March 3, 2003

**         Filed as an exhibit to the  Company's  Proxy  Statement  for the 2002
           Annual Meeting of Stockholders

***        Filed as an exhibit to the Company's  registration  statement on Form
           S-3 (Registration No. 333-100193)

****       Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
           the year ended December 31, 2001

*****      Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
           the fiscal year ended June 30, 2000

******     Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
           the fiscal year ended June 30, 1999

*******    Filed as an exhibit to the Company's  registration  statement on Form
           SB-2 (Registration No. 333-114)

********   Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
           the fiscal year ended June 30, 1996

*********  Filed as an exhibit to the Company's  Proxy  Statement  dated October
           10, 1996

********** Filed as an exhibit to the Company's  Registration  Statement on Form
           SB-2 (Registration No. 333-43258) on August 7, 2000

##         Management  contract or compensation plan or arrangement  required to
           be noted as provided in Item 13(a) of the Form 10-K rules.



                                      -59-
<PAGE>

(B)        REPORTS ON FORM 8-K

           On September  10, 2002,  the Company filed a report on Form 8-K under
           Item 5 thereof referencing a press release, dated September 10, 2002,
           announcing the  completion of a $3.5 million equity  financing from a
           group of accredited  investors,  the  restructuring of the $7 million
           obligation to Hewlett-Packard  Company, as well as the closing of its
           sales  offices in Hong Kong and the United  Kingdom.  Such  report on
           Form 8-K was amended on December  12,  2002.  The Form 8-K included a
           Proforma  Balance Sheet at July 31, 2002 and Proforma Journal Entries
           given effect to this transaction.

           On March 3, 2003,  the Company filed a report on Form 8-K under Items
           2 and 5 thereof  referencing  a press  release,  dated March 3, 2003,
           announcing  the  completion of a debt  financing  with Global Capital
           Funding Group, L.P. ("Global"). The debt is evidenced by a $1,000,000
           Convertible  Note, dated February 14, 2003,  secured by substantially
           all of the  assets of the  Company  and  convertible  into  shares of
           SmartServ  common stock at a price of $1.10 per share.  Additionally,
           the Form 8-K  announced  the  favorable  trial  decision  the Company
           received in the matter of Fishman vs. SmartServ et al.

ITEM 14.   CONTROLS AND PROCEDURES

            (a) Within the 90-day period prior to the filing of this report,  an
evaluation was carried out under the supervision and with the  participation  of
our Chief Executive Officer and our Chief Financial Officer of the effectiveness
of the design and  operation  of our  disclosure  controls  and  procedures,  as
defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended.
Based upon the evaluation,  the Chief Executive  Officer and the Chief Financial
Officer  have  concluded  that these  disclosure  controls  and  procedures  are
effective.

            (b) There have been no significant  changes in our internal controls
or in other  factors  that  could  significantly  affect the  internal  controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.


                                      -60-
<PAGE>


                                   SIGNATURES

In accordance  with Section 13 or 15(d) of the Securities  Exchange Act of 1934,
the  Registrant  has duly  caused  this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


                                        SMARTSERV ONLINE, INC.
                                        ----------------------
                                              Registrant


                                        By: /s/ SEBASTIAN E. CASSETTA
                                           -------------------------------------
                                                Sebastian E. Cassetta
                                                Chairman of the Boar
                                                Chief Executive Officer
                                        Date:   April 23, 2003


In accordance  with the  Securities  Exchange Act of 1934,  this report has been
signed below by the  following  persons on behalf of the  Registrant  and in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>

            Signature                              Title                           Date
            ---------                              -----                           ----
<S>                                       <C>                                 <C>
/S/  SEBASTIAN E. CASSETTA                Chairman of the Board               April 23, 2003
--------------------------------------    Chief Executive Officer
     Sebastian E. Cassetta                Secretary and Director


/S/  MARIO F. ROSSI                       Executive Vice President and        April 23, 2003
--------------------------------------    Director
     Mario F. Rossi


/S/  THOMAS W. HALLER                     Senior Vice President and           April 23, 2003
--------------------------------------    Chief Financial Officer
     Thomas W. Haller


/S/ STEPHEN LAWLER                        Director                            April 23, 2003
-------------------------------------
    Stephen Lawler


/S/ L. SCOTT PERRY                        Director                            April 23, 2003
-------------------------------------
    L. Scott Perry


/S/ ROBERT H. STEELE                      Director                            April 23, 2003
-------------------------------------
    Robert H. Steele


/S/ CATHERINE CASSEL TALMADGE             Director                            April 23, 2003
--------------------------------------
    Catherine Cassel Talmadge


/S/ CHARLES R. WOOD                       Director                            April 23, 2003
--------------------------------------
    Charles R. Wood
</TABLE>


                                      -61-
<PAGE>

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
----------------------------------------

     I, Sebastian E. Cassetta, certify that:

     1.   I have reviewed this annual report on Form 10-KSB of SmartServ Online,
          Inc.;

     2.   Based on my knowledge,  this annual report does not contain any untrue
          statement  of a  material  fact  or  omit to  state  a  material  fact
          necessary to make the statements  made, in light of the  circumstances
          under which such  statements were made, not misleading with respect to
          the period covered by this annual report;

     3.   Based on my knowledge,  the financial statements,  and other financial
          information  included in this  annual  report,  fairly  present in all
          material respects the financial  condition,  results of operations and
          cash flows of the registrant as of, and for, the periods  presented in
          this annual report;

     4.   The registrant's  other certifying  officers and I are responsible for
          establishing  and maintaining  disclosure  controls and procedures (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the  registrant
          and have:

               a)   designed such  disclosure  controls and procedures to ensure
                    that  material   information  relating  to  the  registrant,
                    including its consolidated subsidiaries, is made known to us
                    by others  within those  entities,  particularly  during the
                    period in which this annual report is being prepared;

               b)   evaluated the  effectiveness of the registrant's  disclosure
                    controls and procedures as of a date within 90 days prior to
                    the  filing  date of this  annual  report  (the  "Evaluation
                    Date"); and

               c)   presented in this annual  report our  conclusions  about the
                    effectiveness  of the  disclosure  controls  and  procedures
                    based on our evaluation as of the Evaluation Date;

     5.   The registrant's other certifying officers and I have disclosed, based
          on our most recent  evaluation,  to the registrant's  auditors and the
          audit  committee  of  registrant's  board  of  directors  (or  persons
          performing the equivalent functions):

               a)   all  significant  deficiencies in the design or operation of
                    internal   controls   which  could   adversely   affect  the
                    registrant's  ability  to  record,  process,  summarize  and
                    report   financial   data  and  have   identified   for  the
                    registrant's  auditors any material  weaknesses  in internal
                    controls; and

              b)  any fraud,  whether or not material,  that involves management
                  or  other  employees  who  have  a  significant  role  in  the
                  registrant's internal controls; and

     6.   The  registrant's  other  certifying  officers and I have indicated in
          this annual report whether there were significant  changes in internal
          controls or in other factors that could significantly  affect internal
          controls  subsequent  to the  date  of  our  most  recent  evaluation,
          including   any   corrective   actions  with  regard  to   significant
          deficiencies and material weaknesses.

     Date:   April 23, 2003                    /S/ SEBASTIAN E. CASSETTA
             --------------                    ---------------------------------
                                                   Sebastian E. Cassetta
                                                   Chairman of the Board and
                                                   Chief Executive Officer



                                      -62-
<PAGE>

CERTIFICATION OF CHIEF FINANCIAL OFFICER
----------------------------------------

     I,   Thomas W. Haller, certify that:

     1.   I have reviewed this annual report on Form 10-KSB of SmartServ Online,
          Inc.;

     2.   Based on my knowledge,  this annual report does not contain any untrue
          statement  of a  material  fact  or  omit to  state  a  material  fact
          necessary to make the statements  made, in light of the  circumstances
          under which such  statements were made, not misleading with respect to
          the period covered by this annual report;

     3.   Based on my knowledge,  the financial statements,  and other financial
          information  included in this  annual  report,  fairly  present in all
          material respects the financial  condition,  results of operations and
          cash flows of the registrant as of, and for, the periods  presented in
          this annual report;

     4.   The registrant's  other certifying  officers and I are responsible for
          establishing  and maintaining  disclosure  controls and procedures (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the  registrant
          and have:

              a)  designed  such  disclosure  controls and  procedures to ensure
                  that  material   information   relating  to  the   registrant,
                  including its consolidated  subsidiaries,  is made known to us
                  by others  within  those  entities,  particularly  during  the
                  period in which this annual report is being prepared;

              b)  evaluated the  effectiveness  of the  registrant's  disclosure
                  controls and  procedures  as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

              c)  presented  in this  annual  report our  conclusions  about the
                  effectiveness of the disclosure  controls and procedures based
                  on our evaluation as of the Evaluation Date;

     5.   The registrant's other certifying officers and I have disclosed, based
          on our most recent  evaluation,  to the registrant's  auditors and the
          audit  committee  of  registrant's  board  of  directors  (or  persons
          performing the equivalent functions):

a)                all  significant  deficiencies  in the design or  operation of
                  internal   controls   which   could   adversely   affect   the
                  registrant's ability to record, process,  summarize and report
                  financial  data  and  have  identified  for  the  registrant's
                  auditors any material weaknesses in internal controls; and

              b)  any fraud,  whether or not material,  that involves management
                  or  other  employees  who  have  a  significant  role  in  the
                  registrant's internal controls; and

     6.   The  registrant's  other  certifying  officers and I have indicated in
          this annual report whether there were significant  changes in internal
          controls or in other factors that could significantly  affect internal
          controls  subsequent  to the  date  of  our  most  recent  evaluation,
          including   any   corrective   actions  with  regard  to   significant
          deficiencies and material weaknesses.

     Date:   April 23, 2003                    /S/ THOMAS W. HALLER
             --------------                    ---------------------------------
                                                   Thomas W. Haller
                                                   Senior Vice President
                                                   Chief Financial Officer



                                      -63-