UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                AMENDMENT NO.2 ON
                                  FORM 10-KSB/A

       FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
        ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1997

[_]     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.
                             ----------------------
        (Exact name of small business issuer as specified 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:

                                                    NAME OF EACH EXCHANGE
      TITLE OF EACH CLASS                            ON WHICH REGISTERED
      -------------------                            -------------------
 Common Stock, $0.01 Par Value                       NASDAQ Stock Market
Common Stock Purchase Warrants                       NASDAQ Stock Market

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-B is not contained  herein,  and will not be contained,  to the
best of  issuer'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 its most recent fiscal year.     $688,610

The  aggregate  market value of the voting stock (based on the closing  price of
such  stock on  NASDAQ)  held by  non-affiliates  of the issuer as of October 9,
1997,  was  approximately  $6,126,000.  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 3,695,000 shares of Common Stock outstanding at October 9, 1997.

       

<PAGE>


                                TABLE OF CONTENTS



                                     PART I
ITEM                                                                        PAGE

1.  Description of Business                                                   3
2.  Description of Property                                                  11
3.  Legal Proceedings                                                        11
4.  Submission of Matters to a Vote of Security Holders                      11


                                     PART II

5.  Market for Common Equity and Related Stockholder Matters                 12
6.  Management's Discussion and Analysis or Plan of Operation                14
7.  Financial Statements                                                     19
8.  Changes in and Disagreements with Accountants on Accounting              38
              and Financial Disclosure


                                    PART III

9.      Directors, Executive Officers, Promoters and Control Persons;
              Compliance with Section 16(a) of the Exchange Act              38
10.     Executive Compensation                                               40
11.     Security Ownership of Certain Beneficial Owners and Management       43
12.     Certain Relationships and Related Transactions                       44
13.     Exhibits and Reports on Form 8-K                                     46



                                      2
<PAGE>



                                     PART I

ITEM 1.    DESCRIPTION OF BUSINESS


THE COMPANY
SmartServ Online, Inc.  ("SmartServ" or the "Company") was organized in 1993 and
provides online  information and transactional  services to subscribers  through
generally  available   screen-based  phones  (i.e.  "smart  phones"),   personal
computers  ("PCs"),   personal  digital  assistants   ("PDAs"),   the  Internet,
interactive  voice  response  systems,  alpha numeric  paging  devices and other
wireless Personal  Communications  Systems ("PCSs").  The Company has exited the
development  stage with the completion of its software  architecture and product
offering, and has commenced implementing its marketing strategies.


SERVICES
The  Company  offers a range of services  designed  to meet the varied  needs of
clients of strategic marketing partners  ("Strategic  Marketing  Partners"),  as
well as direct subscribers. These services include: business credit information,
investment  newsletters,   stock  research  reports,  stock  quotes,  nationwide
business  and  residential  directory  services,  business and  financial  news,
research and analysis  reports,  stock  trading  reports by corporate  insiders,
online FedEx package  tracking,  electronic mail, sports  information,  national
weather reports, and other business and entertainment  information.  The Company
provides such services  pursuant to  non-exclusive  agreements with providers of
online information and transactional  services such as: Dun & Bradstreet,  Inc.,
Federal Express  Corporation,  The Weather Channel,  The Options Price Reporting
Authority,  Metromail  Corporation  (a  subsidiary  of RR Donnelley & Sons Co.),
Reuters  NewMedia  Inc., S&P ComStock,  Inc., The Argus Group,  Inc., The Nasdaq
Stock Market, Inc., and The New York Stock Exchange, Inc.

Of  the  thirteen   agreements   with  providers  of  online   information   and
transactional services, twelve agreements are terminable by either party upon 30
days to six months prior  written  notice  before the end of the initial term or
any renewal term thereof.  The remaining  agreement is  cancelable,  pursuant to
written  notice,  by either party at any time.  Two of such  agreements  contain
restrictive  provisions with regard to the approval of potential  subscribers of
the  Company;  and one  agreement  restricts  the  Company to  distributing  its
services  in  North  America.  The  Company  is  not  dependent  on one or a few
information providers as such redistribution  agreements are generally available
on a non-exclusive basis.

The  Company has  invested  in the  development  of  proprietary  software in an
attempt to make its services  easy to use and visually  appealing and to attempt
to take  advantage of the different  virtues and  capabilities  of  screen-based
phones,  PCs, PDAs , the Internet,  interactive  voice response  systems,  alpha
numeric  pagers  and  PCS  devices.  The  Company  believes  that  its  software
architecture and  capabilities,  which recognize  multiple  devices,  format the
information  for  the  particular  device  and  present  the  information  in  a
user-friendly manner, will be attractive in the marketplace. The Company intends
to continue to invest in this area and believes its  software  architecture  and
capabilities represent an important competitive advantage.

Subscribers can connect to the Company's  services using standard phone lines or
through the Internet. The Company had previously contracted with eunetcom, Inc.,
a provider of an X.25 data communications network, to be the delivery medium for
its information services. The operational capacity of eunetcom was inadequate to
support the Company's  volume  requirements  and the relationship was terminated
after the Company  successfully  modified its communication  software to provide
for the delivery of the  information  






                                       3
<PAGE>



platform over the Internet.  The Company believes that its software architecture
and capabilities,  which recognize multiple devices (e.g.,  screen-based phones,
PCs, PDAs, interactive voice response systems and alpha numeric pagers),  format
the  information  for the  particular  device and present the  information  in a
user-friendly manner, make the Company's services "device  independent".  As new
technologies  emerge, the Company  anticipates that its services may be accessed
through these newly developed  devices.  The Company therefore  believes that in
the future it will not be  limited to  providing  services  exclusively  through
screen-based   phones,  PCs,  PDAs,   interactive  voice  response  systems  and
alpha-numeric pagers.


MARKETING STRATEGY
Management   believes  that  the  Company's  primary  source  of  revenues  will
ultimately  be  derived  from end users that  purchase  the  Company's  services
through Strategic  Marketing Partners with mass distribution  capabilities.  The
Company  anticipates that Strategic  Marketing Partners will brand the Company's
"bundled" services,  acquired from the Company's  "information  platform" (i.e.,
information bundled from multiple information providers), with their own private
label,  promote  the  packaged  offering,  and  then  distribute  the  Company's
information  package  to  their  clients  on  screen-based  phones,  PCs,  PDAs,
interactive voice response systems,  alpha-numeric pagers and other PCS devices.
The Company has the ability to customize the  information  package to be offered
to each Strategic Marketing Partner, and in turn to their end users. The Company
has also commenced the development of a direct subscriber base. At September 30,
1997, the Company had approximately 3,400 users online.

The Company's plan of operation  includes programs for marketing  simultaneously
at two distinct  levels.  First, the Company is developing  strategic  marketing
relationships  with  key  partners  that  provide  access  to large  numbers  of
potential subscribers for its monthly services.  These partners include regional
telephone  operating  companies,  long distance  carriers,  telephone  equipment
manufacturers,  and others who distribute  screen  telephone  equipment,  market
local  screen  telephone  services  or  otherwise  benefit  from  the  increased
acceptance of these devices in the marketplace. To these partners, the Company's
services are perceived as a means of increasing  interest in and sales of screen
telephones,  and  there is thus a strong  incentive  to  promote  the  Company's
services.

The Company is also working with businesses that desire to provide new services,
such as those provided by the Company, to an existing base of clients.  Examples
include  brokerage  firms and  disseminators  of  financial  information,  whose
clients can benefit  from the  efficiency,  convenience  and  timeliness  of the
information  services provided by the Company. The Company can co-brand with its
Strategic  Marketing  Partner or offer its services  solely under its  Strategic
Marketing Partner's name.

The  Company  is working  with  these  Strategic  Marketing  Partners  to assure
consumer  awareness of the Company's  services.  Programs under development with
existing Strategic Marketing Partners include direct marketing, cable television
commercials, mailer inserts and in-store promotions.

Secondly, the Company has initiated a direct marketing program for its SmartServ
"Pro" stock quote  services.  The response  from  advertisements  in  Investors'
Business  Daily  and  television  commercials  run on cable  station  CNBC  have
demonstrated that a strong and active market exists for this information.

The  achievement  of the  Company's  goal of  establishing  itself  as a leading
provider of online information and transactional services to subscribers through
screen-based  phones,  PCs,  the  Internet,  PDAs,  interactive  voice  response
systems,  and other devices is contingent on  management's  ability to penetrate
the following four markets targeted by the Company:



                                       4
<PAGE>



     *    COMPANIES THAT WILL PRIVATE LABEL THE COMPANY'S SERVICES
          The Company has entered into agreements, and intends to continue to do
          so, with various  categories of Strategic  Marketing  Partners.  It is
          anticipated that a "private labeled" online  information  package will
          be offered to the Strategic Marketing Partner's clients, and that this
          package  will  include   proprietary   Strategic   Marketing   Partner
          information  in  combination  with other  information  provided by the
          Company.  As a result, the Strategic  Marketing Partner's client would
          receive a branded information package that is not available elsewhere.

     *    THE TELECOMMUNICATIONS INDUSTRY
          The Company believes that it can provide  value-added  services to the
          telecommunications  market.  Several Regional Bell Operating Companies
          have informed the Company that they are interested in promoting  their
          CLASS services,  examples of which include caller ID and enhanced call
          waiting  with ID.  Although  such  services  can  generate  additional
          revenue for the telephone  companies,  they are presently difficult to
          use without a screen-based  phone. To promote wider acceptance of such
          CLASS  services,  the Company  believes  that many of these  telephone
          companies  will be  offering  screen-based  phones  as a means to make
          these services more user-friendly.  Wider distribution of screen-based
          phones provides the Company with a broader potential subscriber base.

     *    INFORMATION COMPANIES
          Companies that can only deliver  information to their users on PCs are
          currently in  discussions  with the Company to provide  information on
          relatively inexpensive and user-friendly devices, such as screen-based
          phones, PDAs and interactive voice response systems. It is anticipated
          that such  information  will be provided  to the end user  through the
          Company.  Certain information will reside on the Company's information
          platform, in other instances,  the Company's systems are linked to the
          systems  of  its  information  providers  and/or  Strategic  Marketing
          Partners.

     *    DIRECT SUBSCRIBERS
          The Company  intends to continue to offer its services  under the name
          "SmartServ  Online"  directly to  consumers,  in  particular  to those
          consumers  interested in real time financial market  information.  The
          Company believes that its services are attractive to consumers because
          the information is presented in a  user-friendly  manner on relatively
          inexpensive  devices  such  as  personal  computers  and  screen-based
          phones.



                                       5
<PAGE>


STRATEGIC MARKETING PARTNER RELATIONSHIPS
Strategic  Marketing  Partners  and the related  marketing  arrangements  are as
follows:

     SCHRODER & CO.,  INC.  has  announced  the  availability  of the  Company's
     services  to its  correspondent  relationships.  The  Company has also been
     selected by Schroder to provide new innovative financial online services to
     its correspondent  firms.  Andrew Peck & Associates,  Inc. has deployed the
     Company's  information services to its customers,  providing such customers
     with  the  ability  to  receive  real-time  stock  quotes  and  to  execute
     securities  transactions online through a PC.  Additionally,  First Montauk
     Securities,   Inc.  has  announced  the   availability   of  the  Company's
     "BrokerNet" product to its 400 retail stock brokers.  During the year ended
     June 30, 1997, the Schroder relationship  accounted for approximately 46.4%
     of the Company's revenues.

     HERZOG,  HEINE,  GEDULD, INC. has agreed to offer the Company's services to
     its customers and those of its correspondent relationships. The Company has
     been  restricted from  furtherance of this  relationship as a result of its
     limited personnel availability and working capital constraints.

     SPRINT  COMMUNICATIONS CORP. entered into an agreement with the Company for
     the marketing and  distribution  of the Company's  suite of information and
     entertainment services to Sprint's Las Vegas telephone customers commencing
     March  1997.  The  launch  of the  "Sprint  Information  Services"  program
     included a comprehensive  direct marketing  program to its embedded base of
     existing screen phone  customers,  and a 500,000 piece insertion in monthly
     customer  statements.   Of  particular  significance  as  regards  customer
     retention is the fact that Sprint has  incorporated  the Company's  billing
     information  on page 3 of its monthly  customer  statements.  In  September
     1997,  the  companies  entered into a 3 year  contract  with respect to the
     expansion of the Company's  services into markets  nationwide.  The Company
     anticipates  that  this  will  result in the  deployment  of the  Company's
     information  services  in  Florida,  New  York,  North  Carolina  and other
     designated  markets as part of a national  campaign.  Although  the Company
     believes that several  thousand  customers will receive online  information
     services  in the  first  year of this  alliance  and  that  ultimately  the
     customer base will exceed 60,000 users,  no assurance can be given that the
     Company's  information  services  will be  accepted  on such a  wide-spread
     basis.

     WINK  COMMUNICATIONS  has  entered  into an  agreement  with the Company to
     provide  the  Company's   financial  and   entertainment   information  via
     interactive  cable TV to  potentially  millions of  viewers.  Wink has been
     selected as the technology of choice by the major cable box  manufacturers,
     including  Pioneer  Digital  Technologies,  Scientific  Atlanta and General
     Instrument.  The  Company  has been  restricted  from  furtherance  of this
     relationship as a result of its limited personnel  availability and working
     capital constraints.

     AT&T  WORLDNET  has  entered  into an  agreement  with the  Company for the
     co-branding  and marketing of the Company's  online  information and AT&T's
     internet product,  "WorldNet".  This alliance represents a potential source
     of revenues to the Company and provides the  Company's  customers  with the
     assurance of high quality service and connectivity through AT&T's worldwide
     network.



                                       6
<PAGE>



     NORTHERN  TELECOM,  INC.  has  begun  direct  marketing  campaigns  for the
     Company's services to the  telecommunications  industry through joint sales
     promotions which include its PowerTouch 350 telephones,  as well as through
     catalog  advertisements  and national  retail  outlets.  In September 1996,
     Northern Telecom and the Company embarked on a joint  advertising  campaign
     focusing  on the  investment  community  via print  media  such as the Wall
     Street  Journal  and  Investors   Business  Daily.  The  Company  has  been
     restricted from furtherance of this relationship as a result of its limited
     personnel availability and working capital constraints.

     CIDCO  INCORPORATED  has entered into an agreement with the Company whereby
     CIDCO will market  screen-based  phones with access to the Company's online
     information  services and assist in the development of other Analog Display
     Services Interface based applications. The Company has been restricted from
     furtherance  of this  relationship  as a result  of its  limited  personnel
     availability and working capital constraints.


The  Company   continues  to  have   discussions   about   potential   marketing
opportunities with other major telecommunications and stock brokerage companies;
however,  there can be no assurance that the Company will enter into  agreements
with any such companies.

MARKETING VEHICLES

   
DIRECT  MARKETING -- The Company has  implemented a targeted,  direct  marketing
program aimed at the small office/home office,  business  professional,  private
investor and retail  consumer  markets.  These  programs  have included and will
continue to include  advertising in financial  related magazines and newspapers,
cable television commercials, and subscriber referral programs. The Company also
plans to promote  SmartServ  Online on the  Internet,  through its Internet home
page (smartserv.com),  from which the Company's  communications  software can be
downloaded,  as well as through other  reciprocal  marketing  arrangements  with
Zacks Investment Research, Inc., Bell South.net, and Q-Up Systems.
    

STRATEGIC  PARTNER MARKETING -- The Company's intent is to continue to work with
its current and potential Strategic Marketing Partners to enhance the efficiency
and  effectiveness of their marketing and distribution  efforts.  Each Strategic
Marketing Partner  approaches the market  differently  depending on its business
strategy,  consumer  mix  and  competitive  situation.  It is  expected  that  a
potential Strategic Marketing Partner will initially test a variety of marketing
and selling options to determine the most cost effective technique to obtain the
maximum number of customers in the least amount of time. The Company  intends to
offer  technical  and  marketing  support  to  enhance  the  effectiveness  of a
potential  Strategic Marketing  Partner's  marketing efforts.  For example,  the
design and preparation of the specific  product  offering,  collateral and other
promotional  materials will be coordinated with a potential  Strategic Marketing
Partner to reflect the best overall positioning of the product to the consumer.

The Company has  demonstrated and intends to continue to demonstrate that it has
the technological infrastructure and ability to distribute online information to
the  customers of actual and potential  Strategic  Marketing  Partners.  This is
typically  done via a testing  program  with  design  input  from the  Strategic
Marketing Partner.

The  Company's  services  are  priced,  as  determined  by the  Company  and the
Strategic Marketing Partner,  based on a pre-negotiated  monthly base charge and
transaction  fees derived from specific  value-added  





                                       7
<PAGE>




services  purchased by end users. The monthly base charge varies,  between $7.95
and  $300.00 per month,  depending  on the  product  offered and market  segment
served. Certain services include a specific amount of access time providing that
additional  usage beyond the specified  amount is billed based upon a negotiated
rate. In the case of direct subscribers, subscriptions are automatically renewed
each month and fees are  generally  charged to credit  cards until a  subscriber
requests cancellation.

To attract direct  subscribers  and Strategic  Marketing  Partners,  the Company
provides free trial periods of its custom  communications  software to potential
direct subscribers and Strategic  Marketing Partners to allow them to sample the
Company's services.

   
COMPETITION
The  market  for  online  information  and  transactional   services  is  highly
competitive and subject to rapid innovation and technological  change,  shifting
consumer  preferences  and  frequent new service  introductions.  In addition to
competing with other companies that provide  screen-based  phones in combination
with online services,  such as Online Resources and Communications  Corporation,
and InteliData Technologies,  the Company also faces increasing competition from
other emerging services delivered through PCs, such as developing  transactional
services  offered by Checkfree  Corporation,  Microsoft  Corp., PC Quote,  Inc.,
Intuit  Inc.,  Electronic  Data  Systems  Corp.  and other  software  and online
companies. The Company expects competition to increase from existing competitors
and from  new  competitors,  possibly  including  telecommunications  companies.
Established  online  information   services  including  America  Online,   Inc.,
CompuServe  Inc. and Prodigy  Services Co. offer  competing  services  delivered
through  home  computers.  Most  of  the  Company's  competitors  and  potential
competitors  have  substantially  greater  financial,  marketing  and  technical
resources than the Company. The Company 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
the Company's  services  could  materially  and  adversely  affect the Company's
results of operations through price reductions and loss of market share.
    

The   information   content   provided   through  the  Company's   software  and
communication   architecture  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 the Company.

The  principal  competitive  factors in the  online  services  industry  include
content,  product  features and  quality,  ease of use,  access to  distribution
channels,  brand  recognition,  reliability and price.  Management  believes the
strategy of establishing  alliances with potential Strategic Marketing Partners,
and its ability to provide what is believed to be a unique software architecture
should enable the Company to compete effectively.


SOFTWARE
The Company  has  developed  proprietary  software  that it  believes  makes its
services easy to use and visually appealing,  and which utilize the capabilities
of  screen-based  phones,  PCs, PDAs, the Internet,  interactive  voice response
systems, alpha-numeric pagers and PCS devices.

The Company has  completed  development  of  front-end  communications  software
(i.e., a user interface) for  screen-based  phones,  PCs and PDAs, the Internet,
interactive  voice  response  systems and  alpha-numeric  pagers.  Such  display
software  creates a user-friendly  method allowing the user to communicate  with
the 





                                       8
<PAGE>




Company's information data base. The Company intends to continue to dedicate its
internal resources to developing  communication  tools to foster interaction and
improved   navigation  and  presentation   techniques  to  make  it  easier  for
subscribers to find and use relevant services.

   
During the fiscal  years  ended June 30,  1997 and 1996,  the  Company  incurred
$1,150,224 and $1,037,941,  respectively,  for research and project  development
activities.  It is estimated that the Company will require between  $150,000 and
$200,000  to  support  the  additional  programming  and  supervisory  personnel
necessary to integrate the Company's  software with the  information  systems of
each of its Strategic Marketing Partners.
    


PROPRIETARY RIGHTS
The Company has designed and developed its own "device independent"  information
platform,  "SmartServ",  based on Sun  Microsystems,  Inc.  computers and Oracle
Corp.'s  version 7.X relational  database  manager,  to support a variety of end
user devices.  This platform  formats  information  for a particular  device and
presents it in a user friendly manner.  The Company relies upon a combination of
contract  provisions and  copyrights,  trade secret laws, and a service mark and
trademark to attempt to protect its proprietary rights. The Company licenses the
use of its services to Strategic Marketing Partners and direct subscribers under
agreements  that  contain  terms and  conditions  prohibiting  the  unauthorized
reproduction  of the  Company's  software  and  services.  Although  the Company
intends to protect its rights vigorously,  there can be no assurance that any of
the foregoing measures will be successful.

The Company  seeks to protect the source code of its  software as a trade secret
and as an unpublished copyrighted work. The Company has obtained an allowance of
its U.S. trademark  application for the mark "SmartServ Online" for the computer
software  used  with  its  platform  services  and  expects  a  U.S.   trademark
registration  for the mark to be granted in the near future.  This  registration
will  have an  initial  term  of 10  years  and be  renewable  indefinitely  for
successive  10-year  terms upon filing proof of continued  use of the mark.  The
Company  has also filed an  intent-to-use  application  to  register  "SmartServ
Online" as a service  mark for its  platform  services  and as a  trademark  for
related  computer  hardware.   Additionally,  the  Company  is  considering  the
submission  of  patent  applications  for  various  aspects  of its  information
delivery systems.

The Company believes that its software, services, service mark and trademark and
other  proprietary  rights do not  infringe on the  proprietary  rights of third
parties. From time to time, however, the Company may receive communications from
third parties asserting that features or contents of certain of its services may
infringe upon  copyrights or other rights of such parties.  To date, the Company
has received one such  communication,  dated May 23, 1995, but believes that the
assertion  contained therein is without merit. Since the receipt of such letter,
the Company has not received further correspondence.  There can be no assurance,
however, that the infringement claim asserted in such letter will not ultimately
require the Company to enter into a royalty arrangement or result in litigation.
Further,  there can be no  assurance  that other 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.



                                       9
<PAGE>


GOVERNMENT REGULATION
The Company is not currently subject to direct regulation other than federal and
state regulation  generally  applicable to businesses.  However,  changes in the
regulatory  environment  relating to the  telecommunications  and media industry
could have an effect on the Company's  business,  including  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 online service  providers.  The
Company cannot predict the likelihood  that any such  legislation  will pass, or
the financial impact, if any, the resulting regulation or taxation may have.

Moreover,  the  applicability  to online  service  providers  of  existing  laws
governing  issues such as intellectual  property  ownership,  libel and personal
privacy is uncertain.  Recent events  relating to the use of online services for
illegal  activities  have  increased  public  focus and could lead to  increased
pressure on legislatures to impose  regulations on online service providers such
as the Company.  The law relating to the liability of online  service  companies
for information  carried on or  disseminated  through their systems is currently
unsettled  and has been the  subject  of several  recent  private  lawsuits.  If
similar  actions were to be initiated  against the Company,  costs incurred as a
result of such actions  could have a material  adverse  effect on the  Company's
business.


EMPLOYEES
The  Company  employs  22  people,  of whom 19 are  full-time  employees.  It is
anticipated  that a minimum  of 3 to 6 people  will be added  during  the period
ending December 31, 1997, in response to the computer  programming  requirements
of Strategic  Marketing  Partners'  product  offerings and for customer support.
None of the Company's employees are covered by a collective bargaining agreement
and  the  Company  believes  that  its   relationship   with  its  employees  is
satisfactory.



                                       10
<PAGE>


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

The  Company  occupies  approximately  6,300  square  feet in a leased  facility
located in Stamford, Connecticut. The lease expires in October 2002.


ITEM 3.    LEGAL PROCEEDINGS
-------

As previously  reported,  in August 1996, the Company commenced an action in the
Supreme Court of the State of New York, New York County, against Strategica Inc.
and its affiliated entities  ("Strategica").  Strategica asserted a counterclaim
against the Company for breach of contract.  The Company and Strategica  entered
into a  settlement  agreement  providing  for the  payment  of  $100,000  by the
Company.

There are no other pending or threatened  material legal proceedings against the
Company or any of its properties.


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

None.



                                       11
<PAGE>


                                     PART II


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

SmartServ's  $.01 par value common stock ("Common Stock")  commenced  trading on
March 21,  1996 on the  over-the-counter  market  and is quoted on the  National
Association of Securities  Dealers' Automated  Quotation System ("NASDAQ").  The
Company's Redeemable Common Stock Purchase Warrants  ("Warrants") also commenced
trading on March 21, 1996 on the  over-the-counter  market and are quoted on the
NASDAQ.

On May 22, 1997, the Company received  notification from The Nasdaq Stock Market
that with the filing of Form 10-QSB for the quarter  ended March 31,  1997,  the
Company no longer met the total asset and net capital requirements of $2,000,000
and $1,000,000,  respectively, for continued listing of the Company's securities
on The Nasdaq Stock Market.  Commencing  September 17, 1997,  NASDAQ changed the
trading  symbol for the Company's  Common Stock and Warrants from SSOL and SSOLW
to SSOLC and SSOWC, respectively, subject to compliance with its total asset and
net capital requirements on or prior to September 30, 1997.

The Company  completed a private placement of $4 million of Prepaid Common Stock
Purchase Warrants on September 30, 1997 and has submitted various information to
NASDAQ  to  demonstrate   the  Company's   compliance   with  NASDAQ's   listing
requirements.  The  Company's  Common Stock and Warrants  will continue to trade
under SSOLC and SSOWC pending approval of the financing transaction by NASDAQ.

The following  table sets forth the high and low prices for the Common Stock and
Warrants during the periods indicated as reported by NASDAQ.

                                   COMMON STOCK                   WARRANTS
                                  HIGH      LOW               HIGH       LOW
YEAR ENDED JUNE 30, 1997                                               
                                                                       
First Quarter                  $  7.500   $ 4.750           $ 3.8750   $ 2.5000
Second Quarter                    6.375     4.250             3.2500     1.2500
Third Quarter                     5.375     4.375             2.0625     1.3125
Fourth Quarter                    4.625     1.875             1.5000     0.5312
                                                                       
                                                                       
YEAR ENDED JUNE 30, 1996                                               
                                                                       
Third Quarter                     7.500     6.000             4.125      3.000
Fourth Quarter                    8.250     5.500             4.500      2.750
                                                                    


As of  October  9,  1997 the  Company  had  3,695,000  shares  of  Common  Stock
outstanding  held by 53 record  holders.  The Company  estimates that the Common
Stock is held by approximately  1,500 beneficial  holders.  As of such date, the
Company had 2,762,000 Warrants outstanding held by 20 record holders.



                                       12
<PAGE>



The  Company  has never  paid a cash  dividend  on its Common  Stock.  It is the
present  policy of the  Company  to retain  earnings,  if any,  to  finance  the
development  and  growth of its  business.  Accordingly,  the  Company  does not
anticipate  that cash  dividends  will be paid until the earnings and  financial
condition of the Company warrant such  dividends,  and there can be no assurance
that the Company can achieve such earnings.





                                       13
<PAGE>


ITEM 6.    MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
------- 

PLAN OF OPERATION

The Company  provides online  information  and  transactional  services  through
screen-based telephones,  personal computers,  personal digital assistants,  the
Internet,  interactive voice response systems,  alpha-numeric paging devices and
other  personal   communications  systems  to  clients  of  potential  Strategic
Marketing Partners,  as well as to prospective direct  subscribers.  The Company
has exited  from the  development  stage  with the  completion  of its  software
architecture  and product  offering and has  commenced  the  implementation  its
marketing strategies.

The Company's plan of operation  includes programs for marketing  simultaneously
at two distinct levels. At the first level, the Company is developing  strategic
marketing  relationships  with key partners that provide access to large numbers
of  potential  subscribers  for its monthly  services.  These  partners  include
regional  telephone  operating  companies,  long  distance  carriers,  telephone
equipment  manufacturers and others who distribute  screen telephone  equipment,
market local screen telephone  services or otherwise  benefit from the increased
acceptance of these devices.  Screen phones were developed to facilitate the use
of caller  ID,  call  waiting  and other  services  offered  at a premium by the
telephone companies.  To these partners, the Company's services are perceived as
a means of increasing  interest in and sales of screen telephones,  and there is
thus a strong  incentive  to promote the  Company's  services  as a  value-added
benefit.

The Company is also working with businesses that desire to provide new services,
such as those provided by the Company, to an existing base of clients.  Examples
include brokerage firms,  such as Andrew Peck & Associates,  Inc., First Montauk
Securities, Inc., and other correspondents of Schroder & Co., Inc. whose clients
can benefit from the  efficiency,  convenience and timeliness of the information
services  provided by the Company.  The Company will co-brand with its Strategic
Marketing Partner or offer its services under its Strategic  Marketing Partner's
name.  By  providing  this  branding  flexibility,  the Company has been able to
expand the number of businesses interested in forming relationships with it, and
has the ability to market its services under far more  recognizable  brand names
than its own.

The Company is working with Strategic  Marketing Partners to assure awareness of
the Company's  services by consumers.  Programs under  development with existing
Strategic Marketing  Partners,  such as Northern Telecom and CIDCO Incorporated,
include direct marketing, package inserts, and in-store promotions.

At the second level,  the Company has initiated a direct  marketing  program for
its SmartServ  "Pro" stock quote  services.  The response to  advertisements  in
Investors'  Business Daily and television  commercials run on cable station CNBC
have demonstrated that a strong and active market exists for this information.

Management  believes  that most of the  Company's  revenues  will  ultimately be
derived from end users who purchase the  Company's  services  through  Strategic
Marketing Partners with mass distribution capabilities.  The Company anticipates
that Strategic Marketing Partners will brand the Company's "bundled" information
services with their own private  label,  promote the packaged  offering and then
distribute the Company's  information package on screen-based phones, PCs, PDAs,
the Internet, interactive voice response systems, alpha-numeric pagers and other
PCS devices to their  clients.  The Company  has the  ability to  customize  the
information  package to be offered to each Strategic  Marketing Partner,  and in
turn to their end users.  The  Company is also  developing  a direct  subscriber
base.

                                       14
<PAGE>




Management   anticipates   that  staffing   requirements   associated  with  the
implementation of its plan of operation will result in the addition of a minimum
of 3 to 6 personnel  during the period ending  December 31, 1997. Such personnel
will be added to assist with the programming requirements of Strategic Marketing
Partners' product offerings and for customer support.


RESULTS OF OPERATIONS

During  the  fiscal  year  ended  June  30,  1997,  the  Company  commenced  the
implementation of its marketing strategies.  Sales of the Company's retail stock
quote product and related  screen-based  telephones were approximately  $323,586
and sales to Sprint customers were approximately $22,775. Additionally, revenues
from the  enhancement,  implementation  and  marketing  of services to Strategic
Marketing  Partners  were  $342,249.  At  September  30,  1997,  the Company has
approximately 3,400 customers. Of such number, 2,200 have been generated through
the Company's  relationship  with Sprint,  1,100 result from the SmartServ "Pro"
advertising  and marketing  program aimed at the PC based  real-time stock quote
user, and 100 are related to the Company's arrangement with Schroder & Co., Inc.
There can however,  be no assurance  that the  Company's  product  offering will
continue to be accepted in the marketplace.

FISCAL YEAR ENDED JUNE 30, 1997 VERSUS FISCAL YEAR ENDED JUNE 30, 1996

During the year ended June 30, 1997, the Company commenced the implementation of
its  marketing  plan and  recorded  revenues  of  $346,361  from the sale of its
information  services and related  screen-based  telephones.  Additionally,  the
Company recorded  revenues of $342,249  related to enhancement,  implementation,
and marketing of services  associated with its arrangement  with Schroder & Co.,
Inc.

During the year ended  June 30,  1997,  with the  Company's  departure  from the
development  stage,  it incurred  costs of revenues  of  $1,133,884.  Such costs
consisted primarily of information and communication costs ($390,000), personnel
costs  ($417,500),  computer  hardware  leases and  maintenance  ($201,800)  and
screenphone  purchases ($95,300).  Product development costs were $1,150,224 vs.
$1,037,941 for the year ended June 30, 1996. Such costs  consisted  primarily of
personnel costs ($686,100) and computer system consultants ($454,000).  Included
in personnel costs is a non-cash charge of approximately  $73,000 for the change
in market value of employee stock options.  During the year ended June 30, 1996,
such product  development  expenses  consisted  primarily  of  personnel  costs.
Included  therein  were fees of  $103,500  that  were  received  from  Strategic
Marketing Partners for the design and development of software applications.



                                       15
<PAGE>



During the year ended June 30, 1997, the Company incurred  selling,  general and
administrative expenses of $2,861,845 vs. $1,220,340 for the year ended June 30,
1996.  Such  costs were  incurred  primarily  for  personnel  costs  ($893,650),
facilities ($148,000), marketing costs ($275,350), advertising costs ($540,000),
professional fees ($456,600),  and telecommunications costs ($85,900).  Included
in personnel costs is a non-cash charge of approximately $115,000 related to the
change in value of employee stock options.  Selling,  general and administrative
costs  increased  $1,641,505  over the prior  year as a result of the  Company's
efforts to build an infrastructure  capable of supporting its operations and the
marketing  and  advertising  of its  information  product  offering.  Such  cost
increases  were  primarily for  advertising  ($382,000),  marketing and customer
support personnel  ($231,000),  marketing consultants  ($125,000),  professional
fees  ($235,000),  investor  and  public  relations  consulting  ($102,300)  and
financial  consulting fees ($115,000),  and for additional  managerial personnel
and salaries  ($125,000).  The  necessary  funds to support  these  efforts were
provided by the  Company's  Initial  Public  Offering  ("IPO") in March 1996 and
revenues from information sales and services.

   
Interest income for the year ended June 30, 1997 amounted to $74,507 vs. $51,527
for the year ended June 30, 1996.  Such amounts were earned  primarily  from the
Company's  investments in highly liquid commercial paper. Interest and financing
costs for the year ended June 30, 1997 were $51,646.  Such amounts were incurred
in  connection  with the issuance of  short-term  notes  payable and  associated
common stock purchase warrants.  Interest and financing costs for the year ended
June 30,  1996 were  incurred  in  connection  with the senior and  subordinated
notes,  as well as the  bridge  financing  outstanding  during  the  period  and
amounted to $759,533.
    


FISCAL YEAR ENDED JUNE 30, 1996 VERSUS FISCAL YEAR ENDED JUNE 30, 1995

During the year ended June 30, 1996, the Company  incurred  product  development
expenses of $1,037,941  vs.  $677,303 for the year ended June 30, 1995. The bulk
of such costs  ($755,218) were incurred in the second half of the Company's 1996
fiscal  year as a result of the  Company's  enhanced  efforts  to  complete  the
development  of its  information  platform.  These  efforts  were  funded by the
Company's IPO and the borrowing of $1,200,000 of short-term  debt.  Included in,
and offset against,  product development costs for the years ended June 30, 1996
and 1995 were $103,500 and $210,000,  respectively, which were received from the
Company's  Strategic Marketing Partners to assist in the development of computer
software  applications  for use by both the Company and its Strategic  Marketing
Partners.   During  the  year  ended  June  30,  1995,  the  Company   wrote-off
approximately  $182,000 of previously  capitalized  software  development  costs
resulting from the delayed  commercialization  and  availability of its products
and services.

During the year ended June 30, 1996, the Company incurred  selling,  general and
administrative  expenses of $1,220,340 vs.  $769,821  during the year ended June
30, 1995. The increase  resulted  primarily from the increase in fees ($160,000)
paid to  financial  and  marketing  consultants,  a non-cash  charge  ($110,000)
relating to the grant of employee  stock  options,  an increase in  professional
fees ($50,000), the hiring of a public relations firm in connection with the IPO
($40,000), and the hiring of financial and marketing personnel during the fourth
quarter ($32,000).

During the year ended June 30,  1996,  the Company  incurred  interest  costs of
$242,000 vs.  $106,595 during the fiscal year ended June 30, 1995. This increase
was a direct result of the issuance of $1,200,000 in short-term notes during the
year  and  the  increased  length  of  time  during  which  long-term  debt  was
outstanding  during the year. Debt origination  costs increased from $300,000 in
the fiscal  year ended June 30,  1995 to  $517,533 in the fiscal year ended June
30, 1996.  During 1995,  the Company  issued  Common Stock valued at $300,000 to
InterBank  Corporation as additional  consideration for the issuance of $312,500
of senior notes. During 1996, the Company incurred  underwriting  ($180,000) and
legal  ($45,000)  fees in  connection  with the  issuance of the  $1,200,000  of
short-term notes and related common stock purchase  warrants.  In addition,  the
Company  wrote-off  deferred  financing costs of $260,000 in connection with the
Company's  inability to obtain an acceptable loan  commitment from Stategica,  a
financial  intermediary  which had  received  116,550  shares of Common Stock in
exchange  for a  commitment  to provide the Company  with a  $2,500,000  line of
credit facility.


                                       16
<PAGE>


CAPITAL RESOURCES AND LIQUIDITY

Since  inception of the Company on August 20, 1993 through  March 21, 1996,  the
date of the IPO, the Company had funded its operations  through a combination of
private  debt  and  equity   financings   totaling   $2,900,000   and  $300,000,
respectively.

The IPO of 1,695,000 common shares and 1,725,000 common stock purchase  warrants
on March 21,1996 provided the Company with gross proceeds of $8,647,500.  Direct
costs associated with the IPO were approximately $1,589,000. In conjunction with
the IPO, the Company converted one-half of the convertible subordinated debt and
accrued  interest  thereon into  427,735  shares of Common Stock at a conversion
rate of $1.65 per share. The remainder of the debt and accrued interest thereon,
totaling $705,763,  was repaid from the proceeds of the IPO.  Additionally,  the
Company  retired senior notes  amounting to $462,502,  as well as the short-term
notes amounting to $1,200,000.

   
During the first half of the year ended June 30, 1997, the Company's  operations
were funded  through the proceeds of the March 1996 IPO and  revenues  generated
from the  Company's  marketing and  advertising  programs.  Commencing  with the
second half of 1997,  the Company  experienced  both equity and working  capital
constraints  resulting  from the  information  delivery  system's  inability  to
support and retain the volume of users generated by the Company's  marketing and
advertising  programs.  In May  1997,  the  Company  arranged  a line of  credit
facility with a financial institution.  Such line of credit was originated for a
maximum  borrowing  amount of $550,000.  In July and September 1997 the facility
was amended to allow for additional borrowings of up to $222,222. In conjunction
with the origination of the line of credit facility,  the Company issued 250,000
common stock  purchase  warrants to the financial  institution.  Similarly,  the
Company issued 50,500 warrants for each of the July and September amendments. As
a result  of the  Company's  default  on the note in  August,  the  Company  was
required to issue 300,500 "default" warrants to such institution.  These 651,500
warrants have been issued at exercise  prices  ranging from $1.125 to $2.825 and
expire in September  2002.  The exercise price of these warrants was adjusted in
September  1997 to a maximum of $1.40.  The Company will record a charge for the
issuance of the default and amendment  warrants in the quarter  ended  September
30, 1997.
    

In May 1997, the Company entered into a 3 year  noncancelable  capital lease for
certain computer  equipment used to provide  information  services.  The cost of
this equipment  ($246,211) is being financed through the manufacturer's  finance
division.

On September  30, 1997,  The Zanett  Securities  Company  ("Zanett"),  acting as
placement agent for the Company,  completed a private placement ("Placement") of
$4 million of the Company's  Prepaid  Common Stock Purchase  Warrants  ("Prepaid
Warrants").  The sale of these Prepaid Warrants was exempt from the registration
requirements  of the Securities Act of 1933, as amended,  pursuant to Regulation
D. Each Prepaid Warrant entitles the holder to purchase that number of shares of
Common Stock that is equal to $1,000 divided by the applicable  exercise  price.
Such exercise  price is determined  initially as 70% of the average  closing bid
price of the  Common  Stock for the 10 trading  days  ending on the day prior to
exercise of the Prepaid Warrants.  Additionally,  the exercise discount shall by
increased  by 1% for each  subsequent  60 day period that the  Prepaid  Warrants
remain unexercised.  The exercise price, however,  shall never exceed $1.40. The
Prepaid  Warrants  may be  exercised  on the  earlier  of the date upon  which a
registration  statement  is declared  effective by the SEC or December 29, 1997.
The sale of Common  Stock  issued  upon  exercise  of the  Prepaid  Warrants  is
restricted  to  one-third  for the first 60, 90 and 120 days  subsequent  to the
registration  statement  becoming  effective.  The  Prepaid  Warrants  expire on
September 30, 2000.



                                       17
<PAGE>


As compensation for the successful completion of the Placement,  Zanett received
a  placement  fee  and  an  unaccountable  expense  allowance  of  10%  and  3%,
respectively, of the gross proceeds of the Placement.  Additionally, the Company
issued 600,000 Common Stock Purchase  Warrants to Zanett that are exercisable at
$1.125 per share of Common Stock.

   
Also in conjunction  with the Placement,  the Company  entered into an agreement
with a financial  consultant who is an affiliate of Zanett  Lombardier,  Ltd, an
investor in the Prepaid  Warrants.  During the  five-year  term of the agreement
this  consultant  will provide the Company with  advisory  services  relating to
financial and strategic  ventures and alliances,  investment banking and general
financial advisory services, and advice and assistance with the Company's market
development  activities.  As compensation for these services, the Company issued
3,555,555 Common Stock Purchase  Warrants to this financial  consultant that are
exercisable  at $1.125 per share of Common  Stock.  The Company has valued these
warrants  using  the   Black-Scholes   pricing   methodology  at   approximately
$4,400,000.  Such amount will be  recorded in  stockholders'  equity as unearned
compensation and amortized to income over the five-year term of the agreement.
    

As part of the Placement,  Zanett  converted a note payable of $772,222,  issued
pursuant to a Line of Credit  Agreement  dated May 29,  1997,  as  amended,  and
accrued interest thereon of $63,837 into Prepaid  Warrants.  The net proceeds of
the  Placement  of  $2,643,941   will  be  used  for  general   working  capital
requirements.

The Company has entered into a 3 year  contract  with  Sprint/United  Management
Corp. and is currently negotiating agreements with several major stock brokerage
firms. The Company's management believes that upon the successful implementation
of its marketing plan,  sufficient  revenues will be generated to meet operating
requirements.  Management  also  believes that the  successful  execution of its
proposed plan of operations  will generate  sufficient cash flow from operations
to enable the Company to offer its services on an  economically  sound basis and
thereby  eliminate,  within a reasonable time period,  the concerns expressed in
the "going concern" paragraph appearing in the Report of Independent Auditors on
page 20 herein.  No  assurance  can be given that such goals will be obtained or
that any expected revenues or cash flows will be forthcoming.

Management  estimates  that,  without a  significant  increase in revenues,  net
proceeds  from  the  Placement  will be  sufficient  to  support  the  Company's
operations through April 1998. The Company intends to seek additional sources of
capital and liquidity through collaborative  agreements,  through the redemption
of the outstanding  common stock purchase  warrants or through public or private
financing;  however, there can be no assurance that additional financing will be
available on acceptable terms or at all.


CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

From time to time,  information provided by the Company,  statements made by its
employees  or  information  included  in its  filings  with the  Securities  and
Exchange  Commission  (including this Form 10-KSB) may contain  statements which
are  not  historical  facts,  so-called  "forward  looking  statements".   These
forward-looking  statements  are made pursuant to the safe harbor  provisions of
the Private  Securities  Litigation  Reform Act of 1995.  The  Company's  actual
future results may differ significantly from those stated in any forward-looking
statements.   Forward-looking   statements   involve   a  number  of  risks  and
uncertainties,  including,  but not limited to, product demand,  pricing, market
acceptance,  litigation,  intellectual  property  rights,  risks in product  and
technology development,  product competition,  limited number of customers,  key
personnel,  and  other  risk  factors  detailed  in this  Annual  Report on Form
10-KSB/A and in the Company's other Securities and Exchange Commission filings.



                                       18
<PAGE>


ITEM 7.    FINANCIAL STATEMENTS



                                                                            PAGE

Report of Independent Auditors                                               20

Balance Sheets as of June 30, 1997 and 1996                                  21

Statements of Operations for the years                                       
     ended June 30, 1997, 1996 and 1995                                      23

Statement of Stockholders' Equity (Deficiency)
     for the years ended June 30, 1997, 1996 and 1995                        24

Statements of Cash Flow for the years
     ended June 30, 1997, 1996 and 1995                                      26

Notes to Financial Statements                                                27




                                       19

<PAGE>







                         REPORT OF INDEPENDENT AUDITORS




Stockholders and Board of Directors
SmartServ Online, Inc.

We have audited the accompanying  balance sheets of SmartServ Online, Inc. as of
June 30, 1997 and 1996, and the related statements of operations,  stockholders'
equity  (deficiency),  and cash flows for each of the three  years in the period
ended June 30, 1997. These financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of SmartServ Online, Inc. at June
30, 1997 and 1996, and the results of its operations and its cash flows for each
of the three  years in the  period  ended  June 30,  1997,  in  conformity  with
generally accepted accounting principles.

The accompanying 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  incurred  recurring  operating  losses and has both  working
capital and net asset  deficiencies.  These conditions raise  substantial  doubt
about the  Company's  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


Stamford, Connecticut
October 6, 1997

                                       20

<PAGE>


                             SMARTSERV ONLINE, INC.

                                 BALANCE SHEETS


                                                               JUNE 30
                                                     --------------------------
                                                         1997           1996
                                                     -----------    -----------
ASSETS

Current assets
   Cash                                              $    93,345    $ 3,460,850
   Accounts receivable, net of an allowance
       for losses of $6,000 in 1997 and $0 in 1996       149,782         57,990
   Prepaid expenses                                       90,725         68,310
                                                     -----------    -----------
Total current assets                                     333,852      3,587,150
                                                     -----------    -----------

Property and equipment
   Data processing equipment                             564,098        280,814
   Data processing equipment purchased
       under a capital lease                             246,211           --
   Office furniture and equipment                         69,196         37,051
   Leasehold improvements                                 36,357           --
   Display equipment                                       9,635          9,635
                                                     -----------    -----------
                                                         925,497        327,500
   Accumulated depreciation, including $8,207 for
       equipment purchased under a capital lease        (181,783)       (68,601)
                                                     -----------    -----------
                                                         743,714        258,899
                                                     -----------    -----------

   
Other assets
   Deferred charges                                       87,905         63,000
   Security deposit                                       81,218         81,218
                                                     -----------    -----------
                                                         169,123        144,218
                                                     -----------    -----------

Total Assets                                         $ 1,246,689    $ 3,990,267
                                                     ===========    ===========
    




See accompanying notes.



                                       21
<PAGE>


<TABLE>
<CAPTION>
                                                                    JUNE 30
                                                          --------------------------
                                                              1997           1996
                                                          -----------    -----------
<S>                                                       <C>            <C>        
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

Current liabilities
   Accounts payable                                       $   829,355    $   406,498
   Accrued liabilities                                        211,813         76,353
   Accrued interest                                            16,323           --
   Payroll taxes payable                                       20,383         14,901
   Salaries payable                                            46,018         44,654
   Current portion of capital lease obligation                 86,072           --
   Deferred revenues                                           24,914           --
                                                          -----------    -----------
Total current liabilities                                   1,234,878        542,406
                                                          -----------    -----------

Long-term portion of capital lease obligation                 160,139           --

   
Notes payable                                                 550,000           --

Stockholders' equity (deficiency)
Common stock - $.01 par value
   Authorized - 15,000,000 shares
   Issued and outstanding - 3,695,000 shares at
     June 30, 1997 and 1996                                    36,950         36,950
Additional paid-in capital                                  9,046,592      8,758,299
Accumulated deficit                                        (9,781,870)    (5,347,388)
                                                          -----------    -----------
Total stockholders' equity (deficiency)                      (698,328)     3,447,861
                                                          -----------    -----------

Total Liabilities and Stockholders' Equity (Deficiency)   $ 1,246,689    $ 3,990,267
                                                          ===========    ===========
</TABLE>
    


                                       22
<PAGE>


                             SMARTSERV ONLINE, INC.

                            STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                     YEAR ENDED JUNE 30
                                         -----------------------------------------
                                             1997           1996           1995
                                         -----------------------------------------
<S>                                      <C>            <C>            <C>      
Revenues                                 $   688,610    $      --      $      --
                                         -----------    -----------    -----------

Costs and expenses
   Cost of services                       (1,133,884)          --             --
   Product development expenses           (1,150,224)    (1,037,941)      (677,303)
   Selling, general and administrative
         expenses                         (2,861,845)    (1,220,340)      (769,821)
                                         -----------    -----------    -----------

Total costs and expenses                  (5,145,953)    (2,258,281)    (1,447,124)
                                         -----------    -----------    -----------

Loss from operations                      (4,457,343)    (2,258,281)    (1,447,124)
                                         -----------    -----------    -----------

   
Other income (expense):
   Interest income                            74,507         51,527          7,536
   Interest expense                          (20,194)      (242,000)      (106,595)
   Debt origination costs                    (31,452)      (517,533)      (300,000)
                                         -----------    -----------    -----------

                                              22,861       (708,006)      (399,059)
                                         -----------    -----------    -----------

Net loss                                 $(4,434,482)   $(2,966,287)   $(1,846,183)
                                         ===========    ===========    =========== 

Net loss per share (Note 2)              $     (1.20)   $     (1.26)   $     (1.12)
                                         ===========    ===========    =========== 
    

Weighted average shares outstanding
   (Note 2)                                3,695,000      2,355,000      1,643,000
                                         ===========    ===========    =========== 
</TABLE>

See accompanying notes.



                                       23
<PAGE>


                             SMARTSERV ONLINE, INC.

                 STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)

<TABLE>
<CAPTION>
                                                             COMMON STOCK           ADDITIONAL
                                                      --------------------------      PAID-IN      ACCUMULATED
                                                         SHARES       PAR VALUE       CAPITAL        DEFICIT
                                                      -----------    -----------    -----------    -----------
<S>                                                     <C>                <C>        <C>             <C>      
Balances at July 1, 1994                                1,756,000    $     8,819    $ 1,228,145    $  (534,918)

Conversion of equity investment by an investor to
   debt (12% notes due December 31, 1999) on
   January 1, 1995                                       (881,000)        (8,810)    (1,191,190)          --
Cancellation of Class A (voting) common stock on
   March 15, 1995                                        (875,000)            (9)          --             --
Issuance of common stock in exchange for Class A
   (voting) common stock to officers on March 15,
   1995                                                 1,597,500         15,975        (15,975)          --
Issuance of common stock to investors in
   conjunction with issuance of $312,500, 12% notes
   on March 15, 1995                                      177,500          1,775        298,225           --
Net loss                                                                                            (1,846,183)
                                                      -----------    -----------    -----------    -----------

Balances at June 30, 1995                               1,775,000         17,750        319,205     (2,381,101)

Issuance of common stock and warrants to investors
   at $4.00                                                57,500            575        229,425           --
Issuance of warrants in conjunction with the
   $1,200,000 of Bridge notes                                --             --           30,000           --
Cancellation of 395,535 shares previously issued to
   officers                                              (393,535)        (3,935)         3,935           --
Issuance of common stock at $5.00 per share and
   1,725,000 warrants at $0.10 per warrant, net of
   direct costs of the offering of $1,588,852           1,695,000         16,950      7,041,698           --
Issuance of 427,735 shares of common stock for
   redemption of the $612,500, 12% convertible,
   subordinated notes and accrued interest thereon        427,735          4,277        701,486           --
Issuance of common stock to a financing
   intermediary for arrangement of a standby
   revolving credit proposal                              116,550          1,165        231,935           --
Issuance of common stock to an investor in
   accordance with the terms of the $312,500, 12%
   notes                                                   16,750            168         33,332           --
Other issuances of warrants                                  --             --            1,510           --
Issuance of employee stock options                           --             --          165,773           --
Net loss                                                     --             --             --       (2,966,287)
                                                      -----------    -----------    -----------    -----------

Balances at June 30, 1996                               3,695,000    $    36,950    $ 8,758,299    $(5,347,388)
                                                      ===========    ===========    ===========    ===========
</TABLE>

                                   (Continued)
See accompanying notes.


                                       24
<PAGE>


                             SMARTSERV ONLINE, INC.

                 STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
                                  (continued)
<TABLE>
<CAPTION>
                                                             COMMON STOCK           ADDITIONAL
                                                      --------------------------      PAID-IN      ACCUMULATED
                                                         SHARES       PAR VALUE       CAPITAL        DEFICIT
                                                      -----------    -----------    -----------    -----------
<S>                                                     <C>                <C>        <C>             <C>      
Balances at June 30, 1996                               3,695,000    $    36,950    $ 8,758,299    $(5,347,388)

Change in market value of employee options                  --              --          188,293           --

   
Issuance of warrants in connection with
   investment advisory services                             --              --           75,000           --

Issuance of warrants in connection with
   short-term line of credit                                --              --           25,000           --

Net loss                                                    --              --             --       (4,434,482)
                                                      -----------    -----------    -----------    -----------
Balance at June 30, 1997                                3,695,000    $    36,950    $ 9,046,592    $(9,781,870)
                                                      ===========    ===========    ===========    ===========
</TABLE>
    



See accompanying notes.


                                       25
<PAGE>


                             SMARTSERV ONLINE, INC.

                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                         YEAR ENDED JUNE 30
                                                              -----------------------------------------
                                                                 1997           1996           1995
                                                              -----------    -----------    -----------
<S>                                                           <C>            <C>            <C>         
   
OPERATING ACTIVITIES
Net loss                                                      $(4,434,482)   $(2,966,287)   $(1,846,183)
Adjustments to reconcile net loss to net cash used in
operating activities:
       Depreciation and amortization                              149,182         41,285         23,647
       Write-off of software development costs                       --             --          181,956
       Provision for losses on and write-off of receivables        29,248           --             --
       Noncash charges for interest expense                          --           94,274           --
       Noncash debt origination costs                              30,449        477,089        300,000
       Compensation expense                                       188,293        165,773           --
       Consulting services                                         75,000        (10,002)       125,002
       Other changes that provided (used) cash
          Accounts receivable                                    (121,040)       (57,990)          --
          Inventories                                                --           10,440         (4,564)
          Prepaid expenses                                        (22,415)       (23,641)        (1,461)
          Accounts payable and accrued liabilities                558,317        178,136        121,482
          Accrued interest                                         16,323       (106,595)       106,595
          Payroll taxes payable                                     5,482        (73,282)        57,451
          Salaries payable                                          1,364         16,462         12,068
          Unearned revenue                                         24,914           --          (25,000)
                                                              -----------    -----------    -----------
Net cash used in operating activities                          (3,499,365)    (2,254,338)      (949,007)
                                                              -----------    -----------    -----------
    

INVESTING ACTIVITIES
Purchase of equipment                                            (351,786)      (190,973)       (43,116)
                                                              -----------    -----------    -----------
Net cash used in investing activities                            (351,786)      (190,973)       (43,116)
                                                              -----------    -----------    -----------

FINANCING ACTIVITIES
Proceeds from the issuance of common stock                           --        8,705,000           --
Proceeds from the issuance of warrants                               --          202,510           --
Proceeds from issuance of debt                                       --             --           25,000
Repayment of debt                                                    --         (612,500)          --
Proceeds from the issuance of notes                                  --             --          337,500
Repayment of notes                                                   --         (452,500)          --
Proceeds from the issuance of short-term notes                    493,646        999,000           --
Repayment of short-term notes                                        --       (1,200,000)          --
Due from officers, net                                               --          (38,497)        46,766
Capital contribution                                                 --             --               (9)
Deferred charges                                                  (10,000)      (108,000)          --
Costs of issuing common stock and warrants                           --       (1,588,852)          --
                                                              -----------    -----------    -----------
Net cash provided by financing activities                         483,646      5,906,161        409,257
                                                              -----------    -----------    -----------

Increase (decrease) in cash and cash equivalents               (3,367,505)     3,460,850       (582,866)
Cash at beginning of year                                       3,460,850           --          582,866
                                                              ===========    ===========    ===========
Cash at end of year                                           $    93,345    $ 3,460,850    $      --
                                                              ===========    ===========    ===========
</TABLE>

See accompanying notes.


                                       26
<PAGE>


                             SMARTSERV ONLINE, INC.

                          NOTES TO FINANCIAL STATEMENTS



1. NATURE OF BUSINESS AND LIQUIDITY

SmartServ Online, Inc. (the "Company")  commenced operations on August 20, 1993.
The Company makes available  online  information and  transactional  services to
subscribers through  screen-based phones,  personal computers,  personal digital
assistants,  the Internet,  interactive  voice response  systems,  alpha-numeric
pagers and other  personal  communications  systems.  The Company  also offers a
range of  services  designed  to meet the varied  needs of clients of  potential
Strategic  Marketing   Partners,   as  well  as  potential  direct  subscribers,
including: business credit information,  investment newsletters,  stock research
reports,  stock quotes,  nationwide business and residential directory services,
business and financial news, sports information,  research and analysis reports,
trading  activity  reports by insiders of  corporations,  online  FedEx  package
tracking,  electronic  mail,  national  weather  reports and other  business and
entertainment information.  The Company's software architecture and capabilities
format  information  for a particular  device and present the  information  in a
user-friendly manner.

On March 21, 1996, the Company completed an Initial Public Offering of 1,695,000
shares of $.01 par value  common stock at $5.00 per share and  1,725,000  common
stock purchase  warrants at $.10 per warrant.  The Company  received  $7,058,648
from the Offering,  net of the costs of issuing these  securities of $1,588,852.
In connection with the Initial Public Offering,  the Board of Directors voted to
increase the aggregate  number of shares that the Company is authorized to issue
to 15,000,000.

   
The  Company  has  completed   development  of  its  information   platform  and
communications  software and exited the developmental stage; however, it has yet
to generate  significant  revenues.  The Company's financial  statements for the
year ended June 30,  1997 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 incurred a net loss of
$4,434,482  for  the  year  ended  June  30,  1997  and as of such  date  had an
accumulated  deficit of  $9,781,870.  In  addition,  the  Company  has a working
capital  deficiency of approximately  $901,000 and a deficiency of net assets of
approximately  $698,000.  These  conditions  raise  substantial  doubt about the
Company's  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.
    

On September 30, 1997, the Company completed a private  placement  ("Placement")
of $4 million of Prepaid Common Stock Purchase Warrants ("Prepaid  Warrants") as
more fully  disclosed  in Note 11. An integral  part of this  Placement  was the
conversion of notes payable and accrued interest thereon,  aggregating $836,059,
into such Prepaid  Warrants.  The net proceeds to the Company of $2,643,941 will
provide it with working capital and allow it to continue its marketing  efforts.
However,  the Company's  ability to generate fee revenue and working capital may
not be  sufficient  to meet  management's  objectives  as presently  structured.
Management  recognizes  that the Company must  generate  additional  revenues or
consider  modifications  to its sales and  marketing  program or institute  cost
reductions  to allow it to continue to operate with  available  cash  resources.
There is no assurance  that the Company will  generate  future  revenues or cash
flow from operations.  Accordingly,  without a significant increase in revenues,
management  estimates  that the  Placement's  net proceeds will be sufficient to
support the Company's  operations  through April 1998.  The Company's  plans for
increasing  cash resources in the event of limited  acceptance of its product in
the  marketplace  could include  additional  funding  through  private or public
offerings and additional credit facility arrangements.



                                       27
<PAGE>

The  market  for  online  information  and  transactional   services  is  highly
competitive and subject to rapid innovation and technological  change,  shifting
consumer  preferences  and  frequent  new  service  introductions.  The  Company
believes  that  potential  new  competitors,   including  large  multimedia  and
information  systems  companies,  are  increasing  their  focus  on  transaction
processing. Increased competition in the market for the Company's services could
materially  and  adversely  affect the Company's  results of operations  through
price reductions and loss of potential  market share.  The Company's  ability to
compete in the future depends on its ability to maintain the  technological  and
performance advantages of its current distribution platform and to introduce new
applications that achieve market acceptance.

The Company's business plan focuses on the strategy of marketing its services in
partnership with those companies that have an economic  incentive to provide the
Company's  information  platform  to their  customers.  Through  the use of this
model, the consumer is a customer of both SmartServ and its Strategic  Marketing
Partner.  The Company also  believes that the sale of its  information  platform
through the cooperative  efforts of partners with more recognizable  brand names
than its own is important to its success.

The Company is  marketing  its  services  to the  regional  telephone  operating
companies,  long distance carriers and telephone  equipment  manufacturers which
have an  incentive  to  increase  the number of screen  phones in  service.  The
Company  believes  its  information  platform  to be a  value-added  service  in
connection with the sale of screen phones to the consumer  market.  In September
1997,  the  Company  signed a 3 year  contract  with a major  telecommunications
company for the delivery of the Company's  information  services into additional
markets  beyond an initial trial city.  The Company  anticipates  that this will
result in the deployment of the Company's  information  services in Florida, New
York, North Carolina,  Chicago, Los Angeles and other designated markets as part
of a national campaign.

The Company is also working with businesses,  such as brokerage firms, that need
to disseminate proprietary information more effectively to their existing client
base. The Company's information platform and communications  architecture allows
the bundling of its partners'  proprietary  information with its own value-added
information,  and makes this package  available to subscribers 24 hours per day,
365 days per year.  The  Company is  currently  working  with a stock  brokerage
company in an effort to provide proprietary account information to the customers
of its correspondent relationships. As a direct result of this relationship, the
Company is providing its stock quote product and online trading  services to the
customers  of a  correspondent  relationship.  Additionally,  the Company has an
agreement  with another  correspondent  firm to make the  Company's  "BrokerNet"
program available to its 400 independent stockbrokers.

Management  believes  that the  Company's  primary  source of  revenues  will be
derived from consumers who purchase the services through its Strategic Marketing
Partners. This strategy provides for the distribution of information services to
a potentially  large  audience.  In an effort to diversify its revenue base, the
Company  has  commenced   development  of  a  direct  subscriber  base.  Through
advertisements  in business  periodicals  such as Investors'  Business Daily and
television commercials run on cable station CNBC, the Company has had success in
marketing its SmartServ  "Pro" stock quote  service.  At September 30, 1997, the
Company had a subscriber base of approximately 3,400.



                                       28
<PAGE>

Notwithstanding  the execution of a contract with a  telecommunications  company
and the continual  discussions with potential Strategic Marketing Partners about
potential marketing relationships,  there can be no assurance that the Company's
products and services  will  continue to be accepted in the  marketplace  by the
ultimate consumers.


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION
---------------------
The financial  statements  are prepared in conformity  with  generally  accepted
accounting  principles.  During the year ended June 30, 1997, the Company exited
the development stage.

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

REVENUE RECOGNITION
-------------------
Revenues are recognized as services are provided.  Deferred  subscription  fees,
resulting  from  customer  prepayments,  are  recognized  over  the  term of the
subscription period.

LOSS PER SHARE
--------------
Net loss per share is computed  based on the weighted  average  number of common
shares and common  equivalents  outstanding during the period using the treasury
stock method.  Shares from the assumed  exercise of options and warrants granted
by the Company have been included in the  computations of loss per share for all
periods, unless their inclusion would be antidilutive.  However, for purposes of
computing net loss per share, options and warrants granted by the Company during
the 12 months  preceding the Initial Public  Offering date have been included in
the calculation of common and common  equivalent  shares  outstanding as if they
were outstanding for all periods presented prior to the Initial Public Offering,
using the treasury stock method and the Initial  Public  Offering price of $5.00
per share.

FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The carrying  amounts of the Company's  financial  instruments  approximate fair
value.

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

CONCENTRATION OF CREDIT RISK
----------------------------
Financial instruments which potentially subject the Company to concentrations of
credit  risk  consist  primarily  of  accounts  receivable.  There is no  single
geographic  concentration of sales or related accounts  receivable in the United
States. At June 30, 1997 accounts  receivable consist principally of amounts due
from a major credit card company  ($26,250),  a stock  brokerage firm ($83,400),
and a telecommunications company ($25,000). The Company performs periodic credit
evaluations  of its  customers  and provides for credit  losses in the financial
statements.

PROPERTY AND EQUIPMENT
----------------------
Property and equipment are stated at cost and include equipment  purchased under
a capital lease.  Depreciation is computed using the  straight-line  method over
estimated useful lives of three to ten years.

   
ADVERTISING COSTS
-----------------
Advertising  costs are expensed as incurred and were  approximately  $540,000 in
1997.  No such costs were incurred in 1996 or 1995.
    


                                       29
<PAGE>



STOCK BASED COMPENSATION
------------------------
The  Company  maintains  a stock  option  plan for  employees  and  non-employee
directors  that provides for the granting of stock options for a fixed number of
shares with an exercise  price equal to the fair value of the shares at the date
of grant.  The Company accounts for this stock  compensation  plan in accordance
with  APB  Opinion  No.  25,   "Accounting   for  Stock  Issued  to  Employees".
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. In 1997,  the Company  adopted the  disclosure  provisions of Statement of
Financial   Accounting   Standards   No.   123   "Accounting   for   Stock-based
Compensation".

RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------

   
In February  1997, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement  128,  Earnings Per Share.  Statement  128  establishes  standards for
computing and  presenting  earnings per share.  This  Statement  simplifies  the
standards for computing  earnings per share  previously  required by APB Opinion
No.  15, and makes them  comparable  to  international  EPS  standards.  Also in
February  1997,  the FASB issued  Statement No. 129,  Disclosure of  Information
about Capital  Structure.  This Statement  established  standards for disclosing
information  about an entity's capital  structure.  Both of these statements are
effective  for fiscal  years ending on or after  December 15, 1997.  The Company
plans to adopt and apply the provisions of these  statements for the fiscal year
ending  June  30,  1998.  The  resulting  effect  of the  application  of  these
statements  is  not  expected  to  have  a  material  impact  on  the  financial
statements.
    


3.    NOTES PAYABLE

On May 29,  1997,  the Company  entered  into a line of credit  facility  with a
financial institution for a maximum borrowing thereunder of $550,000. Borrowings
under this  facility were to be repaid on August 27, 1997 along with interest at
the rate of 24% per annum. On July 21, 1997 and September 16, 1997, the facility
was amended to provide for additional borrowings of up to $222,222. On September
30, 1997, notes payable of $772,222 and accrued interest thereon of $63,837 were
converted into the Company's  Prepaid  Warrants as more fully  described in Note
11.

   
In conjunction with the origination of the line of credit facility,  the Company
issued  250,000  common stock  purchase  warrants to the financial  institution.
Similarly, the Company issued 50,500 warrants for each of the July and September
amendments.  As a result of the  Company's  default on the note in  August,  the
Company was required to issue 300,500  "default"  warrants to such  institution.
These 651,500  warrants have been issued at exercise  prices ranging from $1.125
to $2.825 and expire in September 2002. The exercise price of these warrants was
adjusted in  September  1997 to a maximum of $1.40.  The  Company  will record a
charge for the  issuance of the default  and  amendment  warrants in the quarter
ended September 30, 1997.

The value ($25,000) ascribed to the 250,000 warrants is being amortized over the
life of the debt as additional interest expense.
    


                                       30
<PAGE>

4.    DEBT

In a private placement  commencing in September 1995, the Company issued secured
promissory notes and common stock purchase warrants to investors in exchange for
$1,000,000 of interim financing.  The notes were repaid with the proceeds of the
Initial  Public  Offering  along with interest at the rate of 2% per thirty (30)
day month.  The warrants provide for the purchase of 200,000 common shares at an
exercise  price of $4.00 per share,  subject to the same terms and conditions as
the common stock purchase warrants issued in conjunction with the Initial Public
Offering.

On January 31, 1996, the Company entered into an agreement to borrow $200,000 at
an interest  rate of 10%.  Principal  and accrued  interest were repaid with the
proceeds of the Initial  Public  Offering.  In  conjunction  with this note, the
Company  agreed to issue  warrants for the purchase of 100,000  common shares on
March 21, 1996.  These  warrants are  exercisable  at $4.00 per share for a five
year period commencing March 21, 1996.

All costs  incurred in  conjunction  with the  issuance of these notes have been
charged to debt  origination  costs in the statement of operations  for the year
ended June 30, 1996.

Interest  expense paid during the years ended June 30,  1997,  1996 and 1995 was
$9,194, $327,600, and $0, respectively.

During the year ended June 30, 1997, the Company leased computer  equipment with
a  capitalized  cost of  $246,211.  The  recording of such costs and the related
capitalized  lease obligation are non-cash  transactions for the purposes of the
Statement of Cash Flows.


5. EQUITY TRANSACTIONS

In conjunction with an August 1995 stock subscription in the amount of $230,000,
the  Company  issued  57,500  shares of common  stock and  67,500  common  stock
purchase warrants to a group of outside investors.  The warrants provide for the
purchase  of common  stock at $4.00 per share at any time  during  the five year
period ending March 20, 2001.  These warrants  cannot be redeemed by the Company
without the prior written consent of the holders.

On March 21, 1996, the Company completed an Initial Public Offering of 1,695,000
shares of common stock at $5.00 per share and 1,725,000  redeemable common stock
purchase  warrants for $0.10 per warrant.  Each warrant  entitles the registered
holder  thereof to purchase  one share of common  stock at an exercise  price of
$4.00 per share,  subject to adjustments in certain  events,  at any time during
the period  commencing  March 21,  1997,  and  expiring on March 20,  2001.  The
warrants  are subject to  redemption  by the Company at $0.10 per warrant at any
time  commencing  March 21, 1997,  on not less than 30 days' prior notice to the
holders of the  warrants,  provided  the average  closing bid  quotation  of the
common  stock as reported on The NASDAQ  Stock  Market or a national  securities
exchange,  if traded thereon,  has been at least 187.5% of the current  exercise
price of the warrants  (initially $7.50 per share),  for 20 consecutive  trading
days ending on the third day prior to the date on which the Company gives notice
of the redemption.



                                       31
<PAGE>

Also in connection  with the Initial  Public  Offering,  the Company sold to the
Underwriter for $10.00 warrants  ("Underwriter's  Warrants") for the purchase of
150,000 shares of common stock and 150,000 common stock purchase  warrants.  The
Underwriter may exercise the Underwriter's warrants to purchase the common stock
at $8.25 per share and the warrants at $.165 per warrant.  The warrants  provide
for the purchase of common stock at $6.60 per share. The Underwriter's  Warrants
expire on March 20, 2001.

During  the year  ended June 30,  1997,  the  Company  issued  warrants  for the
purchase of 200,000 shares of common stock in connection with certain investment
advisory agreements.  Such warrants are exercisable at prices ranging from $2.00
to $4.00 per share through May 2002.

On June 30, 1997,  the Company had warrants  outstanding  to purchase  2,762,500
shares of its  common  stock at prices  ranging  from $2.00 to $12.00 per share,
expiring in fiscal years 2001 and 2002.


6. INCOME TAXES

   
At June 30,  1997 and  1996,  the  Company  has  recorded  deferred  tax  assets
aggregating  $4,023,000 and  $2,125,000,  respectively.  The  composition of the
deferred tax asset is as follows:

                                                       1997           1996
                                                       ----           ----
         Capitalized Start-up Costs             $    1,486,000  $   1,858,000
         Net Operating Loss Carryforwards            2,537,000        267,000
                                                --------------  -------------

                                                $    4,023,000  $   2,125,000
                                                ==============  =============
    

In  accordance  with  Statement  of  Financial  Accounting  Standards  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 allowance increased
to  $4,066,000  from  $2,125,000  at June 30, 1996 and from $806,000 at June 30,
1995.

At June 30, 1997, the Company has net operating loss  carryforwards  for Federal
income tax purposes of  approximately  $6,075,000 which expire in the years 2009
through  2012.  As a result of the public  issuance  of stock by the  Company on
March 21,  1996,  and the  resultant  change in  ownership  pursuant to Internal
Revenue Code Section 382, the  utilization of net operating  losses  incurred to
this date of  approximately  $4,255,000 will be limited to an annual  deductible
amount of approximately $425,000.

7. LEASES

The Company leases office space at 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.

On May 1, 1997, the Company  entered into a 3 year  noncancelable  capital lease
for certain computer equipment used to provide information services.

Rent expense amounted to approximately  $148,000,  $111,000 and $110,000 for the
years ended June 30, 1997, 1996 and 1995, respectively.

                                       32
<PAGE>


Minimum future rental payments at June 30, 1997 are as follows:


                                           OPERATING              CAPITAL
                                             LEASE                 LEASE
                                     --------------          -------------
   FISCAL YEAR ENDING JUNE 30
                1998                 $      167,100          $     117,200
                1999                        173,400                100,500
                2000                        179,700                 83,700
                2001                        186,000                     --
                2002                        192,300                     --
          Thereafter                         67,000                     --
                                     --------------          -------------

                                     $      965,500                301,400
                                     ==============

         Less amounts representing interest                         55,189
                                                             -------------
                                                             $     246,211
                                                             =============

8. COMMITMENTS

In August  1996,  the Company  commenced  an action in the Supreme  Court of the
State of New York, New York County,  against  Strategica Inc. and its affiliated
entities ("Strategica").  Strategica asserted a counterclaim against the Company
for breach of  contract.  The Company and  Strategica  entered into a settlement
agreement providing for the payment of $100,000 by the Company.

9. SIGNIFICANT RELATIONSHIPS

During  the  year  ended  June  30,  1997,  one  Strategic   Marketing   Partner
relationship accounted for approximately 46.4% of the Company's revenues.


10. EMPLOYEE STOCK OPTION PLAN

   
In April 1996, the Board of Directors  approved the establishment of an Employee
Stock Option Plan authorizing  stock option grants to directors,  key employees,
and consultants of the Company. 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 Plan provides for the
exercise  of options at not less than the fair value of the stock on the date of
grant. The options are generally  exercisable  after one year from date of grant
and expire on the tenth anniversary of the date of grant.  Pursuant to the terms
of the Plan, each nonemployee  director of the Company receives an initial grant
to purchase  5,000 shares of common stock upon joining the Board,  as well as an
option to purchase  5,000  shares of common  stock  immediately  following  each
annual meeting at which directors are elected. An aggregate of 400,000 shares of
common stock has been reserved for issuance under the Plan which is administered
by a committee designated by the Board of Directors of the Company.
    



                                       33
<PAGE>




In April 1996,  the Board  approved the grant of stock  options to employees and
officers of the Company for the  purchase of 311,550  shares of common  stock at
prices  ranging from $6.44 to $7.08 per share.  The Company  recorded a non-cash
charge of  $165,773  reflecting  the  compensatory  nature of such  issuance  in
accordance with APB Opinion No. 25,  "Accounting for Stock Issued to Employees."
The Plan had not been approved by the  Company's  stockholders,  and  therefore,
measurement  of  compensation  varied  with the  changes in market  value of the
underlying  stock.  On July 16, 1996, the Board of Directors voted to cancel the
outstanding  employee  options  and  reissue  options  covering a like number of
shares to employees at an exercise price not less than the fair value ($5.06) at
that date.

On September 24, 1997,  the Board of Directors  voted to cancel the  outstanding
employee and  non-employee  director options and reissue options covering a like
number of shares to employees and  non-employee  directors at an exercise  price
not less than the fair value at that date.

Information  concerning  stock options for the Company's stock option plan is as
follows:

<TABLE>
<CAPTION>
                                                          YEAR ENDED JUNE 30,
                                        ------------------------------------------------------
                                                   1997                       1996
                                        ------------------------    --------------------------
                                                        Average                       Average
                                                        Exercise                      Exercise
                                         Options        Price        Options          Price
                                        -----------    ---------    -----------      ---------
<S>                                        <C>          <C>                              
Outstanding, beginning of year             311,550      $   6.47          --           --
                                                                                  
Granted                                    424,975          5.23     311,550       $    6.47
                                                                                  
Exercised                                       --         --             --           --
                                                                                  
Cancelled                                  398,175          6.22          --           --
                                        -----------    ---------    -----------    -------------
                                                                                  
Outstanding, end of year                   338,350          5.21     311,550            6.47
                                        ===========    =========    ===========    =============
                                                                                  
Exercisable, end of year                    25,000          6.11          --            --
                                        ===========    =========    ===========    =============
                                                                                  
Available for grant, end of year            61,650                    88,450      
                                        ===========                 ===========   
                                                                               
</TABLE>

The following  table  summarizes  information  about the Company's stock options
outstanding as of June 30, 1997.

<TABLE>
<CAPTION>
                                     Options Outstanding               Options Exercisable
                           ------------------------------------      ----------------------
                                                                    
   
                                                    Average         
                                        Average   Remaining                       Average
        Range of           Numbers of  Exercise   Contractual        Numbers of   Exercise
     Exercise Prices        Options      Prices    Life (Years)       Options      Price
-------------------------- ----------  ---------  ---------------    ----------- ----------
<S>           <C>             <C>      <C>               <C>              <C>    <C>       
   $5.06 to   $6.25           338,350  $    5.21         7.0              25,000 $     6.11
                           ==========  =========  ===============    =========== ==========
</TABLE>
    

                                       34
<PAGE>




Supplemental and Pro Forma Disclosure

In October 1995, the Financial  Accounting  Standards Board issued  Statement of
Financial   Accounting   Standards   No.  123,   "Accounting   for   Stock-Based
Compensation."  This  Statement  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 the new 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 and earnings per share, as if the fair value
based method of accounting had been applied.

The pro forma  information  regarding net income and earnings per share required
by Statement  123 has been  determined  as if the Company had  accounted for its
employee  stock  option  plan under the fair  value  methods  described  in that
Statement.  The fair value of options granted under the Company's employee stock
option plan were estimated at the date of grant using the  Black-Scholes  option
pricing model. The Black-Scholes option valuation model was developed for use in
estimating  the fair value of traded  options that have no vesting  restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input of highly  subjective  assumptions  including the expected dividend yield,
the expected life of the options,  the expected  stock price  volatility and the
risk-free interest rate.

Pertinent  assumptions  with  regard to the  determination  of fair value of the
options and the their impact on earnings per shares are as follows:

                                                            1997     1996
                                                           ------   ------

  Weighted average dividend yield for options granted        0.0%     0.0%

  Weighted average expected life in years                    5.0      5.0

  Weighted average volatility                               70.8%    70.8%

  Risk-free interest rate                                    6.5%     6.28%

  Weighted average grant date fair value of options         $3.30    $4.07

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 loss and loss per share are not indicative of future years.
The Company's pro forma information is as follows:


                                    Year ended June 30,
                     -------------------------------------------------
                             1997                        1996
                     --------------------         --------------------

                     Reported   Pro Forma         Reported   Pro Forma
                     --------   ---------         --------   ---------
                                                             
Loss per share:      $   1.20   $    1.41         $   1.26   $    1.37
                     ========   =========         ========   =========
                                                     

                                       35

<PAGE>


11. SUBSEQUENT EVENTS

   
On September  30, 1997,  The Zanett  Securities  Company  ("Zanett"),  acting as
placement agent for the Company,  completed the private placement  ("Placement")
of $4 million of the Company's Prepaid Common Stock Purchase Warrants  ("Prepaid
Warrants").  The sale of these Prepaid Warrants was exempt from the registration
requirements  of the  Securities  Exchange Act pursuant to Regulation D thereof.
Each Prepaid  Warrant  entitles the holder to purchase  that number of shares of
Common Stock that is equal to $1,000 divided by the applicable  exercise  price.
Such exercise  price is determined  initially as 70% of the average  closing bid
price of the  Common  Stock for the 10 trading  days  ending on the day prior to
exercise of the Prepaid Warrants.  Additionally,  the exercise discount shall be
increaseed  by 1% for each  subsequent  60 day period that the Prepaid  Warrants
remain unexercised.  The exercise price, however,  shall never exceed $1.40. The
Prepaid  Warrants  may be  exercised  on the  earlier  of the date upon  which a
registration  statement  is declared  effective by the SEC or December 29, 1997.
The sale of Common Stock issued upon  exercise of such Warrants is restricted to
one-third  for the  first  60, 90 and 120 days  subsequent  to the  registration
statement becoming effective. The Prepaid Warrants expire on September 30, 2002.
    

Terms of the Placement,  included the conversion by Zanett, of a note payable in
the amount of $772,222  and accrued  interest  thereon of $63,837  into  Prepaid
Warrants.  The net  proceeds of the  Placement  of  $2,643,941  will be used for
general working capital requirements.

As  compensation  for its  services,  Zanett  received  a  placement  fee and an
unaccountable  expense  allowance  of 10% and  3%,  respectively,  of the  gross
proceeds of the Placement. Additionally, the Company issued 600,000 Common Stock
Purchase  Warrants to Zanett that are  exercisable at $1.125 per share of Common
Stock. These warrants expire on September 30, 2002.

   
Also in conjunction  with the Placement,  the Company  entered into an agreement
with a financial  consultant who is an affiliate of Zanett  Lombardier,  Ltd, an
investor in the Prepaid  Warrants.  During the  five-year  term of the agreement
such  consultant  will provide the Company with  advisory  services  relating to
financial and strategic  ventures and alliances,  investment banking and general
financial advisory services, and advice and assistance with the Company's market
development  activities.  As compensation for these services, the Company issued
3,555,555 Common Stock Purchase Warrants to this consultant that are exercisable
at $1.125 per share of Common Stock. The Company has valued these warrants using
the Black-Scholes  pricing methodology at approximately  4,400,000.  Such amount
will be recorded in stockholders' equity as unearned  compensation and amortized
to income over the five-year  term of the agreement.  These  warrants  expire on
September 30, 2002.
    

                                       36
<PAGE>



The pro forma balance sheet reflecting this transaction, is as follows:

<TABLE>
<CAPTION>
                                                             ACTUAL       PRO FORMA
                                                          -----------    -----------
<S>                                                       <C>            <C>        
   
Current Assets                                            $   333,852    $ 3,174,293
                                                          ===========    ===========

Total Assets                                                1,246,689      4,087,130
                                                          ===========    ===========

Current Liabilities                                         1,234,878      1,248,878
                                                          ===========    ===========

Long-term Obligations                                         710,139        160,139
                                                          ===========    ===========

Stockholders' Equity (Deficiency)                            (698,328)     2,678,113
                                                          ===========    ===========

Total Liabilities and Stockholders' Equity (Deficiency)     1,246,689      4,087,130
                                                          ===========    ===========
    
</TABLE>

In  September  1997,  the  Company  signed  a  3  year  contract  with  a  major
telecommunications  company  for  the  delivery  of  the  Company's  information
services  into  additional  markets  beyond an initial  trial city.  The Company
anticipates that this will result in the deployment of the Company's information
services in Florida,  New York,  North  Carolina,  Chicago,  Los Angeles and
other designated markets as part of a national campaign.


                                       37
<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  following  table  sets  forth  information  with  respect  to  the
executive officers and directors of SmartServ Online, Inc. (the "Company").

         NAME                       AGE         POSITION

Sebastian E. Cassetta...............49      Chief Executive Officer, Chairman of
                                            the Board, Secretary and Class III 
                                            Director
Steven T. Francesco.................40      President, Chief Operating Officer 
                                            and Class III Director
Thomas W. Haller, CPA...............43      Vice President, Treasurer and Chief 
                                            Financial Officer
Donald J. Marino....................37      Vice President and Chief Technology
                                            Officer
Mario F. Rossi......................59      Vice President of Operations
Bernard Baum........................48      Class II Director
Beth Bronner........................46      Class I Director
Catherine Cassel Talmadge...........45      Class I Director
Hiro R. Hiranandani................ 59      Class II Director
L. Scott Perry .....................52      Class I Director

         SEBASTIAN E. CASSETTA has been Chief Executive Officer, Chairman of the
Board, Secretary and a director of the Company since inception. Mr. Cassetta was
also the Company's Treasurer from its inception until March 1996. From June 1987
to August 1992, Mr.  Cassetta was the President of Burns and Roe Securacom Inc.,
an engineering and  large-scale  systems  integration  firm. From August 1992 to
January 1994, Mr. Cassetta was a consultant to Smart Phone Services,  Inc. He is
also a former Vice President of Brinks, Incorporated.

         STEVEN T. FRANCESCO has been President and Chief  Operating  Officer of
the Company  since  inception  and a director of the Company since January 1994.
From May 1990 to October  1992,  Mr.  Francesco  was a Senior Vice  President of
Darien Development Corporation,  a technology consulting firm. Mr. Francesco was
also President of Smart Phone Services, Inc. from October 1991 to December 1993.
Mr.  Francesco  is also a former  Senior  Vice  President  of Cantor  Fitzgerald
Securities, Inc.

         THOMAS W. HALLER,  CPA joined the Company as Vice President,  Treasurer
and Chief Financial  Officer in March 1996. From December 1992 to February 1996,
Mr.  Haller  was a Senior  Manager  at  Kaufman  Greenhut  Forman,  LLP a public
accounting firm in New York City where he was responsible for technical advisory
services and the firm's quality  assurance  program.  From June 1991 to December
1992,  Mr.  Haller  was  engaged  in the  practice  of  public  accounting  as a
consultant to certain entrepreneurial  companies. From December 1982 to May 1991
he was a  Senior  Manager  with  Ernst  & Young  LLP,  an  international  public
accounting and consulting firm, where he had  responsibility for client services
and new business  development in the firm's  financial  services  practice.

         DONALD J. MARINO, an information systems executive  specializing in the
securities  industry,  joined the Company in February  1997 as Chief  Technology
Officer.  Prior to joining  the Company he served as Vice  President  of Systems
Development at Deutsche Bank's New York headquarters from June 1996 to December


                                      -38-
<PAGE>



1996.  Prior thereto he was Director of MIS/EDP at Refco  Capital  Holdings from
March 1988 to May 1996 and a Vice President  responsible for Systems Development
and Advanced  Technologies at L.F.  Rothschild & Co. Inc., an investment banking
firm, from March 1985 to March 1988.

         MARIO F. ROSSI has been Vice  President  of  Operations  of the Company
since  December  1994.  From January 1989 to December  1994,  Mr. Rossi was Vice
President of Operations of MVS Inc., a fiber optic systems company.

         BERNARD BAUM has been a director of the Company since March 1996. Since
May 1997,  Mr. Baum has been  Executive  Vice  President  and Chief  Information
Officer of Signet Bank. From March 1996 to May 1997, Mr. Baum had been Executive
Vice President and Chief Operating Officer of Southeast Switch Inc.,  engaged in
the  ATM/POS/debit  card switch and  settlement  business.  From January 1995 to
March 1996, Mr. Baum had been Executive Vice President and Chief Information and
Operations  Officer of Bank South  Corporation,  a bank  holding  company.  From
January 1978 to January  1995,  Mr. Baum held various  positions  with  Citibank
N.A., including Vice President,  Senior Business Manager -- Consumer Bank, Chief
Technology  Officer-The  Citicorp Private Bank and Executive  Director -- Global
Finance.

         BETH BRONNER has been a director of the Company since March 1996. Since
September 1996, Ms. Bronner has been Vice President and Director of Marketing --
United States and Europe of Citibank,  engaged in the global  banking  business.
From July 1994 to September  1996,  Ms.  Bronner was Vice  President  --Emerging
Markets  with  AT&T  Domestic  Communications  Services,  the  consumer  service
division  of AT&T  Corp.  From  February  1992 to June  1994,  she held  various
executive  positions  with  Revlon,  Inc.,  including  President  of the  Revlon
Professional  (Salon  Products)  division and  Executive  Vice  President of the
Beauty Care and  Professional  Products  division.  From October 1990 to January
1992,  Ms.  Bronner was  President  of the Sweet  Goods & Dairy  division of the
Slim-Fast Foods Co. She is also director of The Hain Food Group, Inc.

         CATHERINE  CASSEL  TALMADGE  has been a director of the  Company  since
March 1996.  Since  January 1994,  Ms.  Talmadge has been Vice  President,  Time
Warner  Cable  Programming  of Time  Warner  Cable,  a division  of Time  Warner
Entertainment  Company,  L.P.  ("Time  Warner").  From September 1984 to January
1994,  she  held  various  positions  with  Time  Warner,   including  Director,
Programming Development;  Operations Director,  Financial Analyses; and Manager,
Budget Department.

         HIRO R.  HIRANANDANI  has been a director  of the  Company  since March
1996.  Since  June  1996,  Mr.  Hiranandani  has been the  President  and  Chief
Executive  Officer of  Computer  Power Inc.,  a public  company  which  provides
back-up power for the lighting industry. From January 1977 to December 1994, Mr.
Hiranandani held various positions with Pitney Bowes, Inc., including President,
Business  Systems-International  from  July  1987 to May 1990 and  President  of
Mailing Systems from May 1990 to October 1994.

         L. SCOTT PERRY has been a director of the Company since  November 1996.
Since  December  1995,  Mr.  Perry has been Vice  President,  Advanced  Platform
Services of AT&T Corp.  From  January  1989 to  December  1995,  Mr.  Perry held
various  positions  with AT&T  including  Vice  President - Business  Multimedia
Services,  Vice  President  (East) - Business  Communications  Services and Vice
President -  Marketing,  Strategy  and  Technical  Support for AT&T Data Systems
Group.  Since February 1996, Mr. Perry has also been the Chief Executive Officer
of GeoSphere Communications,  a networking software company. Mr. Perry serves on
the Board of Directors  of Junior  Achievement  of New York,  is a member of the
Cornell University  Engineering College Advisory Council and serves on the Board
of INEA, a private financial planning software company based in Toronto, Canada.



                                      -39-
<PAGE>



         The Board of Directors  consists of seven directors  divided into three
classes  of  directors:  Class I  Directors,  Class II  Directors  and Class III
Directors.  The  Company's  Class I Directors,  Class II Directors and Class III
Directors will serve until the annual meeting of the Company's  stockholders  to
be held in  1999,  1997 and  1998,  respectively,  and  until  their  respective
successors are duly elected and qualified or until their earlier  resignation or
removal.  Directors of each Class are elected for a full term of three years (or
any lesser period  representing  the balance of the previous term of such Class)
and until their  respective  successors  are duly elected and qualified or until
their earlier resignation or removal.  Officers are appointed annually and serve
at the  discretion  of the  Board  for one year.  Mr.  Cassetta  serves as Chief
Executive  Officer,  Chairman of the Board and  Secretary of the Company and Mr.
Francesco  serves  as  President  and Chief  Operating  Officer  of the  Company
pursuant to employment agreements.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Pursuant  to  Section 16 of the  Securities  Exchange  Act of 1934,  as
amended (the "Exchange Act"),  officers,  directors and holders of more than 10%
of the outstanding  shares of the Company's Common Stock  ("Reporting  Persons")
are required to file periodic  reports of their  ownership of, and  transactions
involving,   the  Company's  Common  Stock  with  the  Securities  and  Exchange
Commission  (the  "SEC").  Based  solely  upon a review  of Forms 3, 4 and 5 and
amendments  thereto  furnished to the Company  during and with respect to fiscal
year ended June 30,  1997,  the  Company  believes  that its  Reporting  Persons
complied with all Section 16 filing requirements applicable to them with respect
to the Company's fiscal year ended June 30, 1997.

ITEM 10. EXECUTIVE COMPENSATION

         The  following  table  sets  forth  information  concerning  annual and
long-term compensation, paid or accrued, for the Chief Executive Officer and for
each other executive officer of the Company whose compensation exceeded $100,000
in fiscal 1997 (the "Named  Executive  Officers") for services in all capacities
to the Company during the last three fiscal years:

                         SUMMARY COMPENSATION TABLE (1)

<TABLE>
<CAPTION>
                                                                             LONG-TERM
                                                                           COMPENSATION
                                      ANNUAL COMPENSATION                     AWARDS
                            -----------------------------------------      ------------
                                                             OTHER
                                                             ANNUAL         SECURITIES
         NAME AND           FISCAL                           COMPEN-         UNDERLYING      ALL OTHER
    PRINCIPAL POSITION       YEAR      SALARY    BONUS      SATION(2)(3)      OPTIONS      COMPENSATION
    ------------------       ----      ------    -----      ------------      -------      ------------
<S>                          <C>      <C>                    <C>              <C>                  
Sebastian E. Cassetta        1997     $125,000     --        $ 9,750          100,000            --
Chief Executive Officer      1996     $125,000     --        $ 9,750          100,000(5)         --
                             1995     $125,000     --        $ 9,750             --              --

Steven T. Francesco          1997     $125,000     --        $ 9,750          100,000            --
President and Chief          1996     $125,000  $22,000      $11,750          100,000(5)     $20,000(4)
Operating Officer            1995     $125,000     --        $ 9,750             --              --
</TABLE>





                                       -40-
<PAGE>



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

(1)   None of the Named Executive  Officers received any Restricted Stock Awards
      or LTIP Payouts in 1995, 1996 or 1997.

(2)   As to each Named  Executive  Officer,  the  aggregate  amount of  personal
      benefits  not included in the Summary  Compensation  Table does not exceed
      the lesser of either  $50,000 or 10% of the total annual  salary and bonus
      paid to such Named Executive Officer.

(3)   Amounts shown consist of a non-accountable expense allowance.

(4)   Represents  a payment by the  Company  to Mr.  Francesco  of an  aggregate
      amount equal to the additional  income taxes and penalties  resulting from
      the early  withdrawal by him from an IRA of $35,000 which he loaned to the
      Company.

(5)   On July 16,  1996 the  Compensation  Committee  of the Board of  Directors
      canceled  the stock  options  representing  these  underlying  shares  and
      granted new options to Messrs. Cassetta and Francesco.

STOCK OPTIONS

         The  following  table  sets  forth  information  with  respect to stock
options granted to the Named Executive Officers during fiscal year 1997:

                          OPTION GRANTS IN FISCAL 1997
                             (INDIVIDUAL GRANTS)(1)


                         NUMBER OF       % OF TOTAL
                         SECURITIES       OPTIONS
                         UNDERLYING      GRANTED TO
                          OPTIONS        EMPLOYEES      EXERCISE    EXPIRATION
             NAME         GRANTED      IN FISCAL 1997    PRICE         DATE (2)
             ----        ---------     --------------   -------    ------------

Sebastian E. Cassetta     100,000          23.6%         $5.0625   July 15, 2006

Steven T. Francesco        19,753           4.7%         $5.56875  July 15, 2001
                           80,247          18.9%         $5.0625   July 15, 2006

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

(1)   No stock  appreciation  rights  ("SARs")  were granted to any of the Named
      Executive  Officers  during  fiscal  1997.  On  September  24,  1997,  the
      Compensation  Committee granted new stock options to employees conditional
      upon cancellation of all of their existing stock options. As a consequence
      of this action and upon  cancellation of the options  described above, Mr.
      Cassetta  received an option to purchase  100,000  shares of the Company's
      Common  Stock  exercisable  at a price  of $2.00  per  share  expiring  on
      September 23, 2007 and Mr. Francesco received an option to purchase 45,454
      shares of the Company's  Common Stock  exercisable at a price of $2.20 per
      share  expiring on  September  23,  2002 and an option to purchase  54,546
      shares of the Company's  Common Stock  exercisable at a price of $2.00 per
      share expiring on September 23, 2007.  The options  become  exercisable in
      full on the first anniversary of the grant date.


                                      -41-
<PAGE>



(2)   The options  become  exercisable  in full on the first  anniversary of the
      grant date.

         The  following  table  sets  forth  information  as to  the  number  of
unexercised  shares of Common Stock  underlying stock options at fiscal year end
and the value of unexercised in-the-money stock options at fiscal year
end:

               AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
                        FISCAL YEAR END OPTION VALUE (1)

<TABLE>
<CAPTION>
                                                         NUMBER OF
                                                        UNEXERCISED
                                                         SECURITIES             VALUE OF
                             SHARES                  UNDERLYING OPTIONS   UNEXERCISED IN-THE-
                            ACQUIRED                 AT FISCAL YEAR END      MONEY YEAR END
                               ON         VALUE         EXERCISABLE/          EXERCISABLE/
   NAME                     EXERCISE    REALIZED       UNEXERCISABLE       UNEXERCISABLE (2)
   ----                     --------    --------      ---------------      -----------------
<S>                                                      <C>     <C>           <C>  
Sebastian E. Casetta.....      --          --            0/100,000             $0/$0
Steven T. Francesco......      --          --            0/100,000             $0/$0
</TABLE>

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

(1)   No SARs were  granted  to, or  exercised  by,  any of the Named  Executive
      Officers during fiscal 1997.

(2)   Value is based on the  closing  price  of the  Company's  Common  Stock as
      reported by the National  Association  of  Securities  Dealers'  Automated
      Quotation  System  ("NASDAQ")  on June 30, 1997  ($2.00) less the exercise
      price of the option.

EMPLOYMENT AGREEMENTS

         The Company and  Sebastian  E.  Cassetta  are parties to an  Employment
Agreement (the "Cassetta Agreement"),  effective January 31, 1994, which expires
on January 31,  1999.  The  Cassetta  Agreement  provides for (i) an annual base
salary of $125,000,  (ii) a performance  bonus for each fiscal year between June
30, 1995 and June 30, 1998, payable in cash and Common Stock of the Company,  in
the event the Company  achieves the levels of earnings before  interest,  income
taxes,  depreciation and amortization  ("EBITDA") provided therein and (iii) any
additional amount as determined by the Board or an outside  compensation  board.
The EBITDA goals are $7,000,000 and $10,500,000 for 1997 and 1998, respectively.
If any goal is achieved,  Mr.  Cassetta will receive a cash bonus of one-half of
one  percent  of the goal and  approximately  22,000  shares  of  Common  Stock.
Pursuant to the Cassetta Agreement, Mr. Cassetta is also entitled to participate
in any present or future insurance, pension, retirement, profit sharing or bonus
plan or other  compensation  or  incentive  plan  adopted by the Company for the
general and overall  benefit of full-time  principal  executives of the Company,
such  participation to be upon the same terms and conditions as generally relate
to such full-time principal executives.  Pursuant to the Cassetta Agreement,  in
the event that Mr.  Cassetta's  employment  is  terminated  without  cause,  the
Company is obligated to make a severance  payment to Mr.  Cassetta in the amount
of $250,000 within 30 days following the date of such termination.

         The  Company  and Steven T.  Francesco  are  parties  to an  Employment
Agreement (the "Francesco Agreement"), effective January 31, 1994, which expires
on January 31, 1999.  The  Francesco  Agreement  provides for (i) an annual base
salary of $125,000, (ii) a performance bonus for each fiscal year between June



                                      -42-
<PAGE>



30, 1995 and June 30, 1998, payable in cash and Common Stock of the Company,  in
the event the Company  achieves the levels of EBITDA provided  therein and (iii)
any  additional  amount as  determined  by the Board or an outside  compensation
board.  The  EBITDA  goals  and  bonuses  are the same as those in the  Cassetta
Agreement.  Pursuant to the Francesco Agreement,  Mr. Francesco is also entitled
to participate in any present or future insurance,  pension, retirement,  profit
sharing or bonus plan or other  compensation  or  incentive  plan adopted by the
Company for the general and overall benefit of full-time principal executives of
the Company,  such  participation  to be upon the same terms and  conditions  as
generally  relate  to  such  full-time  principal  executives.  Pursuant  to the
Francesco Agreement,  in the event that Mr. Francesco's employment is terminated
without  cause,  the Company is  obligated  to make a  severance  payment to Mr.
Francesco in the amount of $250,000  within 30 days  following  the date of such
termination.


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

         The  following  table  sets  forth,  as of  October 24,  1997,  certain
information with respect to the beneficial  ownership of the Common Stock by (i)
each  person  known by the  Company  to  beneficially  own  more  than 5% of the
outstanding  shares,  (ii)  each  director  of the  Company,  (iii)  each  Named
Executive  Officer and (iv) all executive  officers and directors of the Company
as a group.  Except as otherwise  indicated,  each person  listed below has sole
voting and investment power with respect to the shares of Common Stock set forth
opposite such person's name.

<TABLE>
<CAPTION>
           NAME AND ADDRESS OF            AMOUNT AND NATURE OF          PERCENT OF
          BENEFICIAL OWNER (1)          BENEFICIAL OWNERSHIP (2)    OUTSTANDING SHARES (3)
          --------------------          ------------------------    ----------------------
<S>                                           <C>                      <C>  
Steven T. Francesco
c/o SmartServ Online, Inc.
Metro Center, One Station Place
Stamford, CT 06902 ..................         839,445                  22.7%

Sebastian E. Cassetta
c/o SmartServ Online, Inc.
Metro Center, One Station Place
Stamford, CT 06902 ..................         376,250                  10.2%

InterBank Communications, Inc.
1733 Connecticut Avenue, N.W.
Washington, DC 20009 ................         204,250(4)               5.5%

Bernard Baum.........................           5,000(5)                 *

Beth Bronner.........................          10,000(5)                 *

Catherine Cassel Talmadge............           7,500(5)                 *

Hiro R. Hiranandani..................          20,000(5)(6)              *

L. Scott Perry.......................          10,000(5)                 *

All executive officers and directors
as a group (10 persons)..............       1,280,695(7)               34.3%
</TABLE>
--------------------
*     Less than 1%


                                      -43-
<PAGE>



(1)   Under the rules of the SEC,  addresses are only given for holders of 5% or
      more of the outstanding Common Stock of the Company.

(2)   Under the rules of the SEC, a person is deemed to be the beneficial  owner
      of a security if such person has or shares the power to vote or direct the
      voting of such security or the power to dispose or direct the  disposition
      of such security.  A person is also deemed to be a beneficial owner of any
      securities  if that person has the right to acquire  beneficial  ownership
      within 60 days of the date hereof. Unless otherwise indicated by footnote,
      the named  entities or individuals  have sole voting and investment  power
      with respect to the shares of Common Stock beneficially owned.

(3)   Represents the number of shares of Common Stock  beneficially  owned as of
      October 24, 1997, by each named person or group, expressed as a percentage
      of the sum of all of the shares of such class  outstanding as of such date
      and the number of shares not  outstanding but  beneficially  owned by such
      named person or group.

(4)   Includes 10,000 shares subject to currently exercisable warrants.

(5)   Includes 5,000 shares subject to currently exercisable options.

(6)   Includes 10,000 shares subject to currently exercisable warrants.

(7)   Includes  36,000  shares  subject to  currently  exercisable  options  and
      warrants.

CHANGES IN CONTROL

         The Company and each of Messrs.  Cassetta  and  Francesco  have entered
into an agreement with Zanett Capital,  Inc. ("Zanett") dated September 29, 1997
which provides, among other things, that for a period of 5 years, at the request
of Zanett the Company  will  appoint  such number of  designees of Zanett to its
Board of Directors so that the designees of Zanett will constitute a majority of
the members of the Board of Directors of the Company.  Further, Messrs. Cassetta
and  Francesco  have agreed to vote their shares of Common  Stock,  representing
approximately 32.5% of the outstanding stock of the Company, and any shares they
may acquire in the future,  in favor of the  designees  of Zanett at each Annual
Meeting of Stockholders of the Company at which Directors are elected.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         In March 1996, upon the  consummation  of the Company's  Initial Public
Offering, the Company and InterBank Communications, Inc. ("InterBank") agreed to
terminate  a  Consulting  Agreement  entered  into  on  June  1,  1995  and,  in
consideration therefor, the Company issued 10,000 warrants to InterBank and paid
InterBank $50,000. The Company also paid InterBank $36,000 in full settlement of
all  amounts  past  due  under  the  Consulting  Agreement.  On the  date of the
execution and delivery of the Consulting Agreement, InterBank beneficially owned
more  than 5% of the  Company's  Common  Stock  and  Simon  A.  Hershon,  Ph.D.,
President  of  InterBank,  was a director  of the  Company.  Mr.  Hershon  was a
director of the Company until November 1996.

         In March 1996, upon the  consummation  of the Company's  Initial Public
Offering,  the Company repaid $707,780  principal amount of certain  convertible
subordinated notes (and accrued interest thereon), and the



                                      -44-
<PAGE>


balance of the notes and accrued  interest  thereon was  converted  into 427,735
shares of Common Stock or more than 5% of the then outstanding  shares of Common
Stock.  Holders of such notes were present or former investment advisory clients
of Laifer Capital Management, Inc.

         In  connection  with a  private  placement  of  securities  made by the
Company in 1995, Sebastian E. Cassetta and Steven T. Francesco, each an officer,
director  and  beneficial  owner  of more  than 5% of the  Common  Stock  of the
Company,  entered  into a  Non-Recourse  Guaranty  and Pledge  Agreement,  dated
October 2, 1995 (the  "Pledge  Agreement"),  with the  placement  agent for such
securities as agent for the subscribers named therein, pursuant to which Messrs.
Cassetta and Francesco each pledged 250,000 shares of Common Stock, which shares
secured the repayment of the  $1,200,000  principal  amount of promissory  notes
sold by the  Company to such  subscribers.  The notes were  repaid in March 1996
upon the consummation of the Company's  Initial Public  Offering,  whereupon the
Pledge Agreement was terminated.

         The Company believes that the terms of the transactions described above
between the Company and its officers, directors or other affiliates were no less
favorable to the Company  than would have been  obtained  from a  non-affiliated
third  party  for  similar  transactions  at the  time  of  entering  into  such
transactions.  In addition,  the Company has adopted a policy whereby all future
transactions and/or loans between the Company and its officers or directors will
be on terms  that the  Company  believes  are no less  favorable  than  could be
obtained from unaffiliated  third parties (at the time such transactions  and/or
loans are entered  into) and will be  approved by a majority of the  independent
disinterested directors of the Company.





                                      -45-
<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            By-laws of the Company, as amended**
4.1            Specimen Certificate of the Company's Common Stock**
4.2            Form of Underwriter's Warrant**
4.3            Form of Warrant Agent Agreement**
4.4            Form of Redeemable Warrant**
4.5            Form of Warrant Agreement used by the Company for warrants issued
               to John E. Herzog,  Emanuel E. Geduld, Andrew DaPonte and Anchung
               Sammy Chung and Fong-Chi Alison Tsao**
4.6            Warrant  dated  February 1, 1994 issued by the Company to Tri Cap
               International**
4.7            Form of Prepaid Common Stock Purchase Warrant****
4.8            Warrant issued to The Zanett Securities Corporation****
4.9            Warrant issued to Bruno Guazzoni****
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           Non-Exclusive  Agency  Agreement  dated as of  November  1,  1994
               between the Company and Dun & Bradstreet, Inc.**
10.6           Services  Agreement  dated as of  February  1, 1995,  between the
               Company and Federal Express Corporation**
10.7           Information Provider Agreement dated as of March 13, 1995 between
               the Company and The Argus Group, Inc.**




                                      -46-
<PAGE>




10.8           Metromail  National Directory  Assistance  Reseller Agreement For
               Electronic  Services Providers dated as of March 13, 1995 between
               the Company and Metromail Corporation**
10.9           Reuters  NewMedia,  Inc. On-Line  Services  Agreement dated as of
               November  13, 1995  between  the  Company  and Reuters  NewMedia,
               Inc.**
10.10          Lease  Agreement  dated as of March 4, 1994,  between the Company
               and One Station  Place,  L.P.  regarding the Company's  Stamford,
               Connecticut, offices**
10.11          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***
10.12          Employment Agreement (the "Cassetta Employment  Agreement") dated
               of January 31, 1994 by and among the  Company  and  Sebastian  E.
               Cassetta**
10.13          Amendment No. 1 to the Cassetta Employment  Agreement dated as of
               June  30,  1994  by  and  among  the  Company  and  Sebastian  E.
               Cassetta**
10.14          Employment Agreement (the "Francesco Employment Agreement") dated
               as of January  31,  1994 by and among the  Company  and Steven T.
               Francesco**
10.15          Amendment No. 1 to the Francesco  Employment Agreement dated June
               30, 1994 by and among the Company and Steven T. Francesco**
10.16          Form of Registration  Rights Agreement  between  the  Company and
               certain investors**
10.17          Form of Consulting Agreement  between  the  Company  and Rickel &
               Associates**
10.18          Agreement  dated as of January 31,  1996  between the Company and
               Henry Snow**
10.19          Memorandum  of  Understanding  dated  February  7,  1996  between
               Northern Telecom Inc. and the Company**
10.20          Subscriber  Agreement dated February 16, 1996 between the Company
               and the Cunningham Group Inc. dba Lotter USA.com**
10.21          Memorandum  of  Understanding,  dated June 26, 1996,  between the
               Company and CIDCO Incorporated***
10.22          Form of 1996  Stock Option  Plan*****
10.23          Form of Registration Rights Agreement  issued  to  purchasers  of
               Prepaid Common Stock Purchase Warrants****
10.24          Consulting Agreement with Bruno Guazzoni****
10.25          Agreement between Sprint/United Management Company and  SmartServ
               Online, Inc. dated September 26, 1997+
11.1           Statement Regarding Computation of Per Share Earnings*
27             Financial Data Schedule+

_________________
*        Filed as an exhibit to the Company's   Annual  Report  on  Form  10-KSB
         for the fiscal year ended June 30, 1997
**       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 Current Report on Form 8-K/A for 
         an event dated September 30, 1997
*****    Filed as an exhibit to the Company's Proxy Statement  dated October 10,
         1996
+        Filed herewith

(B)      REPORTS OF FORM 8-K

Since the end of the fiscal  quarter  ended March 31, 1997,  the Company filed a
Current Report on Form 8-K dated  September 30, 1997 and a Form 8-K/A  reporting
Item 5 and containing a pro forma balance sheet as at August 31, 1997.




                                      -47-
<PAGE>
  

                                   SIGNATURES




           Pursuant to the requirements of 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.

November 3, 1997                        SMARTSERV ONLINE, INC.
                                         Registrant

                                        By:  /S/SEBASTIAN E. CASSETTA
                                           ------------------------------
                                              Sebastian E. Cassetta
                                              Chairman of the Board
                                              Chief Executive Officer




                                      -48-