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

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

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

                         Commission file number 0-28008
                                                -------

                             SmartServ Online, Inc.
                             ----------------------
                 (Name of Small Business Issuer in its Charter)

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

   2250 Butler Pike, Suite 150, Plymouth Meeting, Pennsylvania                              19462
---------------------------------------------------------------------    ----------------------------------------
             (Address of principal executive offices)                                      (Zip Code)
</TABLE>

Issuer's telephone number, including area code (610) 397-0689
                                               --------------

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

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

                               Title of each class
                               -------------------

                          Common Stock, $0.01 Par Value

                         Common Stock Purchase Warrants

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

                                    Yes  X     No
                                       -----     -----

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

Issuer's revenues for the fiscal year ended December 31, 2004.          $358,646
<PAGE>

The aggregate market value of the voting and non-voting common equity (based on
the closing price of such stock on the OTC Bulletin Board) held by
non-affiliates of the issuer as of March 1, 2005 was approximately $6,865,000.
All officers, directors and holders of 10% or more of the outstanding common
stock of the Issuer have been deemed, solely for the purpose of the foregoing
calculation, to be "affiliates" of the issuer.

There were 5,349,392 shares of Common Stock outstanding at March 1, 2005.

                       Documents Incorporated by Reference

None

TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT          YES           NO  X
                                                          ------       -----
<PAGE>

                                TABLE OF CONTENTS

Item                                                                       Page

Part I

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

Part II

5.   Market for Common Equity, Related Stockholder Matters
       and Small Business Issuer Purchases of Equity Securities               8
6.   Management's Discussion and Analysis or Plan of Operations              11
7.   Financial Statements                                                    31
8.   Changes in and Disagreements With Accountants on Accounting
       and Financial Disclosure                                              61
8A.  Controls and Procedures                                                 61
8B.  Other Information                                                       61

Part III

 9.   Directors, Executive Officers, Promoters and Control Persons;
        Compliance with Section 16(a) of the Exchange Act                    62
10.   Executive Compensation                                                 65
11.   Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters                                        70
12.   Certain Relationships and Related Transactions                         74
13.   Exhibits                                                               77
14.   Principal Accountant Fees and Services                                 80
<PAGE>

                                     Part I

Item 1.  Description of Business

Company Overview

We are a Mobile Virtual  Network  Operator  (MVNO)  planning to launch a prepaid
mobile phone  service in 2005 under the  UPHONIA(TM)  brand name  utilizing  the
Sprint nationwide PCS network. The planned service will include low cost prepaid
mobile wireless minute plans,  discounted  international long distance, and free
mobile  content such as  ringtones,  mobile games and images.  In advance of our
mobile phone service launch we are marketing UPHONIA(TM) mobile content products
and UPHONIA(TM)  prepaid  international  long distance phone cards. Our business
strategy is based on the opportunity to utilize  international long distance and
mobile content and as a way to  differentiate  telecom  products and services in
the prepaid wireless market.  Prepaid wireless is a $10 billion business and the
fastest growing segment of the U.S. wireless sector. The prepaid wireless market
has a high  representation  of urban ethnic,  immigrants  who are heavy users of
international  long  distance  products for calling  their friends and family in
their country of origin.  Our MVNO products will bundle prepaid  wireless phones
and service with discounted  international long distance to enable international
calls from UPHONIA(TM)  wireless phones. The availability of free mobile content
will also be  utilized as a  value-added  feature to further  differentiate  our
products to the urban ethnic, immigrant consumer and youth market.

As  identified  below,  we believe  we have  sufficient  capital to support  our
operations through December 31, 2005. To implement our MVNO launch and strategic
plans  we will  need to  raise  additional  capital.  Our  plan to  address  our
liquidity issue is also described  below. No assurance can be given that we will
be able to raise  sufficient  capital to support  our  operations.  Should we be
unable to raise additional debt or equity financing, we will be forced to seek a
strategic buyer, a merger, cease operations or enter into bankruptcy.

As an MVNO we are a mobile  operator  that  does not own or  operate  supporting
infrastructure  such as cell towers and related  support  systems.  We intend to
give  consumers a better  choice in mobile  phone  service by bundling  flexible
prepaid minute plans,  discounted  international long distance,  and free mobile
content  utilizing the existing cell tower  infrastructure  made available to us
through our  agreement  with Sprint.  Under this  agreement,  Sprint  wholesales
wireless  minutes from their network directly to us for resale to our customers.
We  benefit  from  this  agreement  by  receiving  access to  Sprint's  enhanced
nationwide network with turnkey reliability and performance. As an MVNO, we have
the  advantage  of  market  access   without  the  need  to  build  the  telecom
infrastructure  necessary to originate and terminate  domestic  wireless  calls.
Sprint benefits by gaining a distribution and marketing  partner that is focused
on a niche market (i.e., the urban ethnic, immigrant and youth market).

      o     Our UPHONIA(TM) brand will provide consumers flexible prepaid minute
            plans -  UPHONIA(TM)  customers  will  not  sign  up for one  preset
            monthly  contract,  but  instead  will be able to  decide  how  many
            minutes they want to purchase each month.

      o     UPHONIA(TM)  MVNO  customers  will  be  able  to  access  discounted
            international long distance through their UPHONIA(TM) mobile phones.

      o     UPHONIA(TM)  MVNO customers  will be able to personalize  their cell
            phones  with  thousands  of  ringtones,  images,  mobile  games  and
            graphics.  Mobile  content  downloads  will be  accessible  from the
            uphonia.com mobile content website, directly from UPHONIA(TM) phones
            and from  selected  stores  through the  UPHONIA(TM)  retail  mobile
            content kiosk.

Prior to becoming an MVNO, we designed,  developed and distributed  software and
services to enable the delivery of premium mobile  content to wireless  devices.
The content included  ringtones,  images and games, and dynamic changing content
such as  horoscopes,  lottery  results and weather  reports.  The mobile content
infrastructure,   aggregation  and  hosting   capabilities,   and   applications
development  expertise  previously  acquired by SmartServ is being  leveraged to
help differentiate our planned MVNO products and services.


                                       1
<PAGE>

During  2004 we  continued  to have  revenue  sharing  license  agreements  with
wireless  carriers  including  Verizon  Wireless,   AT&T  Wireless,  and  ALLTEL
Wireless,  that  allowed us to  deliver  premium  mobile  content in the form of
dynamic  applications to cell phone users. For enterprises,  we have in the past
offered  solutions  that deliver  financial  market data,  proprietary  internal
documents  and other useful  information  to mobile  workers  through their cell
phones, although this no longer comprises a part of our business or strategy.

In February  2004,  we received $10 million in gross  proceeds  from our private
placement of Units consisting of shares of Series A Convertible  Preferred Stock
and  warrants  to  purchase  common  stock.  We have  used the net  proceeds  of
approximately  $8,600,000 from this offering to repay  outstanding  obligations,
including  $1,391,500 that was used to repay Global Capital  Funding Group,  LP,
completion of a strategic  acquisition and for general working capital purposes.
In particular,  we used a significant  portion of our working  capital to settle
our accounts  payable,  which accounts payable were  approximately  $447,000 and
$1,700,000 as of December 31, 2004 and December 31, 2003, respectively.

During  February  2004,  we acquired  the  business  of an early stage  company,
nReach,  Inc., to increase our offerings of mobile content products and services
to the cell phone industry.  nReach was a wireless content  distribution company
that  offered a broad  portfolio  of  popular  mass-market  cell  phone  content
including   ringtones,   mobile  games,  and  on-device  images.  Prior  to  our
acquisition,  nReach had minimal  revenues  and incurred a  significant  loss in
2003.

We signed an agreement with Sprint during November, 2004 allowing us to purchase
cellular  airtime  on  Sprint's  national  wireless  network  for  resale to our
wireless  customers.  The agreement has a term of five years. This will allow us
to enter the prepaid wireless marketplace and to offer plans that bundle prepaid
wireless airtime with discounted  international long distance and premium mobile
content such as ringtones,  images and games.  We are required to provide Sprint
with a $1,000,000  letter of credit to secure our  obligations  relating to this
agreement prior to Sprint giving us access to its network.

On November 17, 2004, we signed a non-binding  letter of intent to acquire Telco
Group, Inc., and affiliates.  Telco Group, Inc. is a New York-based  provider of
pay-as-you-go wireless  telecommunications  services, prepaid international long
distance, nationwide dial around long distance and nationwide dial up high speed
internet  services.  While the letter of intent  has  expired,  the  acquisition
discussions are continuing with Telco Group. This acquisition,  if completed, is
expected to add  approximately  $300 million in annual revenues.  The closing of
this  acquisition  is subject to customary  closing  conditions for this type of
transaction,  including  the  negotiation  and  execution of a binding  purchase
agreement.  In addition,  we must secure financing to obtain the necessary funds
to pay for  this  acquisition  and  provide  working  capital  for the  combined
company.  There can be no assurance  that these  conditions  will be met and the
closing will occur.

On January 7, 2005, we acquired KPCCD,  Inc., a New York City-based  distributor
of  international  prepaid  calling cards.  Founded in 1998,  KPCCD  distributes
international  prepaid  calling  cards  through a network of  hundreds of retail
outlets  along the East Coast.  We believe  that the  acquisition  of KPCCD will
expand our distribution  network for our planned prepaid  wireless  products and
services.  The acquisition of KPCCD is expected to add as much as  approximately
$3 million in monthly revenue. In connection with the closing of the transaction
on January 7, 2005, KPCCD, the sellers of KPCCD and Prima  Communications,  Inc.
("Prima"),  a company  controlled  by the sellers,  entered into a Master Vendor
Agreement ("Vendor Agreement").  Under the Vendor Agreement,  Prima will sell to
KPCCD at cost all of KPCCD's requirements of international prepaid calling cards
for up to one year  after  January 7,  2005.  The  Company  has  guaranteed  the
obligations  of KPCCD under the Vendor  Agreement.  The Vendor  Agreement can be
terminated prior to its one year term under certain conditions.


                                       2
<PAGE>

We  have  since  our  inception   earned  limited  revenues  and  have  incurred
substantial recurring operating losses,  including net losses of $10,580,372 and
$17,537,775  for the years  ended  December  31,  2004 and  2003,  respectively.
Additionally,  we have an accumulated  deficit of  $100,977,153  at December 31,
2004.

As of March 30, 2005, after reviewing the Company's cash flow  projections,  the
Company  adopted a plan  designed  to  insure  that we have  sufficient  working
capital to support a reduced level of operations through March 2006. As of March
31, 2005 we had $1,012,000 in cash.  Elements of the plan include: 1) maximizing
of KPCCD's  international calling card profits since the acquisition of KPCCD on
January 7, 2005,  2) reduce the level of operating  expenses by  relocating  our
hosting  facility  from an off site  location  to an  on-site  location,  and 3)
elimination of employee positions.

In  addition,  the  Company is  pursuing  various  action  items to improve  its
liquidity in conjunction with beginning to execute its business strategy.  Those
action  items  include  pursuing  the  Telco  Group  acquisition  and  obtaining
sufficient  financing  to cover  the  costs of such  acquisition  and  provide a
sufficient surplus to address the Company's liquidity requirements.  The Company
is also  pursuing  other  sources of capital in the form of a private  placement
unrelated  to the Telco Group  acquisition  to address the  Company's  liquidity
requirements.

However,  no  assurance  can  be  given  that  the  Company  will  conclude  the
acquisition or will be able meet its revenue and cash flow  projections,  reduce
its cost  structure as presently  configured or that  unforeseen  liabilities or
expenses will not arise,  or raise  additional  capital on  satisfactory  terms.
Should the Company be unable to raise  additional debt or equity  financing,  it
will be forced to seek a strategic buyer, a merger or cease operations.

We are  incorporated  in the  State of  Delaware  and have our  headquarters  in
Plymouth Meeting,  Pennsylvania. We commenced operations in August 1993, and had
our initial public offering in March,  1996. In this report,  unless the context
otherwise  requires,  the terms "we", "us", "our", "the Company" and "SmartServ"
refer to SmartServ Online, Inc. and its subsidiaries. References to nReach refer
to nReach,  Inc., a Colorado corporation and references to KPCCD refer to KPCCD,
Inc. (our wholly owned  subsidiaries).  We completed a one-for-six reverse stock
split  effective  November 25, 2003.  Unless  otherwise  noted,  descriptions of
shareholdings and convertible  securities reflect such one-for-six reverse stock
split.

Industry Overview

The U.S.  wireless  market is now over $110  billion in annual  sales.  Over 150
million U.S. consumers own or have access to a cell phone. Household penetration
is over 50% and on average  U.S.  wireless  subscribers  now spend more  minutes
talking on their cell phones  than they do on  traditional  landlines.  Dynamics
within the overall wireless market however are changing.

While overall wireless  penetration  growth in the U.S. is slowing,  the prepaid
segment of the market has emerged as the high growth segment. Prepaid sales have
gone from a standing start to approximately  $10 billion annually since the late
1990's.

Industry  analysts  forecast  that U.S.  prepaid  market  growth will  escalate,
doubling over the next three years.  At these growth rates the prepaid  wireless
market will  generate well over $1 billion in new market  opportunity  each year
over the next three to five years. Even after five years of this rapid projected
growth,  the prepaid  segment will still be  significantly  below  international
penetration  rates (in  Western  Europe  and Latin  America  prepaid  represents
between 50% and 75% of the wireless user base).


                                       3
<PAGE>

Our MVNO business strategy targets the large market convergence of prepaid
wireless, international long distance calling and premium mobile content usage:

      o     Prepaid  wireless is changing  the  dynamics of the entire  wireless
            market.  By  offering  pay-as-you-go  flexibility  and cost  control
            without the need for credit checks or multi-year contracts,  prepaid
            has become the fastest  growth segment in the wireless  market.  The
            prepaid  segment  is  forecast  by  industry  experts  to grow  from
            approximately  $10  billion in 2004 to between  $20  billion and $25
            billion over the next 3 years.

      o     The   international   long   distance   business   in  the  U.S.  is
            approximately $8 billion.  According to the FCC,  international long
            distance  volume has  greatly  expanded  over the past 20 years from
            about 200  million  to more  than 6.2  billion  calls per year.  The
            prepaid   portion  of  the   international   long  distance   market
            (approximately  $2 billion) is a crucial service demanded by many of
            the more than 30 million  immigrants living in the United States for
            making calls to friends and family in their country of origin.  As a
            value added service  integrated into  UPHONIA(TM)  phones,  it is an
            attractive feature to bring subscribers to the UPHONIA(TM) brand.

      o     The global mobile content business is approximately $4 billion.  The
            U.S.  market  is still  at a very  early  stage  in its life  cycle,
            ranging  between  $100  million  and $200  million  based on various
            industry   estimates.   Mobile  content  has  lifestyle  appeal  and
            represents a way to attract and retain  wireless  users by providing
            the  ability to  personalize  a cell phone with  ringtones,  images,
            mobile  games  and  dynamic  applications.  Our MVNO  plans  include
            providing   customized  content  that  will  appeal  to  the  ethnic
            immigrant market.

Our  business  model  focuses on  acquiring  and holding  the  prepaid  wireless
subscriber.  International  long distance  services and premium  mobile  content
offerings  will be  utilized  as bundled  "value-added"  features to attract and
retain the target market to the brand.

Strategy

Our goal is to build a large wireless  subscriber base by providing  value-added
prepaid  wireless  services to the urban ethnic,  immigrant  target market.  The
basic strategic principles that we have established to achieve this goal are:

      o     Deliver products to the target market with  straightforward,  simple
            rate plans  that cut  through  the  complexity  of  current  prepaid
            wireless programs.

      o     Utilize the  technology,  operations and systems  infrastructure  of
            SmartServ  and  our  affiliates  to  bundle   value-added   features
            including discounted  international long distance and mobile content
            with premium handsets and mobile phone service.

      o     Focus on the underserved  urban ethnic,  immigrant market that shops
            in small format retailers and smaller chains that do not get primary
            focus from large  carriers and are often left with  inferior  "white
            label/generic" product choices from 2nd tier resellers.

Access to the prepaid  international calling card distribution network via KPCCD
and our mobile content  distribution and aggregation  capabilities are important
elements of this overall strategy.

Our products will be marketed  under the  UPHONIA(TM)  brand name.  The name was
developed to accomplish  important  consumer  product branding  objectives.  The
UPHONIA(TM)  brand has been well received  both by our prepaid card  distributor
network and on-line at the Uphonia.com  mobile content  website.  The brand name
was developed to deliver premium,  contemporary imagery for the youth and ethnic
segments, to appeal to a broad range of ethnic immigrant consumer segments,  and
to retain appeal for the broader wireless market.


                                       4
<PAGE>

Technology Platform

Our content and  application  delivery  technology is comprised of an integrated
array of hardware, real-time network connections, and a suite of custom software
code that provide a fast,  reliable,  and reusable  solution for the delivery of
data to mobile devices such as cell phones.

Today, mobile application  technology is rapidly evolving along several discrete
and competing  paths.  Some  carriers have begun to deploy  devices that use the
J2ME mobile Java framework from Sun Microsystems,  Inc. for their  applications.
Other  carriers are placing heavy  investments  behind  Qualcomm's  BREW (Binary
Runtime Environment for Wireless) development framework.  Yet other carriers are
relying on WAP (Web Access  Protocol)  or MMS  messaging  extensions  to deliver
application content. This complex array of end-user application technologies has
historically  meant that application  developers needed to pick and choose among
them. A single application could not work on all carriers and mobile devices. We
have   greatly   reduced  the   complexity   of  this   problem  by  building  a
device-independent   middleware   platform.   Our  middleware   translates  user
interactions  with complex  back-end  logic and data feeds into a set of formats
that can be delivered  to virtually  all mobile  devices.  Using this  approach,
although  "thin" client  applications  are still built in BREW, J2ME or WAP, our
platform  allows the majority of each  application's  complexity  to be built in
common back-end code shared across all of these platforms.

In addition to the delivery of  applications,  our platform allows us to deliver
content to most cell phones.  We have created and deployed  software  capable of
delivering mobile content  (including ring tones,  wallpapers and games) to over
200 different handsets through the networks of over 12 carriers.

In support of our  application and content sales, we have developed an extensive
customer support queue management  system, and interfaces to partners to process
consumer payments (credit card and PayPal transactions).

Wireless  carriers and service providers require that the back-end services that
deliver content and  applications be reliably  available on a 24/7 basis. In the
past  we  have  hosted  our   applications   in  a  data  center  that  features
carrier-grade  fault  tolerance  and  redundancy.  Every  critical  hardware and
software  system in the SmartServ  platform is designed to be redundant.  From a
hardware perspective,  our platform has been able to maintain its uptime because
of our  substantial  investment  in  redundant  power  sources,  middleware  and
application servers that mirror one another, and fault-tolerant  storage arrays.
We believe that no single point of failure has existed in our hardware platform.
From a software perspective, our platform provides internal staff and interested
application  partners  with a set of  monitoring  tools that  provide  real-time
information  about our data  center's  status.  Additionally,  we have  built an
application  deployment  process that allows new  applications  and  application
upgrades to be distributed with little or no downtime.

As part of our cost reduction  plan, we intend to host our systems  on-site.  We
intend to build redundancy systems similar to off-site  facilities,  although no
assurance  can be given  we will be able to host  on-site  to the  same  quality
level.

Competition and Competitive Risk

Within  the  prepaid  wireless  market,  there  are two main  types  of  service
providers.  Mobile  Network  Operators  (MNO's)  include the major  national and
regional  wireless  carriers that own wireless spectrum licenses and significant
network  infrastructure.  Mobile Virtual Network  Operators  (MVNO's) do not own
wireless  spectrum nor do they operate their own networks,  but rather  contract
with  MNO's to lease  wireless  minutes  which  they  then  supply  to their own
subscribers  under their own brands.  While the prepaid  wireless  sector in the
U.S.  is  expected  to grow  rapidly  over  the  next  several  years,  the MVNO
sub-segment is expected to contribute disproportionately to this expansion.


                                       5
<PAGE>

Following in the footsteps of European operators such as British Telecom,  which
has an MVNO agreement with Vodafone,  MVNO's are starting to blossom in the U.S.
market.  Virgin  Mobile,  the best known MVNO in the U.S.,  has  exceeded  the 2
million subscriber mark, after launching its service just several years ago.

Virgin Mobile and TracFone have been the most visible of the wireless  resellers
in the U.S. prepaid business. Virgin has been attacking the youth segment with a
simple pricing plan and a promotion of its strong content affiliation with MTV.

TracFone  Wireless,  Inc., a subsidiary of Mexico's  dominant  wireless  carrier
America  Movil,  has been in business  in the U.S.  for  several  years.  It has
primarily targeted under-banked and credit risk customers with a simple pre-paid
model.  Its edge at this  point is in  distribution,  and  TracFone  phones  and
prepaid airtime cards are being sold by many major retailers, including Wal-Mart
and Best Buy.

In addition to TracFone and Virgin Mobile many companies now offer MVNO products
for sale in the U.S. Other entrants, as well as nationally-recognized  brands in
retail and other non-wireless sectors, are also being attracted to the market.

We also face  competition  from the wireless  carriers  themselves,  all of whom
offer  prepaid   wireless   services,   and   separately,   mobile  content  and
applications.  The  principal  competitive  factors in the MVNO  sector  include
quality of service,  price of mobile  handsets and prepaid  minutes,  amount and
type of features provided,  quality and type of mobile handset provided, ease of
use, access to distribution channels,  brand recognition,  and reliability among
other factors.

Overall  the size and  growth of the  prepaid  wireless  sector is  expected  to
continue to attract  many  competitors  and robust  competition  for the prepaid
wireless subscriber.

Proprietary Rights

We have filed an application to trademark our UphoniaTM.

We rely upon a combination  of contract  provisions  and trade  secret,  patent,
trademark and copyright laws to protect our proprietary  rights.  We license the
use  of  our  services  under  agreements  that  contain  terms  and  conditions
prohibiting the  unauthorized  use or reproduction of our software and services.
Although we intend to protect our rights  vigorously,  there can be no assurance
that any of the foregoing measures will be successful.

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

Government Regulation

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


                                       6
<PAGE>

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

Employees

As of March 1, 2005, we employed a total of 21 people, all of whom were employed
in the United States.  Fifteen employees are at SmartServ headquarters and 6 are
employed at KPCCD.  As part of our cost reduction  plan, we intend to reduce the
number of  employees  at our  headquarters.  If we are able to raise  additional
capital to launch our MVNO business,  we anticipate  that staffing  requirements
associated  with the  implementation  of our plan of operation  will require the
addition  of  approximately  3  people  and the  replacement  of our  terminated
headquarters  employees.  None of our  employees  are  covered  by a  collective
bargaining agreement, and we believe that our relationship with our employees is
satisfactory.

Item 2. Description of Property

We occupy  approximately  4,400  square  feet in a leased  facility  located  in
Plymouth Meeting,  Pennsylvania.  This is our headquarters and the lease expires
in September 2007. nReach leases  approximately  4,077 square feet in a facility
located in Lakewood,  Colorado.  The lease expires on July 31, 2007. In November
2004,  we entered into a lease to sublet the entire space through July 31, 2007.
On January 7, 2005, we acquired KPCCD. KPCCD occupies approximately 1,500 square
feet in a  facility  leased  from the former  owner of KPCCD  located in Jackson
Heights, New York. The lease expires on December 31, 2005.

Item 3. Legal Proceedings

On or about February 29, 2000, Commonwealth  Associates,  L.P.  ("Commonwealth")
filed a  complaint  against  us in the  Supreme  Court of the State of New York,
County of New York. The complaint  alleged that in August of 1999,  Commonwealth
entered into an engagement  letter with us that provided for a nonrefundable fee
to Commonwealth  of $15,000  payable in cash or common stock at our option.  The
complaint  alleged  that we elected  to pay the fee in stock  and,  as a result,
Commonwealth  sought  13,333  shares  of  common  stock or at  least  $1,770,000
together with interest and costs.  In our defense,  we denied that we elected to
pay in stock. On March 4, 2003, we received a favorable  decision in this matter
after a trial held in the Supreme  Court of the State of New York.  The decision
holds that,  consistent with our defense,  we are required to pay Commonwealth a
retainer fee of only $13,439,  plus interest and certain  costs.  Commonwealth's
time to appeal has not yet expired  because a notice to enter the  judgment  has
not yet been filed by either  party.  While we intend to  vigorously  defend any
appeal of the decision in the Commonwealth  matter,  the unfavorable  outcome of
such an appeal could have a material adverse effect on our financial  condition,
results of operations and cash flows.

In August of 2003, we entered into a Stipulation  of  Arbitration  with Brauning
Inc., Mike Silva and Todd Peterson, former consultants to us (collectively,  the
"Claimants"),  pursuant to which we and the  Claimants  agreed to resolve,  in a
binding arbitration proceeding, the Claimants' demand for damages resulting from
an alleged breach of contract and a failure by us to timely  register the shares
of common  stock  underlying  certain  consulting  warrants  issued by us to the
Claimants.  Although we believe that the shares  underlying  the  warrants  were
timely  registered,  and that the  Claimants  demand is without  merit,  we have
reached an agreement  to settle this matter in order to avoid the  uncertainties
of litigation.  Under the terms of the settlement agreement,  dated February 27,
2004, we issued 60,000 shares of our common stock in  satisfaction of the claim,
and we paid Claimants $45,000 for certain wireless industry  consulting reports.
We also granted registration rights to the recipients of such 60,000 shares.


                                       7
<PAGE>

On or about March 22, 2004,  Jenkens & Gilchrist Parker Chapin,  LLP, our former
legal counsel, filed a complaint against us in the Supreme Court of the State of
New York, County of New York. The complaint requested payment of unpaid invoices
for legal  services in the amount of $599,244.  In November  2004, the claim was
settled in full for $300,000.

On or about August 17, 2004, Vertical Ventures Investments LLC filed a complaint
against the Company in the Supreme Court of the State of New York, County of New
York. The complaint seeks payment of late  registration  penalties and attorneys
fees in the total amount of $350,000.  While the Company  intends to  vigorously
defend such lawsuit, an unfavorable outcome would have a material adverse effect
on the Company's financial condition, results of operation and cash flows.

Item 4. Submission of Matters to a Vote of Security Holders

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter ended December 31, 2004.

                                     Part II

Item 5. Market for Common Equity, Related Stockholder Matters and Small Business
Issuer Purchases of Equity Securities

On June 27, 2003, our common stock, $.01 par value per share,  commenced trading
on the OTC Bulletin Board. Quotations from the OTC Bulletin Board (SSRV) reflect
inter-dealer prices, without retail mark-up,  mark-down, or commission,  and may
not represent actual transactions.

From  August 20,  2002 to June 26,  2003 our common  stock  traded on the Nasdaq
SmallCap  Market as SSOL.  Prior  thereto,  our  common  stock was traded on the
Nasdaq National Market as SSOL. In each instance, our common stock was de-listed
from the  applicable  Nasdaq  stock  market for  failure  to meet the  continued
listing requirements.

The  following  table sets  forth the high and low  prices for the common  stock
during the periods  indicated as reported by the Nasdaq  SmallCap Market and the
OTC Bulletin Board, as applicable.  All amounts reflect the one-for-six  reverse
stock split effective November 25, 2003.


                                       8
<PAGE>

                                                        Common Stock
                                                   High              Low
                                                   -----            -----
       Year Ended December 31, 2004
       ----------------------------
       First Quarter                               $4.25            $1.35
       Second Quarter                               4.00             2.05
       Third Quarter                                2.40             1.00
       Fourth Quarter                               3.20             1.02

       Year Ended December 31, 2003
       ----------------------------
       First Quarter                              $10.44            $4.86
       Second Quarter                               7.50             2.52
       Third Quarter                                3.06             1.02
       Fourth Quarter                               3.00             1.15

As of March 1, 2005, we had 5,349,392 shares of common stock outstanding held by
approximately 152 record holders.

We have never paid a cash dividend on our common stock. It is our present policy
to retain  earnings,  if any,  to  finance  the  development  and  growth of our
business.  Accordingly, we do not anticipate that cash dividends will be paid on
our common  stock  until our  earnings  and  financial  condition  justify  such
dividends,  and there can be no assurance that we can achieve such earnings. The
terms of our Series A convertible  preferred stock provide that no dividends can
be paid on our common stock  unless an equal or greater  dividend is paid on the
preferred stock and all accrued and unpaid dividends on the preferred stock have
been paid. The Series A convertible  preferred  stock receives  dividends at the
rate of 8% per year  payable  quarterly in cash or, in our sole  discretion,  in
registered shares of our common stock.

Recent Sales of Unregistered Securities

At the time of issuance,  each investor or recipient of unregistered  securities
was either an accredited investor or a sophisticated investor. Each investor had
access to our most recent Form 10-KSB,  all quarterly and periodic reports filed
subsequent  to such Form  10-KSB and our most  recent  proxy  materials.  Unless
otherwise  noted below,  the shares of common  stock and the warrants  described
below were issued in reliance upon the exemption from  registration  provided by
Section 4(2) of the Securities Act of 1933, as amended.

In  February  2004 in  connection  with legal  consulting  services  provided by
Richard  Kerschner  and as part of his  severance  agreement,  we entered into a
consulting  agreement for warrants to purchase  50,000 shares of common stock at
$1.65 per share. These warrants vested upon grant and expire in February 2009.

On  November  4, 2004,  we engaged  Jefferies  & Company,  Inc.  to advise us on
strategic growth opportunities,  financing and capital resources and significant
merger and  acquisition  candidates.  In connection  with that engagement and in
partial payment for providing those services, we issued 125,000 shares of common
stock.  The  agreement  calls for the  issuance of up to an  additional  325,000
shares of common stock upon the  achievement of certain  milestones and services
that may occur in 2005.

In December 2004, in connection with engaging Vineberg Communications to provide
public relations  services we issued three immediately  exercisable  warrants to
purchase  7,500,  16,822 and 7,500  shares of common  stock at $2.40,  $1.07 and
$2.40 per share,  respectively  and expiring in June 2007,  September  2007, and
December 2007, respectively.


                                       9
<PAGE>

In December  2004,  in  connection  with a proposed  settlement  for  liquidated
damages related to a failure to have the Company's SB-2  Registration  Statement
declared  effective  by the SEC, we  established  a pool of warrants to purchase
1,000,000  shares of common  stock at $2.50 per share for  allocation  among our
shareholders  that  participated  in our 2003  bridge and  Series A  Convertible
Preferred Stock financings. The warrants expire in December 2006. As of March 1,
2005,  69% of the  representative  warrant  ownership of the 1,000,000  warrants
responded  to the proposal and of that  amount,  4% declined the  proposal.  The
remaining 31% have not responded to the offer.

In December 2004,  Global Capital Funding,  LP exercised 130,000 warrants of its
257,333  warrants at $1.50 each and the Company  issued 130,000 shares of common
stock.

During  the  quarter  ended  December  31,  2004,  three  holders  of  Series  A
Convertible Preferred Stock converted them and the Company issued 142,093 shares
of common stock.

In  connection  with  consulting  services to be provided by M. Ezzat  Jalled we
entered  into a  consulting  agreement  dated June 2004 for warrants to purchase
100,000 shares of common stock, at $1.50 per share, and expiring in May 2006. In
December  2004 these  warrants  were  cancelled  since the  required  consulting
services were never performed.

The following  chart  describes our  repurchases  of our common stock during the
fourth quarter ended December 31, 2004.

<TABLE>
<CAPTION>
                           SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
----------------------------------------------------------------------------------------------------------------------
                                                                                              (d) Maximum Number (or
                                                                       (c) Total Number of      Approximate Dollar
                                                                       Shares Purchased as     Value) of Shares that
         Period           (a) Total Number of    (b) Average Price       Part of Publicly      May Yet Be Purchased
                            Shares Purchased       Paid per Share       Announced Plans or      Under the Plans or
                                                                             Programs                Programs
----------------------------------------------------------------------------------------------------------------------
<S>                              <C>                   <C>                      <C>                      <C>
10/1/04 - 10/31/04               94,706(1)            $1.01(1)                  0                        0
----------------------------------------------------------------------------------------------------------------------
11/1/04 - 11/30/04                 0                     0                      0                        0
----------------------------------------------------------------------------------------------------------------------
12/1/04 - 12/31/04                 0                     0                      0                        0
----------------------------------------------------------------------------------------------------------------------
Total                            94,706                  --                     0                        0
----------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)   These shares were acquired from  Sebastian E.  Cassetta,  our former Chief
      Executive  Officer  and  Director,   in  connection  with  his  Separation
      Agreement of August 2003. The shares were issued to Mr. Cassetta  pursuant
      to a Restricted Stock Agreement and in exchange for a note in the original
      principal amount of $457,497.  The outstanding  amount of principal on the
      note ($95,653) was cancelled upon delivery by Mr. Cassetta to SmartServ of
      the 94,706 shares of restricted stock that secured the note.


                                       10
<PAGE>

Item 6. Management's Discussion and Analysis or Plan of Operations

This  discussion  and  analysis  of  our  financial  condition  and  results  of
operations  contain certain  "forward-looking  statements" within the meaning of
the Private  Securities  Litigation  Reform Act of 1995.  Actual  results  could
differ materially from those anticipated in these forward-looking statements for
many reasons,  including  the risks faced by us described in "Risk  Factors" and
elsewhere in this report.

We are a Mobile Virtual Network  Operator (MVNO) which is a mobile operator that
does  not own or  operate  supporting  infrastructure  such as cell  towers  and
related  support  systems.  We intend to launch an innovative  prepaid  wireless
service in 2005 under the brand name UPHONIA(TM).  We intend to give consumers a
better choice in mobile phone service by bundling flexible prepaid minute plans,
free  mobile  content  and  discounted  international  long  distance.  With our
UPHONIA(TM)  mobile  phone  service,  prepaid  customers  will  get the  premium
features not usually available at the micro-retailers where they shop:

      o     Our UPHONIA(TM) brand will provide consumers flexible prepaid minute
            plans - UPHONIA(TM)  customers do not sign up for one preset monthly
            contract,  but instead are able to decide how many minutes they want
            each time they purchase additional minutes.

      o     UPHONIA(TM)   customers  can  personalize  their  cell  phones  with
            thousands of ringtones,  images, games and graphics. SmartServ makes
            it easy for  UPHONIA(TM)  customers to download  mobile  content for
            free  -  online  at  the  UPHONIA(TM).com  mobile  content  website,
            in-stores  from  UPHONIA(TM)  mobile content  kiosks,  or right from
            their UPHONIA(TM) phones.

      o     UPHONIA(TM)  customers  will  also  be  able  to  access  discounted
            international long distance through their UPHONIA(TM) phones.

We have an agreement with Sprint to utilize Sprint's  Nationwide PCS Network for
its prepaid  mobile  phone  service.  Under this  agreement,  Sprint  wholesales
wireless  minutes from their  network  directly to  SmartServ  for resale to its
UPHONIA(TM)  customers.  SmartServ  benefits  from this  agreement  by receiving
access to Sprint's  enhanced  nationwide  network with turnkey  reliability  and
performance.  As an MVNO,  SmartServ has the advantage of market access  without
the  need to  build  the  telecom  infrastructure  necessary  to  originate  and
terminate domestic wireless calls. Sprint benefits by gaining a distribution and
marketing  partner  that is  focused  on market  development  in a niche that is
secondary to Sprint (i.e., the immigrant,  urban ethnic and youth markets).  The
agreement  requires  $1,000,000  in the form of a letter of credit to secure our
obligations  under the Sprint  contract which we have yet to provide.  . We also
design, develop and distribute software and services that enable the delivery to
wireless devices of various content,  with special emphasis on cell phones.  The
content which we provide includes premium content such as ringtones,  images and
games,  and dynamic  changing  content such as horoscopes,  lottery  results and
weather reports.  Historically, we have licensed our applications,  content, and
related services to wireless  carriers and enterprises.  We have revenue sharing
license  agreements  with  wireless  carriers  such as  Verizon  Wireless,  AT&T
Wireless, Nextel, and ALLTEL Wireless, that allow us to deliver our services and
branded content to a wide base of consumer cell phone users. For enterprises, we
have  in  the  past  offered  solutions  that  deliver  financial  market  data,
proprietary  internal  documents and other useful information to mobile workers,
although this no longer comprises a core part of our business or strategy.

We  have  since  our  inception   earned  limited  revenues  and  have  incurred
substantial  recurring operating losses,  including net losses of $10,580,372and
$17,537,775  for the years  ended  December  31,  2004 and  2003,  respectively.
Additionally,  we have an accumulated  deficit of  $100,977,153  at December 31,
2004.


                                       11
<PAGE>

As of March 30, 2005, after reviewing the Company's cash flow  projections,  the
Company  adopted a plan  designed  to  insure  that we have  sufficient  working
capital to support a reduced level of operations through March 2006. As of March
31, 2005 we had $1,012,000 in cash.  Elements of the plan include: 1) maximizing
of KPCCD's  international calling card profits since the acquisition of KPCCD on
January 7, 2005,  2) reduce the level of operating  expenses by  relocating  our
hosting  facility  from an off site  location  to an  on-site  location,  and 3)
elimination of employee positions.

In  addition,  the  Company is  pursuing  various  action  items to improve  its
liquidity in conjunction with beginning to execute its business strategy.  Those
action  items  include  pursuing  the  Telco  Group  acquisition  and  obtaining
sufficient  financing  to cover  the  costs of such  acquisition  and  provide a
sufficient surplus to address the Company's liquidity requirements.  The Company
is also  pursuing  other  sources of capital in the form of a private  placement
unrelated  to the Telco Group  acquisition  to address the  Company's  liquidity
requirements.

However,  no  assurance  can  be  given  that  the  Company  will  conclude  the
acquisition or will be able meet its revenue and cash flow  projections,  reduce
its cost  structure as presently  configured or that  unforeseen  liabilities or
expenses will not arise,  or raise  additional  capital on  satisfactory  terms.
Should the Company be unable to raise  additional debt or equity  financing,  it
will be forced to seek a strategic buyer, a merger or cease operations.

We believe  that the  evolution  of the  cellular  industry  is at an  important
turning   point,   where  both  consumers  and  businesses  are  expecting  more
functionality  and  features  from both  their cell  phones  and their  cellular
carriers.  This  expectation  is being  driven  by a number of  industry  trends
including highly  competitive  pricing packages,  newer and more functional cell
phones and mobile devices,  and the customers'  ability to take their cell phone
number  with  them to a new  carrier  that  offers  them  more  value  than  the
incumbent.   Competition  in  this   environment   appears  to  be  moving  from
differentiation  based on  network  coverage  or  minute  rates to one  based on
enhanced  features and services.  We believe that as carriers' network coverage,
quality of service,  and pricing  plans become  more-or-less  equal,  cell phone
customers  will  choose a carrier  based  principally  on the  suite of  premium
content and  applications  that are included with its service.  This environment
will provide an  opportunity  for us to exploit our current and planned  content
assets and delivery capabilities, developed over the past nine years.

t 0 0 To augment our capabilities,  we acquired  Colorado based nReach,  Inc. on
February 28, 2004 in exchange for 500,002  shares of our common  stock.  We also
agreed to an earnout  schedule to pay up to an additional  916,667 shares of our
common stock in the event we reach certain  revenue  targets  within five fiscal
quarters  following the closing of this  transaction at the rate of one share of
our common  stock for every dollar of our revenue in excess of  $2,700,000  (the
"Earnout  Trigger") during such five fiscal quarters.  Management  believes that
due to nReach's performance issues to date the Earnout Trigger will not be paid.
In addition to the liabilities set forth in the financial  statements of nReach,
we assumed (i) ordinary course  liabilities  since November 30, 2003, (ii) taxes
accrued on earnings  since  December 31, 2002 which were not yet due and payable
as of the closing date, (iii) expenses  incurred to accountants and attorneys in
the  transaction  not to exceed  $25,000,  and (iv) short term  borrowings up to
$75,000 due to an nReach shareholder.  nReach is a wireless content distribution
company that offers a broad portfolio of popular mass-market cell phone content,
including ringtones, games, and on-device images both direct to the consumer and
through wireless carriers.

On January 7, 2005, we acquired KPCCD,  Inc., a New York City-based  distributor
of  international  prepaid  calling cards.  Founded in 1998,  KPCCD  distributes
international  prepaid  calling  cards  through a network of  hundreds of retail
outlets  along the East Coast.  We believe  that the  acquisition  of KPCCD will
expand our distribution  network for our planned prepaid  wireless  products and
services.  The acquisition of KPCCD is expected to add as much as  approximately
$3 million in monthly revenue. In connection with the closing of the transaction
on January 7, 2005, KPCCD, the sellers of KPCCD and Prima  Communications,  Inc.
("Prima"),  a company  controlled  by the sellers,  entered into a Master Vendor
Agreement ("Vendor Agreement").  Under the Vendor Agreement,  Prima will sell to
KPCCD at cost all of KPCCD's requirements of international prepaid calling cards
for up to one year  after  January 7,  2005.  The  Company  has  guaranteed  the
obligations  of KPCCD under the Vendor  Agreement.  The Vendor  Agreement can be
terminated prior to its one year term under certain conditions.


                                       12
<PAGE>

On November 17, 2004, we also signed a  non-binding  letter of intent to acquire
Telco  Group,  Inc.,  and  affiliates.  Telco  Group,  Inc. is a New  York-based
provider  of  pay-as-you-go  wireless   telecommunications   services,   prepaid
international long distance, nationwide dial around long distance and nationwide
dial up high  speed  internet  services.  This  acquisition,  if  completed,  is
expected to add approximately $300 million in annual revenues.  While the letter
of intent has expired,  the  acquisition  discussions  are continuing with Telco
Group.  The  closing  of  this  acquisition  is  subject  to  customary  closing
conditions for this type of transaction, including the negotiation and execution
of a binding purchase agreement. In addition, we must secure financing to obtain
the necessary funds to pay for this  acquisition and provide working capital for
the combined  company.  There can be no assurance that these  conditions will be
met and the closing will occur.

While  we  continued  to  support  our  lifestyle  offerings  of BREW  and  J2ME
applications  in 2004,  we augmented  this set of offerings  with the ability to
deliver  static content  (ringtones,  graphics,  and games).  In August 2004, we
launched    a    consumer    web   site   to   sell    this    static    content
(http://www.uphonia.com).  Our  ability to deliver  this type of static  content
allows us to sell directly to the consumer,  removing the necessity of having to
broker these transactions through the wirelesses carriers.  Additionally,  it is
our  expectation  that this  static  content  will  become a key  feature of our
branded  wireless service when we launch our planned MVNO service in 2005. While
we maintain our BREW and J2ME  infrastructure we have not undertaken the expense
to certify these applications for new phones since June, 2004.

As of March 1, 2005, we employed a total of 21 people, all of whom were employed
in the United States.  Fifteen employees are at SmartServ headquarters and 6 are
employed at KPCCD.  As part of our cost reduction  plan, we intend to reduce the
number of  employees  at our  headquarters.  If we are able to raise  additional
capital to launch our MVNO business,  we anticipate  that staffing  requirements
associated  with the  implementation  of our plan of operation  will require the
addition  of  approximately  3  people  and the  replacement  of our  terminated
headquarters  employees.  None of our  employees  are  covered  by a  collective
bargaining agreement, and we believe that our relationship with our employees is
satisfactory.

On November  24,  2003,  we  announced  that our new  trading  symbol on the OTC
Bulletin  Board will be SSRV  effective at market  opening on November 25, 2003.
This new trading symbol was assigned by NASD in conjunction with our one-for-six
reverse  stock split,  which also took effect on November  25,  2003.  Under the
reverse stock split, our outstanding shares of common stock prior to the reverse
split were  exchanged for new shares of common stock at a ratio of one new share
for every six  pre-split  shares.  All of our  convertible  securities,  such as
convertible  debentures,  stock options and  warrants,  were also subject to the
reverse split. Our convertible securities are convertible or exercisable, as the
case may be, at six times the price  for  one-sixth  the  number of shares  into
which such security was previously convertible or exercisable. All share amounts
of common  stock and  convertible  securities  reported  in this Form 10-KSB are
adjusted for the split.


                                       13
<PAGE>

Selected Financial Data

<TABLE>
<CAPTION>
                                                          Year Ended December 31
                                                     -------------------------------
                                                          2004              2003
                                                     -------------------------------
<S>                                                  <C>               <C>
      Statement of Operating Data:

      Revenues                                       $     358,646     $     709,388
                                                     -------------------------------

      Costs and expenses
        Operating costs                                 (5,684,704)       (6,882,722)
        Stock based compensation                        (2,026,337)         (374,569)
        Impairment of capital assets and                        --        (1,548,473)
        capitalized software
                                                     -------------------------------

      Total costs and expenses                          (7,711,041)       (8,805,764)
                                                     -------------------------------

      Loss from operations                              (7,352,395)       (8,096,376)
                                                     -------------------------------

      Net interest expense and other financing          (3,031,177)      (10,121,221)
         costs
      Legal settlement                                    (196,800)               --
      Gain from extinguishment of debt                          --           305,822
      Insurance recovery                                        --           374,000
                                                     -------------------------------
      Net loss                                       $ (10,580,372)    $ (17,537,775)
                                                     ===============================
      Preferred stock dividend accrued                  (4,108,399)               --
                                                     -------------------------------
      Net loss applicable to common shareholders     $ (14,688,771)    $ (17,537,775)
                                                     ===============================
      Basic loss per share                           $       (4.94)    $       (8.46)
                                                     ===============================

      Diluted loss per share(1)                      $       (4.94)    $       (8.46)
                                                     ===============================

      Weighted average shares outstanding - basic        2,972,254         2,073,448
                                                     ===============================

      Weighted average shares outstanding -              2,972,254         2,073,448
         diluted(1)
                                                     ===============================

      Balance Sheet Data:
      Total assets                                   $   3,337,514     $     836,685
      Notes payable                                         50,313         3,340,430
      Accumulated deficit                             (100,977,153)      (90,396,781)
      Stockholders' equity (deficiency)                  1,421,425        (5,469,387)
</TABLE>

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

1     Outstanding  employee  stock  options  and other  warrants  to purchase an
      aggregate of 20,762,061  and 4,447,416  shares of common stock at December
      31, 2004 and 2003,  respectively,  were not included in the computation of
      the  diluted  loss per share  because  either we  reported  a loss for the
      period or their exercise prices were greater than the average market price
      of the common stock and therefore would be antidilutive.


                                       14
<PAGE>

Year Ended December 31, 2004 versus Year Ended December 31, 2003

During the year ended December 31, 2004, we recorded revenues of $358,646, a 49%
decrease over revenues of $709,388 for the year ended December 31, 2003. Of such
2004 revenues,  virtually all were earned  through our licensing  agreement with
Qualcomm. Of such 2003 revenues,  $263,000, $188,500, $136,300 and $108,000 were
earned  through our licensing  agreements  with Salomon Smith Barney,  Qualcomm,
CitiGroup Global and Wireless Retail Pins, respectively.

During the year ended  December  31,  2004,  we  incurred  costs of  services of
$2,137,777,  a decrease of 22% over cost of services of $2,732,571  for the year
ended  December 31, 2003.  Such costs  decreased  primarily due to reductions in
consulting  costs  incurred in connection  with the  development of our systems'
architecture  and  application  platform.  Components  of the  costs of  service
category consist  primarily of information and  communication  costs ($321,152),
personnel costs ($1,055,657),  consulting costs ($255,507),  rent and facilities
($102,369)  and web-site  costs  ($257,738).  During the year ended December 31,
2003,  we incurred  costs of services of  $2,732,571.  Components of these costs
consisted primarily of information and communication costs ($640,200), personnel
costs  ($1,142,600),  computer  hardware  leases,  depreciation  and maintenance
costs, and amortization  expenses relating to capitalized  software  development
costs ($800,586).

During the year  ended  December  31,  2004,  we  incurred  sales and  marketing
expenses of  $522,419,  an increase of 13% over  $460,836  incurred for the year
ended December 31, 2003.  Such costs  increased  primarily due to an increase in
public relations and trade show expenses.  Components of the sales and marketing
category consist primarily of personnel costs ($269,078), public relations costs
($135,262),  trade show costs  ($75,591) and travel  ($21,854).  During the year
ended December 31, 2003,  components of the sales and marketing category consist
primarily  of  personnel  costs  ($333,700),  marketing  consultants  ($51,700),
advertising ($18,100) and travel ($39,900).

During the year ended December 31, 2004, we incurred general and  administrative
expenses of $2,932,636, a decrease of 12% over the year ended December 31, 2003.
Such  costs  decreased  primarily  due to a  reduction  in  personnel  costs,  a
reduction in  professional  fees and a reduction in facilities  costs related to
the  relocation  of our  headquarters  from  Stamford,  Connecticut  to Plymouth
Meeting,  Pennsylvania.  Components of the general and  administrative  category
consist  primarily of personnel costs  ($654,793),  consulting fees ($1,745,606)
professional  fees  ($678,792),   facilities  ($75,116),  insurance  ($112,571),
amortization of intangibles  ($123,201),  investor  relations  costs  ($36,614),
travel costs ($34,667),  communications costs ($78,370), and the write-off of an
uncollectible  receivable  ($44,941).  These costs were offset by a reduction of
aged accounts  payable  negotiated with vendors to settle  outstanding  accounts
payable  amounting to  $746,189.  During the year ended  December  31, 2003,  we
incurred general and administrative expenses of $3,335,109.  Components of these
costs  consisted  primarily of personnel  costs  ($665,100),  professional  fess
($1,234,500)  facilities  ($440,400),  insurance  ($220,100),  computer hardware
leases,  depreciation  and maintenance  costs  ($103,400),  travel ($56,700) and
communications costs ($55,900).

During the year ended December 31, 2004, the net noncash charge for  stock-based
compensation amounted to $2,026,337 compared to a net noncash charge of $374,569
during the year ended  December 31, 2003.  Such  noncash  amounts are  primarily
related  to  the  valuation  of  stock-based  compensation  in  accordance  with
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees"  ("APB No. 25").  Certain  employee  stock options are subject to the
variable plan requirements of APB No. 25, and therefore, compensation expense is
recognized  for changes in the fair value of our common stock.  Noncash  charges
for  consulting  services  for the year ended  December  31,  2004 and 2003 were
$1,062,133 and $600,400, respectively,  resulting primarily from the issuance of
warrants to purchase common stock to various financial,  marketing and technical
consultants.

Interest  income for the year  ended  December  31,  2004 and 2003  amounted  to
$23,196 and $11,601,  respectively.  Such amounts were earned primarily from our
investments in highly liquid commercial  paper, and money fund accounts.  During
the year ended December 31, 2004 and 2003,  interest expense and other financing
costs  were  $3,054,373  and  $10,132,872,  respectively.  During the year ended
December 31, 2004, interest and other financing costs were incurred primarily in
connection  with the  completion,  in February  2004,  of a $10 million  private
offering of  investment  Units in the 2004  Private  Placement.  During the year
ended  December 31, 2003,  interest and other  financing  costs were incurred in
connection  with the  convertible  bridge notes issued in February,  May,  June,
September and November 2003 in  anticipation of closing our funding raise of $10
million in February 2004.


                                       15
<PAGE>

Basic and diluted loss per share was $4.94 for the year ended  December 31, 2004
compared  to a basic and  diluted  loss per  share of $8.46  for the year  ended
December  31,  2003.  The  weighted  average  shares  outstanding  increased  to
2,972,254 for the year ended December 31, 2004 from 2,073,448  weighted  average
shares outstanding for the year ended December 31, 2003.

Capital Resources and Liquidity

Cash Flow

At December 31, 2004 and 2003,  the Company had cash of $1,792,856 and $139,178,
respectively.  Net cash used in  operations  was  $5,474,363  for the year ended
December  31, 2004  compared to  $3,929,136  during the year ended  December 31,
2003.  The primary  reason for this increase was the Company's  reduction of its
accounts payables through payment, and negotiated  settlements with vendors. Net
cash used for  investing  activities  amounted  to $46,826  for the  purchase of
equipment and $100,000 for the purchase of nReach during the year ended December
31, 2004. Net cash provided by financing  activities  was $7,374,564  during the
year ended  December  31,  2004  compared  to  $3,913,555  during the year ended
December31, 2003. Details of financing activities included cash in the amount of
$1,411,711  used for the repayment of notes payable and accrued  interest  while
net cash provided by financing  activities  included $8,591,275 from the sale of
Series A and related  warrants  and  $195,000  from the  exercise of  warrants..
During the year ended  December 31,  2003,  we issued  convertible  notes in the
amount of $3,340,400.  Additionally,  warrant holders provided funds aggregating
$376,000  through the  exercise of warrants  during the year ended  December 31,
2003.

Capital Raising and Other Transactions

In May 2000, we entered into a Business  Alliance  Agreement with HP whereby the
companies agreed to jointly market their respective products and services and to
work on the  build-out  of our  domestic and  international  infrastructure.  In
furtherance  of these  objectives  HP provided us with a line of credit of up to
$20,000,000 for the acquisition of approved hardware,  software and services. As
of September 28, 2001, the expiration  date of the facility,  HP had advanced us
$6,723,156 thereunder.  In September 2002, we reached agreement with HP to amend
the  terms  of the  promissory  note to  provide  for the (i)  reduction  of our
aggregate  outstanding  principal and accrued  interest  amount of $7,045,000 to
$1,000,000,  (ii) return of certain unused  hardware by us, (iii) issuance by us
of a warrant for the purchase of 8,333 shares of common stock and (iv) repayment
of $500,000 of the amended  obligation  on  September  10, 2002.  The  remaining
obligation  was  evidenced  by a note,  bearing an  interest  rate of 11%, to be
repaid as follows:  $200,000 on December 31, 2002,  $200,000 on January 28, 2003
and $100,000 on February 27, 2003. The warrant  expires on September 9, 2005 and
has an exercise price of $10.494 per share. In connection therewith, we recorded
a charge to  earnings of $38,000  representing  the fair value of the warrant as
determined  in  accordance  with  the  Black-Scholes  model.  Additionally,   we
recognized a net gain of $5,679,261 in 2002 resulting from the extinguishment of
this  obligation.  In February  2003, we reached  agreement with HP to amend the
terms of the  amended  promissory  note to  provide  for the  settlement  of our
outstanding obligation of $530,800, inclusive of accrued interest of $30,800, in
consideration of the payment by us of $225,000.  As a result, during the quarter
ended March 31, 2003, we recognized  an additional  gain of $305,822,  resulting
from the extinguishment of this obligation.


                                       16
<PAGE>

In September  2002, we issued Units  consisting of 647,368  shares of our common
stock and warrants to purchase  323,685  shares of common stock,  exercisable at
$5.10 through September 8, 2007, to 22 accredited  investors at a purchase price
of  $5.4750  per  Unit.  Gross  proceeds  from  this  transaction   amounted  to
$3,544,346.  We agreed to pay fees consisting of $249,050,  an expense allowance
of  $25,000,  and  warrants  to  purchase  73,008  shares of common  stock at an
exercise  price  of  $5.10  per  share,   expiring  on  September  8,  2007,  as
compensation  to  certain  individuals  and  entities  that  acted  as  finders.
Additionally,  we incurred  costs and other fees of $28,000 in  connection  with
this transaction.  The warrants expire in September 2007 and are not callable by
us. Therefore, they cannot be relied upon by the Company as a definite source of
capital. The warrant holders may choose to exercise their warrants if the market
price of the Company's  common stock exceeds the exercise  price of the warrant.
From January 1, 2003 through April, 2003, warrants issued in September, 2002 for
the purchase of 73,731 shares of common stock were exercised. Proceeds from such
exercises were $376,000.

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

In February 2003, we issued a convertible  note to Global Capital Funding Group,
LP  ("Global")  in  consideration  for the receipt of $1 million.  The note bore
interest at the rate of 10% per annum,  was secured by our assets,  exclusive of
our internally  developed software  products.  As additional  consideration,  we
issued Global a warrant for the purchase of 33,333 shares of our common stock at
an  exercise  price of $9.66 per share.  The warrant  issued to Global  contains
certain antidilution provisions and expires on February 14, 2006. Alpine Capital
Partners, Inc. ("Alpine") received a finder's fee of $70,000, representing 7% of
the aggregate  purchase price of the convertible note, and a warrant to purchase
15,167  shares of common  stock  exercisable  at $9.66 per  share,  expiring  on
February  14, 2005,  in  connection  with this  transaction.  In April 2003,  we
borrowed an additional  $250,000 from Global and amended the convertible note to
include such amount. As additional consideration, we issued Global a warrant for
the purchase of 3,333  shares of our common stock at an exercise  price of $7.20
per share.  In  connection  with Alpine  Capital's  claim for a finder's  fee in
connection with the April 2003 amendment, Alpine received a warrant in July 2004
to purchase  40,000 shares of our common stock at $1.50 per share  expiring July
8, 2009.  This warrant was valued at $72,128.  Proceeds from the notes were used
for working capital  purposes.  In November 2003, in connection with the sale of
Units in the November  2003 bridge  financing  and the sale of Units in the 2004
Private Placement, we required the consent of Global. As an inducement to obtain
its  consent,  we issued  Global a warrant to purchase  16,667  shares of common
stock at an exercise price of $2.40 per share.  During  February 2004, the note,
as amended, matured and was paid off in full including accrued interest.

In  February  2003,  we issued  20,590  shares of common  stock to 5 vendors  in
settlement of our obligations, aggregating $164,000, to such vendors.


                                       17
<PAGE>

In May 2003, in  consideration  of $358,000,  we issued 3.58 Units consisting of
convertible  notes and  warrants to  purchase  common  stock ("May  Units") to 8
investors.  Each May Unit consisted of a $100,000 convertible note and a warrant
to purchase 33,333 shares our common stock. The convertible  notes bore interest
at 8% per annum,  were  convertible into our common stock at $4.464 (the average
of the  closing  bid  prices of our  common  stock  for the 5 days  prior to the
closing  of the  transaction)  per share and were to  mature on the  earlier  of
November  19,  2003 or the  closing of an equity  placement  of not less than $3
million.  The warrants are exercisable at $4.464 per share and expire on May 19,
2006. In June 2003, in consideration of $1,142,000, we issued 11.42 Units ("June
Units") to 20 accredited investors.  Each June Unit also consisted of a $100,000
convertible  note and a warrant to purchase  33,333  shares of our common stock.
The convertible  notes bore interest at 8% per annum,  were convertible into our
common  stock at $4.764 (the average of the closing bid prices of the our common
stock for the 5 days prior to the closing of the transaction) per share and were
to mature on the  earlier  of  November  19,  2003 or the  closing  of an equity
placement of not less than $3 million.  During June 2003 in connection  with the
Company's  potential  de-listing  from the Nasdaq  SmallCap  Stock  Market,  the
Company  issued  to each  investor  in the  May and  June  2003  transactions  a
Contingent  Warrant  to  purchase  25,000  shares of common  stock for each Unit
purchased exercisable upon such de-listing (and if re-listing did not occur with
90 days  thereafter)  at an exercise  price of $4.464 per share and expiring May
18, 2006.  The Company was de-listed  from the Nasdaq  SmallCap  Stock Market on
June 26, 2003, and did not re-list within 90 days thereafter.  In November 2003,
the  Company,  as an  inducement  to extend  the  maturity  date of the notes to
February  19, 2004,  offered the note  holders a warrant to purchase  additional
shares of common  stock in an amount  equal to 25% of the number of shares  into
which the notes purchased in the Unit are  convertible.  Spencer Trask Ventures,
Inc.  ("Spencer  Trask"),  Steven B. Rosner and Richard Berland acted as finders
for the May and June 2003 transactions.  As consideration therefore, the finders
received their proportionate share of (i) a cash fee of $150,000,  or 10% of the
aggregate  purchase price of the Units sold;  (ii) warrants to purchase  510,158
shares of our common  stock at an exercise  price of $1.50 per share;  and (iii)
5,555 shares of unregistered  common stock per Unit sold. These warrants provide
for cashless  exercise  and expire 5 years from the date of grant.  In addition,
Spencer Trask received a non-accountable  expense allowance of $45,000, or 3% of
the aggregate  proceeds of all Units sold in the May and June 2003 transactions.
Proceeds from the sale of the Units were used for working capital purposes.

On September 16, 2003, we issued 7.4 Units in a financing transaction consisting
of an offering of up to 12 Units comprised of a $50,000  convertible  note and a
warrant to purchase 16,667 shares of our common stock. On September 19, 2003, we
issued the remaining 4.6 Units of the financing  transaction  (collectively  the
"September  Transaction").  The Units were sold to  accredited  investors for an
aggregate of  $600,000.  Holders of the notes had the right to convert the notes
into  shares of common  stock at a price equal to $1.896 per share for the notes
issued on  September  16,  2003 and  $1.920  per  share for the notes  issued on
September 19, 2003. The convertible notes bore interest at 8% per annum, and the
maturity  date  of the  notes  was  the  earlier  of  November  19,  2003 or the
completion  of an equity  placement  of at least $3  million,  at which time the
notes would  automatically  convert  into the equity  placement.  Holders of the
warrants  have the right to exercise the warrants into shares of common stock at
a price equal to $1.50 per share, and the warrants expire 3 years after the date
of grant.  Finders'  compensation  to Spencer Trask and Richard  Berland for the
September  Transaction  consisted  of (i) a cash fee of  $60,000,  or 10% of the
aggregate  purchase price of all of the Units; (ii) warrants to purchase 102,988
shares of common  stock,  or 20% of the shares of common  stock  underlying  the
securities in the Units sold, at exercise prices ranging from $1.50 to $1.90 per
share and  expiring 5 years from the date of grant;  and (iii)  2,778  shares of
unregistered  common stock per Unit sold. In addition,  Spencer Trask received a
non-accountable expense allowance of $18,000, or 3% of the aggregate proceeds of
all Units sold in the September  Transaction.  All of the notes and the warrants
have full ratchet anti-dilution  protection.  In November 2003, as an inducement
to extend the maturity  date of the notes to February  19, 2004,  we granted the
noteholders a warrant to purchase additional shares of common stock in an amount
equal to 25% of the number of shares into which the notes  purchased in the Unit
are convertible.


                                       18
<PAGE>

The September  Transaction  required the consent of Global,  the holder of $1.25
million of our  convertible  notes issued in February and April 2003, and of 51%
or  more  of the  holders  of our  $1.5  million  convertible  notes  issued  in
connection with the bridge  financings in May and June 2003. As an inducement to
obtain their consent, such holders received (i) a change in the conversion price
of their  convertible  notes equal to the lowest  conversion  price of the notes
issued in the  September  financings  ($1.896 per share) and (ii) an increase in
the  number of shares  purchasable  pursuant  to the  warrant  to reflect a full
ratchet  dilution  formula with a decrease in the exercise price of the warrants
to the exercise price of the warrants issued in the September financing ($1.50).
Such amendment, as it pertains to the holders of convertible notes issued in the
May and June 2003  bridge  financings,  was  effective  on  November  25,  2003,
coincident  with the  effective  date of a one-for-six  reverse stock split.  We
recorded a charge in the amount of $4,828,000 as "Other Financing Costs" for the
fair value of the consideration granted to these note holders for such consent.

On November 11, 2003, we issued 18 Units in a financing transaction comprised of
a $50,000 convertible note ("November Notes") and a warrant ("November Warrant")
to  purchase  16,667  shares of our  common  stock.  The  Units  were sold to 20
investors  for an aggregate of $900,000.  Holders of the November  Notes had the
right to convert the November Notes into shares of common stock at a price equal
to $2.10 per share.  The November  Notes bore interest at 8% per annum,  and the
maturity  date was the earlier of  December  19,  2003 or the  completion  of an
equity placement of at least $3 million,  at which time the November Notes would
automatically  convert  into  the  equity  placement.  Holders  of the  November
Warrants have the right to exercise the November  Warrants into shares of common
stock at a price equal to $1.50 per share, and the warrants expire 3 years after
the date of grant.  Finders'  compensation  to Spencer Trask and Richard Berland
consisted of (i) a cash fee of $90,000,  or 10% of the aggregate  purchase price
of all of the Units;  (ii) warrants to purchase  136,000 shares of common stock,
or 20% of the shares of common  stock  underlying  the  securities  in the Units
sold,  at exercise  prices  ranging from $1.50 to $1.90 per share and expiring 5
years from the date of grant;  and (iii)  2,778  shares of  unregistered  common
stock per Unit sold.  In  addition,  Spencer  Trask  received a  non-accountable
expense allowance of $27,000,  or 3% of the aggregate proceeds of all Units sold
in the November transaction. All of the November Notes and the November Warrants
have full ratchet anti-dilution  protection.  In December 2003, as an inducement
to extend the  maturity  date of the November  Notes to February  19,  2004,  we
offered the noteholders a warrant to purchase  additional shares of common stock
in an amount equal to 25% of the number of shares into which the notes purchased
in the Unit are convertible.

In February 2004, the convertible  notes issued in the May, June,  September and
November 2003 bridge  financings  were  automatically  converted  into the Units
issued in connection with the 2004 Private Placement.  The conversion took place
at the rate of $15 per Unit,  which is the price at which the Units were sold in
the 2004 Private  Placement.  This  resulted in the  conversion of the aggregate
outstanding  amount of debt owing from these  convertible  notes  ($3,122,302  -
representing  principal and accrued  interest)  into 208,147 Units from the 2004
Private Placement, which in the aggregate consists of 208,147 shares of Series A
Convertible  Preferred Stock and warrants to purchase 2,081,470 shares of common
stock at an exercise price $2.82 per share.  These  warrants  expire in February
2007. A description of the 2004 Private Placement is set forth below.


                                       19
<PAGE>

In February 2004, we completed the closing of a $10 million private  offering of
investment  Units at the price of $15 per Unit.  Each Unit  consists  of (i) one
share of Series A convertible  preferred stock, $.01 par value, each of which is
initially  convertible  into 10 shares of common stock, and (ii) one warrant for
the purchase of 10 shares of common  stock.  The Series A receives  dividends at
the rate of 8% per year payable quarterly in cash or, in our sole discretion, in
registered  shares  of our  common  stock  Dividends  accrued  on the  Series  A
preferred  stock  amounted  to $909,337 as of  December  31,  2004.  While these
dividends have not been paid, we intend to pay these  dividends with  registered
shares of common stock when we have a registration  statement declared effective
by the SEC,  which would equal 568,153 shares of common stock as of December 31,
2004. The Series A is entitled to a liquidation preference equal to the purchase
price  per  Unit  plus  accrued  and  unpaid  dividends.  The  Series  A is  not
redeemable. The warrants have an exercise price of $2.82 per share and expire in
February  2007. The warrants are callable on 30 days prior written notice in the
event that the closing  bid price of our common  stock is at least 250% of their
respective  exercise prices for a period of 10 consecutive trading days. We also
completed the closing of an additional  $25,000 private  offering of these Units
to an  accredited  investor  in March  2004,  which Units have the same terms as
described above other than the expiration date which will be March 2007. Spencer
Trask, the placement agent for the 2004 Private Placement, received compensation
consisting of (i) a cash fee of  $1,002,500,  or 10% of the  aggregate  purchase
price of all of the Units  acquired  for cash,  (ii) a  non-accountable  expense
allowance of  $300,750,  or 3% of the  aggregate  proceeds of all Units sold for
cash in the  transaction,  and (iii)  warrants to purchase a number of shares of
common  stock  equal  to  20% of the  shares  of  common  stock  underlying  the
securities in the Units sold for cash, constituting in the aggregate warrants to
purchase  1,336,666  shares of common  stock at $1.50 per share and  warrants to
purchase 1,336,666 shares of common stock at $2.82 per share.

While the  warrants  to  purchase  common  stock  issued  during the years ended
December  31,  2003 and 2004  (excluding  warrants  issued  pursuant to the 2004
Private  Placement  described above) represent an additional  source of capital,
they expire  between  April 2006 and  February  2009 and are not callable by us.
Therefore, they cannot be relied upon by us as a definite source of capital. The
warrant holders may choose to exercise their warrants if the market price of our
common stock exceeds the exercise price of the warrant.  The warrants  issued in
the 2004 Private  Placement,  as described  above, are callable on 30 days prior
written notice in the event that the closing bid price of our common stock is at
least 250% of their  respective  exercise  prices for a period of 10 consecutive
trading days.

In March 2004, we completed the acquisition of all of the  outstanding  stock of
nReach Inc., based in Lakewood,  Colorado, in exchange for 500,002 shares of our
common stock,  the assumption and payment of $100,000 of certain  obligations of
nReach's  stockholders  and an earn out schedule that may require our payment of
up to an  additional  916,667  shares of common  stock based on certain  revenue
targets.   Management  believes  that  based  on  performance  issues  that  the
additional shares will not come due.

Our  inability  to timely file or keep  registration  statements  effective  has
affected the registration rights held by certain of our stockholders and warrant
holders.  At December  31, 2004 and 2003,  we recorded an aggregate of $202,000,
and $128,000,  respectively for penalties in connection with the  aforementioned
registration requirements.  Such amounts are included in accrued expenses on our
balance sheet as of December 31, 2003 and December 31, 2004.  While we intend to
cure these deficiencies during 2005, penalties may continue to accrue in certain
circumstances.

In December  2004,  in  connection  with a proposed  settlement  for  liquidated
damages related to a failure to have the Company's SB-2  Registration  Statement
declared  effective  by the SEC, we  established  a pool of warrants to purchase
1,000,000  shares of common  stock at $2.50 per share for  allocation  among our
shareholders that participated in our bridge and Series A Convertible  Preferred
Stock  financings.  The warrants  expire in December  2006.  These warrants were
valued at  $1,782,125.  As of March 1, 2005, 31% of the  representative  warrant
ownership of the 1,000,000 warrants have not responded to the proposal and 4% of
such  representative  warrant  ownership of the 1,000,000  warrants declined the
proposal.


                                       20
<PAGE>

Pursuant to an agreement  with a vendor to whom we issued in  settlement  60,000
shares of common stock,  we were obligated to file a Registration  Statement and
have it declared  effective within the same time frames as required by the terms
of the 2004 Private Placement.  The Registration  Statement was timely filed but
it has not been  declared  effective by the SEC. As a result,  we incurred  late
registration  penalties of $2,000 per month,  or $8,000 as of December 31, 2004.
The late  registration  penalties  are due monthly until the event of default is
cured.

Future Capital Needs

Our financial  statements  have been prepared on a going  concern  basis,  which
contemplates  the  realization of assets and the  settlement of liabilities  and
commitments in the normal course of business. We have since our inception earned
limited  revenues and have  incurred  substantial  recurring  operating  losses,
including net losses of $10,580,372 and $17,537,775 for the years ended December
31, 2004 and 2003, respectively. Additionally, we have an accumulated deficit of
$100,977,153 at December 31, 2004.

As of March 30, 2005, after reviewing the Company's cash flow  projections,  the
Company  adopted a plan  designed  to  insure  that we have  sufficient  working
capital to support a reduced level of operations through March 2006. As of March
31, 2005 we had $1,012,000 in cash.  Elements of the plan include: 1) maximizing
of KPCCD's  international calling card profits since the acquisition of KPCCD on
January 7, 2005,  2) reduce the level of operating  expenses by  relocating  our
hosting  facility  from an off site  location  to an  on-site  location,  and 3)
elimination of employee positions.

In  addition,  the  Company is  pursuing  various  action  items to improve  its
liquidity in conjunction with beginning to execute its business strategy.  Those
action  items  include  pursuing  the  Telco  Group  acquisition  and  obtaining
sufficient  financing  to cover  the  costs of such  acquisition  and  provide a
sufficient surplus to address the Company's liquidity requirements.  The Company
is also  pursuing  other  sources of capital in the form of a private  placement
unrelated  to the Telco Group  acquisition  to address the  Company's  liquidity
requirements.

However,  no  assurance  can  be  given  that  the  Company  will  conclude  the
acquisition or will be able meet its revenue and cash flow  projections,  reduce
its cost  structure as presently  configured or that  unforeseen  liabilities or
expenses will not arise,  or raise  additional  capital on  satisfactory  terms.
Should the Company be unable to raise  additional debt or equity  financing,  it
will be forced to seek a strategic buyer, a merger or cease operations.

Application of Critical Accounting Policies

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

Revenue Recognition

We recognize  revenue  from the use of our  products and services in  accordance
with the American Institute of Certified Public Accountants  ("AICPA") Statement
of  Position   ("SOP")  97-2,   "Software   Revenue   Recognition",   SOP  98-9,
"Modification  of SOP  97-2,  "Software  Recognition  with  Respect  to  Certain
Transactions",   and  the  SEC  Staff  Accounting  Bulletin  No.  104,  "Revenue
Recognition".  Specifically,  there must be (1) evidence of an arrangement,  (2)
delivery of our products and services,  (3) fixed and determinable fees, and (4)
probable  collectibility  of such fees.  Multi-element  revenue  agreements  are
recognized  based on  vendor-specific  objective  evidence  of the fair value of
individual components or if the elements in the arrangement cannot be separated,
all revenues  from the  arrangement  are  deferred  until the earlier of (1) the
existence  of  vendor-specific  objective  evidence  or (2) all  elements of the
arrangement have been delivered.


                                       21
<PAGE>

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

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

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

      o     Subscription  service fees  consisting of fixed or variable  charges
            for usage of our  products.  Such  fees are  based on the  number of
            users having access to our products,

      o     Development and integration fees for the development and integration
            of software  applications  that  integrate our  applications  with a
            customer's proprietary data and legacy systems,

      o     Professional  service revenues that emanate from consulting services
            provided to customers, and

      o     Hosting services whereby we provide the services  necessary to cache
            and deliver a customer's proprietary data.

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

      o     The price charged when the same element is sold separately and,

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

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

Impairment of Property and Equipment

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


                                       22
<PAGE>

Capitalized Software Development Costs

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


                                       23
<PAGE>

Certain Factors That May Affect Future Results

Forward-looking  statements in this document and those made from time-to-time by
our officers are made under the safe harbor provisions of the Private Securities
Litigation  Reform Act of 1995.  Forward-looking  statements  concerning  future
plans or results are necessarily  only estimates and actual results could differ
materially from expectations.  Certain factors that could cause or contribute to
such differences  include those described below under the heading "Risk Factors"
and other risks  described  in this  Annual  Report on Form 10-KSB and our other
filings with the Securities and Exchange Commission.

Risk Factors

We are  subject  to a number of  significant  risks,  and you  should  carefully
consider these risks.  The risks  described  below are not the only ones that we
face.  Additional risks that generally apply to publicly traded companies,  that
are not yet identified or that we currently think are immaterial,  may also have
a material adverse effect on our company.  If any of the events,  contingencies,
circumstances or conditions described in the following risks actually occur, our
business,  financial  condition or results of operations  could be seriously and
irreparably  harmed.  The  trading  price of our common  stock  could,  in turn,
decline and you could lose all or part of your investment in our company.

We may not have sufficient working capital to continue operating

As of March  31,  2005 we had  $1,012,000  in cash,  which we  believe  provides
sufficient  working  capital to support a reduced  level of  operations  through
March 2006. The Company  adopted a plan designed to reduce expenses and maximize
KPCCD's international calling card profits.

No assurance  can be given that the Company will be able to implement  its plans
to reduce its level of operations and expenses or that unforeseen liabilities or
expenses will not arise. Should the Company not have sufficient working capital,
it will be forced to seek a strategic buyer, a merger or cease operations.

Any new capital will dilute existing shareholders.

If we are able to raise  additional  capital it is likely that the number of our
shares or convertible  securities we issue to the new investors will  materially
and significantly  dilute our existing  shareholders.  As a result the ownership
interest and voting  power of our  existing  stockholders  will  materially  and
significantly decrease.

We have a history  of losses and we have  never  been  profitable.  If we do not
achieve profitability we may not be able to continue our business.

We have, since our inception,  earned limited revenues and incurred  substantial
recurring  operating  losses,  including a net loss of $10,580,372  for the year
ended December 31, 2004,  and net losses of  $17,537,775  and $8,037,173 for the
years ended December 31, 2003 and 2002, respectively.  Additionally, at December
31, 2004, we had an accumulated  deficit of  $100,977,153.  Losses have resulted
principally  from  expenses  incurred in  connection  with  activities  aimed at
developing  our  software,   information  and  transactional   services,   costs
associated  with  our  marketing  and  administrative  activities  and  costs of
financing operations.  We have incurred substantial expenses and commitments and
expect to continue to have negative cash flows from operations. No assurance can
be  provided  that we will be able to develop  revenues  sufficient  to generate
positive cash flow from our operations.


                                       24
<PAGE>

We have significant accounts payable obligations.

We used a substantial  amount of our working  capital to compromise with and pay
various creditors.  In general, any company that does not pay its creditors in a
timely  manner  is at risk  of  being  forced  into  an  involuntary  bankruptcy
proceeding instituted by its creditors, which may provide for the liquidation of
assets or the reorganization of assets and debts. There can be no assurance that
our creditors will not pursue similar actions, and that, in the aggregate,  such
collection  actions by creditors and payments by us to  compromise  and pay such
claims  would not have a  material  adverse  impact on our  business,  financial
condition  and  results  of  operations,  or  that we will  not be  forced  into
bankruptcy.

We plan to pursue potential acquisitions,  and we may not be able to complete or
successfully integrate such acquisitions, or achieve the desired results.

Our business plan includes growth through potential strategic  acquisitions such
as the KPCCD acquisition completed on January 7, 2005 and the nReach acquisition
completed  on  February  28,  2004.  We have a  limited  history  of  completing
acquisitions  and  mixed  results  in  integrating  such  acquisitions  into our
company.  We will expend significant  management time and financial resources in
finding, evaluating, and if appropriate,  acquiring companies that can add value
to  our  shareholders.  Acquisitions  are  accompanied  by a  number  of  risks,
including:

      o     the  difficulty  and  expense  of  integrating  the  operations  and
            personnel of the acquired companies;

      o     the potential  disruption of the ongoing  businesses and distraction
            of our management and the management of the acquired companies;

      o     increase in expenses and the potential failure to achieve additional
            sales and enhance our customer base as a result of the acquisitions;

      o     potential   unknown   liabilities   associated   with  the  acquired
            businesses; and

      o     if  we  identify  suitable  acquisition  targets,  there  can  be no
            assurance that we will be able to finance or otherwise  complete the
            acquisitions.

      o     Even  if we  complete  such  acquisitions,  we may  not  succeed  in
            managing the associated acquisition risks, including but not limited
            to, the risks described above. Our failure to successfully integrate
            our  acquisitions  could  have  a  material  adverse  effect  on our
            business,   financial   condition   and   results   of   operations.
            Furthermore, we may issue equity securities or incur additional debt
            to  pay  for  any  future  acquisitions.   The  issuance  of  equity
            securities  would  be  dilutive  to our  existing  stockholders  and
            additional debt could have an adverse effect on our balance sheet.

The  international  long  distance and mobile  content  features that we plan to
bundle with our prepaid phone service depends upon third party licensing  and/or
purchase agreements.

Our  mobile  content  is  generally  licensed  through   non-exclusive   content
distribution  agreements.  Our planned  international long distance feature will
rely upon purchase of minutes and related network  management support from third
party suppliers or acquisition of an international long distance network. Access
to these products and services cannot be assured.  Failure to maintain access to
these products and services through third party suppliers at competitive  prices
could impact our ability to launch and sell our own products.

In addition,  existing and or potential  competitors  may enter into  agreements
with  these and other  providers  and  thereby  acquire  the  ability to deliver
content  or long  distance  features  that are  substantially  similar  to those
planned  by us.  The  providers  of these  services  may also  have  competitive
products to us and could enter the market with additional competitive products.


                                       25
<PAGE>

Our inability to  successfully  maintain access to  international  long distance
services and mobile content at  competitive  prices and to manage related supply
agreements and  competitive  forces could have a material  adverse effect on our
business, financial condition and results of operations.

Our revenues depend upon our ability to launch our prepaid wireless products and
to attract wireless subscribers.

The source of our  revenues in 2003 and 2004 were  licensing  arrangements  with
cell  phone   carriers  for  providing   their   customers   with  mobile  phone
applications.  We expect this revenue  source to end in 2005 or early 2006 as we
transition our business from mobile content/applications  distribution to Mobile
Virtual Network  Operation,  marketing  prepaid wireless phones and service.  In
order to transition  and grow our revenue,  we will need to attract and retain a
wireless  subscriber base. We have not yet launched our planned prepaid wireless
products  and there  can be no  assurance  that we will be able to  successfully
launch our products or obtain a  sufficient  number of wireless  subscribers  to
support our operations. Most of our revenues in 2005 will come from our recently
acquired subsidiary, KPCCD, which is a low margin business and which we acquired
on January 7, 2005, until we launch our MVNO business strategy.

We plan to pursue new  streams of  revenue  from the resale of prepaid  wireless
airtime bundled with  international  long distance and mobile content.  Revenues
from such business may not materialize.

We believe that we have a compelling  market strategy and combination of assets,
including  those  currently owned or licensed and those that we plan to acquire,
that may allow us to build a  significant  subscriber  base by bundling  prepaid
wireless airtime with premium mobile content and discounted  international  long
distance  services.  We plan to  utilize  these  assets to enter the  market for
reselling  wireless  airtime.  We have no prior experience in this area, and the
focus of our  financial  and  management  resources  will be devoted to this new
business.  Our failure to generate significant revenues from these efforts could
have a material adverse affect on our business,  financial condition and results
of operations.

We have a new CEO and executive management team.

We  believe  that due to the rapid pace of our  industry,  as well as the unique
challenges of growing our Company, the quality of our executive officers will be
key to our  success.  Our  prior  CEO,  CFO and  the  balance  of our  executive
management  team left the company  during 2003 and in the first quarter of 2004.
There is a  substantial  risk  that our new  management  team may not be able to
successfully  manage and grow the business.  This would have a material  adverse
effect on our business, financial condition, and results of operations.

The market  for our  planned  business  is in a rapid  growth  stage and may not
continue to grow or achieve the growth we expect in the future.

The market for prepaid  wireless  phones and services is in a rapid growth phase
and is highly dependent upon the evolution of other telecommunications  products
including,  but not limited to, other  wireless and Internet  technologies.  Our
future growth and profitability  will depend, in part, upon consumer  acceptance
of prepaid wireless products bundled with discounted international long distance
and  premium  content in general and a  significant  expansion  in the  consumer
market  for  prepaid  wireless  services.   Even  if  these  markets  experience
substantial  growth,  there can be no  assurance  that our products and services
will be commercially  successful or will benefit from such growth. Further, even
if initially  successful,  any continued development and expansion of the market
for our products and services will depend in part upon our ability to create and
develop  additional  products and adjust  existing  products in accordance  with
changing  consumer  preferences,  all at  competitive  prices.  Our  failure  to
successfully launch our prepaid wireless products or to develop new products and
generate  additional revenues following the launch of our prepaid products could
have a material adverse effect on our business,  financial condition and results
of operations.


                                       26
<PAGE>

We depend upon third party distributor and retailer agreements to achieve market
access.

Distribution is a critical success factor for our business plans. We need access
to small independent  retailers through third party distributors and the ability
to sell our products directly to mid-size and larger retailers.  Agreements with
these  distributors  and retailers are typically short term in nature and depend
upon  distributor  and retailer  assessment of our products,  services,  prices,
support programs,  and sales and management teams versus competition in addition
to other  factors.  Access to market  through these  channels is critical to our
success  and  there  can be no  assurance  that we will be able to  successfully
create or maintain these  distribution  agreements or that these agreements,  if
consummated, will develop and sustain a market for our products.

We compete against larger, well-known companies with greater resources.

The market for wireless products and services is highly competitive and involves
rapid innovation and technological change,  shifting consumer  preferences,  and
frequent  new product and service  introductions.  Many of our  competitors  and
potential  competitors have substantially greater financial,  marketing,  sales,
technical, and support resources than we have.

The principal  competitive  factors in the prepaid wireless  marketplace include
quality of service, product and service features, ease of use, reach and quality
of network, customer service, access to distribution channels, levels and impact
of consumer  marketing and sales programs,  brand  recognition,  and price among
other  factors.  The  market is  intensely  competitive  with  prepaid  wireless
products now offered by most major  telecommunications  companies  and many MVNO
competitors  including Virgin Mobile and TracFone.  We believe that the level of
competitiveness  in the market will  continue to build as both  existing and new
competitors,   including   large   multimedia,   retailer,   telecommunications,
information system companies, and other companies launch new products, marketing
and sales  programs,  and  innovative  features in both the prepaid and postpaid
wireless  sectors.  We also face  competition from numerous  services  delivered
through the Internet to personal  computers  and other  devices,  and from other
emerging or existing telecommunications technologies.

Our  inability to  successfully  manage and adjust to these  competitive  forces
could have a material  adverse effect on our business,  financial  condition and
results of operations.

Our relationship with Spencer Trask.

Spencer Trask and its affiliates own approximately 4% of the outstanding  shares
of our common stock as of March 1, 2005, and in the event its preferred stock is
converted and warrants are  exercised,  Spencer Trask and its  affiliates  could
potentially  beneficially own  approximately  36% of the shares of common stock.
Based on such ownership,  Spencer Trask will be able to affect and exercise some
manner of control over us and our operations.

During 2003 and 2004,  we paid to Spencer Trask  $1,738,050  in cash  (including
consulting  fees,  finders fees and  non-accountable  expenses),  issued 235,556
shares of our common stock, and issued warrants to purchase  4,381,072 shares of
our common stock at exercise  prices  ranging from $1.50 to $2.82 per share.  We
also  owe a  finders  fee  to  Spencer  Trask  in  connection  with  the  nReach
acquisition and Spencer Trask has agreed to accept shares of our common stock in
lieu of a cash payment. While we believe our financial arrangements with Spencer
Trask have been  appropriate,  there can be no assurance  that future  financial
arrangements  may not be  unduly  affected  by the  extent  of  Spencer  Trask's
ownership of us.


                                       27
<PAGE>

We are involved in pending material litigation.

On or about February 29, 2000, Commonwealth  Associates,  L.P.  ("Commonwealth")
filed a  complaint  against  us in the  Supreme  Court of the State of New York,
County of New York. The complaint  alleged that in August of 1999,  Commonwealth
entered into an engagement  letter with us that provided for a nonrefundable fee
to Commonwealth  of $15,000  payable in cash or common stock at our option.  The
complaint  alleged  that we elected  to pay the fee in stock  and,  as a result,
Commonwealth  sought  13,333  shares  of  common  stock or at  least  $1,770,000
together with interest and costs.  In our defense,  we denied that we elected to
pay in stock. On March 4, 2003, we received a favorable  decision in this matter
after a trial held in the Supreme  Court of the State of New York.  The decision
holds that,  consistent with our defense,  we are required to pay Commonwealth a
retainer fee of only $13,439,  plus interest and certain  costs.  Commonwealth's
time to appeal has not yet expired  because a notice to enter the  judgment  has
not yet been filed by either  party.  While we intend to  vigorously  defend any
appeal of the decision in the Commonwealth  matter,  the unfavorable  outcome of
such an appeal could have a material adverse effect on our financial  condition,
results of operations and cash flows.

On or about August 17, 2004, Vertical Ventures Investments LLC filed a complaint
against the Company in the Supreme Court of the State of New York, County of New
York. The complaint seeks payment of late  registration  penalties and attorneys
fees in the total amount of $350,000.  While the Company  intends to  vigorously
defend such lawsuit, an unfavorable outcome would have a material adverse effect
on the Company's financial condition, results of operation and cash flows.

Additional risks associated with a pending lawsuit against Citigroup.

A claim was  filed  during  2003 in US  District  Court,  Northern  District  of
Illinois by over one hundred  investors  in our common stock  against  Citigroup
Global Markets, Inc., Citigroup, Inc., and an individual institutional broker at
Citigroup,  alleging  fraud in  connection  with such  investors'  investment in
SmartServ. Neither us, nor any of any of our employees,  consultants,  officers,
directors or agents have been named as defendants in this lawsuit.  However,  we
can provide no  assurances  that we or any of our  current or former  employees,
consultants,  officers, directors or agents will not be brought into the lawsuit
by the plaintiffs or the defendants.  We believe any such claim would be without
merit. In such case, we would vigorously defend the action,  however,  there can
be no assurance  that we would be successful.  Further,  if we are named in this
lawsuit,  we would  have to  devote  financial  and other  resources,  diverting
management's  attention from our business, and an unfavorable outcome could have
a material  adverse effect on our business,  financial  condition and results of
operations.  Even if no  claim  is  made  against  us,  any  negative  publicity
regarding  this lawsuit  could have a material  adverse  effect on our business,
financial condition and results of operations.

We may not be able to adequately protect our proprietary rights.

We  have  pending  with  the  U.S.  Patent  and  Trademark  Office  a  trademark
application for UphoniaTM.

We rely upon a  combination  of contract  provisions,  as well as trade  secret,
patent,  trademark and copyright  laws, to protect our  proprietary  rights.  We
license our products and related  services under  agreements  that contain terms
and  conditions  prohibiting  the  unauthorized  use or  reproduction  of  those
products and services.  Although we intend to vigorously  protect our rights, if
necessary,  the cost could be burdensome  and there can be no assurance  that we
would be successful.

We believe that none of our products, services,  trademarks or other proprietary
rights infringes on the proprietary rights of third parties.  However, there can
be no assurance that third parties will not assert  infringement  claims against
us with  respect  to current  features,  content  or  services  or that any such
assertion  may not require us to enter into  royalty  arrangements  or result in
costly  litigation,  either of which could have a material adverse effect on our
business, financial condition and results of operations.


                                       28
<PAGE>

We are highly  dependent on  attracting  and  retaining  highly  skilled  sales,
marketing and technology development personnel.

We believe that our ability to increase  revenues and to develop  successful new
products  and product  enhancements  depends in part upon our ability to attract
and retain highly skilled sales, marketing and technology development personnel.
Our products  involve a number of evolving  technologies.  Competition  for such
personnel  is intense.  Our ability to hire and retain such key  personnel  will
depend upon our ability to raise capital and achieve increased revenue levels to
fund the costs associated with such key personnel. Failure to attract and retain
such key personnel  could  adversely  affect our ability to develop new products
and  product  enhancements  and to  generate  revenue  from  the  sale of  those
products,  thereby having a material  adverse effect on our business,  financial
condition and results of operations.

The market price of our common stock may  decrease  because we have issued,  and
will likely continue to issue, a substantial number of securities convertible or
exercisable into our Common Stock.

We will have issued  convertible  preferred  stock and warrants to investors and
consultants and granted options to employees for the purchase of an aggregate of
29,384,878 shares of our common stock as of December 31, 2004, and in the future
we will issue additional shares of common stock,  options,  warrants,  preferred
stock or other securities  exercisable for or convertible into our common stock.
Substantially all of such shares underlying the convertible  preferred stock and
warrants  have  registration  rights.  Additional  shares are available for sale
under Rule 144 of the  Securities  Act.  Sales of these  shares or the  market's
perception that sales could occur may cause the market price of our Common Stock
to fall and may make it more  difficult for us to sell equity  securities in the
future at a time and price that we deem appropriate or to use equity  securities
as consideration for future acquisitions.

Our common stock trades on the Over The Counter  Bulletin Board,  which subjects
it to less liquidity and more volatility than our prior Nasdaq SmallCap listing.

Since June 27,  2003,  our common stock has been trading on the Over the Counter
("OTC")  Bulletin Board.  This may influence the number of investors  willing to
trade in our common  stock,  and  therefore  could  decrease the  liquidity  and
trading  volume of our  common  stock.  Additionally,  our  position  on the OTC
Bulletin  Board may reduce the number of market  makers  willing to trade in our
stock,  making it likely  that wider  fluctuations  in the  quoted  price of our
common stock would occur. As a result,  there is a risk that  stockholders  will
not be able to obtain  price  quotes that reflect the actual value of our common
stock.  Increases in the  volatility  of our common  stock due to the  decreased
number of  individuals  willing to trade in it could also make it more difficult
to pledge the  common  stock as  collateral,  if  stockholders  sought to do so,
because a lender might be unable to accurately value the common stock.

In addition,  we are subject to the Securities and Exchange  Commission's  penny
stock  rules.  Penny stocks are  securities  with a price of less than $5.00 per
share, other than securities that are registered on certain national  securities
exchanges, that are quoted on Nasdaq or that meet certain conditions.  The penny
stock rules require delivery,  by a broker-dealer  prior to any transaction in a
penny stock,  of a disclosure  schedule  about  commissions  payable to both the
broker-dealer and the registered  representative  and current quotations for the
securities.  The rules also require that  broker-dealers send monthly statements
disclosing recent price information for each penny stock held in the account and
information on the limited market in penny stocks.  Because of the burden placed
on  broker-dealers  to comply with the penny stock rules,  stockholders may have
difficulty selling our common stock in the open market.


                                       29
<PAGE>

Provisions  in our  charter  may make it  difficult  for a company  or person to
acquire us.

Our charter  restricts the ability of our  stockholders  to call a stockholders'
meeting  and  provides  that our  stockholders  may not act by written  consent.
Additionally,  our Board of Directors  is divided  into three  classes with each
class  being  elected  by our  stockholders  in  different  years.  Our  charter
restricts the ability of our  stockholders to change the number of directors and
classes  of our Board of  Directors.  These  provisions  may have the  effect of
deterring  or delaying  certain  transactions  involving  an actual or potential
change  in  control  of  our  company,   including  transactions  in  which  our
stockholders  might  otherwise  receive a premium  for  their  shares  over then
current market prices,  and may limit the ability of our stockholders to approve
transactions that they may deem to be in their best interests.


                                       30
<PAGE>

Item 7. Financial Statements

<TABLE>
<CAPTION>
                                                                                             Page

<S>                                                                                            <C>
Report of Carlin, Charron & Rosen, LLP                                                         32

Report of Grant Thornton, LLP                                                                  33

Consolidated Balance Sheets as of December 31, 2004 and 2003                                   34
Consolidated Statements of Operations for the years ended December 31, 2004 and 2003           36

Consolidated Statements of Stockholders' Equity (Deficiency) for the years ended
  December 31, 2004 and 2003                                                                   37

Consolidated Statements of Cash Flows for the years ended December 31, 2004 and 2003           39

Notes to Consolidated Financial Statements                                                     40
</TABLE>


                                       31
<PAGE>

             Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors
SmartServ Online, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of SmartServ Online,
Inc. and  subsidiaries  as of December 31,  2004,  and the related  consolidated
statements of operations,  stockholders equity (deficiency),  and cash flows for
the  year  then  ended.   These  consolidated   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audit  to  obtain  reasonable  assurance  about  whether  the
consolidated  financial statements are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the  consolidated  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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of SmartServ Online,
Inc.  and  subsidiaries  as of  December  31,  2004,  and the  results  of their
operations  and their cash flows for the year then  ended,  in  conformity  with
accounting principles generally accepted in the United States of America.


/s/ Carlin, Charron & Rosen, LLP

Glastonbury, CT
April 11, 2005


                                       32
<PAGE>

             Report of Independent Registered Public Accounting Firm


To the Shareholders and Board of Directors
SmartServ Online, Inc. and Subsidiaries


We have audited the accompanying consolidated balance sheet of SmartServ Online,
Inc. and  subsidiaries  as of December 31,  2003,  and the related  consolidated
statements of operations,  stockholders equity, and cash flows for the year then
ended.  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 audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements  are free of material  misstatement.  The Company is not  required to
have,  nor were we  engaged to perform  an audit of its  internal  control  over
financial reporting.  Our audit included  consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements   assessing  the  accounting   principles  used  and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of SmartServ Online,
Inc.  and  subsidiaries  as of  December  31,  2003,  and the  results  of their
operations  and their cash flows for the year then  ended,  in  conformity  with
accounting principles generally accepted in the United States.


/s/ Grant Thornton LLP


Philadelphia, Pennsylvania
March 24, 2004


                                       33
<PAGE>

                             SmartServ Online, Inc.
                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                       December 31
                                                                -------------------------
                                                                   2004           2003
                                                                ----------     ----------
<S>                                                             <C>            <C>
Assets
Current assets
   Cash                                                         $1,792,856     $  139,178
   Investments                                                      99,697             --
   Accounts receivable                                              92,496        103,230
   Accrued interest receivable                                          --         47,004
   Prepaid compensation                                                 --        133,127
   Prepaid expenses                                                349,040         86,798
   Deferred financing costs                                             --        322,192
                                                                ----------     ----------
Total current assets                                             2,334,089        831,529

Property and equipment, net                                         73,500             --

Other assets
   Intangibles, net of $123,201 of accumulated amortization        911,688             --
   Security deposits                                                18,237          5,156
                                                                ----------     ----------

Total Assets                                                    $3,337,514     $  836,685
                                                                ==========     ==========
</TABLE>


See accompanying notes.


                                       34
<PAGE>

                             SmartServ Online, Inc.
                           Consolidated Balance Sheets
<TABLE>
<CAPTION>
                                                                        December 31
                                                              --------------------------------
                                                                  2004                2003
                                                              -------------      -------------
<S>                                                           <C>                <C>
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities
   Accounts payable                                           $     446,528      $   1,702,768
   Accrued liabilities                                            1,419,248            928,393
   Accrued salaries                                                      --             78,133
   Accrued interest payable                                              --            218,848
   Current portion of note payable                                   36,898                 --
                                                              -------------      -------------
Total current liabilities                                         1,902,674          2,928,142

Deferred revenues                                                        --             37,500

Notes payable                                                        13,415          3,340,430

Commitments and Contingencies                                            --                 --

Stockholders' Equity (Deficiency)
Series A Convertible preferred stock - $0.01 par value
   Authorized - 1,000,000 shares
   Issued -876,491, outstanding -862,282 shares,
   aggregate liquidation preference of $14,056,639 and $0
   as of December 31, 2004 and December 31, 2003,
   respectively                                                       8,623                 --
Common Stock - $0.01 par value
   Authorized - 40,000,000 shares
   Issued - 3,978,445, outstanding - 3,849,392 shares at
     December 31, 2004 and 2,261,300 shares at
     December 31, 2003                                               39,785             22,613
Additional paid-in capital                                      103,877,486         85,160,306
Notes receivable from former officers                                    --           (255,525)
Unearned compensation                                            (1,363,663)                --
Accumulated deficit                                            (100,977,153)       (90,396,781)
                                                              -------------      -------------
                                                                  1,585,078         (5,469,387)
                                                              -------------      -------------
Treasury stock, 129,053 shares at cost                             (163,653)                --
                                                              -------------      -------------
Total stockholders' equity (deficiency)                           1,421,425         (5,469,387)
                                                              -------------      -------------

Total Liabilities and Stockholders' Equity (Deficiency)       $   3,337,514      $     836,685
                                                              =============      =============
</TABLE>

See accompanying notes.


                                       35
<PAGE>

                             SmartServ Online, Inc.
                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                 Year Ended December 31
                                                            ------------------------------
                                                                2004              2003
                                                            ------------      ------------
<S>                                                         <C>               <C>
Revenues                                                    $    358,646      $    709,388
                                                            ------------      ------------

Costs and expenses:
  Cost of services                                            (2,137,777)       (2,732,571)
  Sales and marketing expenses                                  (522,419)         (460,836)
  General and administrative expenses                         (2,932,636)       (3,335,109)
  Provision for losses on loans to former officers               (91,872)         (354,206)
  Stock-based compensation                                    (2,026,337)         (374,569)
  Impairment of capital assets and capitalized software               --        (1,548,473)
                                                            ------------      ------------

Total costs and expenses                                      (7,711,041)       (8,805,764)
                                                            ------------      ------------

Loss from operations                                          (7,352,395)       (8,096,376)
                                                            ------------      ------------

Other income (expense):
  Interest income                                                 23,196            11,601
  Interest expense                                               (53,371)         (235,921)
  Legal settlement                                              (196,800)               --
  Gain from extinguishment of debt                                    --           305,822
  Insurance recovery                                                  --           374,000
  Debt origination and other financing costs                  (3,001,002)       (9,896,951)
  Foreign exchange gain                                               --                50
                                                            ------------      ------------

                                                              (3,227,977)       (9,441,399)
                                                            ------------      ------------

Net loss                                                    $(10,580,372)     $(17,537,775)
                                                            ============      ============

Preferred stock dividend accrued                              (4,108,399)               --

Net loss applicable to common shareholders                  $(14,688,771)     $(17,537,775)
                                                            ============      ============

Basic and diluted loss per share                            $      (4.94)     $      (8.46)
                                                            ============      ============

Weighted average shares outstanding - basic and diluted        2,972,254         2,073,448
                                                            ============      ============
</TABLE>

See accompanying notes.


                                       36
<PAGE>

                             SmartServ Online, Inc.

          Consolidated Statements of Stockholders' Equity (Deficiency)

<TABLE>
<CAPTION>
                                             Common Stock                 Notes
                                     -----------------------------      Receivable       Additional
                                                          Par              from            Paid-in         Accumulated
                                         Shares          Value           Officers          Capital           Deficit
                                     ----------------------------------------------------------------------------------
<S>                                     <C>           <C>              <C>               <C>               <C>
Balances at December 31, 2002           1,906,040     $     19,060     $   (609,996)     $ 73,623,241      $(72,859,006)

Issuance of common stock upon                 958               10               --             9,650                --
  exercise of employee stock
  options

Issuance of common stock upon              73,731              737               --           375,290                --
  exercise of warrants

Issuance of common stock to                20,590              206               --           163,701                --
  vendors to satisfy debt

Change in market value of                      --               --               --            (1,323)               --
   employee stock options

Issuance of common stock as               166,666            1,667               --         1,221,931                --
   compensation for services

Issuance of common stock related           93,315              933               --           436,867                --
  to debt financing

Issuance of warrants as                        --               --               --           154,500                --
  compensation for services

Allowance for uncollectibility                 --               --          354,471                --                --
  of loans to officers

Issuance of warrants related to                --               --               --         7,273,960                --
  debt financing

Beneficial conversion features                 --               --               --         1,902,489                --
  of notes

Net loss for the year                          --               --               --                --       (17,537,775)
                                     ----------------------------------------------------------------------------------

Balances at December 31, 2003           2,261,300     $     22,613     $   (255,525)     $ 85,160,306      $(90,396,781)
                                     ==================================================================================
</TABLE>

See accompanying notes.


                                       37
<PAGE>

                             SmartServ Online, Inc.
     Consolidated Statement of Changes in Stockholders' Equity (Deficiency)

<TABLE>
<CAPTION>
                                                                                          Series A Convertible
                                                                   Common Stock              Preferred Stock
                                                                                                                        Notes
                                                                                                                      Receivable
                                                                                                                     from Former
                                                               Shares      Par Value      Shares      Par Value        Officers
                                                             ----------------------------------------------------------------------
<S>                                                           <C>        <C>                        <C>             <C>
25)nces at December 31, 2003                                 2,261,300  $      22,613         --   $          --   $    (255,525)

Issuance of common stock to acquire nReach, Inc.                500,002          5,000         --              --              --

Issuance of common stock related to financing                    92,720            927         --              --              --

Issuance of common stock related to services                    125,000          1,250         --              --              --

Issuance of common stock to vendor to satisfy debt               60,000            600         --              --              --

Issuance of warrants as compensation for services                    --             --         --              --              --

Issuance of warrants related to financing                            --             --         --              --              --

Issuance of warrants to vendor to satisfy debt                       --             --         --              --              --

Issuance of common stock upon exercise of warrants              130,000          1,300         --              --              --

Issuance of common stock pursuant to an antidilution
  provision of a May 2000 stock purchase agreement              667,330          6,674         --              --              --

Treasury stock shares returned in settlement of note
  receivable from former officers                                    --             --         --              --         163,653

Allowance for uncollectibility of loan to former officer             --             --         --              --          91,872

Beneficial conversion option on convertible Preferred Stock          --             --         --              --              --

Issuanace of Series A Preferred Stock and warrants (net
  of issuance costs of $1,443,769)                                   --             --    876,491           8,765              --

Conversion of Series A Preferred Stock                          142,093          1,421    (14,209)           (142)             --

Accretion of dividends on Series A Preferred Stock                   --             --         --              --              --

Dividends accrued on Preferred Stock                                 --             --         --              --              --

Unearned compensation                                                --             --         --              --              --

Amortization of unearned compensation                                --             --         --              --              --

Net loss for the period                                              --             --         --              --              --
                                                             ----------------------------------------------------------------------
Balances at December 31, 2004                                 3,978,445  $      39,785    862,282   $       8,623           $ -0-
                                                             ======================================================================

<CAPTION>
                                                                     Additional
                                                                       Paid-in        Unearned                       Accumulated
                                                                       Capital      Compensation   Treasury Stock      Deficit
                                                                   --------------------------------------------------------------
<S>                                                                 <C>             <C>             <C>             <C>
Balances at December 31, 2003                                       $  85,160,306   $          --   $          --   $ (90,396,781)

Issuance of common stock to acquire nReach, Inc.                          855,007              --              --              --

Issuance of common stock related to financing                              84,556              --              --              --

Issuance of common stock related to services                              267,500              --              --              --

Issuance of common stock to vendor to satisfy debt                        196,200              --              --              --

Issuance of warrants as compensation for services                       1,062,133              --              --              --

Issuance of warrants related to financing                               1,854,263              --              --              --

Issuance of warrants to vendor to satisfy debt                             26,299              --              --              --

Issuance of common stock upon exercise of warrants                        193,700              --              --              --

Issuance of common stock pursuant to an antidilution
  provision of a May 2000 stock purchase agreement                         (6,674)             --              --              --

Treasury stock shares returned in settlement of note
  receivable from former officers                                              --              --        (163,653)             --

Allowance for uncollectibility of loan to former officer                       --              --              --              --

Beneficial conversion option on convertible Preferred Stock            11,373,288              --              --              --

Issuanace of Series A Preferred Stock and warrants (net
  of issuance costs of $1,443,769)                                      3,529,307              --              --              --

Conversion of Series A Preferred Stock                                         --              --              --              --

Accretion of dividends on Series A Preferred Stock                     (3,199,062)             --              --              --

Dividends accrued on Preferred Stock                                     (909,337)             --              --              --

Unearned compensation                                                   3,390,000      (3,390,000)             --              --

Amortization of unearned compensation                                          --       2,026,337              --              --

Net loss for the period                                                        --              --              --     (10,580,372)
                                                                   --------------------------------------------------------------
Balances at December 31, 2004                                       $ 103,877,486   $  (1,363,663)  $    (163,653)  $(100,977,153)
                                                                   ==============================================================
</TABLE>

See accompanying note.


                                       38
<PAGE>

                             SmartServ Online, Inc.

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                      Year Ended December 31
                                                                      2004               2003
                                                                  ------------      ------------
<S>                                                               <C>               <C>
Operating Activities
Net loss                                                          $(10,580,372)     $(17,537,775)
Adjustments  to  reconcile  net  loss to net  cash  used  for
  operating activities:
    Gain from extinguishment of debt                                        --          (305,822)
    Provision for losses on loans to former officers                    91,872           354,471
    Amortization of deferred financing costs                         1,231,772         9,748,076
    Depreciation and amortization                                      156,491           913,972
    Impairment of capital assets and capitalized                            --         1,548,473
    software
    Noncash compensation costs                                          85,483                --
    Noncash consulting services                                      1,062,133           600,400
    Noncash payments to vendors                                        491,849                --
    Noncash financing costs                                          1,854,263                --
    Amortization of deferred compensation                            2,026,337                --
    Amortization of unearned revenues                                       --          (403,794)
    Loss on disposal of equipment                                       22,125                --
    Changes in operating assets and liabilities:
       Accounts receivable                                              21,796           (47,323)
       Accrued interest receivable                                      47,004             3,654
       Prepaid expenses                                               (259,299)           77,460
       Prepaid compensation                                            133,127                --
       Accounts payable and accrued liabilities                     (1,810,232)          637,538
       Deferred revenues                                               (37,500)          248,000
       Security deposits                                               (11,212)          233,534
                                                                  ------------      ------------
Net cash used for operating activities                              (5,474,363)       (3,929,136)
                                                                  ------------      ------------

Investing Activities
Purchase of investments                                                (99,697)               --
Purchase of equipment                                                  (46,826)               --
Purchase of nReach, Inc.                                              (100,000)               --
                                                                  ------------      ------------
Net cash used for investing activities                                (246,523)               --
                                                                  ------------      ------------

Financing Activities
Proceeds  from  issuance  of series A  convertible
preferred stock and warrants - net                                   8,591,275                --
Proceeds from the issuance of common stock                                  --           385,545
Proceeds from the issuance of notes and warrants                       195,000         3,823,010
Repayment of note payable                                              (20,207)         (295,000)
Repayment of notes payable and accrued interest                     (1,391,504)               --
                                                                  ------------      ------------
Net cash provided by financing activities                            7,374,564         3,913,555
                                                                  ------------      ------------

Increase (decrease) in cash                                          1,653,678           (15,581)
Cash - beginning of year                                               139,178           154,759
                                                                  ------------      ------------
Cash - end of year                                                $  1,792,856      $    139,178
                                                                  ============      ============
</TABLE>

See accompanying notes.


                                       39
<PAGE>

                             SmartServ Online, Inc.

                   Notes to Consolidated Financial Statements

1.    Nature of Business and Operations

SmartServ  Online,  Inc. (the "Company" or  "SmartServ")  designs,  develops and
distributes  software and services that enable the delivery to wireless  devices
of various content,  with special emphasis on cell phones. The content which the
Company provides  includes premium content such as ringtones,  images and games,
and dynamic  changing  content such as horoscopes,  lottery  results and weather
reports.  Historically,  the Company  licensed its  applications,  content,  and
related services to wireless  carriers and enterprises.  The Company has revenue
sharing license agreements with wireless carriers such as Verizon Wireless, AT&T
Wireless, Nextel, and ALLTEL Wireless, that allow it to deliver its services and
branded  content to a wide base of consumer cell phone users.  For  enterprises,
the Company has in the past  offered  solutions  that deliver  financial  market
data,  proprietary  internal  documents and other useful  information  to mobile
workers, although this no longer comprises a core part of the Company's business
or strategy.

The Company, headquartered in Plymouth Meeting, PA, is transitioning to become a
Mobile  Virtual  Network  Operator  (MVNO) that will be  launching  mobile phone
service in 2005 with low cost,  prepaid minute plans,  discounted  international
long distance and the latest in mobile  content such as ringtones,  mobile games
and images.

SmartServ  has an  agreement  with  Sprint to utilize  Sprint's  Nationwide  PCS
Network for its prepaid  mobile  phone  service.  Under this  agreement,  Sprint
wholesales  wireless minutes from their network directly to SmartServ for resale
to  its  UPHONIA(TM)  customers.  SmartServ  benefits  from  this  agreement  by
receiving  access  to  Sprint's   enhanced   nationwide   network  with  turnkey
reliability and performance.  As an MVNO,  SmartServ has the advantage of market
access  without  the need to  build  the  telecom  infrastructure  necessary  to
originate and terminate  domestic  wireless calls.  Sprint benefits by gaining a
distribution  and marketing  partner that is focused on market  development in a
niche that is secondary to Sprint (i.e.,  the immigrant,  urban ethnic and youth
markets to be targeted by the Company).

The Company is  incorporated  in the State of  Delaware.  The Company  commenced
operations in August 1993, and had its initial public  offering in March,  1996.
The Company did a one-for-six  reverse stock split effective  November 25, 2003.
The par  value of the  Company's  common  stock  remained  at $0.01 per share in
accordance with Delaware  corporation law. The reverse stock split also affected
the conversion price and number of shares into which an outstanding  convertible
security is convertible or exercisable.  Unless otherwise noted, descriptions of
shareholdings and convertible  securities reflect such one-for-six reverse stock
split.

Our financial  statements  have been prepared on a going  concern  basis,  which
contemplates  the  realization of assets and the  settlement of liabilities  and
commitments in the normal course of business. We have since our inception earned
limited  revenues and have  incurred  substantial  recurring  operating  losses,
including net losses of $10,580,372 and $17,537,775 for the years ended December
31, 2004 and 2003, respectively. Additionally, we have an accumulated deficit of
$100,977,153 at December 31, 2004.

In February  2004,  the Company  received $10 million in gross proceeds from its
private  placement  of Units  consisting  of  shares  of  Series  A  Convertible
Preferred Stock and warrants to purchase common stock.  The Company has used the
net proceeds of approximately $8,600,000 from this offering to repay outstanding
obligations,  including $1,391,500 that was used to repay Global Capital Funding
Group, LP, completion of a strategic acquisition and for general working capital
purposes.  In particular,  the Company used a significant portion of its working
capital  to  settle  its  accounts   payable,   which   accounts   payable  were
approximately  $447,000 and  $1,700,000 as of December 31, 2004 and December 31,
2003, respectively.


                                       40
<PAGE>

On March 30, 2005,  after  reviewing the Company's  cash flow  projections,  the
board of directors  approved a plan  designed to insure that we have  sufficient
working capital to support a reduced level of operations  through March 2006. As
of March 31,  2005,  the Company had  $1,012,000  in cash.  Elements of the plan
include:  1)  maximizing  KPCCD's  international  calling card profits since the
acquisition  of KPCCD on  January  7,  2005 2)  reduce  the  level of  operating
expenses by  relocating  our hosting  facility  from an off site  location to an
on-site location and 3) eliminating employee positions.

In  addition,  the  Company is  pursuing  various  action  items to improve  its
liquidity in conjunction with transitioning its business strategy.  These action
items include  pursuing the Telco Group  acquisition  and  obtaining  sufficient
financing  to cover the costs of such  acquisition  and  providing a  sufficient
surplus to address the  Company's  liquidity  requirements.  The Company is also
pursuing other sources of capital in the form of a private  placement  unrelated
to the Telco Group acquisition to address the Company's liquidity requirements.

However,  no  assurance  can be given that the Company  will  conclude the Telco
Group acquisition or will be able to meet its revenue and cash flow projections,
reduce its cost structure as presently configured or that unforeseen liabilities
or expenses will not arise, or raise additional  capital on satisfactory  terms.
Should the Company be unable to raise  additional debt or equity  financing,  it
will be forced to seek a strategic buyer, a merger or cease operations.

2.    Summary of Significant Accounting Policies

Basis of Presentation

The  accompanying  consolidated  financial  statements  have  been  prepared  in
conformity with accounting principles generally accepted in the United States of
America.

Principles of Consolidation

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

Use of Estimates

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

Revenue Recognition

The Company  recognizes  revenue  from the sale of its  products and services in
accordance with American  Institute of Certified Public  Accountants'  ("AICPA")
Statement of Position ("SOP") 97-2,  "Software Revenue  Recognition",  SOP 98-9,
"Modification  of SOP  97-2,  Software  Recognition,  With  Respect  to  Certain
Transactions",   and  the  SEC  Staff  Accounting   Bulletin  No.104,   "Revenue
Recognition".  Specifically,  there must be (1) evidence of an arrangement,  (2)
delivery of the Company's products and services, (3) fixed and determinable fees
and (4)  probable  collectibility  of such  fees.  Revenues  from  multi-element
revenue agreements are recognized based on vendor specific objective evidence of
individual  components  or,  if  the  elements  in  the  arrangement  cannot  be
separated,  as has been the situation to date, recognized as one element ratably
over the term of the agreement.

Subscription Revenue

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


                                       41
<PAGE>

Development and Integration Revenue

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

Service Revenue

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

Hosting Services

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

Deferred Revenues

Deferred  revenues,  resulting  from  customer  prepayments,  are  recognized as
services are provided  throughout  the term of the agreement with the respective
customer.

Deferred Financing Costs

Deferred  financing  costs represent those costs incurred in connection with the
issuance of the  Company's  convertible  notes.  These costs are recorded at the
fair value of the consideration (cash or securities) paid to the finders in such
transactions  and are amortized to operations as other  financing costs over the
terms of the respective notes.

Earnings Per Share

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

Capitalized Software Development Costs

In  connection  with certain  contracts  entered into between  SmartServ and its
customers,  as well as other development  projects,  the Company had capitalized
costs related to certain product  enhancements  and  application  development in
accordance with SFAS No. 86,  "Accounting for the Costs of Computer  Software to
be Sold,  Leased or Otherwise  Marketed."  As a result of less than  anticipated
demand for the  Company's  products and  services,  as well as its  inability to
leverage certain  relationships,  the Company recorded,  in accordance with SFAS
No. 86, an impairment  loss of $704,705  during the year ended December 31, 2003
to reduce the recorded  value of the assets to their  estimated  net  realizable
value.

Fair Value of Financial Instruments

The carrying amounts of our financial instruments  approximate fair value due to
their  terms and  maturities.  Financial  instruments  are held for  other  than
trading purposes.


                                       42
<PAGE>

Supplemental Cash Flow Data

The Company  considers  all highly  liquid  investments  with a maturity date of
three  months  or  less  when  purchased  to  be  cash  equivalents.  Therefore,
certificates of deposit have been recorded as investments.

During the year ended  December 31, 2003,  the Company  issued  20,590 shares of
common  stock  to  5  vendors  in  settlement  of  the  Company's   obligations,
aggregating  $164,000,  to  such  vendors.  These  transactions  are  considered
non-cash transactions for the purposes of the Statement of Cash Flows.

In  connection  with  settling a debt with a law firm, in April 2004 the Company
granted a warrant to purchase  1,820  shares of common stock at $3.15 per share.
The warrant  expires in April of 2006.  This warrant was valued at $3,730 and is
considered  a non-cash  transaction  for the  purposes of the  Statement of Cash
Flows.

During the quarter  ended March 31, 2004,  the Company  issued  60,000 shares of
common stock  amounting to $196,800 and a cash payment of $45,000 to a vendor in
settlement of the Company's obligation to that vendor. The issuance of shares of
common  stock is  considered  a non-cash  transaction  for the  purposes  of the
Statement of Cash Flows.

In January  2004,  in connection  with a settlement  with a vendor,  we issued a
warrant  to  purchase  22,000  shares  of  common  stock at $1.34  per share and
expiring in January 2007. The warrant was valued at $22,569.

On February  28,  2004,  the  Company  acquired  the  business of an early stage
company, nReach, Inc. Cash paid for the business acquired is comprised of:

      Fair value of assets acquired                           $ 1,062,332
      Liabilities assumed                                        (102,325)
                                                              -----------
      Purchase price, net of cash received                        960,007
      Common stock issued for business acquired                  (860,007)
                                                              -----------
      Net cash paid for business acquired                     $   100,000
                                                              ===========

During the quarter ended March 31, 2004, the Company converted notes payable and
accrued  interest  amounting to $3,122,302  into Series A convertible  preferred
stock and warrants. This conversion is considered a non-cash transaction for the
purposes of the Statement of Cash Flows.

The Company  purchased  property  and  equipment  totaling  $70,520  through the
assumption of notes payable.

Concentration of Credit Risk

Financial  instruments that potentially  subject  SmartServ to concentrations of
credit risk consist of cash,  investments and accounts  receivable.  The Company
places its cash deposits, including investments in certificates of deposit, with
high credit quality institutions. From time to time, a substantial amount of the
Company's cash can be uninsured.  However,  the Company has not  experienced any
losses in this area and management believes its cash deposits are not subject to
significant  credit risk.  At December 31, 2004 and December 31, 2003,  accounts
receivable  consist  principally of amounts due from a major  telecommunications
carrier.  The Company performs periodic credit evaluations of its customers and,
if  applicable,  provides for credit losses in the financial  statements.  As of
December 31, 2004 and  December 31, 2003,  the Company did not believe a reserve
for doubtful accounts was necessary.


                                       43
<PAGE>

Property and Equipment

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

On an ongoing basis, SmartServ reviews its property and equipment for impairment
whenever events or changes in  circumstances  indicate that the carrying amounts
may not be recoverable.  When such events or changes in  circumstances do occur,
an impairment loss is recognized if the undiscounted  future cash flows expected
to be generated by the asset are less than its  carrying  value.  As a result of
less than anticipated demand for the Company's products and services, as well as
its  inability  to  leverage  certain  relationships,  the  Company  recorded an
impairment loss of $843,768 during the quarter ended June 30, 2003 to reduce the
recorded value of its assets to their estimated net realizable value.

Stock Based Compensation

Employee Stock Option Plans

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

Non-Employee Compensation

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

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

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

SmartServ's pro forma information is as follows:

<TABLE>
<CAPTION>
                                                                 Year Ended
                                                                 December 31
                                                       ------------------------------
                                                           2004               2003
                                                       ------------------------------
<S>                                                    <C>               <C>
Net loss as reported                                   $(10,580,372)     $(17,537,775)

Employee stock-based compensation included in net         2,026,337           374,569
  loss

Employee stock-based compensation pursuant
  to SFAS 123                                            (3,264,693)         (677,416)
                                                       ------------------------------

Proforma net loss                                      $(11,818,728)     $(17,840,622)
                                                       ==============================

Basic and diluted l\oss per share                      $      (4.94)     $      (8.46)
                                                       ------------------------------

Proforma basic and diluted loss per share              $      (3.98)     $      (8.60)
                                                       ==============================
</TABLE>


                                       44
<PAGE>

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

Pertinent  assumptions  with  regard to the  determination  of fair value of the
options  granted  during  the  years  ended  December  31,  2004 and 2003 are as
follows:

       Weighted average dividend yield for options granted       0.0%

       Weighted average expected life in years                  10.0

       Weighted average volatility                            117.54%

       Risk-free interest rate                                  4.17%

       Weighted average fair value of options granted          $2.73

Recent Accounting Pronouncements

In December  2004,  the FASB issued SFAS No. 123  (revised  2004),  "Share-Based
Payment"  SFAS  123  (revised  2004)  requires  companies  to  recognize  in the
statement of  operations  the  grant-date  fair value of stock options and other
equity-based  compensation.  That cost will be recognized over the period during
which an  employee is  required  to provide  service in exchange  for the award,
usually  the  vesting  period.  Subsequent  changes  in fair  value  during  the
requisite service period, measured at each reporting date, will be recognized as
compensation cost over that period.  SFAS No. 123 (revised 2004) is effective in
the first interim or annual period  beginning  after June 15, 2005.  The Company
will be required to adopt SFAS No. 123  (revised  2004) in its third  quarter of
fiscal 2005.  The Company is currently  evaluating the impact of the adoption of
SFAS 123  (revised  2004) on the  Company's  financial  position  and results of
operations.

3.    Property and Equipment

Property and equipment consist of the following:

                                                          December 31
                                                -------------------------------
                                                    2004                2003
                                                -----------         -----------
Data processing equipment                       $ 4,620,680         $ 4,594,526
Office furniture and equipment                      397,474             397,474
Display equipment                                   144,428              71,335
Leasehold improvements                               69,852              69,852
                                                -----------         -----------
                                                  5,232,434           5,133,187

Impairment of capital assets                       (843,768)           (843,768)
Accumulated depreciation                         (4,315,166)         (4,289,419)
                                                -----------         -----------
                                                $    73,500         $        --
                                                ===========         ===========


                                       45
<PAGE>

4.    Acquisition

On February  28,  2004,  the  Company  acquired  the  business of an early stage
company,  nReach, Inc., to increase its offerings of mobile content products and
services  to the  cell  phone  industry.  nReach  Inc.  was a  wireless  content
distribution  company that offered a broad portfolio of popular mass-market cell
phone content including ringtones, mobile games, and on-device images

The Company paid $100,000 and issued  500,002  shares of its common stock valued
at $860,007 in exchange for all of the  outstanding  shares of nReach,  Inc. The
acquisition  was  accounted  for using the purchase  method of  accounting  and,
accordingly,  the purchase price has been allocated to the assets  purchased and
the liabilities assumed based upon their fair values at the date of acquisition.
The fair value of assets  acquired was $1,062,332 and  liabilities  assumed were
$102,325 resulting in a net purchase price of $960,007.

5.    Intangible Assets

Intangible assets consist of the following as of December 31, 2004.


                                          Gross
                                         Carrying      Accumulated
                                          Amount      Amortization       Net
                                        ----------------------------------------
    Technology - nReach acquisition     $1,034,889     $  123,201     $  911,688
                                        ========================================

Future  amortization  expense for each of the years succeeding December 31, 2004
is as follows:

            Year ending December 31,
            2005                                            $147,841
            2006                                             147,841
            2007                                             147,841
            2008                                             147,841
            2009                                             147,841
            2010 and thereafter                              172,483
                                                            --------
                                                            $911,688
                                                            ========

6.    Note Receivable From Former Officer

In December 2000, the Company's Board of Directors  authorized the issuance of a
line of  credit  to  Sebastian  Cassetta,  SmartServ's  former  Chief  Executive
Officer, for an amount not to exceed $500,000.  Such amount bore interest at the
prime rate and matured on March 20, 2004. In October 2003 the Company  agreed to
forgive this loan over a three-year period pursuant to Mr. Cassetta's Separation
Agreement.  The  financial  statements  prior to December  31, 2003  contained a
valuation  allowance  for  a  potential  loss  of  $552,467,   relating  to  the
collectibility  of Mr.  Cassetta's  line  of  credit  and the  interest  accrued
thereon. The note was written off against the reserve.

Additionally,  during the quarter  ended June 30, 2003,  the Company  recorded a
valuation   allowance   of   $270,000   in   connection   with   the   potential
uncollectibility  of an additional loan made to Mr. Cassetta for the purchase of
SmartServ  restricted  stock.  Such  reserve is  classified  as a  reduction  of
stockholders'  equity.  In his separation  agreement in August 2003, the Company
extended the maturity date of the restricted stock note from December 2003 until
September  2004.  During the quarter  ended  September  30,  2004 an  additional
valuation   allowance   of  $91,872  was   provided  in   connection   with  the
uncollectibility  of the restricted  stock loan from Mr. Cassetta and all 94,706
shares of stock,  which were pledged as collateral  for the loan,  were assigned
and transferred to the Company and the outstanding  debt and accrued interest of
$569,670 in the aggregate was cancelled.


                                       46
<PAGE>

7.    Note Payable

In May 2000,  the  Company  entered  into a  Business  Alliance  Agreement  with
Hewlett-Packard  Company ("HP")  whereby the companies  agreed to jointly market
their  respective  products  and  services,  and to  work  on the  build-out  of
SmartServ's domestic and international  infrastructure.  In furtherance of these
objectives,  HP provided the Company with a line of credit of up to  $20,000,000
for the acquisition of approved  hardware,  software and services.  On September
10, 2002, the Company and HP amended the terms of the promissory note to provide
for the (i) reduction of SmartServ's aggregate outstanding principal and accrued
interest  amount of  $7,045,000  to  $1,000,000,  (ii) return of certain  unused
hardware by SmartServ, (iii) issuance by SmartServ of a warrant for the purchase
of 8,333  shares of common  stock and (iv)  repayment of $500,000 of the amended
obligation  on  September  10,  2002.  The  remaining  $500,000  obligation  was
evidenced by a note,  bearing an interest rate of 11%,  secured by the Company's
assets  exclusive  of  its  internally  developed  software  products,  and  was
satisfied  through a partial  repayment in February 2003. The warrant expires on
September 9, 2005 and has an exercise price of $6.996, determined as 110% of the
average closing bid price of the common stock for the five trading days prior to
September 10, 2002. In connection  therewith,  the Company  recorded a charge to
earnings of $38,000  representing the fair value of the warrant as determined in
accordance with the Black-Scholes pricing model.

In  February  2003,  the Company  issued a  convertible  note to Global  Capital
Funding Group, LP ("Global") in consideration for the receipt of $1 million. The
note  bore  interest  at the  rate of 10% per  annum,  and  was  secured  by the
Company's assets,  exclusive of its internally developed software products.  The
note matured on February 14, 2004,  contained certain  antidilution  provisions,
and could be converted into shares of SmartServ common stock at $6.60 per share.
As  additional  consideration,  the  Company  issued  Global a  warrant  for the
purchase of 33,333 shares of its common stock at an exercise  price of $9.66 per
share. The warrant issued to Global contains certain antidilution provisions and
expires on February  14, 2006.  The note and the warrant  have been  recorded in
accordance with APB No. 14,  "Accounting  for  Convertible  Debt and Debt Issued
with Stock Purchase  Warrants".  The warrant has been valued in accordance  with
the  Black-Scholes  pricing  methodology  and is netted against the  outstanding
obligation  in  the  financial  statements.   Such  amount  was  amortized  into
operations as interest  expense and other  financing  costs over the life of the
obligation.  Alpine Capital Partners, Inc. ("Alpine") received a finder's fee of
$70,000, representing 7% of the aggregate purchase price of the convertible note
and a warrant to purchase 15,167 shares of common stock exercisable at $9.66 per
share, expiring on February 14, 2005, in connection with this transaction.  This
warrant has been valued in  accordance  with SFAS No. 123 and the  Black-Scholes
pricing  methodology  and  recorded  in the  financial  statements  as  deferred
financing  costs.  This amount was amortized into  operations on a straight-line
basis  as  interest  expense  and  other  financing  costs  over the life of the
obligation.  Also in  connection  with the 10%  convertible  notes,  the Company
recorded a non-cash charge for other financing costs of $406,400, representing a
portion  of the  intrinsic  value of the  beneficial  conversion  feature of the
notes.  Emerging  Issues Task Force  ("EITF")  Issue No. 98-5,  "Accounting  for
Convertible  Securities  with  Beneficial  Conversion  Features or  Contingently
Adjustable Conversion Ratios" ("Issue No. 98-5") as more fully described in EITF
Issue  No.  00-27  "Application  of  Issue  No.  98-5  to  Certain   Convertible
Instruments",  defines the beneficial  conversion  feature as the non-detachable
conversion  feature that is  "in-the-money"  at the date of issuance.  Issue No.
98-5 requires the recognition of the intrinsic  value of the conversion  feature
as the difference  between the conversion price and the fair value of the common
stock into which the notes are convertible.  In April 2003, the Company borrowed
an additional  $250,000 from Global and amended the convertible  note to include
such amount.  As additional  consideration,  the Company issued Global a warrant
for the  purchase of 3,333  shares of its common  stock at an exercise  price of
$7.20 per  share.  In  connection  with  Alpine's  claim for a  finder's  fee in
connection with the April 2003 amendment, Alpine received a warrant in July 2004
to purchase  40,000  shares of common stock at $1.50 per share  expiring July 8,
2009.  This warrant is valued at $72,128.  In November 2003, as an inducement to
obtain  Global's  consent  to the  sale of  Units in  another  bridge  financing
transaction and the $10 million private placement, in February 2004, the Company
issued Global a warrant to purchase 16,667 shares of common stock at an exercise
price of $2.40 per share. On February 13, 2004, we paid off the convertible note
in full for the principal and accrued  interest due under the Global note, which
was $1,391,504.


                                       46
<PAGE>

In May 2003, the Company,  in consideration for the receipt of $358,000,  issued
3.58 Units consisting of convertible notes and warrants to purchase common stock
("May Units") to 8 investors.  Each May Unit consisted of a $100,000 convertible
note and a warrant to purchase 33,333 shares of the Company's  common stock. The
convertible  notes bore  interest  at 8% per annum,  were  convertible  into the
Company's  common  stock at $4.464 (the average of the closing bid prices of the
Company's  common stock for the 5 days prior to the closing of the  transaction)
per share and were to mature on the earlier of November  19, 2003 or the closing
of an equity placement of not less than $3 million. The warrants are exercisable
at $4.464 per share and expire on May 19,  2006.  In June 2003,  the  Company in
consideration  for the receipt of $1,142,000  issued 11.42 Units ("June  Units")
(each May or June Unit  referred to  individually  as a "Unit") to 20 accredited
investors.  Each June Unit also consisted of a $100,000  convertible  note and a
warrant to purchase 33,333 shares of the Company's common stock. The convertible
notes bore interest at 8% per annum,  were convertible into the Company's common
stock at $4.764 (the average of the closing bid prices of the  Company's  common
stock for the 5 days prior to the closing of the transaction) per share and were
to mature on the  earlier  of  November  19,  2003 or the  closing  of an equity
placement of not less than $3 million.  The warrants are  exercisable  at $4.764
per share  and  expire  on June 13,  2006.  The  Units  have  been  recorded  in
accordance with APB No. 14. The warrants have been valued in accordance with the
Black-Scholes  pricing  methodology  and  are  netted  against  the  outstanding
obligation  in the financial  statements.  Such amount is being  amortized  into
operations as interest  expense and other  financing  costs over the life of the
obligation.  Also in connection with the 8% convertible  notes,  the Company has
recorded a non-cash charge for other financing costs of $81,400,  representing a
portion  of the  intrinsic  value of the  beneficial  conversion  feature of the
notes.  EITF Issue No. 98-5,  as more fully  described in EITF Issue No.  00-27,
defines  the  beneficial  conversion  feature as the  non-detachable  conversion
feature that is "in-the-money" at the date of issuance.  Issue No. 98-5 requires
the  recognition  of the  intrinsic  value  of  the  conversion  feature  as the
difference  between the conversion  price and the fair value of the common stock
into which the notes are  convertible.  During June 2003 in connection  with the
Company's  potential  de-listing  from the Nasdaq  SmallCap  Stock  Market,  the
Company  issued  to each  investor  in the  May and  June  2003  transactions  a
Contingent  Warrant  to  purchase  25,000  shares of common  stock for each Unit
purchased  exercisable  upon such  de-listing  (and if re-listing  did not occur
within 90 days thereafter) at an exercise price of $4.464 per share and expiring
May 18, 2006. The Company was de-listed from the Nasdaq SmallCap Stock Market on
June 26, 2003, and did not re-list within 90 days thereafter.  In November 2003,
the  Company,  as an  inducement  to extend  the  maturity  date of the notes to
February  19, 2004,  offered the note  holders a warrant to purchase  additional
shares of common  stock in an amount  equal to 25% of the number of shares  into
which the notes  purchased in the Unit are  convertible.  During  February 2004,
SmartServ  completed  a private  placement  for $10 million in  aggregate  gross
proceeds,  which  consisted of shares of Series A Convertible  Preferred  Stock,
$.01 par value ("Series A") and warrants to purchase common stock ("2004 Private
Placement").  Pursuant to their terms,  the  principal  and accrued  interest on
SmartServ's  convertible  debentures  issued  in the  May  2003  and  June  2003
transactions,  were  automatically  converted into Units. Each Unit consisted of
one share of Series A initially  convertible into ten shares of common stock and
one warrant for the purchase of ten shares of common stock.  The purchase  price
per Unit was $15.00.


                                       48
<PAGE>

Spencer Trask Ventures,  Inc.  ("Spencer  Trask"),  Steven B. Rosner and Richard
Berland  acted  as  finders  for  the  May  and  June  2003   transactions.   As
consideration,  the finders received their proportionate share of (i) a cash fee
of $150,000,  or 10% of the  aggregate  purchase  price of the Units sold;  (ii)
warrants to purchase 510,158 shares of the Company's common stock at an exercise
price of $1.50 per share;  and (iii) 5,555 shares of  unregistered  common stock
per Unit sold. These warrants  provide for cashless  exercise and expire 5 years
from the date of grant.  In addition,  Spencer Trask received a  non-accountable
expense allowance of $45,000,  or 3% of the aggregate proceeds of all Units sold
in the May and June 2003  transactions.  The warrants  were valued in accordance
SFAS No. 123 and the Black-Scholes  pricing methodology and recorded in the 2003
financial  statements  as  deferred  financing  costs.  Such  costs  were  being
amortized into operations on a straight-line basis as interest expense and other
financing costs over the life of the obligation.  Unamortized deferred financing
costs  were fully  expenses  during  2004 in  connection  with the 2004  private
placement.

On September  16, 2003,  SmartServ  issued 7.4 Units in a financing  transaction
consisting of an offering of up to 12 Units  comprised of a $50,000  convertible
note and a warrant to purchase  16,667 shares of  SmartServ's  common stock.  On
September  19, 2003,  SmartServ  issued the remaining 4.6 Units of the financing
transaction (collectively the "September  Transaction").  The Units were sold to
18 investors for an aggregate of $600,000. Holders of the notes had the right to
convert  the notes into  shares of common  stock at a price  equal to $1.896 per
share for the notes  issued on  September  16, 2003 and $1.920 per share for the
notes issued on September 19, 2003. The maturity date of the notes was to be the
earlier of November  19, 2003 or the  completion  of an equity  placement  of at
least $3 million, at which time the notes would  automatically  convert into the
equity  placement.  Holders  of the  warrants  have the  right to  exercise  the
warrants  into  shares of common  stock at a price  equal to $1.500  per  share.
Spencer   Trask  and  Richard   Berland  acted  as  finders  for  the  September
transaction. As consideration, the finders received their proportionate share of
(i) a cash fee of $60,000,  or 10% of the aggregate purchase price of all of the
Units;  (ii) warrants to purchase  102,988 shares of common stock, or 20% of the
shares of common stock  underlying the securities in the Units sold, at exercise
prices  ranging from $1.50 to $1.90 per share and expiring 5 years from the date
of grant; and (iii) 2,778 shares of unregistered  common stock per Unit sold. In
addition, Spencer Trask received a non-accountable expense allowance of $18,000,
or 3% of the aggregate proceeds of all Units sold in the September  Transaction.
All of the notes and the warrants have full ratchet anti-dilution protection. In
November 2003, the Company,  as an inducement to extend the maturity date of the
notes to  February  19,  2004,  offered  the  noteholders  a warrant to purchase
additional  shares of common  stock in an amount  equal to 25% of the  number of
shares  into  which  the notes  purchased  in the Unit are  convertible.  During
February 2004, SmartServ completed the 2004 Private Placement of Units. Pursuant
to their terms,  the principal and accrued  interest on SmartServ's  convertible
debentures  issued in September  2003 were  automatically  converted  into these
Units.  Each Unit consisted of one share of Series A initially  convertible into
ten shares of common  stock and one  warrant  for the  purchase of ten shares of
common stock. The purchase price per Unit was $15.00.

The September  Transaction  required the consent of Global,  the holder of $1.25
million of SmartServ's  convertible notes issued in February and April 2003, and
of the holders 51% or more of SmartServ's $1.5 million  convertible notes issued
in connection with the bridge  financings in May and June 2003. As an inducement
to obtain their  consent,  such holders  received (a) a change in the conversion
price of their  convertible  notes equal to the lowest  conversion  price of the
notes issued in the September  financings ($1.896 per share) and (b) an increase
in the number of shares  purchasable  pursuant  to the warrant to reflect a full
ratchet  dilution  formula with a decrease in the exercise price of the warrants
to the exercise price of the warrants issued in the September financing ($1.50).
Such amendment, as it pertains to the holders of convertible notes issued in the
May and June 2003  bridge  financings,  was  effective  on  November  25,  2003,
coincident  with  the  effective  date of a  one-for-six  reverse  stock  split.
SmartServ  recorded a charge in the  amount of  $4,828,000  as "Other  Financing
Costs" for the fair value of the consideration granted to these note holders for
such consent.


                                       49
<PAGE>

On November  11,  2003,  SmartServ  issued 18 Units in a  financing  transaction
comprised  of a  $50,000  convertible  note  ("November  Notes")  and a  warrant
("November  Warrant") to purchase 16,667 shares of SmartServ's common stock. The
Units were sold to 20 investors  for an  aggregate  of $900,000.  Holders of the
November  Notes  have the right to convert  the  November  Notes into  shares of
common  stock at a price  equal to $2.10 per  share.  The  maturity  date of the
November  Notes was the earlier of December  19,  2003 or the  completion  of an
equity placement of at least $3 million,  at which time the November Notes would
automatically  convert  into  the  equity  placement.  Holders  of the  November
Warrants have the right to exercise the November  Warrants into shares of common
stock at a price  equal to $1.50 per  share.  Finders'  compensation  to Spencer
Trask and Richard Berland consisted of (i) a cash fee of $90,000,  or 10% of the
aggregate  purchase price of all of the Units; (ii) warrants to purchase 136,000
shares of common  stock,  or 20% of the shares of common  stock  underlying  the
securities in the Units sold, at exercise prices ranging from $1.50 to $1.90 per
share and  expiring 5 years from the date of grant;  and (iii)  2,778  shares of
unregistered  common stock per Unit sold. In addition,  Spencer Trask received a
non-accountable expense allowance of $27,000, or 3% of the aggregate proceeds of
all Units sold in the November  transaction.  All of the November  Notes and the
November Warrants have full ratchet anti-dilution  protection. In December 2003,
as an inducement  to extend the maturity date of the November  Notes to February
19, 2004, the Company offered the  noteholders a warrant to purchase  additional
shares of common  stock in an amount  equal to 25% of the number of shares  into
which the notes  purchased in the Unit are  convertible.  During  February 2004,
SmartServ  completed  the 2004  Private  Placement  of Units.  Pursuant to their
terms, the principal and accrued interest on SmartServ's  convertible debentures
issued in November 2003,  were  automatically  converted into these Units.  Each
Unit consisted of one share of Series A initially convertible into ten shares of
common stock and one warrant for the purchase of ten shares of common stock. The
purchase price per Unit was $15.00.

While the warrants,  as described  above, to purchase common stock issued during
the years ended December 31, 2003 and 2004  (excluding  warrants issued pursuant
to the 2004 Private Placement)  represent an additional source of capital,  they
expire between April 2006 and February 2009 and are not callable by the Company.
Therefore,  they cannot be relied  upon by the  Company as a definite  source of
capital.  The warrant  holders may not choose to exercise  their warrants if the
market price of the Company's common stock does not exceed the exercise price of
the warrant.

The warrants  issued in the 2004 Private  Placement,  as  described  above,  are
callable on 30 days prior written notice in the event that the closing bid price
of our common stock is at least 250% of their  respective  exercise prices for a
period of 10 consecutive trading days

During the quarter ended June 30, 2004, the Company  entered into a note payable
to finance kiosk equipment in the amount of $70,520.  The note bears interest at
a rate of five  percent per annum and has a two year term.  As of  December  31,
2004 the balance of the amount due on the note was $50,313.

As of December 31, 2004, all of the Company's  convertible  notes were converted
into shares of Series A and warrants to purchase  common  stock,  as part of the
2004  Private  Placement.  As of  December  31,  2003,  the face  amount  of the
Company's debt obligations was $4,250,010 and the unamortized  discount amounted
to $909,580.

8.    Equity Transactions

In  December  1998,  the  Company's  Board of  Directors  approved  the terms of
restricted stock purchase agreements for Sebastian E. Cassetta,  former Chairman
and Chief Executive Officer, and Mario F. Rossi, former Executive Vice President
of Technology.  In connection with Mr. Cassetta's  purchase of 103,040 shares of
restricted stock,  SmartServ received cash in the amount of $6,182 and a 5 year,
non-recourse  promissory note in the amount of $457,497.  In connection with Mr.
Rossi's purchase of 34,347 shares of restricted stock,  SmartServ  received cash
in the amount of $2,061 and a 5 year, non-recourse promissory note in the amount
of $152,499.  The notes were secured by the stock and bore  interest at the rate
of 7.50% per  annum.  The stock  purchase  agreements  provided  SmartServ  with
certain  repurchase  options and provided Messrs.  Cassetta and Rossi with a put
option in the event of the termination of their employment. Through December 31,
1999,  the  restricted  stock  purchase  agreements  were  variable  plan awards
pursuant to APB No. 25 and  accordingly,  SmartServ  was  required to  recognize
compensation expense for the changes in the market value of its common stock. As
a result  thereof,  the  Company  recorded a charge to  compensation  expense of
$15,636,300,  as well as a corresponding  increase to additional paid-in capital
during the year ended June 30, 2000.  The restricted  stock purchase  agreements
with Messrs.  Cassetta  and Rossi were  amended to provide for certain  recourse
against them in the event of their default on their  obligations to the Company.
Effective  January 1, 2000, the restricted  stock awards were no longer variable
plan  awards  pursuant  to APB No. 25. The  Company  entered  into a  Separation
Agreement with Sebastian E. Cassetta,  our former  Chairman and Chief  Executive
Officer, effective as of October 21, 2003 (the "Cassetta Separation Agreement").
The Cassetta  Separation  Agreement  terminated Mr.  Cassetta's rights under his
employment agreement,  including without limitation,  any rights to compensation
and severance,  in exchange for the consideration  set forth therein,  including
the following: (i) a cash payment for unpaid base salary and accrued vacation of
$18,990,  payable on or before October 31, 2003, (ii)  forgiveness over a 3 year
period of  certain  loans in the  original  principal  amount of  $500,000  plus
accrued  interest,  (iii) extension of the Put Right contained in Mr. Cassetta's
Restricted Stock Agreement dated December 28, 1998, allowing Mr. Cassetta 1 year
instead of 60 days to either repay a promissory  note in the original  principal
amount of $457,497 plus accrued interest,  or return 94,706 restricted shares of
our  common  stock in full  satisfaction  of such  promissory  note and  accrued
interest thereon.  During the quarter ended September 30, 2004 all 94,706 shares
of stock,  which were  pledged as  collateral  for the loan,  were  assigned and
transferred  to the Company  and the  outstanding  debt and accrued  interest of
$569,670 in the aggregate was cancelled. In January 2004, Mr. Rossi assigned and
transferred  all  34,347  restricted  shares  of  common  stock  to us  and  the
outstanding  debt  and  accrued  interest  of  $199,504  in  the  aggregate  was
cancelled.


                                       50
<PAGE>

During the year ended  December 31, 2003,  the Company  issued  73,731 shares of
common stock to investors upon the exercise of warrants to purchase such shares.
Proceeds from the exercise of these warrants were $376,000.

In February  2003,  the Company  issued an aggregate of 20,590  shares of common
stock to 5 vendors in satisfaction  of obligations for services  rendered to the
Company aggregating $164,000.

In May 2003, the Company entered into a Corporate Finance  Consulting  Agreement
("Consulting  Agreement")  with Spencer  Trask  whereby  Spencer Trask agreed to
render services to the Company as its corporate  finance  consultant,  financial
advisor and investment  banker.  As compensation for such services,  the Company
has issued  Spencer Trask 83,333  shares of its common stock.  The value of such
compensation   has  been  recorded  in  the  financial   statements  as  prepaid
compensation  and was  amortized  over  the  one  year  term  of the  Consulting
Agreement.

Also,  during the year ended December 31, 2003, the Company issued 72,222 shares
of common stock to Spencer Trask as fees related to the May, June, September and
November  2003  bridge  financing  and  14,441  shares  of  common  stock to two
individuals as fees for assisting with such bridge financings.

Also during the year ended  December 31, 2003,  the Company issued 93,315 shares
related to an anti-dilution adjustment with respect to a certain May 2000 equity
financing

In January  2004,  in connection  with a settlement  with a vendor,  the Company
issued  three  warrants to purchase  22,000  shares of common stock at $1.34 per
share and expiring in January 2007. The warrant was valued at $22,569.


                                       51
<PAGE>

In February  2004,  the Company  completed the closing of a $10 million  private
offering  of  investment  Units  consisting  of shares  of Series A  Convertible
Preferred   Stock  and  warrants  to  purchase   common  stock  ("2004   Private
Placement").  The private offering consisted of investment Units at the price of
$15 per Unit.  Each  Unit  consists  of (i) one  share of  Series A  convertible
preferred  stock,  $.01  par  value("Series  A"),  each of  which  is  initially
convertible  into 10  shares  of  common  stock,  and (ii) one  warrant  for the
purchase of 10 shares of common  stock.  The Series A receives  dividends at the
rate  of 8% per  year  payable  quarterly  in cash  or,  in the  Company's  sole
discretion,  in registered  shares of the Company's  common stock.  The warrants
have an  exercise  price of $2.82 per share and  expire in  February  2007.  The
Company also completed the closing of an additional  $25,000 private offering of
these Units to an accredited  investor in March 2004,  which Units have the same
terms as  described  above  other than the  expiration  date which will be March
2007. The Series A is entitled to a liquidation preference equal to the purchase
price  per  Unit  plus  accrued  and  unpaid  dividends.  The  Series  A is  not
redeemable.  Spencer Trask, the placement agent for the 2004 Private  Placement,
received compensation consisting of (i) a cash fee of $1,002,500,  or 10% of the
aggregate  purchase  price  of  all of  the  Units  acquired  for  cash,  (ii) a
non-accountable  expense allowance of $300,750,  or 3% of the aggregate proceeds
of all Units sold for cash in the transaction,  and (iii) warrants to purchase a
number  of shares of common  stock  equal to 20% of the  shares of common  stock
underlying  the  securities  in the  Units  sold for cash,  constituting  in the
aggregate  warrants to purchase  1,336,666  shares of common  stock at $1.50 per
share and  warrants to purchase  1,336,666  shares of common  stock at $2.82 per
share.  During the quarter  ended March 31, 2004,  the Company  converted  notes
payable and accrued interest amounting to $3,122,302 into the Units.

In  February  2004 in  connection  with legal  consulting  services  provided by
Richard  Kerschner and as part of his severance  agreement,  the Company entered
into a consulting  agreement  for warrants to purchase  50,000  shares of common
stock at $1.65 per share,  and expiring in February  2009.  These  warrants were
valued at $81,110.

In connection with consulting services provided by Steven Rosner and Brockington
Securities, Inc., the Company entered into consulting agreements dated March 31,
2004 for  warrants to  purchase  300,000  and  100,000  shares of common  stock,
respectively,  at $1.50 per share and expiring on March 31,  2007.  The warrants
were valued at $902,367  and  $300,787  respectively.  During 2004  $601,576 and
$200,527 of the warrants vested, respectively.

During the quarter  ended March 31, 2004,  the Company  issued  60,000 shares of
common stock  amounting to $196,800 and a cash payment of $45,000 to a vendor in
settlement of the Company's obligation to that vendor.

In March 2004, the Company  completed the  acquisition of all of the outstanding
stock of nReach,  Inc.,  based in  Lakewood,  Colorado,  in exchange for 500,002
shares of the Company's  common stock amounting to $860,007,  the assumption and
payment of $100,000 of certain obligations of nReach's  stockholders and an earn
out  schedule  that may require  the  Company's  payment of up to an  additional
916,667 shares of common stock based on certain revenue targets.

In  connection  with  settling a debt with a law firm, in April 2004 the Company
granted a warrant to purchase  1,820  shares of common stock at $3.15 per share.
The warrant expires in April of 2006. This warrant was valued at $3,730.

In connection with engaging a vendor to provide investor relation  services,  in
May 2004 the Company  entered  into an  agreement to grant a warrant to purchase
50,000  shares of common stock at $2.15 per share.  If issued the warrant  would
expire in May of 2006. This warrant was valued at $107,657.

In connection with engaging a vendor to provide recruiting services in June 2004
the Company  entered  into an  agreement  to grant a warrant to  purchase  5,000
shares of common stock at $3.10 per share.  The warrant  expires in May of 2006.
This warrant was valued at $7,377.


                                       52
<PAGE>

During the quarter  ended June 30, 2004,  the Company  issued  83,275  shares of
common  stock to Spencer  Trask and  Richard  Berland as  finders'  fees for the
recent bridge  financings  and during the quarter ended  September 30, 2004, the
Company  issued 9,445 shares of common stock to Spencer  Trask as finder's  fees
related to the 2003 bridge financings amounting to $85,483.

In connection with consulting  services to be provided by Shai Stern and E. Alan
Scheik III, the Company entered into consulting  agreements  dated June 2004 for
warrants to purchase  25,000  shares and 10,000  shares of common stock at $1.50
and $2.50 per share, respectively, and expiring in May 2006. These warrants were
valued at $45,080 and $15,782, respectively

In connection with Alpine  Capital's claim for a finder's fee in connection with
the April  2003  amendment  related  to a bridge  financing,  Alpine  received a
warrant  in July 2004 to  purchase  40,000  shares of common  stock at $1.50 per
share expiring July 8, 2009. This warrant was valued at $72,128.

During the quarter ended  September 30, 2004,  the Company issued 667,330 shares
to TecCapital  Ltd.  pursuant to an  antidilution  provision of a May 2000 stock
purchase agreement related to the recent financings.

On November 4, 2004, the Company engaged Jefferies & Company,  Inc. to advise us
on  strategic  growth   opportunities,   financing  and  capital  resources  and
significant  merger  and  acquisition   candidates.   In  connection  with  that
engagement  and in partial  payment for providing  those  services,  the Company
issued  125,000 shares of common stock valued at $267,500.  The agreement  calls
for the issuance of up to an additional  325,000 shares of common stock upon the
achievement of certain milestones and services that may occur in 2005.

In  December  2004,  in  connection  with  engaging a vendor to  provide  public
relation services,  the Company issued three warrants to purchase 7,500,  16,822
and  7,500  shares  of  common  stock at  $2.40,  $1.07  and  $2.40  per  share,
respectively  and expiring in June 2007,  September  2007,  and  December  2007,
respectively.  These  warrants  were  valued at $12,631,  $12,320  and  $12,621,
respectively.

In December 2004,  Global Capital Funding,  LP exercised 130,000 warrants of its
257,333  warrants at $1.50 each and the Company  issued 130,000 shares of common
stock.

During  the  quarter  ended  December  31,  2004,  three  holders  of  Series  A
Convertible Preferred Stock converted them and the Company issued 142,093 shares
of common stock.

At December 31, 2004, there were 3,649,042 shares reserved for issuance upon the
exercise of options  granted to employees and directors  and  17,113,019  shares
reserved  for issuance  upon the  exercise of warrants to purchase  common stock
granted to investors in, and  consultants to the Company.  The range of exercise
prices of the warrants to purchase common stock are as follows:

                  Exercise Price Range       Underlying Shares
                  --------------------------------------------

                      $1.34 to $3.15                16,753,364

                      $5.10 to $9.00                   352,966

                       Above $30.00                      6,690
                                                    ----------

                                                    17,113,019
                                                    ==========


                                       53
<PAGE>

The Company's inability to timely file its Form 10-KSB for its fiscal year ended
December 31, 2002 and a failure to have its SB-2 Registration Statement declared
effective by the SEC has affected the following registration rights held by some
of its shareholders and warrant holders.

Obligations to Maintain Effective Registration Statements:

Vertical  Ventures  Investments,  LLC holds a warrant to  purchase  up to 22,476
shares of common stock that is subject to registration  rights. The Registration
Statement  covering the shares  underlying this warrant is no longer  effective.
The Company had until May 14, 2003 to cause the Registration  Statement to again
become effective. The Company was unable to do so by May 14, 2003, so it accrued
a fee of $8,250 for the first month of the  deficiency  and a fee of $16,500 for
each month  thereafter  until the shares  underlying the warrant are registered.
The total amount accrued as December 31, 2004 was $202,125.

Accredited investors in the Company's September 2002 Equity Placement hold up to
an aggregate of 616,991  shares of common stock,  and warrants to purchase up to
an  aggregate of 249,954  shares of common  stock,  all subject to  registration
rights requiring the Company to use its commercially  reasonable best efforts to
maintain the effectiveness of the Registration  Statement covering the shares of
common stock and the shares underlying the warrants.  The Registration Statement
is no longer effective.

Obligation to File a Registration Statement:

Global  Capital  Funding  Group,  L.P.  held  warrants to purchase up to 257,333
shares of common stock, and in December 2004,  Global  exercised  130,000 of the
warrants and now holds 127,333  warrants.  Global also held a  convertible  note
convertible  into 189,394  shares of common stock which was paid off in February
2004.  The Company was required to file a  Registration  Statement  covering all
such  shares by April 14,  2003.  That  filing was  delayed  and as a result the
Company negotiated a cure of a penalty fee, equal to $25,000 for each month that
the delay  deficiency  remained  uncured,  by paying off the convertible note in
February 2004. The Company filed a Form SB-2  Registration  Statement on May 13,
2004 that  covered  the  common  stock  underlying  the  Global  warrants  which
Registration Statement has not yet been declared effective by the SEC.

Pursuant to the terms of the 2004 Private Placement, the Company was required to
file a  Registration  Statement  with the SEC and have it declared  effective no
later  than  120  days  after  April  30,  2004,  or by  August  29,  2004.  The
Registration  Statement  was  filed  on May 13,  2004  but it has  not yet  been
declared effective by the SEC and as a result,  the Company incurred  liquidated
damages in the form of a monthly cash  requirement  equal to 2% of the aggregate
purchase price of the offering, or approximately $266,000 per month.  Liquidated
damages  are due  monthly  until the event of  default  is  cured.  The  Company
proposed a settlement to limit the liquidated damages. In December 2004, in full
settlement of the default,  the Company established a pool of 1,000,000 warrants
with an  exercise  price of $2.50  per share  and a two year  term.  The pool of
warrants  was  allocated  among  each   participant   based  on  the  investor's
proportionate  participation in the 2004 Private Placement. The Company recorded
a financing expense of $1,782,125 as of December 31, 2004 related to the pool of
warrants.  As of March 1, 2005, 69% of the  representative  warrant ownership of
the 1,000,000 warrants responded to the proposal and of that amount, 4% declined
the proposal. The remaining 31% have not responded to the offer.

In 2004,  pursuant to an agreement  with a vendor to whom the Company  issued in
settlement  60,000 shares of common  stock,  the Company was obligated to file a
Registration  Statement  and have it  declared  effective  within  the same time
frames as required by the terms of the 2004 Private Placement.  The Registration
Statement was timely filed but it has not been declared effective by the SEC. As
a result, the Company incurred late registration  penalties of $2,000 per month,
or $8,000 as of December  31,  2004.  The late  registration  penalties  are due
monthly until the event of default is cured.


                                       54
<PAGE>

9.    Stock-based Compensation

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

As more fully  described  in Note 15 to the  financial  statements,  stock-based
compensation  for the years  ended  December  31,  2004 and 2003,  consisted  of
options issued with exercise  prices below market value on the date of grant and
the impact of changes in the market value of the  Company's  common stock on the
value  of  options  to  purchase  common  stock  issued  to  employees  and  the
amortization of deferred costs associated with the prior issuance of warrants to
purchase common stock to various consultants.

In connection with entering into an Employment  Agreement on March 12, 2004, the
Company  granted to Robert Pons,  the Company's  President  and Chief  Executive
Officer,  an option to purchase  1,300,000 shares of common stock,  which option
has an  exercise  price of $1.50 per share  and a term of 10 years.  The  option
provides for 557,141 shares to vest immediately and the remaining 742,859 shares
to vest in equal amounts as of the last day of each calendar quarter  commencing
March 31, 2004.  The option will vest  immediately  upon a Change of Control (as
defined in his option  agreement) or in the event Mr. Pons is  terminated  Other
Than for Cause or he terminates  employment  for Good Reason (as each is defined
under the Employment Agreement).

In connection with entering into an Employment  Agreement on March 12, 2004, the
Company granted to Timothy Wenhold,  the Company's  Executive Vice President and
Chief Operating  Officer,  an option to purchase 700,000 shares of common stock,
which  option has an  exercise  price of $1.50 per share and a term of 10 years.
The option  provides for 300,000  shares to vest  immediately  and the remaining
400,000  shares  to vest in equal  amounts  as of the last day of each  calendar
quarter  commencing  March 31,  2004.  The option will vest  immediately  upon a
Change of  Control  (as  defined in his  option  agreement)  or in the event Mr.
Wenhold is terminated Other Than for Cause or he terminates  employment for Good
Reason (as each is defined under the Employment Agreement)

In April 2004, the Company granted to Len von Vital,  Matthew Stecker and Daniel
Wainfan,  the Company's Chief Financial  Officer,  Chief Technology  Officer and
Vice  President  of  Marketing,  respectively,  an option  for each to  purchase
300,000, 150,000 and 100,000 shares of common stock, respectively, which options
have exercise prices of $3.75,  $1.50 and $3.25 per share,  respectively,  and a
term of 10 years.  The options  vest in equal  amounts over four years as of the
last day of each calendar  quarter  commencing  September 30, 2004.  The options
will vest  immediately  upon a Change of Control  (as  defined  in their  option
agreements).

In August 2004, the Company  granted options to purchase 60,000 shares of common
stock to all three of its then non-employee  directors pursuant to the Company's
non-employee director compensation plan, which options have an exercise price of
$1.75 per share. In November 2004 each of these non-employee  directors resigned
and 35,000 shares vested for each director.

During the quarter  ended  December 31,  2004,  the Company  granted  options to
purchase  60,000  shares of common  stock to all  three  non-employee  directors
pursuant to the Company's  non-employee director compensation plan which options
have an  exercise  price of $1.67 per share and a term of 10 years.  The options
vest annually  over three years  commencing  October 30, 2005.  The options will
vest  immediately  upon  a  Change  of  Control  (as  defined  in  their  option
agreements).

In December 2004,  the Company  granted to Messrs.  Pons and Wenhold  options to
purchase 400,000 and 250,000 shares of common stock, respectively, which options
have an  exercise  price of $2.07 per share and a term of 10 years.  The options
vest monthly  over three years  commencing  December 31, 2004.  The options will
vest  immediately  upon  a  Change  of  Control  (as  defined  in  their  option
agreements).

In December  2004,  the  Company  granted to Dan  Wainfan,  the  Company's  Vice
President  of Marketing an option to purchase  100,000  shares of common  stock,
which  option has an  exercise  price of $1.56 per share and a term of 10 years.
The option vests  quarterly  over three years  commencing  March 31,  2005.  The
option will vest  immediately upon a Change of Control (as defined in his option
agreement).


                                       55
<PAGE>

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

                                                Year Ended December 31
                                            -----------------------------
                                                2004              2003
                                            -----------       -----------

      Costs of services                     $  (800,625)      $   (81,604)

      Sales and marketing                            --                --

      General and administrative             (1,225,712)         (292,965)
                                            -----------       -----------

                                            $(2,026,337)      $  (374,569)
                                            ===========       ===========

10.   Earnings Per Share

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

<TABLE>
<CAPTION>
                                                                       Year Ended December 31
                                                                   ------------------------------
                                                                       2004              2003
                                                                   ------------      ------------
<S>                                                                <C>               <C>
Numerator
   Net loss applicable to common shareholders                      $(14,688,771)     $(17,537,775)
                                                                   ============      ============

Denominator
   Denominator for basic and diluted loss per share - weighted
   average shares                                                     2,972,254         2,073,448
                                                                   ------------      ------------

Basic and diluted loss per common share                            $      (4.94)     $      (8.46)
                                                                   ============      ============
</TABLE>

Outstanding  employee  stock options and other warrants to purchase an aggregate
of  20,762,061  and  4,447,416  shares of common  stock at December 31, 2004 and
2003,  respectively,  and other convertible  securities were not included in the
computation  of diluted  earnings per share because the Company  reported a loss
for the year.

11.   Income Taxes

At December 31, 2004 and 2003, SmartServ has deferred tax assets as follows:

                                                            December 31
                                                    ---------------------------
                                                        2004            2003
                                                    -----------     -----------

      Net operating loss carryforwards              $38,700,000     $35,800,000
                                                    ===========     ===========

In accordance with SFAS No. 109,  "Accounting for Income Taxes," the Company has
established a valuation allowance to fully reserve the future income tax benefit
of these deferred tax assets due to uncertainty about their future  realization.
The valuation  allowances were  $38,700,000 and $35,800,000 at December 31, 2004
and 2003, respectively.


                                       56
<PAGE>

At December 31,  2004,  the Company has net  operating  loss  carryforwards  for
Federal  income tax purposes of  approximately  $98,000,000  which expire in the
years 2009 through 2023. As a result of ownership changes,  pursuant to Internal
Revenue  Code  Section  382,  the  utilization  of net  operating  losses may be
limited.

12.   Leases

SmartServ leased office space for its Stamford, Connecticut headquarters under a
noncancelable  lease.  The lease included  escalation  clauses for items such as
real estate taxes, building operation and maintenance expenses,  and electricity
usage.  In January 2004,  the Company  negotiated a settlement of that lease the
terms of which  included a cash payment of $175,000  (evidenced  by a promissory
note)  payable  over time  through  December  31, 2004 and a warrant to purchase
22,000 shares of SmartServ  common stock at an exercise price equal to $1.34 per
share.  The warrant vested upon grant and expires on the three year  anniversary
of the grant date.

In September  2003,  the Company  relocated its  headquarters  and leases office
space in Plymouth Meeting,  Pennsylvania.  The lease includes escalation clauses
for  items  such  as real  estate  taxes,  building  operation  and  maintenance
expenses.

nReach occupied  approximately 4,077 square feet in a leased facility located in
Lakewood,  Colorado.  The lease expires on July 31, 2007. In November  2004, the
Company  entered  into a lease to sublet  that  space.  On January 7, 2005,  the
Company  acquired  KPCCD.  KPCCD occupies  approximately  1,500 square feet in a
facility leased from the former owner of KPCCD located in Jackson  Heights,  New
York. The lease expires on December 31, 2005.

Rent expense amounted to approximately $156,295 and $384,800 for the years ended
December 31, 2004, and 2003, respectively.

Minimum future rental payments at December 31, 2004 are as follows:

Year Ending December 31

         2005                                            $ 159,540
         2006                                              128,655
         2007                                               87,417
         Sublease                                         (135,397)
                                                         ---------
                                                         $ 240,215
                                                         =========

13.   Commitments and Contingencies

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

On or about February 29, 2000, Commonwealth  Associates,  L.P.  ("Commonwealth")
filed a complaint  against the Company in the Supreme  Court of the State of New
York,  County  of New  York.  The  complaint  alleged  that in  August  of 1999,
Commonwealth and SmartServ entered into an engagement letter that provided for a
nonrefundable  fee to Commonwealth of $15,000 payable in cash or common stock at
SmartServ's  option. The complaint alleged that SmartServ elected to pay the fee
in stock and, as a result,  Commonwealth  sought 2,222 shares of common stock or
at least  $1,770,000  together with interest and costs. In SmartServ's  defense,
SmartServ  denied that it elected to pay in stock.  On March 4, 2003,  SmartServ
received a favorable  decision in this matter  after a trial held in the Supreme
Court of the  State of New  York.  The  decision  holds  that,  consistent  with
SmartServ's defense, SmartServ is required to pay Commonwealth a retainer fee of
only $13,439, plus interest and certain costs. Commonwealth's time to appeal has
not yet expired.


                                       57
<PAGE>

On or about March 22, 2004, Jenkens & Gilchrist Parker Chapin, LLP,  SmartServ's
former legal counsel,  filed a complaint  against SmartServ in the Supreme Court
of the State of New York,  County of New York.  The complaint  sought payment of
unpaid invoices for legal services in the amount of $599,244.  In November 2004,
this claim was settled in full for $300,000.

On or about August 17, 2004, Vertical Ventures Investments LLC filed a complaint
against the Company in the Supreme Court of the State of New York, County of New
York. The complaint sought payment of late registration  penalties and attorneys
fees in the total amount of $350,000.  While the Company  intends to  vigorously
defend such lawsuit, an unfavorable outcome would have a material adverse effect
on the Company's financial condition,  results of operation and cash flows. (See
Note 8 for additional information).

During 2003 and 2004 former employees of SmartServ filed complaints  against the
Company for unpaid  wages  arising  from salary  reductions  implemented  by the
Company in 2002. These claims,  totaling $215,000,  are currently pending before
the  Connecticut  Department  of  Labor  and  the  Connecticut  Superior  Court.
Management  believes these claims have no merit and intends to defend the claims
vigorously.

14. Significant Relationships

During the years  ended  December  31, 2004 and 2003,  substantially  all of the
Company's revenues were earned through one customer.

The Company entered into a consulting arrangement with Spencer Trask in May 2003
providing  that  Spencer  Trask would  render  corporate  financial  consulting,
financial   advisory,   and  investment   banking  services  ("Trask  Consulting
Agreement").  Under the Trask  Consulting  Agreement,  the Company agreed to pay
consulting  fees of $7,500 per month  commencing  July 1, 2003 thru May 31, 2004
and in 2003 the Company  issued  Spencer  Trask 83,333  shares of common  stock.
Spencer  Trask is a  beneficial  owner of more than 5% of the  Company's  common
stock.

As part of the  consulting  arrangement,  Spencer  Trask  acted as a finder  and
assisted the Company with sales of Units  consisting of  convertible  debentures
and warrants  from May 2003 through  November  2003 in the  aggregate  amount of
$2,685,000. The Company paid Spencer Trask a finder's fee consisting of $349,050
in cash (including finder's fees and non-accountable  expenses),  152,223 shares
of common  stock and a warrant to  purchase  749,146  shares of common  stock at
exercise  prices  ranging  from  $1.50 to $1.90  per  share.  The  Company  also
reimbursed   Spencer  Trask  for  $20,000  of  legal   expenses  and  $5,000  of
out-of-pocket expenses.

Under the terms of the Trask Consulting Agreement, SmartServ is obligated to pay
Spencer Trask a fee upon closing of the  acquisition  of nReach,  based on 5% of
the  first   two-million   dollars  of  the  aggregate   consideration  of  such
acquisition,  4% of the next two million dollars or portion  thereof,  3% of the
third  $2,000,000  or  portion   thereof,   and  2.5%  of  the  balance  of  the
consideration.  For purposes of  determining  the aggregate  consideration,  the
total value of  liabilities  assumed are  included,  and fees on any  contingent
payment  shall be paid to Spencer  Trask when such  contingent  payment is made.
Spencer Trask has agreed to accept shares of the Company's  common stock in lieu
of cash with respect to such fees.

Under the  terms of the  Trask  Consulting  Agreement,  in the event  that on or
before  May  31,  2004  or 18  months  thereafter  (under  certain  conditions),
SmartServ sells, outside the ordinary course of business,  its company or any of
its assets,  securities or business by means of a merger,  consolidation,  joint
venture or exchange offer, or any transaction resulting in any change in control
of  SmartServ or its assets or business,  or  SmartServ  purchases,  outside the
ordinary course of business, another company or any of its assets, securities or
business by means of a merger,  consolidation,  joint venture or exchange offer,
or SmartServ  receives an investment  (other than an  investment  pursuant to an
agented offering,  which will be subject to compensation  pursuant to a separate
arrangement with Spencer Trask), SmartServ will owe Spencer Trask a cash fee and
in some instances, warrants.


                                       58
<PAGE>

15.   Employee Stock Option Plans

In April 1996, the Company's Board of Directors approved the establishment of an
Employee  Stock Option Plan ("1996  Plan")  authorizing  stock option  grants to
directors, key employees and consultants. The options are intended to qualify as
incentive  stock  options  within the  meaning of  Section  422 of the  Internal
Revenue Code of 1986, as amended,  or as  nonqualified  stock options.  The 1996
Plan  provided for the issuance of up to 41,667 of such options at not less than
the fair  value of the stock on the date of grant.  The  options  are  partially
exercisable  after  one year  from the date of grant  and  expire  on the  tenth
anniversary of the date of grant. As of December 31, 2004, there were options to
purchase  8,167 shares of common stock  issued and  outstanding  and -0- options
available for grant pursuant to the 1996 Plan.

In October 1999, the Board of Directors authorized the establishment of the 1999
Employee  Stock  Option  Plan  ("1999  Plan").  The 1999 Plan  provided  for the
issuance of options to employees  and directors for the purchase of a maximum of
66,667 shares of the Company's common stock.  The Board of Directors  authorized
the issuance of 66,667 of such options to both  employees  and  directors at the
fair value of the common stock on that date. As of December 31, 2004, there were
options to purchase 17,000 shares of common stock issued and outstanding and -0-
options available for grant pursuant to the 1999 Plan.

In May 2000,  the Board of Directors  authorized the  establishment  of the 2000
Employee  Stock  Option  Plan ("2000  Plan").  In  November  2000,  the Board of
Directors  increased the number of shares  available for issuance under the 2000
Plan by 100,000 to a maximum of 225,000. The 2000 Plan provides for the issuance
of such  options at not less than the fair value of the common stock on the date
of grant.  The Board of  Directors  has  authorized  the  issuance of options to
purchase  38,875  shares of common stock to employees  and directors at exercise
prices equal to the fair value on the dates of grant. The stockholders  approved
the  repricing  of  options  to  purchase  132,875  shares of common  stock with
exercise  prices  ranging  between  $35.82 and $297.00 to $8.52 per share at the
Annual Meeting of  Stockholders  on December 13, 2002. In connection  therewith,
the Company recorded a charge to earnings of  approximately  $42,600 in the year
ended  December 31, 2003 for the  increase in the market value of the  Company's
common stock between the date the repricing was  authorized by the Board and the
date it was approved by the  stockholders.  As of December 31, 2004,  there were
options to purchase 38,875 shares of common stock issued and outstanding and -0-
options available for grant pursuant to the 2000 Plan.

In connection with the stockholders' approval of the Company's 2002 Stock Option
Plan at the Annual  Meeting of  Stockholders  on December 13, 2002, the Board of
Directors  amended all  previously  existing  stock option plans by reducing the
size of such plans to the number of options issued and outstanding at that date.
Additionally, the Board of Directors amended such plans so that options that are
terminated or forfeited may not be re-granted.

At the Annual Meeting of  Stockholders  on December 13, 2002,  the  stockholders
approved the  establishment  of the Company's  2002  Employee  Stock Option Plan
("2002  Plan").  The 2002 Plan provides for the issuance of options to employees
and directors for the purchase of a maximum of 250,000 shares of common stock at
an exercise  price not less than the fair value of the common  stock on the date
of grant. No options have been granted pursuant to the 2002 Plan.

In Novemeber 2004, the Board of Directors  authorized the  establishment  of the
2004 Stock Option Plan ("2004 Plan"). The 2004 Plan provides for the issuance of
options to  employees  and  directors  for the  purchase of a maximum of 200,000
shares of common stock at an exercise  price not less than the fair value of the
common stock on the date of grant. No options have been granted  pursuant to the
2004 Plan.


                                       59
<PAGE>

Information  concerning stock options of the Company discussed above and in Note
9 is presented below.

                                                                      Weighted
                                                                       Average
                                                                       Exercise
                                                        Options         Price
                                                      --------------------------
Balance at December 31, 2002                             317,164      $     9.54
     Granted                                                  --              --
     Exercised                                              (958)           5.90
     Cancelled                                          (129,909)           9.60
                                                      --------------------------
Balance at December 31, 2003                             186,297            9.55
     Granted                                           3,660,000            1.86
     Exercised                                                --              --
     Cancelled                                          (197,255)           5.44
                                                      --------------------------
Balance at December 31, 2004                           3,649,042      $     1.96
                                                      ==========================

The  following  table  summarizes   information  about  employee  stock  options
outstanding as of December 31, 2004.

<TABLE>
<CAPTION>
                                             Options Outstanding                                 Options Exercisable
                            -------------------------------------------------------    ----------------------------------------

                                                                     Weighted
                                                  Weighted           Average
                                                   Average          Remaining                                     Average
         Range of               Number of         Exercise         Contractual              Number of            Exercise
     Exercise Prices             Options            Price          Life (Years)              Options               Price
-----------------------------------------------------------------------------------    ----------------------------------------
<S>                         <C>                         <C>            <C>                     <C>                  <C>
    $5.63 to $9.75                64,042                 $7.76          5.6                        64,042           $7.76

    $1.50 to $3.75             3,585,000                 $1.86          9.6                     1,350,981           $1.64
                            ------------                                               ------------------

                               3,649,042                                                        1,415,022
                            ============                                               ==================
</TABLE>

16.   Subsequent Events

On January 7, 2005, SmartServ acquired all of the issued and outstanding capital
stock of KPCCD,  Inc.  ("KPCCD")  pursuant to a stock purchase  agreement  dated
December 19, 2004. The Company issued 1,000,000 shares of its common stock, $.01
par  value  per share to the  sellers  as  consideration  for  acquiring  KPCCD.
Following the closing of this acquisition, KPCCD is a wholly-owned subsidiary of
the Company.

In connection with the closing of the transaction on January 7, 2005, KPCCD, the
sellers and Prima  Communications,  Inc. ("Prima"),  a company controlled by the
sellers, entered into a Master Vendor Agreement ("Vendor Agreement").  Under the
Vendor Agreement,  Prima will sell to KPCCD at cost all of KPCCD's  requirements
of international prepaid calling cards for up to one year after January 7, 2005.
The Company has guaranteed the obligations of KPCCD under the Vendor  Agreement.
The Vendor  Agreement can be terminated prior to its one year term under certain
conditions.


                                       60
<PAGE>

KPCCD is a New York  City-based  distributor of  international  prepaid  calling
cards.  The Company  expects KPCCD to continue in the same line of business as a
wholly-owned subsidiary of the Company.

On January 28,  2005,  SmartServ  entered  into an  agreement  with  TecCapital,
Ltd.("TEC") pursuant to which TEC agreed to waive and release certain rights TEC
has under a certain stock  purchase  agreement  dated May 12, 2000. TEC provided
these  waivers  and  releases in  consideration  for the grant to TEC of 500,000
shares of the  Company's  common  stock.  The Company  believes  that TEC is the
beneficial  owner of more than ten percent of the Company's common stock. In the
event  that  both the  acquisition  of  Telco  Group  is not  consummated  and a
registration  statement  covering  all of TEC's  shares of  common  stock is not
declared effective within 270 days after the date of the agreement,  TEC may (in
its sole  discretion)  return all of the shares to the  Company  within 330 days
from the  date of the  agreement,  and in such  case the  waivers  and  releases
granted  in the  agreement  would  become  void and TEC could  pursue any claims
against the Company as if such waivers and releases had never been granted.

Item 8.  Changes  in and  Disagreements  With  Accountants  on  Accounting  and
         Financial Disclosure

On December  20,  2004,  the Audit  Committee  of the Board of  Directors of the
Company  selected  Carlin,  Charron & Rosen,  LLP ("Carlin  Charron") as its new
independent  registered public accounting firm, in replacement of Grant Thornton
LLP ("Grant Thornton"). On December 15, 2004, Grant Thornton advised the Company
that  it  declined  to  stand  for  re-election  as  the  Company's  independent
registered  public  accounting  firm.  During the  Company's  fiscal  year ended
December 31, 2003 and the subsequent interim period from January 1, 2004 through
December 21, 2004, there were no disagreements with Grant Thornton on any matter
of accounting  principles  or  practices,  financial  statement  disclosure,  or
auditing  scope  or  procedure,  which  disagreements,  if not  resolved  to the
satisfaction  of Grant  Thornton,  would have caused it to make reference to the
subject  matter  of the  disagreement  in  connection  with  its  report  on the
Company's consolidated financial statements.

Item 8A. Controls and Procedures

We maintain a system of disclosure controls and procedures that is designed to
provide reasonable assurance that information that is required to be disclosed
by us in the reports that we file or submit under the Securities and Exchange
Act of 1934, as amended, is accumulated and communicated to management in a
timely manner. Our Chief Executive Officer and Chief Financial Officer have
evaluated this system of disclosure controls and procedures as of the end of the
period covered by this annual report, and each believes that the system is
operating effectively to ensure appropriate disclosure at a reasonable level of
assurance. There have been no changes during the fourth fiscal quarter in our
internal control over financial reporting, to the extent that elements of
internal control over financial reporting are subsumed within disclosure
controls and procedures, that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.

Item 8B. Other Information

None


                                       61
<PAGE>

                                    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 our  executive
officers and directors.

<TABLE>
<CAPTION>
Name                                       Age        Position
<S>                                         <C>       <C>
Robert Pons                                 48        Chief Executive Officer, President and Class III Director
Timothy G. Wenhold                          43        Chief Operating Officer, Executive Vice President,
                                                        Secretary and Class 1 Director
Len von Vital                               54        Chief Financial Officer
Paul J. Keeler (1)(2)(3)                    60        Chairman of the Board and Class I Director
John E. Goode (1)(2)(3)                     53        Class III Director
Paul L. Melchiorre (1)(2)(3)                44        Class I Director
</TABLE>

---------------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of Nominating Committee

Robert M. Pons has been our Chief Executive  Officer and President since January
24,  2004 and a director  since  August  28,  2003.  He served as Interim  Chief
Executive  Officer from August 28, 2003 to January 24, 2004. Mr. Pons had been a
consultant to us from August 4, 2003 to January 24, 2004. From April 16, 1999 to
April 15, 2002, Mr. Pons was founder and President of FreedomPay, a stored value
payment processing company enabling cashless payments on wireless devices.  From
March 1999 through  December 1999, Mr. Pons was Chief Operating  Officer of Real
Time  Data,  a company  in the data  transmission  (telemetry)  business.  Prior
thereto, from March 1, 1995 to April 15, 1999, Mr. Pons was President and CEO of
LifeSafety  Solutions,  an  enhancement  to the 9-1-1  public  safety  emergency
system.  Mr. Pons also held executive  positions  with both MCI and Sprint.  Mr.
Pons is a member of the Board of  Directors  of  Network-1  Security  Solutions,
Inc., a software licensing company.

John E. Goode has been a director of the Company since  October 2004.  From 1999
to 2001 Mr. Goode led the Methodology Group of Zefer  Corporation,  a consulting
company focused on Internet  technology  development,  and from 1994 to 1998 Mr.
Goode was an independent  consultant providing senior consulting  experience and
methodology  assistance to Waite and Company,  a strategy  consulting  firm. For
over 30 years Mr. Goode has consulted and provided  methodologies for leveraging
the power of emerging  technologies  and business  practices to improve business
strategy,  performance and profitability used by Fortune 500 companies, Internet
start-up companies and government agencies.

Paul J. Keeler has been the  Chairman of the Board of  Directors  since  October
2004.  Mr.  Keeler is  currently a managing  partner at  Convergence  Consulting
Group,  LLC. From February 1991 to February  2001, Mr. Keeler was a Principal at
Morgan  Stanley & Co., and Head of Global  Sales and Service for Morgan  Stanley
Capital  International,  a joint venture between Morgan Stanley & Company,  Inc.
and Capital Group Companies.  Prior to that, Mr. Keeler served as Vice President
of Morgan Stanley Technology  Services;  President,  Chief Executive Officer and
Vice Chairman of Tianchi Telecommunications Corp.; President and Chief Operating
Officer  of  Westinghouse  Communications  Software,  Inc.;  Vice  President  of
Strategic  Accounts  and Business  Development  for Reuters  Holdings,  PLC; and
Director,  Northeast  Metro  Region,  of MCI  Communications.  He also served as
President and CEO of Halcyon  Securities  Corporation  and is a former member of
the New York and American Stock  Exchanges.  Mr. Keeler is presently a member of
the  Board of  Directors  of  DSL.net,  Inc.,  a  provider  of  high-speed  data
communications, internet access and related services.


                                       62
<PAGE>

Paul L.  Melchiorre has been a director  since  November  2004.  Since 1998, Mr.
Melchiorre   has  been  the   Vice-President   of   Operations   of   Ariba,   a
spend-management  software company. In 1992 Mr. Melchiorre joined SAP America as
the manager of the East Coast Region and in 1997 Mr. Melchiorre was appointed as
the  Vice-President  of Sales of SAP America,  managing all  strategic  business
units and SAP North America.

Timothy G.  Wenhold  has been our  Executive  Vice  President,  Chief  Operating
Officer and  Secretary  since March 10,  2004 and a director  since  October 30,
2004.  Mr.  Wenhold had been a consultant  to the Company from August 4, 2003 to
March 10, 2004. From May 1, 2002 to August 31, 2003, Mr. Wenhold was founder and
President of Factory X, Inc. a  manufacturer  of licensed high end movie,  comic
and gaming collectibles. Prior thereto, from January 1, 1985 to May 1, 2002, Mr.
Wenhold was founder and  President of Sintaks,  Inc., a system  integration  and
technology consulting firm. Sintaks was acquired by Canon in 1998.

Other Executive Officer

Len von Vital, 54, has been our Chief Financial Officer since April 9, 2004. Mr.
von Vital was engaged by us as a consultant to provide  financial  services from
January 27, 2004 to April 9, 2004.  From  February 11, 2002 to October 31, 2003,
Mr.  von Vital was Chief  Financial  Officer of 4GL School  Solutions,  Inc.,  a
developer and vendor of special education software and services. From April 2001
to November 2001, Mr. von Vital was Chief Financial Officer of eCal Corporation,
a  developer  and  vendor of  enterprise  Internet  calendaring  and  scheduling
software and services and was a consultant  in December  2001 and January  2002.
From July 2000 to March  2001,  Mr.  von Vital was Chief  Financial  Officer  of
National  Dental  Corporation,  an  e-commerce  start-up  and  software  company
providing  procurement  savings to the dental  industry,  and from March 2000 to
June 2000,  was Chief  Financial  Officer of  Financialweb.com,  an  e-financial
services  company.  From  October 1998 to February  2000,  Mr. von Vital was the
Chief   Financial   Officer   of  ESPS,   Inc.,   a   provider   of   enterprise
business-to-business  document  management and publishing software and services.
ESPS had its initial public  offering in June 1999. Mr. von Vital also served as
interim CEO of ESPS, Inc. from June 1999 until October 1999.  Prior thereto,  he
held the  positions  of senior vice  president of product  management  and Chief
Financial  Officer for Astea  International,  Inc.,  a  developer  and vendor of
enterprise customer relationship  management software and services, that had its
initial public  offering in July 1995. He also held senior  financial  positions
during a twelve-year  career with Decision Data Inc., an international  provider
of plug-compatible  IBM computer  peripheral  equipment and services,  including
Vice President of Mergers and Acquisitions,  Corporate  Controller and Principal
Accounting Officer. Mr. von Vital is a certified public accountant.

Our officers are elected  annually and serve at the  discretion  of the Board of
Directors  for a one year term and until their  respective  successors  are duly
elected and qualified or until their earlier resignation or removal,  subject to
any rights  provided by employment  agreements  that are  described  below under
"Executive Compensation - Agreements with Named Executive Officers".

Audit Committee

The Audit Committee  consists of Paul L.  Melchiorre,  John E. Goode and Paul J.
Keeler,  none of whom is an officer or  employee of us. The Audit  Committee  is
established in accordance  with Section  3(a)(58)(A) of the Securities  Exchange
Act of 1934. Each member meets the independence requirements for audit committee
members under the listing  standards of the Nasdaq Stock Market,  as required by
our Audit Committee Charter. Our Board of Directors has determined that a member
of the  Audit  Committee,  Paul J.  Keeler,  qualifies  as an  "audit  committee
financial  expert" as defined in Item 401(e) of  Regulation  S-B. The  Committee
provides  assistance  to our  directors  in  fulfilling  the  Board's  oversight
responsibility  as to our accounting,  auditing and financial  reporting and the
quality and integrity of our financial reports.

Nomination Procedures

A Nominating Committee was created in February,  2005 and is currently comprised
of John E. Goode,  Paul L.  Melchiorre and Paul J. Keeler.  While the Nominating
Committee  does  not  have  a  formal  charter,  the  Board  adopted  guidelines
addressing  the purpose and  responsibilities  of the  Nominating  Committee  in
connection  with  its  formation,   which  guidelines   include  procedures  for
recruiting,  considering and recommending nominees to the Board and criteria for
Board  membership.  As part of such  guidelines,  the Nominating  Committee will
consider any director candidates proposed in good faith by a stockholder.  To do
so,  a  stockholder  must  send  the  candidate's  name,  credentials,   contact
information  and his or her written  consent to be  considered as a candidate to
the Company's Corporate Secretary. The proposing stockholder should also include
his or her contact  information  and a statement of his or her share  ownership.
The  Nominating  Committee  may from time to time adopt a timeline  within which
stockholder  nominations  must be  received  in  order to be  considered  by the
Nominating Committee, and the Nominating Committee will publish this timeline in
a press release or filing with the Securities and Exchange Commission.


                                       63
<PAGE>

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities  Exchange Act of 1934 requires our Directors and
executive  officers,  and  persons  who own more than ten  percent of the Common
Stock,  to file with the  Securities  and Exchange  Commission  ("SEC")  initial
reports of ownership and reports of changes in ownership of our Common Stock and
other  equity  securities.  Officers,  Directors  and  greater  than ten percent
stockholders  (collectively,  "Reporting Persons") are additionally  required to
furnish us with copies of all Section 16(a) forms they file.

To our knowledge, based solely on review of the copies of such reports furnished
to us and written representations of the Reporting Persons that no other reports
were  required  with  respect to fiscal  year 2004,  all  Section  16(a)  filing
requirements  applicable to the Reporting Persons were complied with on a timely
basis in fiscal year 2004,  except  that (i) as to John E. Goode,  the Form 3 to
report his  ownership  of  securities  as of October 30,  2004,  the date he was
elected as a director,  was filed on November 30, 2004, and the Form 4 to report
the grant of options on October 30, 2004 covering  60,000 shares of Common Stock
was filed on November 30, 2004; (ii) as to Paul J. Keeler,  the Form 3 to report
his ownership of securities as of October 30, 2004, the date he was elected as a
director,  was filed on November 30, 2004, and the Form 4 to report the grant of
options on October 30, 2004 covering  60,000 shares of Common Stock was filed on
November  30,  2004;  (iii) as to Paul L.  Melchiorre,  the Form 4 to report the
grant of options on November 1, 2004 covering  60,000 shares of Common Stock was
filed on November 5, 2004;  (iv) as to L. Scott Perry,  a former  director,  the
Form 4 to report the grant of options on August 1, 2004  covering  60,000 shares
of Common Stock was filed on April 13,  2005,  (v) the Form 3 for Robert M. Pons
to report his  ownership of  securities  as of August 28, 2003,  the date he was
elected as an officer and director,  was filed on March 16, 2004,  the Form 4 to
report the grant of  options  on March 12,  2004  covering  1,300,000  shares of
Common Stock was filed on March 16, 2004,  and the Form 4 to report the grant of
options on December 20, 2004 covering  400,000  shares of Common Stock was filed
on January 14, 2005; (vi) as to Catherine  Cassel  Talmadge,  a former director,
the Form 4 to report the sale of 100 shares of Common  Stock on January 23, 2002
by her daughter under a Uniform Gift to Minor Account for which Ms.  Talmadge is
the custodian was filed on March 16, 2004, and the Form 4 to report the grant of
options on August 1, 2004  covering  60,000  shares of Common Stock was filed on
March 30,  2005;  (vii) as to Len von  Vital,  the Form 4 to report the grant of
options on April 9, 2004  covering  300,000  shares of Common Stock was filed on
April 13, 2004; (viii) as to Timothy G. Wenhold,  the Form 4 to report the grant
of options on March 12, 2004 covering  700,000  shares of Common Stock was filed
on March 16, 2004, and the Form 4 to report the grant of options on December 20,
2004 covering 250,000 shares of Common Stock was filed on January 14, 2005; (ix)
as to Charles Wood, a former director, the Form 4 to report the grant of options
on August 1, 2004 covering  60,000 shares of Common Stock was filed on March 23,
2005, (x) as to Kevin  Kimberlin,  a 10%  stockholder,  (a) the Form 5 to report
certain  transactions on September 16, 2003, September 19, 2003 and November 11,
2003, involving the acquisition of our common stock and warrants to purchase our
common  stock,  was filed on March 31, 2004 and amended on August 25, 2004,  and
(b) the Form 4 to report  the  acquisition  on March  22,  2004 of  warrants  to
purchase  our common stock and the  disposition  on July 27, 2004 of warrants to
purchase  our common  stock was filed on August 10,  2004,  (xi) as to Crestview
Capital Masters, LLC, a 10% stockholder during part of fiscal year 2004, (a) the
Form 3 to report the  acquisition on February 27, 2004 of our Series A preferred
stock and warrants to purchase our common stock was filed on September  17, 2004
and (b) a Form 4 has  not  been  filed  to  report  eight  transactions  between
February 19, 2004 and April 22, 2004  involving the sale of shares of our common
stock,  (xii) as to Headwater  Holdings,  LLC, a 10% stockholder  during part of
fiscal  year  2004,  the  Form 3 to  report  three  transactions  involving  the
acquisition  of warrants to purchase our common stock between  February 27, 2004
and  December  1,  2004  was  filed on April 6,  2005,  and  (xiii)  as to Vitel
Ventures,  Inc., a 10% stockholder during part of fiscal year 2004, a Form 3 was
not filed with  respect to the  acquisition  of warrants to purchase  our common
stock and Series A preferred stock convertible into our common stock.


                                       64
<PAGE>

Code of Ethics

Each of our  directors,  officers and  employees are required to comply with the
Code of Ethics adopted by us. The Code of Ethics sets forth policies  covering a
broad range of subjects and requires  strict  adherence to laws and  regulations
applicable to our business. The Code of Ethics is attached to this Annual Report
on Form 10-KSB as Exhibit 14.1.

Item 10. Executive Compensation

The  following  table sets forth,  for each of the last three full fiscal years,
information  concerning annual and long-term  compensation,  paid or accrued for
services in all  capacities  during the fiscal year ended December 31, 2004, for
our Chief Executive Officer during 2004 and for the two other executive officers
(collectively,  the "Named  Executive  Officers")  with base  salary and bonuses
exceeding $100,000 during 2004:

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                          Annual Compensation                      Long-term Compensation
                            ------------------------------------------------     --------------------------
                                                                  Other
                                                                  Annual          Restricted   Securities
Name and Principal          Fiscal                             Compensation         Stock      Underlying       All Other
Position                    Year         Salary   Bonus             (1)           Awards(2)    Options(3)      Compensation
-----------------------------------------------------------------------------------------------------------------------------
<S>                         <C>          <C>       <C>              <C>           <C>          <C>                <C>
Robert Pons (4)             2004         $236,000  $105,000         $ --           --           1,700,000          $100,000
Chief Executive Officer     2003           44,000        --           --           --              50,000            16,000
                            2002               --        --           --           --                  --               --

Timothy G. Wenhold (5)      2004          113,333    85,000           --           --             950,000            40,000
Chief Operating Officer     2003               --        --           --           --               8,333            35,000
                            2002               --        --           --           --                  --                --

Len von Vital (6)           2004          108,333        --           --           --             300,000            20,875
Chief Financial Officer     2003               --        --           --           --                  --                --
                            2002               --        --           --           --                  --                --
</TABLE>

(1)   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 the Named Executive Officers.

(2)   The Named Executive  Officers did not receive any restricted  stock awards
      or long-term incentive plan payouts during fiscal 2004, 2003 or 2002.

(3)   See description on page 66 under the heading "Stock Options" regarding the
      grants  made in 2004.  In  addition,  Mr.  Pons was  granted  warrants  to
      purchase  50,000 shares of Common Stock in 2003 pursuant to his Consulting
      Agreement with us dated August 4, 2003 (see footnote 4 below). Mr. Wenhold
      was  granted  warrants to purchase  8,333  shares of Common  Stock in 2003
      pursuant to his  Consulting  Agreement  with us dated  August 1, 2003 (see
      footnote 5 below).

(4)   Salary in 2003 reflects amounts paid under Mr. Pons' Consulting  Agreement
      with us dated August 4, 2003.  Salary in 2004 includes  $61,000 paid under
      his  Consulting  Agreement.  Mr.  Pons served as Interim  Chief  Executive
      Officer  from  August 28, 2003 to January  24,  2004.  He became our Chief
      Executive  Officer on January 24, 2004. The entry in 2004 under "All Other
      Compensation"   represents  $100,000  paid  to  Mr.  Pons  from  us  as  a
      transaction fee in connection with the 2004 Private Placement transaction,
      which fee was paid pursuant to the terms of his  Consulting  Agreement and
      his Employment Agreement with us dated March 12, 2004.


                                       65
<PAGE>

(5)   Mr. Wenhold became our Chief Operating Officer on March 10, 2004.  Amounts
      under "All Other Compensation" represent payments to Mr. Wenhold under his
      Consulting Agreement with us dated August 4, 2003.

(6)   Mr. von Vital became our Chief Financial Officer on April 9, 2004. Amounts
      under "All Other  Compensation"  represent  payments  to Mr. von Vital for
      consulting services provided by him to us in 2004.

Stock Options

The following table sets forth information with respect to stock options granted
to the Named Executive Officers in fiscal year 2004:

                        Option Grants in Last Fiscal Year

<TABLE>
<CAPTION>
                                      Number of             % of Total Options
                                      Securities                Granted to            Exercise            Expiration
         Name                     Underlying Options         Employees in the          Price                 Date
                                       Granted                  fiscal year
------------------------------- ----------------------- --------------------------- ---------------- ------------------------
<S>                                     <C>                      <C>                    <C>          <C>
Robert Pons                             1,300,000                39.4%                  $1.50        March 12, 2014
Robert Pons                               400,000                12.1%                  $2.07        December 20, 2014
Timothy G. Wenhold                        700,000                21.2%                  $1.50        March 12, 2014
Timothy G. Wenhold                        250,000                7.6%                   $2.07        December 20, 2014
Len von Vital                             300,000                9.1%                   $3.75        April 9, 2014
</TABLE>

(1)   This  option to  purchase  1,300,000  shares of Common  Stock was  granted
      pursuant to an Option  Agreement with Mr. Pons dated as of March 12, 2004.
      This  option  vests as follows:  (i)  557,141  shares on the date of grant
      (March 12, 2004) and (ii) the balance of the 742,859 shares vests in equal
      amounts as of the last day of each  calendar  quarter  beginning  with the
      quarter ending March 31, 2004 and ending with the quarter ending  December
      31, 2007.

(2)   This  option  to  purchase  400,000  shares of  Common  Stock was  granted
      pursuant to an Option  Agreement  with Mr.  Pons dated as of December  20,
      2004.  This option vests on the last day of each month in 36 equal monthly
      installments  beginning  on December  31, 2004 and ending on November  30,
      2007.

(3)   This  option  to  purchase  700,000  shares of  Common  Stock was  granted
      pursuant to an Option  Agreement  with Mr.  Wenhold  dated as of March 12,
      2004.  This  option  vests as follows:  (i) 300,000  shares on the date of
      grant (March 12, 2004) and (ii) the balance of the 400,000 shares vests in
      equal amounts as of the last day of each calendar  quarter  beginning with
      the quarter  ending  March 31,  2004 and ending  with the  quarter  ending
      December 31, 2007.

(4)   This  option  to  purchase  250,000  shares of  Common  Stock was  granted
      pursuant to an Option  Agreement with Mr. Wenhold dated as of December 20,
      2004.  This option vests on the last day of each month in 36 equal monthly
      installments  beginning  on December  31, 2004 and ending on November  30,
      2007.

(5)   This  option  to  purchase  300,000  shares of  Common  Stock was  granted
      pursuant  to an Option  Agreement  with Mr. von Vital dated as of April 9,
      2004.  This option  vests on the last day of each  calendar  quarter in 16
      equal  quarterly  installments  beginning  on June 30,  2004 and ending on
      March 31, 2008.


                                       66
<PAGE>

The  following  table sets  forth  information  as to the number of  unexercised
shares of Common Stock  underlying  stock  options and the value of  unexercised
in-the-money stock options at December 31, 2004:

               Aggregated Option Exercises in Last Fiscal Year and
                       Fiscal Year End Option Value (1)(2)

<TABLE>
<CAPTION>
                                                                         Number of Securities             Value of Unexercised In-
                                                                        Underlying Unexercised              The-Money Options at
                               Shares                                   Options at Fiscal Year                 Fiscal Year End
                             Acquired on             Value                 End Exercisable/                     Exercisable/
             Name             Exercise              Realized                Unexercisable                       Unexercisable
----------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>                     <C>                 <C>                               <C>
Robert Pons                      --                     --                  742,856/957,144                   $482,856/$394,144
Timothy G. Wenhold               --                     --                  400,000/550,000                   $260,000/$215,000
Len von Vital                    --                     --                  56,250/243,750                         $0/$0
</TABLE>

(1)   Value is based on the closing price of our Common Stock as reported by the
      OTC Bulletin Board on December 31, 2004 ($2.15) less the exercise price of
      the option.

(2)   No stock options were exercised by the Named Executive Officers during the
      fiscal year ended December 31, 2004.

Agreements with Named Executive Officers

We entered into an Employment  Agreement with Robert Pons, dated March 12, 2004.
The  agreement  provides for a 4 year term with a base annual salary of $210,000
in the first year of the term,  subject to increases as  determined by the Board
of  Directors.  Mr.  Pons shall also be  eligible  for  bonuses in the event the
Company meets certain  performance goals related to raising additional  capital,
revenue  targets or other goals mutually set by Mr. Pons and us. On February 11,
2005, the Compensation  Committee  approved an increase in Mr. Pons' base annual
salary and a cash bonus  depending  on whether  the  acquisition  of Telco Group
occurs in calendar  year 2005.  Assuming  the Telco Group  acquisition  does not
occur in calendar year 2005, the Compensation  Committee approved a 15% increase
of base  compensation  for Mr.  Pons to  $241,500  and a cash bonus based on the
following: (i) successful integration of KPCCD - 15% of base compensation;  (ii)
successful  introduction  of  Uphonia  "brand"  and  equipment  -  15%  of  base
compensation;  and (iii)  attainment  of cash flow break even or better - 35% of
base compensation.  The determination of the first two bonus items will be based
on specific  parameters to be determined by the  Compensation  Committee and the
third item would be based on the actual results for calendar year 2005. Assuming
the  Telco  Group   acquisition  is  consummated  in  calendar  year  2005,  the
Compensation  Committee  approved an increase of Mr. Pons' base  compensation to
$350,000, effective upon the consummation of such acquisition. In such case, the
maximum  bonus for Mr.  Pons  would  increase  to  $200,000,  with the  specific
criteria to be determined by the Committee in the future.

Mr.  Pons also  received an option to  purchase  1,300,000  shares of our common
stock under a non-plan option  agreement,  which option has an exercise price of
$1.50 per share and a term of 10 years.  The option  provides for 557,141 shares
to vest immediately and the remaining 742,859 shares to vest in equal amounts as
of the last day of each calendar quarter  commencing March 31, 2004. The options
will vest  immediately  upon a Change  of  Control  (as  defined  in his  option
agreement)  or in the event Mr.  Pons is  terminated  Other Than for Cause or he
terminates  employment  for Good Reason (as each is defined under the Employment
Agreement). Mr. Pons will also receive 12 months of base salary upon termination
Other Than for Cause or if he terminates employment for Good Reason.

We entered into an Employment Agreement with Timothy G. Wenhold, dated March 12,
2004.  The  agreement  provides  for a 4 year term with a base annual  salary of
$170,000 in the first year of the term,  subject to increases as  determined  by
the Board of  Directors.  Mr.  Wenhold shall also be eligible for bonuses in the
event we meet certain  performance goals related to raising additional  capital,
revenue  targets or other goals  mutually set by Mr. Wenhold and us. On February
11, 2005 the Compensation  Committee  approved an increase in Mr. Wenhold's base
annual salary and a cash bonus  depending upon whether the  acquisition of Telco
Group occurs in calendar year 2005.  Assuming the Telco Group  acquisition  does
not occur in  calendar  year 2005,  the  Compensation  Committee  approved a 15%
increase of base  compensation  for Mr.  Wenhold to  $195,500,  and a cash bonus
based  on the  following:  (i)  successful  integration  of  KPCCD - 15% of base
compensation;  (ii)  successful  introduction of Uphonia "brand" and equipment -
15% of base compensation; and (iii) attainment of cash flow break even or better
- 35% of base compensation.  The determination of the first two bonus items will
be based on specific  parameters to be determined by the Compensation  Committee
and the third item would be based on the actual  results for calendar year 2005.
Assuming the Telco Group  acquisition is  consummated in 2005, the  Compensation
Committee  approved an increase of Mr. Wenhold's base  compensation to $283,000,
effective upon the consummation of such  acquisition.  In such case, the maximum
bonus for Mr. Wenhold would increase to $167,000,  with the specific criteria to
be determined by the Compensation Committee in the future.


                                       67
<PAGE>

Mr.  Wenhold also  received an option to purchase  700,000  shares of our common
stock under a non-plan option  agreement,  which option has an exercise price of
$1.50 per share and a term of 10 years.  The option  provides for 300,000 shares
to vest immediately and the remaining 400,000 shares to vest in equal amounts as
of the last day of each calendar quarter  commencing March 31, 2004. The options
will vest  immediately  upon a Change  of  Control  (as  defined  in his  option
agreement) or in the event Mr. Wenhold is terminated  Other Than for Cause or he
terminates  employment  for Good Reason (as each is defined under the Employment
Agreement).  Mr.  Wenhold  will  also  receive  12 months  of base  salary  upon
termination Other Than for Cause or if he terminates employment for Good Reason.

Directors' Compensation

Prior to the adoption by the Board of  amendments  to the  compensation  paid to
non-employee  directors  which are  described  below,  as of June 4, 2004,  each
non-employee  director  was entitled to receive a $1,000 fee for each meeting he
or she attended and each committee member was entitled to receive up to $500 per
committee meeting attended.  Additionally, each non-employee director who is not
an  officer  or  employee  was  entitled  to  be  reimbursed   for  his  or  her
out-of-pocket  expenses  incurred in connection  with  attendance at meetings or
other Company business.

On February 11, 2005, the Board approved  amendments to the compensation paid to
the non-employee  directors. As of February 11, 2005, the non-employee directors
are no longer  entitled to receive per meeting fees and will be  compensated  as
described below.  The  non-employee  directors will be paid the following annual
rates for service on the Board, which will be paid on a quarterly basis:

            o     Non-employee board member -- $10,000

            o     Non-employee Chairman of the Board -- $60,000

            o     Committee Chairman -- $3,000

            o     Committee Member -- $2,000

The  directors  will  be  reimbursed  for  out-of-pocket  expenses  incurred  in
attending meetings.  The Board also intends to issue additional stock options to
non-employee  directors  from  time to time as  determined  by the  Board in its
discretion.

The  Board  also  approved  further  amendments  to  the  compensation  paid  to
non-employee  directors  to become  effective  upon (and  conditioned  upon) the
closing of the proposed acquisition of Telco Group. In particular,  in the event
the Telco Group closing occurs then the non-employee  directors will be paid the
following  annual  rates  for  service  on the  Board,  which  will be paid on a
quarterly basis:

            o     Non-employee board member -- $30,000

            o     Non-employee Chairman of the Board -- $150,000

            o     Committee Chairman -- $7,500

            o     Committee Member -- $5,000


                                       68
<PAGE>

The  directors  would be  reimbursed  for  out-of-pocket  expenses  incurred  in
attending  meetings,  and the Board intends to issue additional stock options to
non-employee directors from time to time.

We also  adopted  a  compensation  plan  for  outside  (non-employee)  directors
effective June 4, 2004. Each outside  director will receive an option for 60,000
shares.  The outside  directors in office on the effective date, L. Scott Perry,
Charles R. Wood,  and  Catherine  Cassel  Talmadge  (collectively,  the  "Former
Directors")  received such option grant on August 1, 2004. Paul J. Keeler,  John
E. Goode and Paul L. Melchiorre  (collectively,  the "Current  Directors"),  the
directors  presently in office,  received such option grant on October 30, 2004,
October 30, 2004 and November 1, 2004,  respectively.  Any new outside  director
will receive  such option  grant on the date of joining the Board.  The exercise
price will be the average of the  closing  stock price on the date of the option
grant. The option grant to the Former Directors was initially  scheduled to vest
in  increments of 20,000  shares at December 31, 2004,  2005 and 2006.  However,
pursuant to letter  agreements  between us and each Former Director,  each dated
October 30, 2004,  each of which was entered into in connection with such Former
Director's resignation as a director,  35,000 shares of the option grant to each
Former  Director  automatically  vested  and the  balance of such  option  grant
(25,000 shares) will not be  exercisable.  The option will vest in increments of
20,000 shares, at the first, second and third anniversaries of the date of grant
for the Current Directors and any new outside directors.

The former Chairman of the Board of Directors,  L. Scott Perry,  was paid $5,000
per quarter in 2004 for serving as Chairman of the Board of Directors. Mr. Perry
was paid $15,000 in 2004 pursuant to this arrangement,  prior to his resignation
in October 2004. On January 10, 2005, the Board granted to the current  Chairman
of the Board of Directors,  Paul J. Keeler, a warrant to purchase 250,000 shares
of the  Common  Stock at an  exercise  price of $2.10 per  share,  which was the
closing  stock price of the Common Stock on the date of grant.  These  warrants,
which have a 5 year term and are  immediately  exercisable,  were  issued to Mr.
Keeler for serving as the Chairman of the Board.


                                       69
<PAGE>

Item 11.  Security  Ownership of Certain  Beneficial  Owners and  Management and
          Related Stockholder Matters

                        BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of March 1, 2005,  certain  information  with
respect to the beneficial  ownership of our Common Stock and Preferred  Stock by
(i) each person known by us to beneficially  own more than 5% of our outstanding
shares of Common Stock or Preferred  Stock,  (ii) each of our  directors,  (iii)
each of the Named Executive  Officers and (iv) all of our executive officers and
directors as a group.

<TABLE>
<CAPTION>
                                             Common Stock                  Series A Preferred Stock
                                     Amount and                          Amount and
                                     Nature of         Percent of        Nature of         Percent of
       Name and Address of           Beneficial       Outstanding        Beneficial        Outstanding
      Beneficial Owner (1)         Ownership (2)       Shares (3)      Ownership (2)       Shares (3)        Total (4)
<S>                                   <C>                <C>             <C>                <C>             <C>
Kevin Kimberlin                       2,732,309 (5)(6)   34.82%          46,065 (6)           5.34%            19.39% (5)(6)
c/o Spencer Trask
535 Madison Avenue
New York, New York 10021

TecCapital, Ltd.                      1,353,288          25.30%              0                  *               9.60%
Cedar House
41 Cedar Avenue
Hamilton, HM 12, Bermuda

Crestview Capital Masters, LLC          488,597 (7)       8.48%            32,667             3.79%             5.67% (7)
Crestview Fund
Crestview Fund II
Crestview Offshore Fund
95 Revere, Suite F
Northbrook, IL  60062

Headwater Holdings                      421,204 (8)       7.30%            14,059             1.63%             3.90% (8)
220 Montgomery Street,
Suite 500
San Francisco, CA  94104

Vitel Ventures, Inc.                    427,312 (9)       7.40%            20,544             2.38%             4.39% (9)
802 Grand Pavilion, 1st Floor
P.O. Box 30543 SMB
Grand Cayman
Cayman Islands, BWI

Nimesh Patel                            333,333           6.23%              0                  *               2.39%
84-21 37th Avenue
Jackson Heights, NY 11372

Ashok Patel                             333,333           6.23%              0                  *               2.39%
84-21 37th Avenue
Jackson Heights, NY 11372
</TABLE>


                                       70
<PAGE>

<TABLE>
<CAPTION>
                                             Common Stock                  Series A Preferred Stock
                                     Amount and                          Amount and
                                     Nature of         Percent of        Nature of         Percent of
       Name and Address of           Beneficial       Outstanding        Beneficial        Outstanding
      Beneficial Owner (1)         Ownership (2)       Shares (3)      Ownership (2)       Shares (3)        Total (4)
<S>                                   <C>                <C>             <C>                <C>             <C>
Kala Patel                              333,334           6.23%              0                  *               2.39%
84-21 37th Avenue
Jackson Heights, NY 11372

Robert M. Pons                          899,839 (10)     14.41%              0                  *               6.05% (10)

Len von Vital                            75,000 (11)      1.38%              0                  *                  *  (11)

Timothy G. Wenhold                      468,055 (12)      8.05%              0                  *               3.24% (12)

John E. Goode                                 0            *                 0                  *                  *

Paul J. Keeler                          250,000 (13)      4.46%              0                  *               1.76% (13)

Paul L. Melchiorre                            0            *                 0                  *                  *

All executive officers and
directors as a group (6 persons)      1,692,894 (14)     24.06%              0                  *              10.81% (14)
</TABLE>

--------------------
*        Less than 1%

(1)   Addresses  are only  given for  holders  of 5% or more of our  outstanding
      common  stock who are not  currently  officers  or  directors.  This table
      contains  information  furnished to us by the respective  stockholders  or
      contained in filings  made with the  Securities  and  Exchange  Commission
      ("SEC"),  or, with  respect to shares of common stock  underlying  certain
      warrants, options and convertible preferred stock, from our records.

(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 March 1, 2005.  For purposes of beneficial  ownership of
      our common  stock,  excludes  shares of common  stock that may be acquired
      upon the conversion of Series A preferred stock held by such person.  Also
      excludes  184,938  shares  of common  stock in the  aggregate  subject  to
      issuance in connection  with the payment of stock  dividends to holders of
      our  preferred  stock  for the  period  ended  June 30,  2004.  Except  as
      otherwise  indicated,  the named entities or individuals  have sole voting
      and  investment  power  with  respect  to the  shares of common  stock and
      preferred stock beneficially owned.

(3)   Represents  the number of shares of common  stock or  preferred  stock (as
      applicable) beneficially owned as of March 1, 2005 by each named person or
      group,  expressed as a  percentage  of the sum of all of (i) the shares of
      such class  outstanding  as of such date, and (ii) the number of shares of
      such class not outstanding, but beneficially owned by such named person or
      group as of such date  (e.g.,  shares of common  stock  underlying  vested
      options or warrants).  For purposes of beneficial  ownership of our common
      stock,  excludes  shares of common  stock  that may be  acquired  upon the
      conversion  of Series A preferred  stock held by such  person.  There were
      5,349,392  shares of common stock and 862,282 shares of Series A preferred
      stock outstanding on March 1, 2005.

(4)   The  percentage in this column is based upon the total number of shares of
      common stock beneficially owned,  calculated by assuming conversion of all
      of the outstanding Series A preferred shares.

(5)   Includes  holdings  of  (i)  Spencer  Trask  Ventures,  Inc.,  a  Delaware
      corporation and wholly-owned subsidiary of Spencer Trask & Co., a Delaware
      corporation, of which Kevin Kimberlin is the controlling shareholder, (ii)
      Spencer  Trask  Investment  Partners  LLC,  a Delaware  limited  liability
      company,  of which Kevin  Kimberlin is the non-member  manager,  and (iii)
      Spencer Trask Private Equity Fund I, LP, Spencer Trask Private Equity Fund
      II LP, Spencer Trask Private Equity  Accredited Fund III, LLC, and Spencer
      Trask  Illumination  Fund  (collectively,  the  "Funds"),  of which  Kevin
      Kimberlin  is a 100%  owner  of the  entity  that is a 100%  owner  of the
      manager of such Funds.  Includes  2,496,753 shares of common stock subject
      to warrants.


                                       71
<PAGE>

(6)   Excludes 1,831,755 shares of common stock subject to warrants  transferred
      to employees of Spencer Trask and Spencer Trask & Co.

(7)   Includes holdings of (i) Crestview Fund I, LP, (ii) Crestview Fund II, LP,
      (iii)  Crestview  Offshore Fund and (iv) Crestview  Capital  Masters,  LLC
      (collectively, the "Crestview Entities")., Daniel Walsh, Stewart Flink and
      Bob Hoyt share voting and investment power over the shares held by each of
      the Crestview Entities. Includes 409,599 shares of common stock subject to
      warrants.

(8)   Includes 421,204 shares of common stock subject to warrants.

(9)   Includes 427,312 shares of common stock subject to warrants.

(10)  Includes of 50,000  shares of common stock subject to warrants and 844,839
      shares of common stock subject to options.

(11)  Includes 75,000 shares of common stock subject to options.

(12)  Includes  459,722  shares of common  stock  subject to  options  and 8,333
      shares of common stock subject to warrants.  (13) Includes  250,000 shares
      of common stock  subject to warrants.  (14) Includes  1,687,894  shares of
      common  stock  subject to options  and  warrants  issued to our  executive
      officers and directors.

Equity Compensation Plan Information

The table  below  sets forth  certain  information  as of our fiscal  year ended
December 31, 2004  regarding the shares of our common stock  available for grant
or granted under  compensation  plans that (i) were adopted by our  stockholders
and (ii) were not adopted by our stockholders.

<TABLE>
<CAPTION>
                                                                                           Number of securities
                                                                                          remaining available for
                                                                 Weighted-average          future issuance under
                               Number of securities to be       exercise price of        equity compensation plans
                                 issued upon exercise of           outstanding         (excluding securities in the
                                   outstanding options               options            first column of this table)
                             --------------------------------  --------------------   --------------------------------
<S>                                     <C>                         <C>                         <C>
Equity compensation
plans approved by
security holders                          8,167                       $8.55                       250,000

                             --------------------------------                         --------------------------------
Equity compensation
plans not approved
by security holders                     3,640,875                     $1.94                       200,000
                             --------------------------------                         --------------------------------
Total                                   3,649,042                     $1.95                       450,000
                             ================================                         ================================
</TABLE>

Description of Plans Not Adopted by Stockholders

The  aggregate  number of shares of our Common  Stock for which  options  may be
granted under the 1999 Stock Option Plan ("1999  Plan") is 66,667.  Such options
may be issued to key employees,  officers,  directors and consultants.  The 1999
Plan is administered by the Board of Directors. The Board of Directors may grant
only  non-qualified  stock options (options which do not comply with section 422
of the Internal  Revenue Code of 1986, as amended) under the 1999 Plan. The 1999
Plan permits the administrators of the plan, in their sole discretion,  to allow
the cashless exercise of options. As of December 31, 2004, there were options to
purchase  17,000 shares of common stock issued and outstanding and -0- available
for grant pursuant to the 1999 Plan.

On December 28, 1999,  the Board of Directors  granted  Stephen  Lawlor,  then a
director,  an option to  purchase  3,333  shares of common  stock at an exercise
price of $102.042  per share.  Such  option  vested  immediately  and expired on
December 27, 2004.


                                       72
<PAGE>

The  aggregate  number of shares of our Common  Stock for which  options  may be
granted under the 2000 Stock Option Plan ("2000 Plan") is 225,000.  Such options
may be issued to key employees,  officers who are key  employees,  directors and
consultants.  The 2000 Plan is administered by the Board of Directors. The Board
of Directors may grant only  non-qualified  stock options  (options which do not
comply with section 422 of the Internal  Revenue Code of 1986, as amended) under
the 2000 Plan.  The 2000 Plan permits the  administrators  of the plan, in their
sole discretion,  to allow the cashless exercise of options.  As of December 31,
2004,  there were options to purchase  113,717 shares of common stock issued and
outstanding  and -0- shares of common stock  available for grant pursuant to the
2000 Plan.

The  aggregate  number of shares of our Common  Stock for which  options  may be
granted under the 2004 Stock Option Plan ("2004 Plan") is 200,000.  Such options
may be issued to  employees,  including  employees who are also  directors,  and
non-employee  directors.  The  2004  Plan is  administered  by the  Compensation
Committee  of the Board of  Directors.  Unless the 2004 Plan is  approved by our
stockholders,  the  Compensation  Committee may grant only  non-qualified  stock
options  (options  which do not comply with Section 422 of the Internal  Revenue
Code of 1986,  as  amended)  under  the 2004  Plan.  The 2004 Plan  permits  the
administrators  of the plan,  in their sole  discretion,  to allow the  cashless
exercise of options

Footnote 15 to our financial statements, included in the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 2004,  contains additional
information regarding each of the stock option plans described above.

We adopted a compensation  plan (the  "Non-Employee  Director Plan") for outside
(non-employee)  directors  effective  June 4, 2004.  Each outside  director will
receive an option for 60,000  shares.  The  option  will vest in  increments  of
20,000 shares, and at the first,  second and third  anniversaries of the date of
grant. The options expire ten years from the date of grant.

In August 2004, we granted  options to purchase 60,000 shares of common stock to
all  three of our  then  non-employee  directors  pursuant  to the  Non-Employee
Director  Plan,  which  options  have an exercise  price of $1.75 per share.  In
November 2004 each of these  non-employee  directors  resigned and 35,000 shares
vested for each director.

During the quarter  ended  December  31,  2004,  we granted  options to purchase
60,000 shares of common stock to all three  non-employee  directors  pursuant to
the Non-Employee Director Plan which options have an exercise price of $1.67 per
share and a term of 10  years.  The  options  vest  annually  over  three  years
commencing  October 30, 2005. The options will vest immediately upon a Change of
Control (as defined in their option agreements).

In connection  with entering into an Employment  Agreement on March 12, 2004, we
granted to Robert Pons, our President and Chief Executive Officer,  an option to
purchase 1,300,000 shares of common stock, which option has an exercise price of
$1.50 per share and a term of 10 years.  The option  provides for 557,141 shares
to vest immediately and the remaining 742,859 shares to vest in equal amounts as
of the last day of each calendar  quarter  commencing March 31, 2004. The option
will vest  immediately  upon a Change  of  Control  (as  defined  in his  option
agreement)  or in the event Mr.  Pons is  terminated  Other Than for Cause or he
terminates  employment  for Good Reason (as each is defined under the Employment
Agreement).

In connection  with entering into an Employment  Agreement on March 12, 2004, we
granted to Timothy  Wenhold,  the Company's  Executive  Vice President and Chief
Operating  Officer,  an option to purchase 700,000 shares of common stock, which
option  has an  exercise  price of $1.50 per  share and a term of 10 years.  The
option provides for 300,000 shares to vest immediately and the remaining 400,000
shares  to vest in equal  amounts  as of the last day of each  calendar  quarter
commencing  March 31, 2004.  The option will vest  immediately  upon a Change of
Control  (as  defined in his option  agreement)  or in the event Mr.  Wenhold is
terminated Other Than for Cause or he terminates  employment for Good Reason (as
each is defined under the Employment Agreement)


                                       73
<PAGE>

In April 2004, we granted to Len von Vital,  Matthew Stecker and Daniel Wainfan,
our Chief  Financial  Officer,  Chief  Technology  Officer and Vice President of
Marketing,  respectively,  an option for each to purchase  300,000,  150,000 and
100,000 shares of common stock, respectively, which options have exercise prices
of $3.75, $1.50 and $3.25 per share,  respectively,  and a term of 10 years. The
options  vest in  equal  amounts  over  four  years  as of the  last day of each
calendar  quarter   commencing   September  30,  2004.  The  options  will  vest
immediately upon a Change of Control (as defined in their option agreements).

In December  2004,  we granted to Messrs.  Pons and Wenhold  options to purchase
400,000 and 250,000 shares of common stock, respectively,  which options have an
exercise  price of $2.07  per share and a term of 10  years.  The  options  vest
monthly over three years  commencing  December  31, 2004.  The options will vest
immediately upon a Change of Control (as defined in their option agreements).

In December  2004, we granted to Dan Wainfan,  the Company's  Vice  President of
Marketing an option to purchase 100,000 shares of common stock, which option has
an exercise  price of $1.56 per share and a term of 10 years.  The option  vests
quarterly  over three  years  commencing  March 31,  2005.  The option will vest
immediately upon a Change of Control (as defined in his option agreement).

Item 12. Certain Relationships and Related Transactions

On January 7, 2005, we acquired all of the issued and outstanding  capital stock
of KPCCD,  Inc.  ("KPCCD")  pursuant to a Stock Purchase  Agreement by and among
Nimesh Patel, Ashok Patel and Kala Patel  (collectively,  the "Sellers") and us,
dated  December  19, 2004  ("KPCCD  Agreement").  Following  the closing of this
acquisition, KPCCD became our wholly-owned subsidiary.  Pursuant to the terms of
the Agreement, we issued an aggregate of 1,000,000 shares of our common stock to
the Sellers as  consideration  for  acquiring  KPCCD.  As a result,  each of the
Sellers  owns  more than 5% of our  issued  and  outstanding  common  stock,  as
described  in Item 11,  Security  Ownership  of  Certain  Beneficial  Owners and
Management and Related Stock Holder Matters.

In connection  with the closing of the  transactions  contemplated  by the KPCCD
Agreement, on January 7, 2005 KPCCD, the Sellers and Prima Communications,  Inc.
("Prima"),  a company  controlled  by the Sellers,  entered into a Master Vendor
Agreement ("Vendor Agreement").  Under the Vendor Agreement,  Prima will sell to
KPCCD at cost all of KPCCD's requirements of international prepaid calling cards
for up to one year after January 7, 2005. We have  guaranteed the obligations of
KPCCD under the Vendor Agreement.

Additionally,  per the terms of the KPCCD  Agreement,  immediately  prior to the
closing KPCCD  distributed  to Prima all of KPCCD's cash,  accounts  receivable,
inventory  (including  prepaid  calling cards) and accounts  payable.  The KPCCD
Agreement also provides the Sellers with certain registration rights with regard
to our common stock they received in the transaction. In particular, the Sellers
received  "piggyback"  registration  rights for a period of two years  after the
closing, which requires us to use best efforts to include the Sellers' shares in
any  registration  statement  under the Securities Act of 1933 that we otherwise
file with the Securities  and Exchange  Commission to register our common stock,
except for certain registration statements relating to an equity line of credit,
employee benefit plans or certain business combinations.

In connection  with the  transactions  contemplated by the KPCCD  Agreement,  we
entered into  employment  agreements with each of Nimesh Patel to be employed as
President  of KPCCD and Kala Patel to be  employed as Vice  President  of KPCCD,
each dated January 7, 2005  (collectively,  the "KPCCD Employment  Agreements").
Nimesh  Patel and Kala Patel are each  entitled  to annual  compensation  in the
amount of $180,000 during the period in which the Vendor Agreement is in effect,
under the terms of their respective Employment  Agreements.  Upon termination of
the Vendor  Agreement,  the  annual  compensation  under  each KPCCD  Employment
Agreement  will be  reduced  to  $120,000.  Additionally,  under  each of  their
respective Employment Agreements,  Nimesh Patel and Kala Patel are each entitled
to a bonus  equal to 17.5% of  KPCCD's  net  operating  cash  flow in  excess of
$50,000. The KPCCD Employment  Agreements cannot be terminated during the period
in which the Vendor Agreement is in effect either by us with or without cause or
by Nimesh Patel or Kala Patel, voluntarily.


                                       74
<PAGE>

We  entered  into a  consulting  arrangement  with  Spencer  Trask  in May  2003
providing  that  Spencer  Trask would  render  corporate  financial  consulting,
financial  advisory,  and investment  banking services to us ("Trask  Consulting
Agreement").  Under the Trask Consulting Agreement,  we agreed to pay consulting
fees of $7,500 per month commencing July 1, 2003 thru May 31, 2004 and we issued
Spencer Trask 83,333 shares of Common Stock.

As part of the  consulting  arrangement,  Spencer  Trask  acted as a finder  and
assisted  us with  sales of  Units  consisting  of  convertible  debentures  and
warrants  from  May  2003  through  November  2003 in the  aggregate  amount  of
$2,685,000.  We paid Spencer Trask a finders fee  consisting of $349,050 in cash
(including finders fees and non-accountable expenses),  152,223 shares of Common
Stock and a warrant  to  purchase  749,146  shares of Common  Stock at  exercise
prices ranging from $1.50 to $1.90 per share. We also  reimbursed  Spencer Trask
for $20,000 of legal expenses and $5,000 of out-of-pocket expenses.

Under the terms of the  Trask  Consulting  Agreement,  we are  obligated  to pay
Spencer  Trask a fee as a result of the  closing of our  acquisition  of nReach,
based on 5% of the first two-million  dollars of the aggregate  consideration of
such acquisition,  4% of the next two million dollars or portion thereof,  3% of
the  third  $2,000,000  or  portion  thereof,  and  2.5% of the  balance  of the
consideration.  For purposes of  determining  the aggregate  consideration,  the
total value of  liabilities  assumed are  included,  and fees on any  contingent
payment  shall be paid to Spencer  Trask when such  contingent  payment is made.
Spencer  Trask has agreed to accept  shares of our Common  Stock in lieu of cash
with respect to such fees.

Under the terms of the Trask Consulting  Agreement,  in the event that within 18
months  after May 31,  2004 (under  certain  conditions),  we sell,  outside the
ordinary  course of business,  our company or any of our assets,  securities  or
business by means of a merger,  consolidation,  joint venture or exchange offer,
or any  transaction  resulting  in any  change in control of us or our assets or
business,  or we  purchase,  outside the ordinary  course of  business,  another
company  or any of its  assets,  securities  or  business  by means of a merger,
consolidation,  joint venture or exchange  offer, or we receive an investment in
us (other  than an  investment  pursuant to an agented  offering,  which will be
subject to compensation  pursuant to a separate arrangement with Spencer Trask),
we will owe Spencer Trask a cash fee and in some instances, warrants.

Spencer Trask served as the placement agent for our $10 million private offering
of investment  Units  consisting  of shares of our Series A preferred  stock and
warrants to purchase our Common Stock, which transaction closed in February 2004
(the "2004 Private  Placement").  In accordance  with the terms of the Placement
Agency Agreement,  dated January 29, 2004,  Spencer Trask received  compensation
consisting of (i) a cash fee of  $1,002,500,  or 10% of the  aggregate  purchase
price of all of the Units  acquired  for cash,  (ii) a  non-accountable  expense
allowance of  $300,750,  or 3% of the  aggregate  proceeds of all Units sold for
cash in the  transaction,  and (iii)  warrants to purchase a number of shares of
Common  Stock  equal  to  20% of the  shares  of  Common  Stock  underlying  the
securities in the Units sold for cash, constituting in the aggregate warrants to
purchase  1,336,666  shares of Common  Stock at $1.50 per share and  warrants to
purchase 1,336,666 shares of Common Stock at $2.82 per share.

We entered into a consulting  agreement  with Robert Pons,  dated August 4, 2003
("Pons Consulting Agreement"),  whereby Mr. Pons rendered consulting services to
us related to our business activities,  strategic planning,  and market research
and strategic due diligence on proposed  business  opportunities.  The agreement
had an initial term of four months and was  continued  until Mr. Pons became the
Company's Chief Executive  Officer on January 24, 2004. As compensation for such
services,  we agreed to pay him a cash fee of $15,000 per month ($4,000 of which
was deferred until we closed a financing on no less than $2.5  million),  issued
to him a warrant to purchase 41,667 shares of Common Stock, which was changed to
50,000 shares of Common Stock,  and agreed to pay him a transaction fee equal to
1% of (i) any cash or  securities  received  by us from any  equity  transaction
during the term of the agreement and (ii) sales revenue  received and recognized
by us resulting  from his  assistance.  The warrant  expires in August 2008,  is
convertible at the price of $2.04 per share, and became  exercisable in December
2003. The Pons Consulting  Agreement was entered into prior to Mr. Pons becoming
our Interim Chief Executive Officer on August 28, 2003. Pursuant to the terms of
the Pons  Consulting  Agreement and his  employment  agreement with us, Mr. Pons
received  $100,000 from us in 2004 as a transaction  fee in connection  with the
2004 Private Placement transaction. See Agreements with Named Executive Officers
under Item 10 (Executive Compensation) for a description of Mr. Pons' employment
agreement.


                                       75
<PAGE>

In  connection  with the  resignations  of  three  directors  from our  Board of
Directors,  we entered  into Letter  Agreements  with each of  Catherine  Cassel
Talmadge ("Talmadge"), Charles R. Wood ("Wood") and L. Scott Perry ("Perry", and
with Talmadge and Wood, individually, a "Former Director" and collectively,  the
"Former Directors"), each dated October 30, 2004. The Letter Agreement with each
Former Director  provides that 35,000 shares of that certain Option dated August
1, 2004 issued to such Former  Director  pursuant to the  Non-Employee  Director
Option Plan will  automatically  vest and we will indemnify such Former Director
with  respect to his or her service as a director  substantially  in  accordance
with our By-Laws. We also agreed that we will purchase and maintain insurance on
behalf of such  Former  Director  in his or her  capacity  as a director  of our
company,  to the fullest extent provided under the Delaware General  Corporation
Law.

Additionally,  each Former Director agreed to waive any and all meeting fees and
other directors compensation which would otherwise be due with respect to his or
her position as a director or  participation  at Board  meetings  and  Committee
meetings,  and to  release  us and our  subsidiaries,  directors,  officers  and
employees  from all claims such Former  Director  may have  against such persons
except for the indemnification rights described above. We agreed to release each
Former  Director  from any claims we may have to the  fullest  extent  permitted
under Delaware law,  except for liability (i) for breach of the duty of loyalty,
(ii) for acts or  omissions  not in good  faith  or  which  involve  intentional
misconduct  or a  knowing  violation  of law,  (iii)  under  Section  174 of the
Delaware  General  Corporation  Law, or (iv) for any transaction from which such
Former Director derived an improper personal benefit.

In December  2000,  our Board of Directors  authorized the issuance of a line of
credit to Sebastian Cassetta,  our former Chief Executive Officer, for an amount
not to exceed $500,000.  Such amount bore interest at the prime rate and matured
on March 20,  2004.  Pursuant to the terms of the note,  interest for the period
January 2, 2001 to June 30, 2002 had been  accrued and was payable at  maturity.
Commencing July 1, 2002 until maturity,  interest was payable  same-annually  in
arrears on January 1st and July 1st. In October  2003 we agreed to forgive  this
loan over a three year period  pursuant to the  Separation  Agreement we entered
into  with  Mr.  Cassetta  effective  as of  October  21,  2003  (the  "Cassetta
Separation Agreement").

The Cassetta  Separation  Agreement  terminated Mr.  Cassetta's rights under his
employment agreement,  including without limitation,  any rights to compensation
and severance,  in exchange for the consideration  set forth therein,  including
the following: (i) a cash payment for unpaid base salary and accrued vacation of
$18,990.30, payable on or before October 31, 2003, (ii) forgiveness of the loans
described  in the  preceding  paragraph,  and (iii)  extension  of the Put Right
contained in Mr. Cassetta's  Restricted Stock Agreement dated December 28, 1998,
allowing Mr. Cassetta 1 year (i.e.,  until September 2004) instead of 60 days to
either repay a promissory note (the "Cassetta  Note") in the original  principal
amount of $457,496.86 plus accrued interest,  or return 94,707 restricted shares
of our  Common  Stock in full  satisfaction  of the  Cassetta  Note and  accrued
interest thereon. During the quarter ended September 30, 2004, all 94,706 shares
of stock,  which were pledged as collateral for the Cassetta Note, were assigned
and transferred to us and the outstanding  debt and accrued interest of $569,670
in the aggregate was cancelled.

In January 2000, we issued Mr. Mario Rossi,  our former Executive Vice President
and Chief Technology Officer and a Director,  34,347 shares of restricted Common
Stock in exchange  for Mr.  Rossi's  note in the amount of $152,500  (the "Rossi
Note").  The Rossi Note was secured by the Common Stock issued to Mr. Rossi.  In
connection with his retirement,  we entered into a Separation Agreement with Mr.
Rossi effective as of October 21, 2003 (the "Rossi Separation  Agreement").  The
Rossi  Separation  Agreement  terminated Mr. Rossi's rights under his employment
agreement,   including  without  limitation,  any  rights  to  compensation  and
severance,  in exchange for the consideration  set forth therein,  including the
following:  (i) a cash payment for unpaid base salary and vacation of $16,667.00
payable in two equal  installments  on October 31, 2003 and  November  20, 2003,
(ii) a cash payment for unpaid contractual base salary of $112,500.00,  of which
$81,370.69  was offset  against Mr.  Rossi's  obligation  to us of $47,004.00 in
accrued interest on the Rossi Note, and the remaining $31,129.31 was paid in two
equal  installments  on April 21, 2004 and October 21, 2004,  (iii) a warrant to
purchase 41,667 shares of Common Stock at no less than $2.40 per share, and (iv)
pursuant to Mr. Rossi's rights under a Restricted Stock Agreement,  cancellation
of the  principal  amount of the Rossi Note upon  delivery by Mr. Rossi to us of
the 34,347 shares of restricted  stock securing the Rossi Note. In January 2004,
Mr. Rossi assigned and transferred all 34,347  restricted shares of Common Stock
to us in full satisfaction of the outstanding non-recourse debt of $68,000.


                                       76
<PAGE>

Pursuant to the terms of the 2004 Private Placement,  we were required to file a
Registration Statement with the SEC and have it declared effective no later than
120 days after April 30, 2004, or by August 29, 2004. The Registration Statement
was filed on May 13, 2004 but it has not yet been declared  effective by the SEC
and as a result,  we incurred  liquidated  damages in the form of a monthly cash
requirement  equal to 2% of the aggregate  purchase  price of the  offering,  or
approximately  $266,000 per month.  Liquidated damages are due monthly until the
event of default is cured.  We  proposed a  settlement  to limit the  liquidated
damages.  In December 2004, in full settlement of the default,  we established a
pool of 1,000,000  warrants with an exercise  price of $2.50 per share and a two
year term. The pool of warrants was allocated  among each  participant  based on
the investor's proportionate  participation in the 2004 Private Placement. As of
March 1, 2005,  69% of the  representative  warrant  ownership of the  1,000,000
warrants responded to the proposal and of that amount, 4% declined the proposal.
The remaining 31% have not responded to the offer.

Item 13. Exhibits

Exhibit  Description

2.1      Reorganization  and Stock  Purchase  Agreement  dated as of January 29,
         2004 by and among nReach,  SmartServ and the shareholders of nReach set
         forth on Schedule A thereto(12)
2.2      Stock  Purchase  Agreement,  dated as of December 19, 2004 by and among
         Nimesh Patel, Ashok Patel and Kala Patel and SmartServ.(20)
3.1      Amended and Restated  Certificate  of  Incorporation  of SmartServ,  as
         amended(16)
3.2      By-laws of SmartServ, as amended(8)
4.1      Specimen Certificate of SmartServ's Common Stock(8)
4.2      Stock Purchase  Agreement,  dated May 12, 2000,  between  SmartServ and
         TecCapital, Ltd., The Abernathy Group and Conseco Equity Fund(11)
4.3      Convertible Note, dated February 14, 2003, between SmartServ and Global
         Capital Funding Group, LP(2)
4.4      Security  Agreement  dated  February 14, 2003,  between  SmartServ  and
         Global Capital Funding Group, LP(2)
4.5      Amendment No. 1 to the  Convertible  Note between  SmartServ and Global
         Capital Funding Group, LP(15)
4.6      Amendment No. 1 to the Security  Agreement between SmartServ and Global
         Capital Funding Group, LP(15)
4.7      Amendment No. 2 to the  Convertible  Note between  SmartServ and Global
         Capital Funding Group, LP(15)
4.8      Amendment No. 2 to the Security  Agreement between SmartServ and Global
         Capital Funding Group, LP(15)
4.9      Form of Warrant for the Investors in the September  2003 Placement (the
         "September Investors")(13)
4.10     Form  of  Registration  Rights  Agreement  between  SmartServ  and  the
         September Investors(13)
4.11     Form of Warrant for the Investors in the November 2003  Placement  (the
         "November Investors")(13)
4.12     Form  of  Registration  Rights  Agreement  between  SmartServ  and  the
         November Investors(13)
4.13     Form of Warrant for the Investors in the May 2003  Placement  (the "May
         Investors")(14)
4.14     Form of  Registration  Rights  Agreement,  dated May 19, 2003,  between
         SmartServ and the May Investors(14)
4.15     Form of Warrant for the Investors in the June 2003 Placement (the "June
         Investors")(14)
4.16     Form of Registration  Rights  Agreement,  dated June 13, 2003,  between
         SmartServ and the June Investors(14)


                                       77
<PAGE>

4.17     Form of Letter  Agreement  Extending the Maturity  Date of  Convertible
         Debentures  from  November  19,  2003 to  February  19,  2004,  between
         SmartServ and each of the May, June and September Investors(16)
4.18     Form of Letter  Agreement  Extending the Maturity  Date of  Convertible
         Debentures  from  December  19,  2003 to  February  19,  2004,  between
         SmartServ and the November Investors(16)
4.19     Form of Warrant for the  Investors in the 2004 Private  Placement  (the
         "2004 Private Placement Investors"(16)
4.20     Form of Registration Rights Agreement, dated February 13, 2004, between
         SmartServ and the Investors in the 2004 Private Placement(16)
4.21     Specimen  Certificate  of  SmartServ's  Series A Convertible  Preferred
         Stock(16)
4.22     Form of Warrant for Spencer  Trask issued  pursuant to the 2004 Private
         Placement(16)
10.1     Information  Distribution  License  Agreement dated as of July 18, 1994
         between SmartServ and S&P ComStock, Inc.(8)
10.2     New York Stock Exchange,  Inc.  Agreement for Receipt and Use of Market
         Data dated as of August 11,  1994  between  SmartServ  and the New York
         Stock Exchange, Inc.(8)
10.3     The Nasdaq Stock Market,  Inc. Vendor Agreement for Level 1 Service and
         Last Sale Service dated as of September 12, 1994 between  SmartServ and
         The Nasdaq Stock Exchange, Inc. ("Nasdaq")(8)
10.4     Amendment to Vendor Agreement for Level 1 Service and Last Sale Service
         dated as of October 11, 1994 between SmartServ and Nasdaq.(8)
10.5     License   Agreement   between   SmartServ   and  Salomon  Smith  Barney
         (Confidential  treatment  has been  requested  with  respect to certain
         portions of this agreement)(4)
10.6     1996 Stock Option Plan(10)#
10.9     1999 Stock Option Plan(11)#
10.10    2000 Stock Option Plan(6)#
10.11    2002 Stock Option Plan(3)#
10.12    2004 Stock Option Plan+#
10.13    Separation   Agreement  between   SmartServ  and  Sebastian   Cassetta,
         effective as of October 21, 2003(13)#
10.14    Form  of  Securities  Purchase  Agreement  between  SmartServ  and  the
         September Investors(13)
10.15    Form of Convertible Debenture for the September Investors(13)
10.16    Form  of  Securities  Purchase  Agreement  between  SmartServ  and  the
         November Investors(13)
10.17    Form of Convertible Debenture for the November Investors(13)
10.18    Form of  Securities  Purchase  Agreement,  dated May 19, 2003,  between
         SmartServ and the May Investors(14)
10.19    Form of Convertible Debenture for the May Investors(14)
10.20    Form of Securities  Purchase  Agreement,  dated June 13, 2003,  between
         SmartServ and the June Investors(14)
10.21    Form of Convertible Debenture for the June Investors(14)
10.22    Consulting Agreement, dated May 15, 2003, between SmartServ and Spencer
         Trask Ventures, Inc.(14)
10.23    Employee  Separation   Agreement,   dated  February  2,  2004,  between
         SmartServ and Richard Kerschner(17)#
10.24    Severance Agreement,  dated June 20, 2003, between SmartServ and Thomas
         Haller(14)#
10.25    Form of Amendment  Agreement,  dated June 13, 2003, to the May 19, 2003
         Securities   Purchase   Agreement   between   SmartServ   and  the  May
         Investors(14)
10.26    Consulting Agreement between SmartServ and Robert Pons, dated August 4,
         2003, as amended(16)#
10.27    Consulting  Agreement between  SmartServ and Timothy G. Wenhold,  dated
         August 1, 2003(16)#
10.28    Placement Agency Agreement,  dated January 29, 2004,  between SmartServ
         and Spencer Trask in connection with the 2004 Private Placement(16)
10.29    Employment  Agreement dated as of March 12, 2004 between  SmartServ and
         Robert Pons(17)#
10.30    Employment  Agreement dated as of March 12, 2004 between  SmartServ and
         Timothy G. Wenhold(17)#
10.31    Option  Agreement  dated as of March 12,  2004  between  SmartServ  and
         Robert Pons(17)#
10.32    Option  Agreement  dated as of March 12,  2004  between  SmartServ  and
         Timothy G. Wenhold(17)#
10.33    Option  Agreement  dated as of April 9, 2004 between  SmartServ and Len
         Von Vital(19)#
10.34    Settlement  Agreement  dated  as of  February  27,  2004  by and  among
         SmartServ and Michael Silva, Todd Peterson and Brauning Inc.(17)


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<PAGE>

10.35    Amended and Restated  Consulting  Agreement  dated as of March 31, 2004
         between SmartServ and Steven B. Rosner, as amended(17)
10.36    Consulting  Agreement dated as of March 31, 2004 between  SmartServ and
         Brockington Securities, Inc., as amended(17)
10.37    Employment  Agreement  dated as of February 28, 2004 between  SmartServ
         and Michael Stemple(17)#
10.38    Option  Agreement  dated as of April 15,  2004  between  SmartServ  and
         Matthew Stecker(19)#
10.39    Option  Agreement  dated as of April 26,  2004  between  SmartServ  and
         Daniel Wainfan(19)#
10.40    Warrant for Richard Kerschner dated as of February 2, 2004(17)#
10.41    Non-Employee Director Compensation Plan(19)#
10.42    Agreement  dated as of June 1,  2004  between  SmartServ  and M.  Ezzat
         Jalled(18)
10.43    Form of Warrant  related  to  registration  rights of the 2004  Private
         Placement Investors, May Investors, June Investors, September Investors
         and November Investors+
10.44    Form of  Waiver  Letter  related  to  registration  rights  of the 2004
         Private Placement Investors, May Investors,  June Investors,  September
         Investors and November Investors+
10.45    Option  Agreement dated December 20, 2004 between  SmartServ and Robert
         M. Pons+#
10.46    Option Agreement dated December 20, 2004 between  SmartServ and Timothy
         G. Wenhold+#
10.47    Option  Agreement  dated October 27, 2004 between  SmartServ and Daniel
         Wainfan+#
10.48    Private  Label  PCS  Service  Agreement  dated as of  November  5, 2004
         between Sprint Spectrum L.P. and SmartServ+
10.49    Letter  Agreement  dated December 2, 2004 between  Jefferies & Company,
         Inc. and SmartServ+
10.50    Letter  Agreement  dated  October 29,  2004  between L. Scott Perry and
         SmartServ+#
10.51    Letter  Agreement  dated  October 29, 2004 between  Charles R. Wood and
         SmartServ+#
10.52    Letter  Agreement  dated  October 29,  2004  between  Catherine  Cassel
         Talmadge and SmartServ+#
10.53    Consulting  Agreement dated as of September 15, 2004 between  SmartServ
         and Michael Stemple+#
14.1     Code of Ethics+
21.1     List of Subsidiaries(16)
23.1     Consent of Grant Thornton, LLP+
23.2     Consent of Carlin, Charron & Rosen, LLP +

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

+        Filed herewith

(1)      Filed as an exhibit to our Form 8-K, dated November 13, 2003
(2)      Filed as an exhibit to our Form 8-K, dated March 3, 2003
(3)      Filed as an exhibit to our Proxy  Statement for the 2002 Annual Meeting
         of Stockholders
(4)      Filed as an exhibit to Amendment No. 3 to our registration statement on
         Form S-3 (Registration No. 333-100193) on February 11, 2003
(5)      Filed as an exhibit to our  Annual  Report on Form  10-KSB for the year
         ended December 31, 2001
(6)      Filed as an exhibit to our Annual  Report on Form 10-KSB for the fiscal
         year ended June 30, 2000
(7)      Filed as an exhibit to our Annual  Report on Form 10-KSB for the fiscal
         year ended June 30, 1999
(8)      Filed  as an  exhibit  to  our  Registration  Statement  on  Form  SB-2
         (Registration No. 333-114)
(9)      Filed as an exhibit to our Annual  Report on Form 10-KSB for the fiscal
         year ended June 30, 1996
(10)     Filed as an exhibit to our Proxy Statement dated October 10, 1996
(11)     Filed  as an  exhibit  to  our  Registration  Statement  on  Form  SB-2
         (Registration No. 333-43258) on August 7, 2000
(12)     Filed as an exhibit to our Form 8-K, dated March 4, 2004
(13)     Filed as an  exhibit  to our  Quarterly  Report on Form  10-QSB for the
         quarter ended September 30, 2003
(14)     Filed as an  exhibit  to our  Quarterly  Report on Form  10-QSB for the
         quarter ended June 30, 2003
(15)     Filed as an exhibit to our Annual  Report on Form 10-KSB for the fiscal
         year ended December 31, 2002
(16)     Filed as an exhibit to our Annual  Report on Form 10-KSB for the fiscal
         year ended December 31, 2003 on April 13, 2004
(17)     Filed  as an  exhibit  to  our  Registration  Statement  on  Form  SB-2
         (Registration No. 333-115462) on May 13, 2004.


                                       79
<PAGE>

(18)     Filed as an exhibit to Amendment No. 1 to our Registration Statement on
         Form SB-2 (Registration No. 333-115462) on July 27, 2004.
(19)     Filed as an  exhibit  to our  Quarterly  Report on Form  10-QSB for the
         quarter  ended June 30, 2004.  20. Filed as an exhibit to our Form 8-K,
         dated January 13, 2005.
#        Management contract or compensation plan or arrangement  required to be
         noted as provided in Item 13(a) of the Form 10-KSB rules.

Item 14. Principal Accountant Fees and Services

Audit and Other Fees Paid to Independent Registered Public Accounting Firm

The  following  table  presents  fees billed by Ernst & Young  ("E&Y") and Grant
Thornton LLP ("Grant  Thornton")  for  professional  services  rendered to us in
fiscal years ended December 31, 2004 and December 31, 2003.

      Services Rendered             Fiscal 2004   Fiscal 2003

      Audit Fees                      $237,572      $101,910
      Audit-Related Fees              $      0      $      0
      Tax Fees                        $ 11,244      $      0
      All Other Fees                  $      0      $      0

Grant Thornton  served as our  independent  registered  public  accounting  firm
during fiscal year 2004 until December 19, 2004.  Carlin,  Charron & Rosen,  LLP
was engaged as our new  independent  accounting  firm on  December  19, 2004 and
performed  the  audit  for  fiscal  year  2004.  See  Item 8 -  "Changes  in and
Disagreements with Accountants on Accounting and Financial  Disclosure" for more
details.

Audit Fees

The audit fees are billed for  professional  services  rendered for the audit of
our  annual  financial  statements,  the  reviews  of the  financial  statements
included in our  Quarterly  Reports on Form  10-QSB,  and  services  provided in
connection with SEC registration statements. Of the fiscal 2004 amount, $221,072
was  billed by Grant  Thornton  relating  to its audit of our  annual  financial
statements,  review of our  Quarterly  Reports on Form  10-QSB for the  quarters
ended March 31, 2004, June 30, 2004 and September 30, 2004, services provided in
connection  with  SEC  registration   statements  and  meeting  with  our  Audit
Committee, and the remaining amount, $16,500 was billed by E&Y.

Audit-Related Fees

We did not incur any audit-related fees from our independent auditors for fiscal
years 2003 and 2004. Tax Fees

Tax fees for  fiscal  year 2004  consisted  principally  of  preparing  our U.S.
federal,  state and local income tax returns for the tax year ended December 31,
2003.

All Other Fees

We did not incur any fees from our  independent  auditors for all other services
(other than audit services,  audit-related  services and tax services) in fiscal
years 2003 and 2004.


                                       80
<PAGE>

                Pre-Approval Policy for Services by Independent
                       Registered Public Accounting Firm

The Company's Audit Committee has implemented procedures for the pre-approval of
all engagements of the independent  registered  public  accounting firm for both
audit and permissible non-audit services.  Under these procedures,  all services
provided by the independent  registered  public accounting firm must be approved
by the Audit Committee prior to the  commencement of the services.  During 2004,
no audit or non-audit services performed by the Company's  independent  auditors
were conducted and not pre-approved.


                                       81
<PAGE>

                                   Signatures

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


                                        SMARTSERV ONLINE, INC.


                                        By: /s/Robert M. Pons
                                            ------------------------------------
                                            Robert M. Pons
                                            Chief Executive Officer

                                        Date: April 15, 2005

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

<TABLE>
<CAPTION>
         Signature                                 Title                                  Date

<S>                                       <C>                                     <C>
/s/   Robert M. Pons                      Chief Executive Officer,                April 15, 2005
---------------------------------------   (Principal Executive Officer)
      Robert M. Pons


/s/   Len von Vital                       Chief Financial Officer                 April 15, 2005
---------------------------------------   (Principal Financial and
      Len von Vital                       Accounting Officer)



/s/  Paul J. Keeler                       Chairman of the Board                   April 15, 2005
---------------------------------------   of Directors
     Paul J. Keeler


                                          Director                                April __, 2005
---------------------------------------
     John E. Goode


/s/  Paul L. Melchiorre                   Director                                April 15, 2005
---------------------------------------
     Paul L. Melchiorre


/s/   Timothy G. Wenhold                   Chief Operating Officer                April 15, 2005
---------------------------------------    and Director
      Timothy G. Wenhold
</TABLE>


                                       82