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

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

[ X ]    ANNUAL  REPORT  PURSUANT TO SECTION 13 OR 15(D) OF THE  SECURITIES
         EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1998

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

                         Commission file number 0-28008

                             SMARTSERV ONLINE, INC.
                            ------------------------
        (Exact name of small business issuer as specified in its charter)

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

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

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

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

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

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

Indicate by check mark whether the issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during
the preceding 12 months (or for such shorter period that the issuer was required
to file such reports),  and (2) has been subject to such filing requirements for
the past 90 days.
Yes          No  X
     ---        ---
Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-B is not contained  herein,  and will not be contained,  to the
best of  issuer's  knowledge,  in  definitive  proxy or  information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. 
                  ---

Issuer's revenues for its most recent fiscal year.   $873,476
                                                     ---------

The  aggregate  market value of the voting stock (based on the closing  price of
such stock on OTC  Bulletin  Board) held by  non-affiliates  of the issuer as of
January 14, 1999, was  approximately  $3,470,900.  All officers and directors of
the  issuer  have  been  deemed,   solely  for  the  purpose  of  the  foregoing
calculation, to be "affiliates" of the issuer.

There were 1,199,787 shares of Common Stock outstanding at January 14, 1999.

<PAGE>


                                TABLE OF CONTENTS



                                     Part I
Item                                                                      Page
----                                                                      ----

1.    Description of Business                                               3 
2.    Description of Property                                               8 
3.    Legal Proceedings                                                     8 
4.    Submission of Matters to a Vote of Security Holders                   9 
                                                                            

                                     Part II

5.     Market for Common Equity and Related Stockholder Matters            10
6.     Management's Discussion and Analysis or Plan of Operation           13
7.     Financial Statements                                                19
8.     Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure                                     39


                                    Part III

9.      Directors, Executive Officers, Promoters and Control Persons;
              Compliance with Section 16(a) of the Exchange Act            40
10.     Executive Compensation                                             42
11.     Security Ownership of Certain Beneficial Owners and Management     44
12.     Certain Relationships and Related Transactions                     46
13.     Exhibits and Reports on Form 8-K                                   47

                                       2
<PAGE>


                                     Part I


Item 1.    Description of Business
------

The Company
SmartServ Online, Inc.  ("SmartServ" or the "Company") was organized in 1993 and
provides online  information and transactional  services to subscribers  through
wireless personal  communications  systems ("PCS") devices,  personal  computers
("PCs"),  personal digital assistants ("PDAs"), the Internet,  interactive voice
response  systems,   alpha  numeric  paging  devices  and  screen-based  phones.
Effective  June  1996,  the  Company  exited  the  development  stage  with  the
completion of its core application software and communications  architecture and
has commenced the implementation of its marketing strategies.


Services
The Company is a single source information provider offering a range of services
designed to meet the varied  needs of clients of  strategic  marketing  partners
("Strategic   Marketing   Partners").   These   services   include:   investment
newsletters,  real-time stock quotes,  business and financial news, research and
analysis  reports,  stock trading  reports by corporate  insiders,  online FedEx
package tracking, private labeled electronic mail, sports information,  national
weather reports,  local news, and other business and entertainment  information.
The Company's services are inherently  flexible,  allowing  Strategic  Marketing
Partners the opportunity to customize  service packages for their specific needs
and providing end users with the ability to manage their  information  according
to  their   preferences.   The  Company  provides  such  services   pursuant  to
non-exclusive  agreements with providers of online information and transactional
services such as: The Weather  Channel,  The Options Price Reporting  Authority,
S&P ComStock,  Inc.,  Comtex,  Inc., The Nasdaq Stock Market,  Inc., and The New
York  Stock  Exchange,  Inc.  The  Company  is  not  dependent  on  one or a few
information providers as such redistribution  agreements are generally available
on a non-exclusive basis.

The Company has invested in the development of proprietary applications software
and  communications  architecture in an attempt to make its services easy to use
and visually appealing and to attempt to take advantage of the different virtues
and capabilities of PCs, wireless PCS devices,  PDAs, the Internet,  interactive
voice  response  systems,  alpha numeric  pagers and  screen-based  phones.  The
Company believes that its application software and communications  architecture,
which  recognize  multiple  devices,  format the  information for the particular
device and present the information in a user-friendly manner, will be attractive
in the marketplace.  Product  development efforts are focused on enhancements to
existing  services,  format  modifications  for  emerging  devices,  content and
features  improvements  and  customizations  based on market  requirements.  The
Company  intends to continue to invest in this area and believes its application
software and  communications  architecture  represent  an important  competitive
advantage.

Subscribers  can connect to the Company's  services  using standard phone lines,
the Internet or through a variety of wireless PCS devices.  The Company believes
that its application software and communications  architecture,  which recognize
multiple  devices (e.g.,  PCs,  wireless PCS devices,  PDAs,  interactive  voice
response  systems,  alpha numeric pagers and  screen-based  phones),  format the
information  for  the  particular  device  and  present  the  information  in  a
user-friendly manner, make the Company's services "device  independent".  As new
technologies  emerge,  the  Company  anticipates  that  the  flexibility  of its
application  software and communication  architecture will allow its services to
be accessed through these newly developed devices.

                                      -3-
<PAGE>

Marketing Strategy
Management   believes  that  the  Company's  primary  source  of  revenues  will
ultimately  be  derived  from end users that  purchase  the  Company's  services
through Strategic Marketing Partners with mass distribution capabilities.  Thus,
Strategic  Marketing  Partners  will  brand the  Company's  "bundled"  services,
acquired from the Company's "information platform" with their own private label,
promote the packaged  offering,  and then  distribute the Company's  information
package to their clients on wireless PCS devices,  PCs, PDAs,  interactive voice
response systems,  alpha-numeric  pagers and screen-based  phones. The Company's
strategy  of forming  alliances  with  Strategic  Marketing  Partners  that have
established  relationships  with its potential  customers enables the Company to
maximize its market reach at minimal operating costs. The Company's  application
software  and  communications  architecture  enables the  customization  of each
information package offered to each Strategic Marketing Partner,  and in turn to
their end  users.  The use of this model has  resulted  in the  distribution  of
SmartServ  information  products by Data  Transmission  Network  Corporation  as
"DTNIQ", "TradeNet", and "BrokerNet";  Sprint/United Management Corp. as "Sprint
Information Services";  CIDCO Inc. as "CIDCO Information  Services";  and ALLTEL
Communications Company as "ALLTEL Information  Services".  During the year ended
June 30, 1998, the Company  discontinued  its efforts to market  products to the
retail market via its own direct marketing programs.

The Company  continues to develop  strategic  marketing  relationships  with key
partners that provide access to large numbers of potential  subscribers  for its
monthly  services.  As an early entrant in the dynamic market of distribution of
financial information and trading services via wireless PCS devices, the Company
is developing  strategic  marketing  relationships  with the wireless  equipment
manufacturers,  carriers and potential corporate  partners.  Management believes
the wireless area has  tremendous  potential for  distribution  of the Company's
information  products and as a source of revenues from "fee based"  transactions
such as stock  trading.  The Company has  partnered  with and  continues to seek
relationships with regional telephone operating companies,  such as ALLTEL, long
distance carriers, such as Sprint,  telephone equipment  manufacturers,  such as
Nortel,  and others who  distribute  screen  telephone  equipment,  market local
screen telephone services or otherwise benefit from the increased  acceptance of
these devices in the marketplace.  To these partners, the Company's services are
perceived  as a means  of  increasing  interest  in and  sales  of  screen-based
telephones and CLASS services,  and there is thus a strong  incentive to promote
the Company's services.

The Company is also working with businesses that desire to provide new services,
such as those  provided by the Company,  to an existing  base of clients.  As an
example,  the Company  entered into a contract  with Data  Transmission  Network
Corporation ("DTN") whereby the Company licensed to DTN the rights to market and
service three of its Internet products.  DTN, which has over 150,000 subscribers
for its satellite-based  information services,  lacked an Internet-based product
and delivery system. SmartServ Online filled that need. The Company continues to
seek  relationships  with other brokerage firms and  disseminators  of financial
information,  whose  clients can benefit from the  efficiency,  convenience  and
timeliness of the information services provided by the Company. The high quality
of the Company's services and systems'  architecture  continues to draw interest
from potential partners.

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

                                      -4-
<PAGE>


Marketing Vehicles
The Company intends to continue to work with its current and potential Strategic
Marketing  Partners  to  enhance  the  efficiency  and  effectiveness  of  their
marketing and distribution efforts.  Through the use of this model, the customer
is  a  customer  of  both  SmartServ  and  its  Strategic   Marketing   Partner.
Accordingly,  both parties have an economic  incentive to provide the  Company's
information services to the Strategic Marketing Partners' customers.  While each
Strategic  Marketing Partner approaches the market differently  depending on its
business strategy, consumer mix and competitive situation, they generally test a
variety of marketing and selling  options to determine  the most cost  effective
technique to obtain the maximum number of customers in the least amount of time.
The Company offers technical and marketing  support to enhance the effectiveness
of a potential Strategic Marketing Partner's marketing efforts. For example, the
design and preparation of the specific  product  offering,  collateral and other
promotional  materials will be coordinated with a potential  Strategic Marketing
Partner to reflect the best overall positioning of the product to the customer.

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


Competition
The  market  for  online  information  and  transactional   services  is  highly
competitive and subject to rapid innovation and technological  change,  shifting
consumer preferences and frequent new service introductions. While the Company's
application software and communications  architecture makes the services "device
independent",  the Company  faces  increasing  competition  from other  emerging
services  delivered  through  PCs,  such as  developing  transactional  services
offered  by  Checkfree   Corporation,   Microsoft   Corp.,   Data   Broadcasting
Corporation,  PC Quote,  Inc.,  Intuit Inc.,  Electronic  Data Systems Corp. and
other software and online companies. Although in its infancy, the wireless arena
too has its  competitors,  such as  DataLink  Systems  Corporation,  Intelligent
Information, Inc. and AirMedia. The Company expects competition to increase from
existing   competitors   and   from   new   competitors,    possibly   including
telecommunications  companies.  Most of the Company's  competitors and potential
competitors  have  substantially  greater  financial,  marketing  and  technical
resources than the Company. The Company believes that potential new competitors,
including large  multimedia and  information  system  companies,  are increasing
their focus on transaction  processing.  Increased competition in the market for
the Company's  services  could  materially  and  adversely  affect the Company's
results of operations through price reductions and loss of market share.

The information content provided through the Company's  application software and
communication   architecture  is  generally   purchased  through   non-exclusive
distribution  agreements.  While the Company is not dependent on any one content
provider,  existing and potential  competitors  may enter into  agreements  with
these and other such providers and thereby acquire the ability to deliver online
information and transactional  services  substantially similar to those provided
by the Company.

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

                                      -5-

<PAGE>


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

SmartServ's   user-friendly   front-end  application  software  is  designed  to
accommodate  instant  access to  information  and to be  flexible to the varying
needs of multiple users. Subscribers are empowered to create their own groupings
of information they routinely  request and are able to navigate  directly to the
information  they seek with the software's  easy to read menu systems and search
capabilities.  SmartServ's  application  software  employs common user interface
techniques, such as icons, pull-down menus, spreadsheet formats, tree structures
and the use of  "key"  words,  to  make  its  product  intuitive  to its  users.
SmartServ's software is notable for its visually appealing formats, which it has
standardized  across  different types of  information.  Subscribers are provided
with several display  options,  including text and graphics,  according to their
preferences.

During the fiscal years ended June 30, 1998, 1997 and 1996, the Company incurred
costs of $923,082,  $1,150,224 and  $1,037,941,  respectively,  for research and
project development activities.


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

The Company  seeks to protect the source code of its  software as a trade secret
and as an unpublished copyrighted work. The Company has obtained an allowance of
its U.S. trademark  application for the mark "SmartServ Online" for the computer
software  used  with  its  platform  services  and  expects  a  U.S.   trademark
registration  for the mark to be granted in the near future.  This  registration
will  have an  initial  term  of 10  years  and be  renewable  indefinitely  for
successive  10-year  terms upon filing proof of continued  use of the mark.  The
Company  has also filed an  intent-to-use  application  to  register  "SmartServ
Online" as a service  mark for its  platform  services  and as a  trademark  for
related computer  hardware.  The Company  believes that its software,  services,
service mark and other  proprietary  rights do not  infringe on the  proprietary
rights of third  parties.  From time to time,  however,  the Company may receive
communications from third parties asserting that features or contents of certain
of its services may infringe upon copyrights or other rights of such parties. To
date, the Company has received one such  communication,  dated May 23, 1995, but
believes  that the  assertion  contained  therein  is without  merit.  Since the
receipt of such  letter,  the Company has not received  further  correspondence.
There can be no assurance that other third parties will not assert  infringement
claims against the Company with respect to current features, content or services
or that any such  assertion  may not require  the Company to enter into  royalty
arrangements or result in litigation.


                                      -6-

<PAGE>


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

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


Employees
The  Company  employs  21  people,  18 of whom are  full-time  employees.  It is
anticipated  that a minimum  of 3 to 6 people  will be added  during  the period
ending June 30, 1999, in response to the computer  programming  requirements  of
Strategic  Marketing  Partners'  product  offerings  and for  customer  support.
Additionally, management anticipates that 2 to 3 people will join the Company in
sales and marketing  positions  during the period ending June 30, 1999.  None of
the Company's employees are covered by a collective bargaining agreement and the
Company believes that its relationship with its employees is satisfactory.


                                      -7-

<PAGE>


Item 2.    Description of Property
------

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


Item 3.    Legal Proceedings
------

On or about  December 15, 1997,  Steven T.  Francesco,  then President and Chief
Operating  Officer  of the  Company,  filed a  complaint  against  the  Company,
Sebastian E. Cassetta (its Chairman of the Board and Chief  Executive  Officer),
Bruno Guazzoni,  Claudio Guazzoni,  Zanett Securities,  Inc. and Zanett Capital,
Inc.  in the  Supreme  Court of the  State of New York,  County of New York.  On
February 6, 1998 the Board of Directors  terminated Mr.  Francesco's  employment
with the Company as its President and Chief Operating  Officer.  In a motion for
an amended complaint Mr. Francesco alleged, among other things, that the Company
breached the terms of its employment  agreement  with him. The proposed  amended
complaint seeks damages against the Company and certain of its directors for his
wrongful  termination in an amount of at least $50 million and damages for fraud
in an unspecified amount.

By an agreement dated November 11, 1998 ("Agreement"),  Mr. Francesco has agreed
to settle  this  action  and to  resolve  all of his  claims  against  the above
referenced  parties. In consideration  thereof,  Mr. Francesco is due, under the
Agreement,  to receive  $305,000,  payable in two  installments:  $200,000 on or
before  January  31,  1999  and  $105,000  on  or  before   February  28,  1999.
Additionally,  Mr. Francesco has rceived, under the Agreement, 125,000 shares of
SmartServ  Common Stock and warrants to purchase  16,667  shares of Common Stock
exercisable  at $5.00 per share until November 11, 2001.  However,  in the event
that the Company  fails to make the above  referenced  cash payments in a timely
fashion,  Mr.  Francesco  would have the right to pursue this action against the
above referenced parties,  except that his sole remedy against the Company would
be to  enter  judgment  against  it in the  amount  of  $305,000,  less any cash
received pursuant to the Agreement.

By letter dated April 10, 1998,  Michael  Fishman,  then Vice President of Sales
for the Company,  resigned his position. On or about April 24, 1998, Mr. Fishman
filed a  complaint  in the United  States  District  Court for the  District  of
Connecticut against the Company, Sebastian E. Cassetta, Claudio Guazzoni, Zanett
Securities  Co.,  Zanett  Capital Corp. and Zanett  Lombardier  Ltd. On or about
August 20, 1998, Mr. Fishman served an amended complaint,  alleging, among other
things,  that (i) he relied on false statements that the Company allegedly made,
in filings  with the  Securities  and  Exchange  Commission  and  otherwise,  in
accepting  a  position  with the  Company  and (ii) the  Company  constructively
discharged him by breaching the terms of its employment  agreement with him. The
amended  complaint  seeks to assert  claims  for (i) fraud and other  violations
under the federal securities laws, (ii) breach of various terms of the Company's
employment agreement with Mr. Fishman,  (iii) breach of the implied duty of good
faith  and  fair  dealing,  (iv)  fraudulent  misrepresentation,  (v)  negligent
misrepresentation,  (vi) intentional  misrepresentation and (vii) failure to pay
wages. The amended complaint seeks damages against the Company in an unspecified
amount.  The Company expects to move to dismiss the amended  complaint,  and the
Court has issued an order setting a schedule for the briefing of that motion. No
discovery in this action has yet been noticed or taken.  Although the Company is
vigorously  defending  this action,  there can be no  assurance  that it will be
successful.

On or about May 11, 1998, Ronald G. Weiner filed a complaint against the Company
and Mr.  Francesco in the Supreme Court of the State of New York,  County of New
York.  The complaint  alleges,  among other things,  that in May 1993, by letter
from Mr.  Francesco,  Mr.  Weiner was offered a 10% equity  stake in Smart Phone
Services,  Inc.  ("SPS"),  a company of which Mr.  Francesco  allegedly  was the
President and a majority shareholder, in exchange for his active involvement in,
among other things,  raising capital and managing the financial  aspects of SPS.
The complaint alleges that, in November 1993, Mr. Francesco sent a letter to Mr.


                                      -8-
<PAGE>

Weiner  in which he (i)  represented  that SPS had  failed  to  attract a single
investor and (ii) withdrew his offer to Mr.  Weiner of a 10% equity  position in
SPS. The  complaint  further  alleges  that,  in  conversations  with Mr. Weiner
beginning in November 1993, Mr.  Francesco  represented  that he was ceasing all
efforts to capitalize SPS. The complaint alleges,  among other things,  that Mr.
Francesco and SPS breached their agreement with Mr. Weiner by withdrawing  their
offer to him of a 10% equity stake in SPS, and that,  at the time Mr.  Francesco
represented  that he was ceasing  efforts to  capitalize  SPS,  he had  actually
formed the Company and was  actively  seeking  investors  for it. The  complaint
further  alleges  that  the  Company  is a  successor  entity  to SPS and  that,
therefore, the Company is liable for SPS' and Mr. Francesco's alleged conduct in
derogation of their alleged  agreement  with Mr.  Weiner.  The complaint  seeks,
among other things, (i) a declaratory judgment declaring Mr. Weiner a 10% equity
shareholder of the Company,  (ii) a constructive trust in Mr. Weiner's favor for
10% of the Company's equity shares and (iii)  restitution  against Mr. Francesco
and the Company  for unjust  enrichment.  On his unjust  enrichment  claim,  Mr.
Weiner seeks unspecified damages that he alleges to be at least $250,000. In its
answer to the complaint,  the Company has denied the material allegations of the
complaint,  asserted affirmative defenses and also asserted cross-claims against
Mr.  Francesco  seeking  indemnification  from,  or  contribution  towards,  any
judgment  that Mr. Weiner may obtain  against the Company.  No discovery in this
action has yet been taken.  Although the Company is  vigorously  defending  this
action and vigorously  prosecuting its  cross-claims,  there can be no assurance
that it will be successful.  In accordance  with an agreement dated November 11,
1998, the Company has filed a motion to  discontinue  the  cross-claims  that it
asserted against Mr. Francesco.

By memorandum dated April 10, 1998,  Jonathan  Paschkes,  then Vice President of
Marketing for the Company, resigned his position. On or about November 17, 1998,
Mr. Paschkes filed a complaint  against the Company and Sebastian E. Cassetta in
the United States District Court, District of Connecticut. In the complaint, Mr.
Paschkes  alleges (i)  fraudulent  inducement to him to accept his position with
the Company;  (ii) breach of various terms of the Company's  employment contract
with him;  and (iii)  failure by the  Company to pay him wages and  bonuses  and
issue options to him pursuant to the terms of his  employment  contract.  On his
fraudulent  inducement  and  breach  of  contract  claims,  Mr.  Paschkes  seeks
unspecified  damages that he alleges to be at least  $2,000,000 for each. On his
failure to pay wages claim, Mr. Paschkes seeks  unspecified  actual and punitive
damages that he alleges to be at least $200,000. No discovery in this action has
yet been taken.  Although the Company is vigorously defending this action, there
can be no assurance that it will be successful.

While the Company  intends to vigorously  defend these actions,  the unfavorable
outcome of any such action could have a material adverse effect on the Company's
financial condition, results of operations, and cash flows.


Item 4.    Submission of Matters to a Vote of Security Holders
------
None.


                                      -9-

<PAGE>


                                     Part II


Item 5.    Market for Common Equity and Related Stockholder Matters
------


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

On May 20, 1998, the Company received  notification from The Nasdaq Stock Market
that the Company no longer met the net tangible asset/market  capitalization/net
income  requirements  for continued  listing of the Company's  securities on The
Nasdaq Stock Market.  Accordingly, at the close of business on May 20, 1998, the
Company's  Common Stock and Public  Warrants were delisted from The Nasdaq Stock
Market.  Currently,  the Company's securities trade on the OTC Bulletin Board as
SSOL and SSOLW.

On October 15, 1998, the Company's  stockholders  approved a one-for-six reverse
stock split ("Reverse Stock Split") which became effective on October 26, 1998.

The following  table sets forth the high and low prices for the Common Stock and
Public Warrants during the periods  indicated as reported by the NASDAQ SmallCap
Market and the OTC Bulletin  Board,  as applicable.  Such amounts (and all other
share and price information contained in this Form 10-KSB) have been adjusted to
reflect the above mentioned Reverse Stock Split.

                                         Common Stock             Warrants
                                         ------------             --------
                                     High         Low         High        Low
                                     ----         ---         ----        ---
Year Ended June 30, 1998            
------------------------            

First Quarter                     $  18.750     $ 6.750     $ 4.500      $ .750
Second Quarter                       21.000       4.128       5.250        .750
Third Quarter                        19.125       3.750       6.563        .938
Fourth Quarter                       22.500       3.000       9.188       1.688


Year Ended June 30, 1997
------------------------

First Quarter                     $  45.000     $ 28.500    $ 23.250   $ 15.000
Second Quarter                       38.250       25.500      19.500      7.500
Third Quarter                        32.250       26.250      12.375      7.875
Fourth Quarter                       27.750       11.250       9.000      3.187


As of  December  1, 1998,  the  Company  had  1,183,317  shares of Common  Stock
outstanding  held by 70 record  holders.  The Company  estimates that its Common
Stock is held by approximately  1,800 beneficial  holders.  As of such date, the
Company had 337,500 Public Warrants outstanding held by 28 record holders.

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

                                      -10-

<PAGE>


On July 14, 1995, the Company sold 4,166 shares of Common Stock for an aggregate
purchase  price of $100,000 to John E.  Herzog and,  for nominal  consideration,
issued a warrant to purchase an  additional  4,166  shares of Common Stock at an
exercise price of $24.00 per share to Mr. Herzog. No sales commissions were paid
in connection with such offering.  The securities were issued in reliance on the
exemption from registration provided by Section 4 (2) of the Securities Act.

On August  24,  1995,  the  Company  sold  2,083  shares of Common  Stock for an
aggregate  purchase  price of $50,000  to each of  Emanuel E.  Geduld and Andrew
DaPonte  and,  for  nominal  consideration,  issued a  warrant  to  purchase  an
additional 2,083 shares of Common Stock at an exercise price of $24.00 per share
to Mr.  Geduld and  warrants  to  purchase  3,750  shares of Common  Stock at an
exercise  price of $24.00  per share to Mr.  DaPonte.  On August 24,  1995,  the
Company also sold an aggregate of 1,250 shares of Common Stock to Anchung  Sammy
Chung and Fong-Chi  Alison Tsao for an aggregate  purchase price of $30,000 and,
for nominal  consideration,  issued to them a warrant to purchase an  additional
1,250 shares of Common Stock at an exercise price of $24.00 per share.  No sales
commissions  were paid in connection  with such  offerings.  The securities were
issued in reliance on the exemption from registration  provided by Section 4 (2)
of the Securities Act.

Between  October  1995  and  December  1995,  the  Company  sold 40  Units to 25
investors who  subscribed to purchase  such Units  pursuant to the  Confidential
Offering  Memorandum  dated  September  22,  1995,  as amended by a letter dated
October 12,  1995,  at a price of $25,000 per Unit,  each Unit  consisting  of a
$25,000  promissory note and a warrant to purchase 833 shares of Common Stock at
an exercise price of $24.00 per share.  Rickel and Associates,  Inc.  ("Rickel")
acted as placement agent for the Company for such private placement and received
a commission of $100,000 for its services and a non-refundable,  non-accountable
expense  allowance  of $30,000.  The  securities  were issued in reliance on the
exemption from registration provided by Section 4 (2) of the Securities Act.

On February 1, 1996, the Company issued a $200,000 promissory note and agreed to
issue  warrants  to  purchase  16,667  shares of Common  Stock to Henry Snow for
$200,000.  The warrants were issued in March 1996 and have an exercise  price of
$24.00 per share.  Rickel  received a commission  of $26,000 for its services in
connection with such transaction.  The securities were issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act.

On  February  28,  1996,  the Company  issued  2,791  shares of Common  Stock to
InterBank  Communications,  Inc. in accordance with the anti-dilution provisions
of an  agreement  with it and 19,425  shares of Common  Stock to The  Strategica
Group in  accordance  with the terms of a  Standby  Revolving  Credit  Agreement
Proposal.  No sales commissions were paid in connection with such  transactions.
The  securities  were  issued in  reliance on the  exemption  from  registration
provided by Section 4 (2) of the Securities Act.

In March 1996,  the Company  issued 71,289 shares of Common Stock to six holders
of convertible  subordinated notes in redemption of $612,500 principal amount of
such notes and  accrued  interest  thereon.  No sales  commissions  were paid in
connection  with such  transaction.  The stock was issued in  reliance  upon the
exemption from registration provided by Section 3 (a) (9) of the Securities Act.

During  April and May 1997,  the  Company  agreed to issue  warrants to purchase
33,333  shares  of  Common  Stock to  Rickel,  the  Company's  underwriter,  for
investment  advisory  services.  Such warrants are exercisable at prices ranging
from $12 to $24 per share and expire in April and May 2002.

On May 29, 1997, the Company issued a $550,000  promissory  note and warrants to
purchase 33,333 shares of Common Stock to Zanett  Lombardier,  Ltd.  ("ZLL") for
$550,000. On each of July 21, 1997 and September 16, 1997, the Company issued an
additional  $111,111  promissory  note and warrants to purchase  and  additional
6,733 shares of Common Stock to ZLL for  $111,111.  The warrants  have  exercise
prices of $6.75 and $8.25 per share.  Zanett Securities  Corporation  ("Zanett")
received fees of $78,576 for its services in connection with such  transactions.
Additionally,  Zanett  received  warrants  to purchase  11,700  shares of Common
Stock.  Such warrants have exercise  prices of $6.75 and $8.25.  The  promissory
notes and warrants were issued in reliance upon the exemption from  registration
provided by Section 4 (2) of the Securities Act.

On September 16, 1997, the Company issued  warrants to purchase 50,083 shares of
Common Stock to ZLL as a default penalty under the ZLL notes.  The warrants have
an exercise  price of 50% of the closing price of the Company's  Common Stock on
the  exercise  date.  No sales  commissions  were paid in  connection  with such
transactions.  The  warrants  were issued in reliance  upon the  exemption  from
registration provided by Section 4 (2) of the Securities Act.

                                      -11-
<PAGE>

On September 29, 1997,  the Company  issued 4,000 prepaid  common stock purchase
warrants ("Prepaid  Warrants") to 12 investors for $4,000,000.  Included in such
amount  were  $772,222  of the  promissory  notes  issued to ZLL and  $63,837 of
accrued   interest   thereon  which  were  cancelled  in  connection  with  this
transaction.  The Prepaid  Warrants are  convertible  into a number of shares of
Common  Stock of the Company that is equal to $1,000  divided by the  applicable
exercise  price.  The exercise price is 70% of the average  closing bid price of
the Common  Stock for the 10 trading days ending on the day prior to exercise of
such warrants,  reduced by 1% for each 60 day period the Prepaid Warrants remain
unexercised, but in no event above $8.40 per share. Zanett received a commission
of $400,000,  an unaccountable  expense  allowance of $120,000,  and warrants to
purchase  100,000  shares of Common Stock at $6.75 per share in connection  with
such transaction.  The Prepaid Warrants, and the warrants issued to Zanett, were
issued in reliance upon the exemption  from  registration  provided by Section 4
(2) of the Securities Act.

On September 29, 1997, the Company issued 83,333 warrants to Bruno Guazzoni and,
subject to stockholder  approval (which was  subsequently  obtained),  agreed to
issue to him warrants to purchase an additional  509,259 shares of Common Stock.
These  additional  warrants  were issued in April  1998.  The  warrants  have an
exercise price of $6.75 per share. No sales  commissions were paid in connection
with such  transaction.  The warrants were issued in reliance upon the exemption
from registration provided by Section 4 (2) of the Securities Act.

Between  January 13, 1998 and November  30,  1998,  an aggregate of 1696 Prepaid
Warrants were  converted  into an aggregate of 392,483 shares of Common Stock of
the Company. No sales commissions were paid in connection with such conversions.
The shares were issued in reliance upon the exemption from registration provided
by Section 3 (a) (9) of the Securities Act.

On January 2, 1998 and March 3, 1998,  the Company  issued  warrants to purchase
16,666 and 20,833  shares of Common  Stock,  respectively,  in  connection  with
investment  advisory  contracts.  The warrants have exercise prices of $3.75 and
$15.75 to $19.50, respectively. No commissions were paid in connection with such
transactions.  The  warrants  were issued in reliance  upon the  exemption  from
registration provided by Section 4 (2) of the Securities Act.

On August 31, 1998,  the Company issued 32,953 shares of Common Stock to ZLL and
17,046  shares of Common  Stock to Bruno  Guazzoni  in  consideration  for their
agreeing to certain restrictions on the exercise of the Prepaid Warrants and the
resale  of  the  shares  of  Common  Stock  issuable  on  exercise  thereof.  No
commissions  were paid in  connection  with such  transaction.  The shares  were
issued in reliance upon the exemption  from  registration  provided by Section 4
(2) of the Securities Act.

On September 8, 1998,  the Company  agreed to issue 3,000 common stock  purchase
warrants to DTN for prepayment of certain guaranteed payments in accordance with
the Software License and Service  Agreement  between the parties dated April 23,
1998. Such warrants are exercisable at $3.00 per share of Common Stock.

On November 17, 1998,  the Company  issued 125,000 shares of Common Stock
and warrants to purchase 16,667 shares of Common Stock, exercisable at $5.00 per
share until November 11, 2001, to Mr. Steven Francesco,  a former officer of the
Company,  as partial  consideration for the settlement of his claims against the
Company and certain of its officers and directors.

Between  November 20, 1998 and December 3, 1998, the Company issued  warrants to
purchase  833,333  shares of Common Stock to investors  in  connection  with the
issuance of $500,000 of convertible  notes.  Spencer Trask  Securities Inc., the
placement agent,  received a commission of $50,000 and an unaccountable  expense
allowance of $15,000 in  connection  with such  transaction.  Additionally,  the
Company  issued  warrants to purchase  166,667 shares of Common Stock to Spencer
Trask Securities, Inc. exercisable at $.72 per share. These warrants were issued
in reliance upon the exemption  from  registration  provided by Section 4 (2) of
the Securities Act.

On January 14, 1999, the Company issued 10,000 shares of Common Stock to Arnhold
& S.  Bleichroeder,  Inc., an investor in the  Company's  Prepaid  Warrants,  in
consideration  of an agreement  to waive  certain  events of default  under such
Prepaid Warrants.  No commissions were paid in connection with such transaction.
These  shares were  issued in  reliance  upon the  exemption  from  registration
provided by Section 4 (2) of the Securities Act. 

                                      -12-
<PAGE>


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


Plan of Operation

The Company  provides online  information  and  transactional  services  through
wireless PCS devices,  PCs,  PDAs,  the  Internet,  interactive  voice  response
systems,  alpha-numeric paging devices and screen-based telephones to clients of
potential Strategic Marketing Partners.  Effective June 1996, the Company exited
from the development stage with the completion of its core application  software
and  communications  architecture  and has commenced the  implementation  of its
marketing strategies.

The Company's plan of operation  includes  programs for marketing and developing
strategic marketing relationships with key partners that provide access to large
numbers  of  potential  subscribers  for its  monthly  services.  The  Company's
strategy  of forming  alliances  with  Strategic  Marketing  Partners  that have
established  relationships  with its potential  customers enables the Company to
maximize its market reach at minimal  operating  costs.  The  flexibility of the
Company's  application  software  and  communications  architecture  enables the
customization  of each information  package offered to each Strategic  Marketing
Partner,  and in turn to their end users.  The use of this model has resulted in
the distribution of SmartServ  information products by Data Transmission Network
Corporation as "DTNIQ",  "TradeNet" and  "BrokerNet",  Sprint/United  Management
Corp.  as  "Sprint  Information  Services",  CIDCO  Inc.  as "CIDCO  Information
Services" and ALLTEL Communications Company as "ALLTEL Information Services".

As an  early  entrant  in  the  dynamic  market  of  distribution  of  financial
information and trading services via wireless devices, the Company is developing
strategic marketing relationships with wireless equipment manufactures, carriers
and  potential  corporate  partners.  Management  believes the wireless area has
tremendous potential for distribution of the Company's  information products and
as source of revenues from "fee based" transactions such as stock trading.

The Company has partnered with and continues to seek relationships with regional
telephone operating companies,  such as ALLTEL, long distance carriers,  such as
Sprint,  telephone  equipment  manufacturers,  such as  Nortel,  and  others who
distribute screen telephone equipment, market local screen telephone services or
otherwise  benefit  from  the  increased  acceptance  of  these  devices  in the
marketplace.  To these partners, the Company's services are perceived as a means
of increasing interest in and sales of screen telephones and CLASS services, and
there is thus a strong incentive to promote the Company's services.

The Company is also working with businesses that desire to provide new services,
such as those  provided  by the  Company,  to an existing  base of  clients.  By
providing  this  branding  flexibility,  the Company has been able to expand the
number of businesses  interested in forming  relationships  with it, and has the
ability to market its services under far more recognizable  brand names than its
own.

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

                                      -13-
<PAGE>


Management   anticipates   that  staffing   requirements   associated  with  the
implementation of its plan of operation will result in the addition of a minimum
of 3 to 6 personnel  during the period ending June 30, 1999. Such personnel will
be added to assist with the  programming  requirements  of  Strategic  Marketing
Partners' product offerings and for customer support.  Additionally,  management
anticipates  that 2 to 3 people  will join the  Company  in sales and  marketing
positions during the period ending June 30, 1999.


Results of Operations

Fiscal Year Ended June 30, 1998 versus Fiscal Year Ended June 30, 1997

During the year ended June 30, 1998, the Company  recorded  revenues of $873,476
from the sale of its  information  services vs.  $688,610  during the year ended
June 30, 1997. Included in revenues for the year ended June 30, 1998 is $210,000
resulting from the Company's licensing agreement with DTN. During the year ended
June 30, 1997, the Company earned revenues from the enhancement, implementation,
and marketing of services to Schroder & Co. Inc. of $342,200.

During the year ended June 30, 1998,  the Company  incurred costs of services of
$1,216,761.  Such costs  consisted  primarily of information  and  communication
costs  ($551,700),  personnel costs ($310,600) and computer  hardware leases and
maintenance ($339,300).  During the year ended June 30, 1997, with the Company's
departure  from  the  development  stage,  it  incurred  costs  of  revenues  of
$1,133,884.  Such costs  consisted  primarily of information  and  communication
costs  ($390,000),  personnel  costs  ($417,500),  computer  hardware leases and
maintenance ($201,800) and screenphone purchases ($95,300).  Product development
costs were $923,082 vs.  $1,150,224 for the year ended June 30, 1997. During the
year ended June 30, 1998,  such costs  consisted  primarily  of personnel  costs
($541,400) and computer  system  consultants  ($335,000).  During the year ended
June 30, 1997 such costs consisted  primarily of personnel costs  ($686,100) and
computer system consultants ($454,000). Included in personnel costs in 1997 is a
non-cash  charge of  approximately  $73,000  for the  change in market  value of
employee stock options.

During the year ended June 30, 1998, the Company incurred  selling,  general and
administrative expenses of $3,221,940 vs. $2,861,845 for the year ended June 30,
1997.  During the year ended June 30, 1988,  such costs were incurred  primarily
for  personnel  costs  ($898,300),   facilities   ($209,800),   marketing  costs
($143,300),   advertising  costs  ($97,100),   professional  fees  ($1,051,400),
telecommunications  costs  ($73,100),  and settlement of litigation  ($450,750).
During the year ended June 30, 1998, selling,  general and administrative  costs
increased  $360,095 from the prior year as a result of increases in professional
fees ($593,000),  facilities ($49,500), and settlement of litigation ($450,750).
Such  increases  were offset by  decreases  in  marketing  expenses  ($158,400),
advertising  expenses  ($442,500),  and personnel costs ($38,200).  Professional
fees  includes a  non-cash  charge of  $527,576,  representing  amortization  of
deferred  compensation  in connection  with the issuance of 592,592 common stock
purchase warrants to a financial consultant.

Interest income for the year ended June 30, 1998 amounted to $40,788 vs. $74,507
for the year ended June 30, 1997.  Such amounts were earned  primarily  from the
Company's  investments in highly liquid commercial paper. Interest and financing
costs for the year ended June 30, 1998 were $592,490.  These costs were incurred
in connection with the origination of the Company's May 1997 line of credit.  Of
such amount,  $463,600  represents  the  non-cash  charges  associated  with the
revaluation  of  certain  common  stock  purchase  warrants  granted  to Zanett.
Interest and financing costs for the year ended June 30, 1997 were $54,646. Such
amounts were incurred in connection with the Company's May 1997 line of credit.

Loss per share was $7.65 per share for year  ended June 30,  1998 vs.  $7.20 per
share for the year ended June 30, 1997.  While the net loss  increased  $605,527
the Company  issued  220,395 shares of Common Stock in 1998 upon the exercise of
Prepaid Warrants, thereby reducing the per share loss.

                                      -14-
<PAGE>

Fiscal Year Ended June 30, 1997 versus Fiscal Year Ended June 30, 1996

During the year ended June 30, 1997, the Company commenced the implementation of
its  marketing  plan and  recorded  revenues  of  $346,361  from the sale of its
information  services and related  screen-based  telephones.  Additionally,  the
Company recorded  revenues of $342,249  related to enhancement,  implementation,
and marketing of services  associated with its arrangement  with Schroder & Co.,
Inc. As the Company was  previously  a  development  stage  enterprise,  no such
revenues existed during the fiscal year ended June 30, 1996.

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

During the year ended June 30, 1997, the Company incurred  selling,  general and
administrative expenses of $2,861,845 vs. $1,220,340 for the year ended June 30,
1996.  Such  costs were  incurred  primarily  for  personnel  costs  ($936,500),
facilities ($160,300), marketing costs ($301,700), advertising costs ($540,000),
professional fees ($458,600),  and telecommunications costs ($85,900).  Included
in personnel costs is a non-cash charge of approximately $115,000 related to the
change in value of employee stock options.  Selling,  general and administrative
costs  increased  $1,641,505  over the prior  year as a result of the  Company's
efforts to build an infrastructure  capable of supporting its operations and the
marketing  and  advertising  of its  information  product  offering.  Such  cost
increases  were  primarily for  advertising  ($382,000),  marketing and customer
support personnel  ($231,000),  marketing consultants  ($125,000),  professional
fees ($235,000), investor and public relations consulting ($102,300),  financial
consulting fees ($115,000), and for additional managerial personnel and salaries
($125,000).  The  necessary  funds to support these efforts were provided by the
Company's  Initial  Public  Offering  ("IPO")  in March 1996 and  revenues  from
information sales and services.

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


Capital Resources and Liquidity

Since  inception of the Company on August 20, 1993 through  March 21, 1996,  the
date of the IPO, the Company had funded its operations  through a combination of
private  debt  and  equity  financings   totaling   $3,610,000  and  $12,877,500
respectively.

The IPO of 282,500 common shares and 287,500  common stock purchase  warrants on
March 21, 1996 provided the Company with gross  proceeds of  $8,647,500.  Direct
costs associated with the IPO were approximately $1,589,000. In conjunction with
the IPO, the Company converted one-half of certain

                                      -15-

<PAGE>

convertible subordinated debt and accrued interest thereon into 71,289 shares of
Common Stock at a conversion rate of $9.90 per share.  The remainder of the debt
and accrued interest thereon, totaling $705,763, was repaid from the proceeds of
the IPO.  Additionally,  the Company retired senior notes amounting to $462,502,
as well as the short-term notes amounting to $1,200,000.

In May 1997,  the Company  arranged a line of credit  facility  with a financial
institution.  Such line of credit was originated for a maximum  borrowing amount
of $550,000.  In July and September  1997, the facility was amended to allow for
additional  borrowings of up to $222,222. In conjunction with the origination of
the line of credit  facility,  the Company  issued 41,666 common stock  purchase
warrants to the  financial  institution.  Similarly,  the Company  issued  8,416
warrants  for each of the  July and  September  amendments.  As a result  of the
Company's  default on the note in August,  the  Company  was  required  to issue
50,083  "default"  warrants to such  institution.  These  108,581  warrants  are
exercisable at prices ranging from $4.50 to $8.25 and expire in September  2002.
In accordance with Financial  Accounting  Standard No. 123 "Accounting for Stock
Based  Compensation"  the Company has recorded a charge to earnings of $463,567,
representing the value ascribed to such warrants using the Black-Scholes  option
pricing methodology.

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

On  September  30,  1997,  Zanett,  acting as  placement  agent for the Company,
completed  a private  placement  ("Placement")  of $4 million  of the  Company's
prepaid  common  stock  purchase  warrants  ("Prepaid  Warrants").  The  Prepaid
Warrants expire on September 30, 2000. As part of the Placement, ZLL converted a
note payable of $772,222,  issued  pursuant to a Line of Credit  Agreement dated
May 29, 1997, as amended,  and accrued  interest thereon of $63,837 into Prepaid
Warrants.  The net proceeds of the Placement of $2,643,941 were used for general
working capital requirements.

In  September  1997,  the  Company  entered  into a three  year  agreement  with
Sprint/United  Management  Corp.  with respect to the  expansion of its services
provided  pursuant to a March 1997  agreement.  Such agreement  provided for the
potential  deployment of the Company's  services on a nationwide basis. In April
1998,  the  Company  entered  into an  agreement  with DTN,  whereby the Company
licensed to DTN the rights to market three of the Company's  Internet  products.
The Company  received  $850,000 upon  execution of the contract and will receive
minimum monthly payments of $100,000 through April 1999.  Thereafter,  cash flow
from license fees will be determined  as a percentage of revenues  earned by DTN
through sales to its customers. Additionally, DTN has agreed to absorb the costs
associated  with the  expansion  of the  computer  and  communications  hardware
necessary  to support  the  expansion  of the user base.  Although  the  Company
believes that both Sprint and DTN have the experience and the financial  ability
to distribute the Company's services to thousands of potential customers,  there
can be no  assurance  that the  products  and  services  will be accepted by the
ultimate consumer on a wide spread basis.

On August 11, 1998, the Company  entered into a letter of intent,  as amended on
November 24, 1998, with Spencer Trask  Securities,  Inc.  ("Spencer Trask") (the
"Letter of Intent")  which provided for the retention of Spencer Trask to act as
exclusive  placement agent in connection with a private placement by the Company
of a minimum of  $5,000,000  and a maximum of  $10,000,000  of securities of the
Company (the "Further Placement"). The Further Placement is conditioned upon the
occurrence  of the Reverse  Stock Split which was effective on October 26, 1998.
The Letter of Intent  provides that the Company will offer a minimum of 50 units
and a maximum  of 100 units at a gross  purchase  price of  $100,000,  each unit
consisting of shares of convertible  preferred stock (the  "Preferred  Shares").
The number of Preferred  Shares will be determined by dividing the unit price of
$100,000 by the conversion price (the "Placement  Conversion  Price"),  which is
anticipated  to be  equal  to 75% of the  average  closing  bid  price  for  the
Company's  Common  Stock for the 15 days  following  the  effective  date of the
Reverse Stock Split,  which was $1.019 per share.  The Preferred  Shares will be
convertible by the holder into

                                      -16-
<PAGE>
shares of Common Stock on a one-to-one basis at any time prior to the expiration
of a 30-day  period  commencing  upon the giving of notice of  redemption by the
Company.  After two  years,  the  Preferred  Shares  will be  redeemable  at the
Company's option at 110% of the purchase price for Preferred Shares in the event
that the  average  closing  price of the Common  Stock for the 20  trading  days
preceding  the notice of  redemption  exceeds 150% of the  Placement  Conversion
Price.  The  Preferred  Shares  will  receive  an  8%  annual  dividend  payable
semi-annually,  in-kind or in cash at the Company's  option. No assurance can be
given that the Further  Placement will be  consummated.  In connection  with the
Further Placement, Spencer Trask will receive, in addition to customary fees and
expenses,  five (5) year warrants (the "Placement  Warrants") to purchase Common
Stock at 120% of the  offering  price per share in an amount equal to 10% of the
Preferred  Shares  contained  in the units sold in the  Further  Placement.  The
Placement Warrants will contain certain demand and piggyback registration rights
with respect to the shares of Common Stock into which the Placement Warrants are
convertible.

On November 24, 1998, the Company  completed an interim financing of $500,000 of
securities of the Company.  The Company offered five (5) units,  each consisting
of a of a secured  convertible  note in the  principal  amount of  $100,000  and
warrants to purchase Common Stock of the Company. The notes and the warrants are
convertible and  exercisable,  respectively,  at $.60 per share of Common Stock.
The Convertible  Notes,  which are secured by all of the Company's assets,  will
mature on the earlier to occur of (i) the closing of the  Further  Placement  or
(ii) November 15, 1999. The Convertible  Notes may be prepaid without premium or
penalty.  Upon  the  closing  of  the  Further  Placement,  the  holders  of the
Convertible  Notes will have the right to require the Company to redeem for cash
fifty percent (50%) of the Convertible Notes they own. The remaining Convertible
Notes will be converted  into units in the Further  Placement.  The  Convertible
Notes will bear interest at eight percent (8%) per annum, payable semi-annually,
in kind or in cash at the Company's  option.  The Company has agreed to register
the shares of Common Stock issuable upon exercise of the warrants and conversion
of the notes.  In addition to customary fees and expenses,  the Placement  Agent
has received for nominal  consideration,  warrants to purchase ten percent (10%)
of the shares of Common Stock of the Company issuable on conversion of the notes
and  exercise  of the  warrants  at one  hundred  twenty  percent  (120%) of the
conversion price of the notes.

Additionally,  the Company  entered into agreements with certain warrant holders
pursuant to which,  among other things, the Company (i) agreed to acquire on the
date the Further  Placement  commences  warrants to purchase  801,175  shares of
Common Stock from such holders in exchange for the issuance by the Company of an
aggregate of 342,842  shares of Common Stock (the "Warrant  Redemption"),  which
shares may not be sold (except  privately)  for a period of eighteen (18) months
following  the final  closing of the Further  Placement  or  September  1, 2000,
whichever is earlier,  and (ii) has issued  50,000 shares of Common Stock to the
holders of  $1,669,000  of Prepaid  Warrants in  consideration  of such  holders
agreeing to similar restrictions on the exercise of the Prepaid Warrants and the
resale of the shares of Common Stock issuable upon such exercise.

The Company's  financial  statements  for the year ended June 30, 1998 have been
prepared on a going concern basis which  contemplates  the realization of assets
and the  settlement  of  liabilities  and  commitments  in the normal  course of
business.  The  Company  incurred  net  losses of  $5,040,009,  $4,434,482,  and
$2,966,287 for the years ended June 30, 1998, 1997, and 1996  respectively,  and
as of June 30, 1998 had an accumulated deficit of $14,821,879.  In addition, the
Company has a working  capital  deficiency of $1,850,287 and a deficiency of net
assets of  $1,246,861.  Lastly,  the  Company is a  defendant  in several  legal
proceedings  which  could  have a  material  adverse  effect  on  the  Company's
financial position, cash flow, and results of operations. These conditions raise
substantial  doubt about the Company's  ability to continue as a going  concern.
The financial  statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and  classification  of  liabilities  that may result  from the outcome of these
uncertainties.

The Company's management believes that upon the successful implementation of its
marketing  plan,  sufficient  revenues  will  be  generated  to  meet  operating
requirements.  Management  also  believes that the  successful  execution of its
proposed plan of operations  will generate  sufficient cash flow from operations
to enable the Company to offer its services on an  economically  sound basis and
thereby  eliminate,  within a reasonable time period,  the concerns expressed in
the "going concern" paragraph appearing in the Report of Independent Auditors on
page 20 herein.  No  assurance  can be given that such goals will be obtained or
that any  expected  revenues or cash flows will be  achieved.  Additionally,  no
assurance can be given that the Company will  consummate the Further  Placement.
In the event the Further  Placement  is not  consummated,  by February 28, 1999,
Management will be required to seek alternative  financing vehicles,  consider a
sale or merger of the Company or terminate its operations.

                                      -17-

<PAGE>


Year 2000 Compliance

The Company's  information  services are  distributed via a combination of third
party computer  hardware and software  applications as well as Company  designed
application software and communication  networks.  The Company has formed a task
force to assure that its products and services are Year 2000 compliant.  As part
of the process to ascertain  Year 2000  compliance,  the Company has queried its
software vendors and third party information providers and is presently updating
third party software  and/or waiting for letters of compliance.  The Company has
also queried hardware vendors as to Year 2000 compliance  issues associated with
embedded software.  In addition,  the Company is in the process of reviewing its
proprietary application software for proper compliance.

It is  anticipated  that the Year 2000  Compliance  issue will be  substantially
completed by June 1999,  at an  estimated  cost of not to exceed  $120,000.  The
Company anticipates that extensive testing will continue through 1999.

The  Company is working  diligently  to assure  that all  systems  are Year 2000
compliant  because failure to do so could have a material  adverse effect on the
Company's  ability to offer its  financial  services  software and thus generate
revenue.


Certain Factors That May Affect Future Results

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

                                      -18-
<PAGE>


Item 7.    Financial Statements
------

                                                                            Page
                                                                            ----

Report of Independent Auditors                                               20

Balance Sheets as of June 30, 1998 and 1997                                  21

Statements of Operations for the years
     ended June 30, 1998, 1997 and 1996                                      23

Statement of Stockholders' Equity (Deficiency)
     for the years ended June 30, 1998, 1997 and 1996                        24

Statements of Cash Flow for the years
     Ended June 30, 1998, 1997 and 1996                                      26

Notes to Financial Statements                                                27




                                      -19-

<PAGE>




                         Report of Independent Auditors




Stockholders and Board of Directors
SmartServ Online, Inc.

We have audited the accompanying  balance sheets of SmartServ Online, Inc. as of
June 30, 1998 and 1997, and the related statements of operations,  stockholders'
equity  (deficiency),  and cash flows for each of the three  years in the period
ended June 30, 1998. These financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of SmartServ Online, Inc. at June
30, 1998 and 1997, and the results of its operations and its cash flows for each
of the three  years in the  period  ended  June 30,  1998,  in  conformity  with
generally accepted accounting principles.

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




/s/ Ernst & Young LLP

Stamford, Connecticut 
December 9, 1998


                                      -20-
<PAGE>


                             SmartServ Online, Inc.

                                 Balance Sheets

<TABLE>
<CAPTION>


                                                                             June 30
                                                             -----------------------------------------
                                                                     1998                 1997
                                                             --------------------- -------------------

<S>                                                          <C>                   <C>              
Assets
Current assets
   Cash                                                      $         354,225     $          93,345
   Accounts receivable, net of an allowance
       for losses of $0 in 1998 and $6,000 in 1997                     111,051               149,782
   Prepaid expenses                                                    130,603                90,725
                                                             --------------------- -------------------
Total current assets                                                   595,879               333,852
                                                             --------------------- -------------------

Property and equipment, net                                            610,537               743,714

Other assets
   Deferred charges                                                         --                87,905
   Security deposit                                                     70,437                81,218
                                                             --------------------- -------------------
                                                                        70,437               169,123
                                                             --------------------- -------------------

Total Assets                                                   $     1,276,853     $       1,246,689
                                                             ===================== ===================

</TABLE>


                                      -21-

<PAGE>


                             SmartServ Online, Inc.

                                 Balance Sheets


<TABLE>
<CAPTION>

                                                                                  June 30
                                                                  -----------------------------------------
                                                                         1998                 1997
                                                                  -------------------- --------------------

<S>                                                                 <C>                <C>              
Liabilities and Stockholders' Deficiency
Current liabilities
   Accounts payable                                                 $       800,545    $         829,355
   Accrued liabilities                                                      736,137              211,813
   Accrued interest                                                              --               16,323
   Payroll taxes payable                                                      4,294               20,383
   Salaries payable                                                          53,014               46,018
   Current portion of capital lease obligation                               76,127               86,072
   Deferred revenues                                                        776,049               24,914
                                                                  -------------------- --------------------
Total current liabilities                                                 2,446,166            1,234,878
                                                                  -------------------- --------------------

Long-term portion of capital lease obligation                                77,548              160,139
Notes payable                                                                    --              550,000

Commitments and Contingencies - Note 9                                   

Stockholders' Deficiency
Preferred  stock - $0.01 par value
   Authorized  -  1,000,000  shares 
   Issued and outstanding - None
Common Stock - $0.01 par value
   Authorized - 40,000,000 shares
   Issued and outstanding - 836,227 at June 30, 1998
      and 615,832 shares at June 30, 1997                                     8,362                6,158
Additional paid-in capital                                               18,184,580            9,077,384
Unearned compensation                                                    (4,617,924)                  --
Accumulated deficit                                                     (14,821,879)          (9,781,870)
                                                                  -------------------- --------------------
Total stockholders' deficiency                                           (1,246,861)            (698,328)
                                                                  -------------------- --------------------

Total Liabilities and Stockholders' Deficiency                      $     1,276,853    $       1,246,689
                                                                  ==================== ====================
</TABLE>

See accompanying notes.

                                      -22-
<PAGE>


                             SmartServ Online, Inc.

                            Statements of Operations

<TABLE>
<CAPTION>




                                                                                Year Ended June 30
                                                            -----------------------------------------------------------
                                                                   1998                1997                1996
                                                            -----------------------------------------------------------

<S>                                                           <C>              <C>                    <C>            
Revenues                                                      $      873,476       $    688,610        $           --
                                                            -----------------------------------------------------------

Costs and expenses
   Cost of services                                               (1,216,761)        (1,133,884)                   --
   Product development expenses                                     (923,082)        (1,150,224)           (1,037,941)
   Selling, general and administrative
         expenses                                                 (3,221,940)        (2,861,845)           (1,220,340)
                                                            -----------------------------------------------------------

Total costs and expenses                                          (5,361,783)        (5,145,953)           (2,258,281)
                                                            -----------------------------------------------------------

Loss from operations                                              (4,488,307)        (4,457,343)           (2,258,281)
                                                            -----------------------------------------------------------

Other income (expense):
   Interest income                                                    40,788             74,507                51,527
   Interest expense                                                  (57,485)           (20,194)             (242,000)
   Debt origination costs                                           (535,005)           (31,452)             (517,533)
                                                            -----------------------------------------------------------

                                                                    (551,702)            22,861              (708,006)
                                                            -----------------------------------------------------------

Net loss                                                      $   (5,040,009)      $ (4,434,482)       $   (2,966,287)
                                                            ===========================================================

Basic and diluted earnings per share                          $        (7.65)      $      (7.20)       $        (7.56)
                                                            ===========================================================
                                                           
Weighted average shares outstanding                                  659,034            615,833               392,500
                                                            ===========================================================
</TABLE>

See accompanying notes.

                                      -23-

<PAGE>


                             SmartServ Online, Inc.

                 Statement of Stockholders' Equity (Deficiency)
<TABLE>
<CAPTION>



                                                                                   
                                                           Common Stock           Additional  
                                                   -----------------------------    Paid-in          Unearned     Accumulated
                                                      Shares        Par Value       Capital       Compensation        Deficit
                                                   --------------------------------------------------------------------------------

<S>                                                 <C>         <C>          <C>              <C>               <C>          
Balances at June 30, 1995                               295,833     $   2,958    $   333,997      $         --      $ (2,381,101)
Issuance of common stock and warrants to
   investors at $24.00                                    9,583            96        229,904
Issuance of warrants in conjunction with the
   $1,200,000 of bridge notes                                                         30,000
Cancellation of 65,589 shares previously issued
   to officers                                          (65,589)         (655)           655
Issuance of common stock at $30.00 per share and
   287,500 warrants at $0.60 per warrant, net of
   direct costs of the offering of $1,588,852           282,500         2,825      7,055,823
Issuance of common stock for redemption of the
   $612,500, 12% convertible subordinated notes
   and accrued interest thereon                          71,289           713        705,050
Issuance of common stock to a financing
   intermediary for arrangement of a standby
   revolving credit proposal                             19,425           194        232,906
Issuance of common stock to an investor in
   accordance with the terms of the $312,500, 12%
   notes                                                  2,791            27         33,473
Other issuances of warrants                                                            1,510
Issuance of employee stock options                                                   165,773
Net loss                                                                                                              (2,966,287)
                                                   --------------------------------------------------------------------------------

Balances at June 30, 1996                               615,832         6,158      8,789,091                --        (5,347,388)

Change in market value of employee options                                           188,293

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

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

Net loss                                                                                                              (4,434,482)
                                                   --------------------------------------------------------------------------------

Balances at June 30, 1997                               615,832   $     6,158   $ 9,077,384       $         --    $   (9,781,870)
                                                   --------------------------------------------------------------------------------

</TABLE>

                                   (Continued)
See accompanying notes.

                                      -24-
<PAGE>


                             SmartServ Online, Inc.

                 Statement of Stockholders' Equity (Deficiency)
<TABLE>
<CAPTION>

                                   (Continued)


                                                                                   
                                                            Common Stock            Additional   
                                                   -------------------------------   Paid-in         Unearned      Accumulated
                                                       Shares        Par Value       Capital       Compensation      Deficit
                                                   -------------------------------------------------------------------------------

<S>                                                  <C>        <C>                 <C>         <C>            <C>              
Balances at June 30, 1997                               615,832    $6,158         $ 9,077,384     $        --    $ (9,781,870)    
                                                                                                                                  
Issuance of 4,000 Prepaid Common Stock Purchase                                                                                   
   Warrants, net of direct costs of                                                                                               
  $545,000                                                   --        --           3,455,000              --              --     
                                                                                                                                  
Conversion of 1,429 Prepaid Common Stock Purchase                                                                                 
  Warrants into Common Stock                            220,395     2,204              (2,204)             --              --     
                                                                                                                                  
Issuance  of  Common  Stock  Purchase  Warrants                                                                                   
   to a  financial  consultant  in   connection                                                                                   
   with the issuance of 4,000 Prepaid Common Stock                                                                                
   Purchase Warrants                                        --         --           5,145,500      (5,145,500)             --     
                                                                                                                                  
Issuance of Common Stock Purchase Warrants in                                                                                     
   connection with the issuance of notes                    --         --             388,900              --              --     
                                                                                                                                  
Issuance of Common Stock Purchase Warrants in                                                                                     
  connection with investment advisory contracts                                                                                   
                                                            --         --             120,000              --              --     
                                                                                                                                  
Amortization of unearned compensation over the                                                                                    
  term of the agreement                                     --         --                  --        527,576               --     
                                                                                                                                  
Net loss for the year                                       --         --                  --             --       (5,040,009)    
                                                   ------------------------------------------------------------------------------ 
                                                                                                                                  
Balances at June 30, 1998                              836,227     $8,362         $18,184,580    $(4,617,924)    $(14,821,879)    
                                                   ============================================================================== 
                                                                                                                                  
                                                                                  
</TABLE>

See accompanying notes.


                                      -25-
<PAGE>


                             SmartServ Online, Inc.

                            Statements of Cash Flows
<TABLE>
<CAPTION>


                                                                                 Year Ended June 30
                                                                -----------------------------------------------------
                                                                       1998              1997             1996
                                                                -----------------------------------------------------

<S>                                                             <C>                <C>              <C>          
Operating Activities
Net loss                                                           $ (5,040,009)      $ (4,434,482)    $ (2,966,287)
Adjustments to reconcile net loss to net cash used in
operating activities:
       Depreciation and amortization                                    193,601            149,182           41,285
       Provision for losses on and write-off of receivables              (1,300)            29,248               --
       Noncash charges for interest expense                              52,837                 --           94,274
       Noncash debt origination costs                                   475,527             30,449          477,089
       Compensation expense                                                  --            188,293          165,773
       Consulting services                                              660,576             75,000          (10,002)
       Amortization of unearned revenues                               (251,058)                --               --
       Settlement of litigation                                         145,750                 --               --
       Other changes that provided (used) cash
          Accounts receivable                                            40,031           (121,040)         (57,990)
          Inventories                                                        --                 --           10,440
          Prepaid expenses                                              (25,878)           (22,415)         (23,641)
          Accounts payable and accrued liabilities                      349,764            558,317          178,136
          Accrued interest                                               (5,323)            16,323         (106,595)
          Payroll taxes payable                                         (16,089)             5,482          (73,282)
          Salaries payable                                                6,996              1,364           16,462
          Unearned revenue                                            1,002,193             24,914               --
          Security deposit reduction                                     10,781                 --               --
                                                                -----------------------------------------------------
Net cash used in operating activities                                (2,401,601)        (3,499,365)      (2,254,338)
                                                                -----------------------------------------------------

Investing Activities
Purchase of equipment                                                   (60,424)          (351,786)        (190,973)
                                                                -----------------------------------------------------
Net cash used in investing activities                                   (60,424)          (351,786)        (190,973)
                                                                -----------------------------------------------------

Financing Activities
Proceeds from the issuance of common stock                                   --                 --        8,705,000
Proceeds from the issuance of warrants                                2,643,941                 --          202,510
Repayment of debt                                                            --                 --         (612,500)
Repayment of notes                                                           --                 --         (452,500)
Proceeds from the issuance of short-term notes                          196,500            493,646          999,000
Repayment of short-term notes                                                --                 --       (1,200,000)
Repayment of capital lease obligation                                   (92,536)                --               --
Due from officers, net                                                       --                 --          (38,497)
Deferred charges                                                             --            (10,000)        (108,000)
Costs of issuing common stock and warrants                              (25,000)                --       (1,588,852)
                                                                -----------------------------------------------------
Net cash provided by financing activities                             2,722,905            483,646        5,906,161
                                                                -----------------------------------------------------

Increase (decrease) in cash and cash equivalents                        260,880         (3,367,505)       3,460,850
Cash at beginning of year                                                93,345          3,460,850               --
                                                                =====================================================
Cash at end of year                                                   $ 354,225           $ 93,345      $ 3,460,850
                                                                =====================================================
</TABLE>

See accompanying notes.

                                      -26-

<PAGE>


                             SmartServ Online, Inc.

                          Notes to Financial Statements



1.   Nature of Business and Liquidity

SmartServ Online, Inc. (the "Company")  commenced operations on August 20, 1993.
The Company makes available  online  information and  transactional  services to
subscribers   through   proprietary   application   software  and  communication
architecture to wireless PCS devices, PCs, PDAs, the Internet, interactive voice
response systems, alpha-numeric pagers and screen-based phones. The Company also
offers a range of  services  designed  to meet the  varied  needs of  clients of
potential  Strategic  Marketing  Partners,   such  as  investment   newsletters,
real-time  stock  quotes,  business  and  financial  news,  sports  information,
research  and  analysis  reports,   trading  activity  reports  by  insiders  of
corporations,  online FedEx package tracking,  private-labeled  electronic mail,
national weather reports and other business and entertainment  information.  The
Company's  software  architecture  and  capabilities  format  information  for a
particular device and present the information in a user-friendly manner.

On March 21, 1996, the Company  completed an Initial Public  Offering of 282,500
shares of $.01 par value  common  stock at $30.00 per share and  287,500  common
stock purchase  warrants at $.60 per warrant.  The Company  received  $7,058,648
from the Offering, net of the costs of issuing these securities of $1,588,852.

The Company's  financial  statements  for the year ended June 30, 1998 have been
prepared on a going concern basis which  contemplates  the realization of assets
and the  settlement  of  liabilities  and  commitments  in the normal  course of
business.  The  Company  incurred  net  losses of  $5,040,009,  $4,434,482,  and
$2,966,287 for the years ended June 30, 1998, 1997, and 1996  respectively,  and
as of June 30, 1998 had an accumulated deficit of $14,821,879.  In addition, the
Company has a working  capital  deficiency of $1,850,287 and a deficiency of net
assets of  $1,246,861.  Lastly,  the  Company is a  defendant  in several  legal
proceedings  (See Note 9) which  could  have a  material  adverse  effect on the
Company's  financial  position,  cash flow,  and  results of  operations.  These
conditions raise  substantial doubt about the Company's ability to continue as a
going  concern.  The  financial  statements  do not include any  adjustments  to
reflect the possible future effects on the  recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of these uncertainties.

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

On September 30, 1997, the Company completed a private  placement  ("Placement")
of $4 million of Prepaid Common Stock Purchase Warrants ("Prepaid  Warrants") as
more fully  disclosed  in Note 5. An  integral  part of this  Placement  was the
conversion of notes payable and accrued interest thereon,  aggregating $836,059,
into Prepaid Warrants.  The net proceeds of $2,643,941 have provided the Company
with working capital to continue its marketing efforts.

Effective  May 1,  1998,  the  Company  entered  into  an  agreement  with  Data
Transmission  Network  Corporation  ("DTN")  whereby DTN purchased the exclusive
right to market three of the Company's Internet 

                                      -27-
<PAGE>

products:  SmartServ Pro, a real time stock quote product;  TradeNet,  an online
trading vehicle for the customers of small and medium sized brokerage companies,
and  BrokerNet,  an  administrative  reporting  package for brokers of small and
medium sized brokerage companies. The consummation of this agreement has removed
the  Company  from  the  retail  market  and  allows  the  Company  to  focus on
business-to-business  marketing. The Company received $850,000 upon execution of
the Contract and has an obligation  to provide  services to the customers of DTN
through April 2001. The Company will also receive  minimum  monthly  payments of
$100,000  through  April 1999.  The  unearned  portion of such  payment has been
reported  in  the  balance  sheet  at  June  30,  1998  as  deferred   revenues.
Additionally,  the terms of the  agreement  provide for the Company to receive a
per user licensing  fee, as well as for DTN to fund the additional  hardware and
communications costs necessary to support the growth of the user base.

The Company  continues  to market its services to regional  telephone  operating
companies,  long distance carriers and telephone  equipment  manufacturers which
have an  incentive  to  increase  the number of screen  phones in  service.  The
Company  believes  its  information  platform  to be a  value-added  service  in
connection with the sale of screen phones to the consumer  market.  In September
1997, the Company signed a 3 year contract with Sprint/United Management Company
("Sprint") for the delivery of the Company's  information  services into markets
beyond the initial  trial city - Las Vegas.  The Company  anticipates  that this
will result in the deployment of the Company's  information  services in Florida
and other designated markets as part of a national campaign.

The Company is also working with businesses,  such as brokerage firms, that need
to disseminate proprietary information more effectively to their existing client
base. The Company's information platform and communications  architecture allows
the bundling of its partners'  proprietary  information with its own value-added
information,  and makes this package  available to subscribers 24 hours per day,
365 days per year.

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

Notwithstanding the execution of the Sprint and DTN agreements and the continual
discussions   with   potential   Strategic   Marketing   Partners  about  future
relationships, the Company's ability to generate fee revenue and working capital
may not be sufficient to meet management's  objectives as presently  structured.
Management  recognizes  that the Company must  generate  additional  revenues or
consider  additional  modifications  to  its  sales  and  marketing  program  or
institute cost reductions to allow it to continue to operate with available cash
resources.  There is no assurance that the Company will generate future revenues
or cash flow from  operations or that the  Company's  products and services will
continue to be accepted in the marketplace by the ultimate consumers.


2.   Summary of Significant Accounting Policies

Basis of Presentation

The financial  statements  are prepared in conformity  with  generally  accepted
accounting  principles.  Effective June 1996, the Company exited the development
stage.

                                      -28-
<PAGE>


The  Company's  stockholders  approved a  one-for-six  reverse  stock split at a
Special Meeting on October 15, 1998.  Such reverse stock split became  effective
on October 26, 1998.  All  applicable  financial  statement  amounts and related
disclosures have been restated to give effect to this transaction.

Use of Estimates

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

Revenue Recognition

Revenues are recognized as services are provided.  Deferred revenues,  resulting
from customer  prepayments,  are recognized as services are provided  throughout
the term of the contract.

Basic and Diluted Earnings Per Share

In 1997, the Financial  Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("Statement 128").  Statement
128 replaced the  previously  reported  primary and fully  diluted  earnings per
share with basic and diluted  earnings per share.  Unlike  primary  earnings per
share,  basic  earnings  per share  excludes  any  dilutive  effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously  reported fully diluted  earnings per share.  All earnings per
share amounts for all periods have been presented, and where necessary, restated
to conform to the  Statement  128  requirements.  The  weighted  average  shares
outstanding  are  determined as the mean average of the shares  outstanding  and
assumed to be outstanding during the period.

Fair Value of Financial Instruments

The carrying  amounts of the Company's  financial  instruments  approximate fair
value.

Supplemental Cash Flow Data

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

Interest  expense paid during the years ended June 30, 1998,  1997, and 1996 was
$32,536, $9,194, and $327,600, respectively.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of
credit  risk  consist  primarily  of  accounts  receivable.  There is no  single
geographic  concentration of sales or related accounts  receivable in the United
States. At June 30, 1998, accounts receivable consist principally of amounts due
from  a  stock  brokerage  firm  ($37,500),  and  a  telecommunications  company
($64,800). The Company performs periodic credit evaluations of its customers and
provides for credit losses in the financial statements.

Property and Equipment

Property and equipment are stated at cost.  Equipment  purchased under a capital
lease  has been  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.

                                      -29-
<PAGE>
Advertising Costs

Advertising  costs are  expensed as incurred and were  approximately  $97,100 in
1998 and $540,000 in 1997. No such costs were incurred in 1996.

Stock Based Compensation

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

Recent Accounting Pronouncements

  In June 1997, the Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting Standards No. 130,  "Comprehensive  Income" ("Statement No.
130") which requires companies to report a new,  additional measure of income on
the income  statement  in a full set of  general-purpose  financial  statements.
Comprehensive  Income will include foreign currency translation gains and losses
and unrealized  gains and losses on equity  securities that have been previously
excluded  from income and  reflected  instead in equity.  The  Company  does not
anticipate any differences between net income and comprehensive  income upon the
adoption of Statement No. 130 in the first quarter of fiscal 1999.

In December 1998, The Accounting  Standards Executive Committee issued Statement
of Position 98-9, " Modification  of SOP 97-2,  "Software  Revenue  Recognition"
with respect to certain types of transactions. Such amendment is not expected to
have a matieral  impact on the  Company's  financial  position  or results  from
operations.

In March 1998, the American  Institute of Certified  Public  Accountants  issued
Statement of Position 98-1, as amended by SOP 98-4, "Accounting for the Costs of
Computer  Software  Developed or Obtained for Internal  Use" ("SOP  98-1").  The
Company is reviewing  the  requirements  of the SOP and has not  determined  the
impact, if any, that SOP 98-1 will have on the Company. If applicable,  SOP 98-1
is required to be adopted by the Company no later than July 1, 1999.

3.   Property and Equipment

Property and equipment consist of the following:
<TABLE>
<CAPTION>
                                                                             June 30
                                                             ------------------------------------------
                                                                    1998                    1997
                                                             -------------------      -----------------
<S>                                                        <C>                      <C>            
   Data processing equipment                                 $        616,587         $       564,098
   Data processing equipment purchased under a capital lease          246,211                 246,211
   Office furniture and equipment                                      70,597                  69,196
   Display equipment                                                    9,635                   9,635
   Leasehold improvements                                              36,678                  36,357
                                                             -------------------      -----------------

                                                                      979,708                 925,497

   Accumulated depreciation, including $57,449 and
       $8,207 for equipment purchased under a capital lease          (369,171)               (181,783)
                                                             ===================      =================
                                                             $        610,537         $       743,714
                                                             ===================      =================
</TABLE>
                                      -30-
<PAGE>


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


4.   Notes Payable

On May 29,  1997,  the Company  entered  into a line of credit  facility  with a
financial institution for a maximum borrowing thereunder of $550,000. Borrowings
under this  facility were to be repaid on August 27, 1997 along with interest at
the rate of 24% per annum. On July 21, 1997 and September 16, 1997, the facility
was amended to provide for additional borrowings of up to $222,222. On September
30, 1997, notes payable of $772,222 and accrued interest thereon of $63,837 were
converted into the Company's Prepaid Warrants as more fully described in Note 5.

In conjunction with the origination of the line of credit facility,  the Company
issued  41,666  common stock  purchase  warrants to the  financial  institution.
Similarly,  the Company issued 8,416 warrants for each of the July and September
amendments.  As a result of the  Company's  default on the note in  August,  the
Company was required to issue 50,083 "default" warrants to such institution.  At
June 30, 1998,  these 108,581  warrants were  exercisable at prices ranging from
$4.50 to $8.25.  These warrants expire in September 2002.  Pursuant to Statement
of  Financial   Accounting  Standard  No.  123,   "Accounting  for  Stock  Based
Compensation",  the  Company  valued  these  warrants  in  accordance  with  the
Black-Scholes  pricing  methodology  at the time of issuance and  recorded  such
valuation in the  statement of  operations  as financing  costs.  Certain of the
warrants contain  variable  exercise  provisions  predicated on the price of the
Company's  Common Stock upon the  occurrence of certain  future events or at the
time of  exercise.  These  warrants  have  been  revalued  at June  30,  1998 in
accordance with the Black-Scholes  pricing  methodology giving  consideration to
facts and  circumstances  as they existed at that date. The Company has recorded
financing  costs  associated  with these warrants of $463,567 for the year ended
June 30, 1998.

On November 24,  1998,  the Company  completed an interim  financing of $500,000
securities of the Company.  The Company offered five (5) units,  each consisting
of a secured  convertible  note in the principal amount of $100,000 and warrants
to purchase Common Stock of the Company. The notes and the warrants will each be
convertible and  exercisable,  respectively,  at $.60 per share of Common Stock.
The convertible notes are secured by all of the Company's assets and will mature
on the  earlier  to  occur  of (i) the  closing  of the  Further  Placement  (as
described in Note 12 below) or (ii) November 15, 1999. The convertible notes may
be  prepaid  without  premium  or  penalty.  Upon  the  closing  of the  Further
Placement,  the  holders of the notes will have the right to require the Company
to redeem for cash fifty  percent  (50%) of the notes  they own.  The  remaining
notes will be converted into units in the Further Placement. The notes will bear
interest at eight percent (8%) per annum, payable  semi-annually,  in kind or in
cash at the Company's  option.  The Company has agreed to register the shares of
Common Stock issuable upon exercise of the warrants and conversion of the notes.
In addition to customary fees and expenses, the placement agent has received for
nominal  consideration,  warrants to purchase ten percent (10%) of the shares of
Common Stock of the Company  issued on  conversion  of the notes and exercise of
the warrants at one hundred twenty percent (120%) of the conversion price of the
notes.


5.   Equity Transactions


On July 14, 1995, the Company sold 4,166 shares of Common Stock for an aggregate
purchase  price of $100,000 to John E.  Herzog and,  for nominal  consideration,
issued a warrant to purchase an  additional  4,166  shares of Common Stock at an
exercise price of $24.00 per share to Mr. Herzog. No sales commissions were paid
in connection with such offering.  The securities were issued in reliance on the
exemption from registration provided by Section 4 (2) of the Securities Act.

On August  24,  1995,  the  Company  sold  2,083  shares of Common  Stock for an
aggregate  purchase  price of $50,000  to each of  Emanuel E.  Geduld and Andrew
DaPonte  and,  for  nominal  consideration,  issued a  warrant  to  purchase  an
additional 2,083 shares of Common Stock at an exercise price of $24.00 per share
to Mr.  Geduld and  warrants  to  purchase  3,750  shares of Common  Stock at an
exercise  price of $24.00  per share to Mr.  DaPonte.  On August 24,  1995,  the
Company also sold an aggregate of 1,250 shares of Common Stock to Anchung  Sammy
Chung and Fong-Chi  Alison Tsao for an aggregate  purchase price of $30,000 and,
for nominal  consideration,  issued to them a warrant to purchase an  additional
1,250 shares of Common Stock at an exercise price of $24.00 per share.  No sales
commissions  were paid in connection  with such  offerings.  The securities were
issued in reliance on the exemption from registration  provided by Section 4 (2)
of the Securities Act.

Between  October  1995  and  December  1995,  the  Company  sold 40  Units to 25
investors who  subscribed to purchase  such Units  pursuant to the  Confidential
Offering  Memorandum  dated  September  22,  1995,  as amended by a letter dated
October 12,  1995,  at a price of $25,000 per Unit,  each Unit  consisting  of a
$25,000  promissory note and a warrant to purchase 833 shares of Common Stock at
an exercise price of $24.00 per share.  Rickel and Associates,  Inc.  ("Rickel")
acted as placement agent for the Company for such private placement and received
a commission of $100,000 for its services and a non-refundable,  non-accountable
expense  allowance  of $30,000.  The  securities  were issued in reliance on the
exemption from registration provided by Section 4 (2) of the Securities Act.

On February 1, 1996, the Company issued a $200,000 promissory note and agreed to
issue  warrants  to  purchase  16,667  shares of Common  Stock to Henry Snow for
$200,000.  The warrants were issued in March 1996 and have an exercise  price of
$24.00 per share.  Rickel  received a commission  of $26,000 for its services in
connection with such transaction.  The securities were issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act.

On  February  28,  1996,  the Company  issued  2,791  shares of Common  Stock to
InterBank  Communications,  Inc. in accordance with the anti-dilution provisions
of an  agreement  with it and 19,425  shares of Common  Stock to The  Strategica
Group in  accordance  with the terms of a  Standby  Revolving  Credit  Agreement
Proposal.  No sales commissions were paid in connection with such  transactions.
The  securities  were  issued in  reliance on the  exemption  from  registration
provided by Section 4 (2) of the Securities Act.

In March 1996,  the Company  issued 71,289 shares of Common Stock to six holders
of convertible  subordinated notes in redemption of $612,500 principal amount of
such notes and  accrued  interest  thereon.  No sales  commissions  were paid in
connection  with such  transaction.  The stock was issued in  reliance  upon the
exemption from registration provided by Section 3 (a) (9) of the Securities Act.

On March 21, 1996, the Company  completed an Initial Public  Offering of 282,500
shares of common stock at $30.00 per share and 287,500  redeemable  common stock
purchase  warrants  for $0.60 per warrant  that  provided the Company with gross
proceeds of $8,647,500.  Each warrant entitles the registered  holder thereof to
purchase  one share of common  stock at an  exercise  price of $24.00 per share,
subject  to  adjustments  in  certain  events,  at any time  during  the  period
commencing  March 21, 1997,  and  expiring on 

                                      -31-
<PAGE>
March 20, 2001.  The warrants are subject to  redemption by the Company at $0.60
per  warrant at any time  commencing  March 21,  1997,  on not less than 30 days
prior notice to the holders of the  warrants,  provided the average  closing bid
quotation  of the  common  stock as  reported  on The NASDAQ  Stock  Market or a
national securities exchange, if traded thereon, has been at least 187.5% of the
current  exercise  price of the warrants  (initially  $45.00 per share),  for 20
consecutive  trading days ending on the third day prior to the date on which the
Company gives notice of the redemption.

Also in connection  with the Initial  Public  Offering,  the Company sold to the
Underwriter for $10.00 warrants  ("Underwriter's  Warrants") for the purchase of
25,000 shares of common stock and 25,000  common stock  purchase  warrants.  The
Underwriter may exercise the Underwriter's warrants to purchase the common stock
at $49.50 per share and the warrants at $ .99 per warrant.  The warrants provide
for the purchase of common stock at $39.60 per share. The Underwriter's Warrants
expire on March 20, 2001.

During the year ended June 30,  1997,  the Company  authorized  the  issuance of
warrants for the purchase of 33,333  shares of common stock in  connection  with
certain investment advisory agreements.  Such warrants are exercisable at prices
ranging from $12.00 to $24.00 per share through May 2002.

On September 30, 1997, The Zanett Securities Corporation  ("Zanett"),  acting as
placement agent for the Company,  completed the private placement  ("Placement")
of $4 million of the Company's Prepaid Common Stock Purchase Warrants  ("Prepaid
Warrants").  The sale of these Prepaid Warrants was exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Regulation D
thereof.  Each Prepaid  Warrant  entitles the holder to purchase  that number of
shares  of  Common  Stock  that is equal to  $1,000  divided  by the  applicable
exercise  price.  Such  exercise  price is  determined  initially  as 70% of the
average  closing bid price of the Common Stock for the 10 trading days ending on
the day prior to exercise of the Prepaid  Warrants.  Additionally,  the exercise
discount  shall be  increased by 1% for each  subsequent  60 day period that the
Prepaid Warrants remain unexercised.  The exercise price,  however,  shall never
exceed $8.40. The Prepaid  Warrants became  exercisable on December 29, 1997 and
expire on September 30, 2000.

Terms of the Placement included the conversion of notes payable in the amount of
$772,222 and accrued interest thereon of $63,837 into Prepaid Warrants.  The net
proceeds of the  Placement  of  $2,643,941  have been used for  general  working
capital requirements.

As  compensation  for its  services,  Zanett  received  a  placement  fee and an
unaccountable   expense   allowance  of  10%   ($400,000)   and  3%  ($120,000),
respectively, of the gross proceeds of the Placement.  Additionally, the Company
issued 100,000 Common Stock Purchase  Warrants to Zanett that are exercisable at
$6.750 per share of Common Stock. These warrants expire on September 30, 2002.

Also in conjunction  with the Placement,  the Company  entered into an agreement
with a financial  consultant who is an affiliate of Zanett  Lombardier,  Ltd, an
investor in the Prepaid  Warrants.  During the  five-year  term of the agreement
such  consultant  will provide the Company with  advisory  services  relating to
financial and strategic  ventures and alliances,  investment banking and general
financial advisory services, and advice and assistance with the Company's market
development  activities.   As  compensation  for  these  services,  the  Company
authorized the issuance of 592,592 Common Stock Purchase  Warrants  ("Consulting
Warrants") to this  consultant that are exercisable at $6.75 per share of Common
Stock.  The issuance of 509,259 of such Consulting  Warrants was contingent upon
the approval of the Company's shareholders which was received on April 24, 1998.
However, since the issuance of 509,259 of such Consulting Warrants was uncertain
until April 24, 1998,  the Company has  revalued  these  Consulting  Warrants in
accordance with Statement of Financial  Accounting Standard No. 123, "Accounting
for Stock-Based Compensation", and the Black-Scholes pricing methodology, giving
consideration  to the facts and  circumstances  as they  existed  at that  date.
Accordingly,  unearned compensation has been adjusted to $5,145,500 at April 24,
1998.  Such  amount  has been  recorded  in  stockholders'  equity  as  unearned
compensation  and will be  amortized  to income over the

                                      -32-
<PAGE>

five-year  term of the agreement.  These warrants  expire on September 30, 2002.
The Company has recorded  consulting expense of $527,576 for the year ended June
30, 1998.

At June 30,  1998,  an  aggregate  of  $2,588,355  shares of Common  stock  were
reserved for future issuance upon exercise of outstanding nonemployee warrants.

The  delisting  of the  Company's  Common Stock from the Nasdaq Small Cap Market
caused the  Company to default on certain  terms and  conditions  of the Prepaid
Warrants. Such default obligates the Company to pay financial penalties, as well
as to redeem the outstanding  Prepaid Warrants at a 43% premium.  The holders of
the Prepaid Warrants have waived their rights under the Prepaid Warrants and the
related  Registration  Rights Agreement dated September 29, 1997, subject to the
successful completion of the Further Placement by January 31, 1999.


6.   Earnings per Share

The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>

                                                                  Year Ended June 30
                                            ----------------------------------------------------------------
                                                   1998                   1997                 1996
                                            ------------------   --------------------   --------------------


<S>                                         <C>                  <C>                    <C>             
Numerator:
   Net loss                                 $   (5,040,009)      $    (4,434,482)       $    (2,966,287)
                                            ==================   ====================   ====================

Denominator:
   Weighted average shares                         659,034               615,833                392,500
                                            ==================   ====================   ====================

Basic and diluted earnings
   per common share                          $       (7.65)       $        (7.20)       $         (7.56)
                                            ==================   ====================   ====================
</TABLE>

At June 30, 1998 there were,  exclusive  of the Common Stock  Purchase  Warrants
issued in connection with the issuance of notes payable (Note 4) and the Prepaid
Warrants  (Note 5), 447,916 Common Stock  Purchase  Warrants  outstanding.  Such
warrants have exercise  prices ranging from $3.75 to $72.00 per share and expire
from March 2001 through March 2003. Additionally, the Company has established an
employee  stock  option  plan  for the  benefit  of  directors,  employees,  and
consultants  to the Company.  These options are intended to qualify as incentive
stock options within the meaning of Section 422 of the Internal Revenue Code, as
amended, or as nonqualified stock options. The options are partially exercisable
after one year from date of grant and no options may be granted  after April 15,
2006.  At the Annual  Meeting on April 24, 1998,  the  shareholders  approved an
amendment  to the Plan  authorizing  the  issuance  of up to 250,000  options to
employees  and  non-employee  directors.  At June 30,  1998,  there are  options
outstanding  for the purchase of 173,412  shares of the Company's  Common Stock.
None of the warrants or options have been included in the computation of diluted
loss per share because their inclusion would be antidilutive.


7.   Income Taxes

At June 30, 1998 and 1997, the Company has deferred tax assets as follows:

                                                   1998              1997
                                                   ----              ----

         Capitalized Start-up Costs           $    1,112,500   $   1,486,000
         Net Operating Loss Carryforwards          4,126,000       2,054,000
                                               -------------    ------------

                                              $    5,238,500   $   3,540,000
                                               =============    ============

                                      -33-
<PAGE>


In  accordance  with  Statement  of  Financial  Accounting  Standards  No.  109,
"Accounting for Income Taxes," the Company has established a valuation allowance
to fully reserve the future income tax benefit of these  deferred tax assets due
to uncertainty about their future realization. The valuation allowance increased
to $5,238,500 at June 30, 1998 from  $3,540,000 at June 30, 1997 and  $2,125,000
at June 30, 1996.

At June 30, 1998, the Company has net operating loss  carryforwards  for Federal
income tax purposes of  approximately  $9,600,000 which expire in the years 2009
through  2013.  As a result of the public  issuance  of stock by the  Company on
March 21,  1996,  and the  resultant  change in  ownership  pursuant to Internal
Revenue Code Section 382, the  utilization of net operating  losses  incurred to
this date may be limited.


8.   Leases

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

On May 1, 1997, the Company  entered into a 3 year  noncancelable  capital lease
for  certain   computer   equipment  used  to  provide   information   services.
Additionally, the Company also leases certain computer equipment under operating
leases which expire through April 2000.

Rent expense amounted to approximately $278,000,  $207,000, and $113,000 for the
years ended June 30, 1998, 1997, and 1996, respectively.

Minimum future rental payments at June 30, 1998 are as follows:
<TABLE>
<CAPTION>

                                                 Operating Leases                  
                                        ------------------------------------          Capital       
Year Ending June 30                         Premises           Equipment               Lease                     
-------------------                     -----------------    ---------------     ------------------

<S>                                    <C>                  <C>                   <C>         
         1999                             $   173,400          $   25,550            $    100,500
         2000                                 179,700              13,800                  83,700
         2001                                 186,000                  --                      --
         2002                                 192,300                  --                      --
         2003                                  67,000                  --                      --
                                        -----------------    ---------------     ------------------

                                          $   798,400          $   39,350                 184,200
                                        =================    ===============

         Less amounts
         representing interest
         and executory costs                                                               30,525
                                                                                 ------------------

                                                                                     $    153,675
                                                                                 ==================
</TABLE>


                                      -34-

<PAGE>


9.   Commitments and Contingencies

On or about  December 15, 1997,  Steven T.  Francesco,  then President and Chief
Operating  Officer  of the  Company,  filed a  complaint  against  the  Company,
Sebastian E. Cassetta (its Chairman of the Board and Chief  Executive  Officer),
Bruno Guazzoni,  Claudio Guazzoni,  Zanett Securities,  Inc. and Zanett Capital,
Inc.  in the  Supreme  Court of the  State of New York,  County of New York.  On
February 6, 1998 the Board of Directors  terminated Mr.  Francesco's  employment
with the Company as its President and Chief Operating  Officer.  In a motion for
an amended complaint Mr. Francesco alleged, among other things, that the Company
breached the terms of its employment  agreement  with him. The proposed  amended
complaint seeks damages against the Company and certain of its directors for his
wrongful  termination in an amount of at least $50 million and damages for fraud
in an unspecified amount.

By an agreement dated November 11, 1998 ("Agreement"),  Mr. Francesco has agreed
to settle  this  action  and to  resolve  all of his  claims  against  the above
referenced  parties. In consideration  thereof,  Mr. Francesco is due, under the
Agreement,  to receive  $305,000,  payable in two  installments:  $200,000 on or
before  January  31,  1999  and  $105,000  on  or  before   February  28,  1999.
Additionally, Mr. Francesco has received, under the Agreement, 125,000 shares of
SmartServ  Common Stock and warrants to purchase  16,667  shares of Common Stock
exercisable  at $5.00 per share until November 11, 2001.  However,  in the event
that the Company  fails to make the above  referenced  cash payments in a timely
fashion,  Mr.  Francesco  would have the right to pursue this action against the
above referenced parties,  except that his sole remedy against the Company would
be to  enter  judgment  against  it in the  amount  of  $305,000,  less any cash
received pursuant to the Agreement.  The cost of this settlement  ($450,750) has
been included in the financial  statements for the year ended June 30, 1998. The
Company  will use a portion  of the  proceeds  from the  Further  Placement,  as
described in note 12, to settle this obligation.

By letter dated April 10, 1998,  Michael  Fishman,  then Vice President of Sales
for the Company,  resigned his position. On or about April 24, 1998, Mr. Fishman
filed a  complaint  in the United  States  District  Court for the  District  of
Connecticut against the Company, Sebastian E. Cassetta, Claudio Guazzoni, Zanett
Securities  Co.,  Zanett  Capital Corp. and Zanett  Lombardier  Ltd. On or about
August 20, 1998, Mr. Fishman served an amended complaint,  alleging, among other
things,  that (i) he relied on false statements that the Company allegedly made,
in filings  with the  Securities  and  Exchange  Commission  and  otherwise,  in
accepting  a  position  with the  Company  and (ii) the  Company  constructively
discharged him by breaching the terms of its employment  agreement with him. The
amended  complaint  seeks to assert  claims  for (i) fraud and other  violations
under the federal securities laws, (ii) breach of various terms of the Company's
employment agreement with Mr. Fishman,  (iii) breach of the implied duty of good
faith  and  fair  dealing,  (iv)  fraudulent  misrepresentation,  (v)  negligent
misrepresentation,  (vi) intentional  misrepresentation and (vii) failure to pay
wages. The amended complaint seeks damages against the Company in an unspecified
amount.  The Company expects to move to dismiss the amended  complaint,  and the
Court has issued an order setting a schedule for the briefing of that motion. No
discovery in this action has yet been noticed or taken.  Although the Company is
vigorously  defending  this action,  there can be no  assurance  that it will be
successful.

On or about May 11, 1998, Ronald G. Weiner filed a complaint against the Company
and Mr.  Francesco in the Supreme Court of the State of New York,  County of New
York.  The complaint  alleges,  among other things,  that in May 1993, by letter
from Mr.  Francesco,  Mr.  Weiner was offered a 10% equity  stake in Smart Phone
Services,  Inc.  ("SPS"),  a company of which Mr.  Francesco  allegedly  was the
President and a majority shareholder, in exchange for his active involvement in,
among other things,  raising capital and managing the financial  aspects of SPS.
The complaint alleges that, in November 1993, Mr. Francesco sent a letter to Mr.
Weiner  in which he (i)  represented  that SPS had  failed  to  attract a single
investor and (ii) withdrew his offer to Mr.  Weiner of a 10% equity  position in
SPS. The  complaint  further  alleges  that,  in  conversations  with Mr. Weiner
beginning in November 1993, Mr.  Francesco  represented  that he was ceasing all
efforts to capitalize SPS. The complaint alleges,  among other things,  that Mr.
Francesco and SPS breached their agreement with Mr. Weiner by withdrawing  their
offer to him of a 10% equity stake in SPS, and that,  at the time Mr.


                                      -35-
<PAGE>

Francesco  represented  that he was ceasing  efforts to  capitalize  SPS, he had
actually  formed the  Company and was  actively  seeking  investors  for it. The
complaint  further  alleges  that the Company is a  successor  entity to SPS and
that,  therefore,  the  Company is liable for SPS' and Mr.  Francesco's  alleged
conduct in derogation of their alleged agreement with Mr. Weiner.  The complaint
seeks, among other things, (i) a declaratory judgment declaring Mr. Weiner a 10%
equity  shareholder of the Company,  (ii) a constructive  trust in Mr.  Weiner's
favor for 10% for the Company's equity shares and (iii) restitution  against Mr.
Francesco and the Company for unjust enrichment. On his unjust enrichment claim,
Mr. Weiner seeks unspecified damages that he alleges to be at least $250,000. In
its answer to the complaint,  the Company has denied the material allegations of
the  complaint,  asserted  affirmative  defenses and also asserted  cross-claims
against Mr. Francesco seeking indemnification from, or contribution towards, any
judgment  that Mr. Weiner may obtain  against the Company.  No discovery in this
action has yet been taken.  Although the Company is  vigorously  defending  this
action and vigorously  prosecuting its  cross-claims,  there can be no assurance
that it will be successful.  In accordance  with an agreement dated November 11,
1998 the  Company has filed a motion to  discontinue  the  cross-claims  that it
asserted against Mr. Francesco.

By memorandum dated April 10, 1998,  Jonathan  Paschkes,  then Vice President of
Marketing for the Company, resigned his position. On or about November 17, 1998,
Mr. Paschkes filed a complaint  against the Company and Sebastian E. Cassetta in
the United States District Court, District of Connecticut. In the complaint, Mr.
Paschkes  alleges (i)  fraudulent  inducement to him to accept his position with
the Company;  (ii) breach of various terms of the Company's  employment contract
with him;  and (iii)  failure by the  Company to pay him wages and  bonuses  and
issue options to him pursuant to the terms of his  employment  contract.  On his
fraudulent  inducement  and  breach  of  contract  claims,  Mr.  Paschkes  seeks
unspecified  damages that he alleges to be at least  $2,000,000 for each. On his
failure to pay wages claim, Mr. Paschkes seeks  unspecified  actual and punitive
damages that he alleges to be at least $200,000. No discovery in this action has
yet been  taken  nor has the  Company  estimated  the  amount  of loss,  if any,
incurred. Although the Company is vigorously defending this action, there can be
no assurance that it will be successful.

While the Company  intends to vigorously  defend these actions,  the unfavorable
outcome of any such action could have a material adverse effect on the Company's
financial condition, results of operations, and cash flows.

10.  Significant Relationships

During  the  year  ended  June  30,  1998,  three  Strategic  Marketing  Partner
relationships  accounted  for  10.2%,  10.0%  and  24.1%,  respectively,  of the
Company's revenues. During the year ended June 30, 1997, one Strategic Marketing
Partner  relationship   accounted  for  approximately  46.4%  of  the  Company's
revenues.


11.  Employee Stock Option Plan

In April 1996, the Board of Directors  approved the establishment of an Employee
Stock Option Plan authorizing  stock option grants to directors,  key employees,
and consultants of the Company. The options are intended to qualify as incentive
stock options within the meaning of Section 422 of the Internal  Revenue Code of
1986, as amended,  or as nonqualified  stock options.  The Plan provides for the
exercise  of 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 date of
grant and expire on the tenth  anniversary of the date of grant. On February 23,
1998,  the Board of Directors  approved  amendments to the Plan: (1) to increase
the number of shares of the Company's Common Stock issuable upon the exercise of
stock  options  granted or to be granted  under the Plan from  66,666 to 250,000
shares and (2) to eliminate  the  mandatory  grants of options to members of the
Board  of  Directors  and  grant  the  Compensation  Committee  of the  Board of
Directors  the  discretionary  authority to grant  options to both  employee and
non-employee directors.

In April 1996,  the Board  approved the grant of stock  options to employees and
officers  of the Company for the  purchase of 51,925  shares of common  stock at
prices ranging from $38.64 to $42.48 per share.  The Company recorded a non-cash
charge of  $165,773  reflecting  the  compensatory  nature of such  issuance  in


                                      -36-
<PAGE>

accordance with APB Opinion No. 25,  "Accounting for Stock Issued to Employees."
The Plan had not yet been approved by the Company's stockholders, and therefore,
measurement  of  compensation  varied  with the  changes in market  value of the
underlying stock.

On September 24, 1997, the Compensation  Committee  granted new stock options to
employees and non-employee  directors  conditional  upon  cancellation of all of
their existing stock options.  Such options were exercisable at $12.00 per share
and expire on  September  23, 2007.  On August 7, 1998 and October 8, 1998,  the
Board of Directors  voted to cancel the  outstanding  employee and  non-employee
director  options  and  reissue  options  covering  a like  number  of shares to
employees and non-employee directors at an exercise price not less than the fair
value at that date. At October 8, 1998,  the exercise price of the shares issued
to employees and non-employee  directors of the Company is $1.29 per share. Such
options expire on October 7, 2008.

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

                                                                 Average
                                                                Exercise
                                           Options                Price
                                     -------------------- ----------------------

Balance at July 1, 1995                            --                --
     Granted                                   51,925         $      38.82
     Exercised                                     --                --
     Cancelled                                     --                --
                                     -------------------- ----------------------
Balance at June 30, 1996                       51,925                38.82

     Granted                                   70,829                31.38
     Exercised                                     --                --
     Cancelled                                 66,362                37.32
                                     -------------------- ----------------------
Balance at June 30, 1997                       56,392                31.26

     Granted                                  202,225                12.00
     Exercised                                     --                --
     Cancelled                                 85,204                25.50
                                     ==================== ======================
Balance at June 30, 1998                      173,413         $      12.00
                                     ==================== ======================


The following  table  summarizes  information  about the Company's stock options
outstanding as of June 30, 1998.
<TABLE>
<CAPTION>

                                          Options Outstanding                             Options Exercisable
                            -------------------------------------------------      -----------------------------------

                                                                 Average
                                                 Average        Remaining                                Average
         Range of              Number of         Exercise      Contractual            Number of         Exercise
     Exercise Prices            Options           Price        Life (Years)            Options            Price
--------------------------- ----------------- --------------- ---------------      ---------------- ------------------

<S>                           <C>           <C>                   <C>                <C>             <C>      
       $12.00                     173,413       $   12.00             9.0                22,500          $   12.00
=========================== ================= =============== ===============      ================ ==================
</TABLE>

Supplemental and Pro Forma Disclosure

In October 1995, the Financial  Accounting  Standards Board issued  Statement of
Financial   Accounting   Standards   No.  123,   "Accounting   for   Stock-Based
Compensation."  This  Statement  requires  companies to  recognize  compensation
expense based on the respective fair values of the options at the date of grant.


                                      -37-
<PAGE>

Companies  that  choose  not to adopt the new rules will  continue  to apply the
existing  accounting rules contained in APB No. 25, but are required to disclose
the pro forma effects on net income and earnings per share, as if the fair value
based method of accounting had been applied.

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

Pertinent  assumptions  with  regard to the  determination  of fair value of the
options and their impact on earnings per share are as follows:
<TABLE>
<CAPTION>

                                                                1998                 1997                1996
                                                         -------------------    ---------------    ------------------

       
<S>                                                              <C>                    <C>                 <C> 
        Weighted  average  dividend  yield for  options
             granted                                             0.0%                   0.0%                0.0%

        Weighted average expected life in years                  5.0                    5.0                 5.0

        Weighted average volatility                            143.9%                  70.8%               70.8%

        Risk-free interest rate                                  6.00%                  6.5%                6.28%

        Weighted  average  grant  date  fair  value  of
             options                                           $10.92                 $19.80              $24.42
</TABLE>

For purposes of pro forma  disclosures,  the estimated fair value of the options
is amortized to expense over the options' vesting period. As such, the pro forma
net loss and loss per share are not  indicative of future  years.  The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>

                                                            Year Ended June 30
                       -----------------------------------------------------------------------------
                                   1998                   1997                            1996
                       -----------------------------------------------------------------------------

                          Reported    ProForma    Reported      ProForma   Reported      ProForma
                       -----------------------------------------------------------------------------

<S>                       <C>          <C>        <C>          <C>         <C>       <C>  
Loss per Share               $7.65        $8.58      $7.20        $8.46       $7.56     $8.22
                       =============================================================================

</TABLE>

12.  Subsequent Events

Subsequent to June 30, 1998,  holders of 267 of the Company's  Prepaid  Warrants
converted such warrants into 172,088  shares of Common Stock at exercise  prices
ranging from $.75 to $2.40 per share.

On August 11, 1998, the Company  entered into a letter of intent,  as amended on
November 24, 1998, with Spencer Trask Securities,  Inc.  ("Spencer Trask") (the
"Letter of Intent")  which provided for the retention of Spencer Trask to act as
exclusive  placement agent in connection with a private placement by the Company
of a minimum of  $5,000,000  and a maximum of  $10,000,000  of securities of the
Company (the "Further 


                                      -38-
<PAGE>

Placement").  The Further  Placement is  conditioned  upon the occurrence of the
Reverse  Stock Split which was  effective  on October  26,  1998.  The Letter of
Intent  provides that the Company will offer a minimum of 50 units and a maximum
of 100 units at a gross  purchase  price of $100,000,  each unit  consisting  of
shares of convertible  preferred stock (the "Preferred  Shares").  The number of
Preferred  Shares will be  determined  by dividing the unit price of $100,000 by
the conversion price (the "Placement Conversion Price"), which is anticipated to
be equal to 75% of the average closing bid price for the Company's  Common Stock
for the 15 days  following the  effective  date of the Reverse Stock Split which
was $1.019 per share.  The Preferred  Shares will be  convertible  by the holder
into  shares  of Common  Stock on a  one-to-one  basis at any time  prior to the
expiration of a 30-day period commencing upon the giving of notice of redemption
by the Company.  After two years, the Preferred Shares will be redeemable at the
Company's option at 110% of the purchase price for Preferred Shares in the event
that the  average  closing  price of the Common  Stock for the 20  trading  days
preceding  the notice of  redemption  exceeds 150% of the  Placement  Conversion
Price.  The  Preferred  Shares  will  receive  an  8%  annual  dividend  payable
semi-annually,  in-kind or in cash at the Company's  option. No assurance can be
given that the Further Placement will be consummated.

In  connection  with the  Further  Placement,  Spencer  Trask will  receive,  in
addition to customary fees and expenses,  five (5) year warrants (the "Placement
Warrants") to purchase  Common Stock at 120% of the offering  price per share in
an amount equal to 10% of the  Preferred  Shares  contained in the units sold in
the Further  Placement.  The Placement  Warrants will contain certain demand and
piggyback  registration  rights with  respect to the shares of Common Stock into
which the Placement Warrants are convertible.

Additionally,  the Company  entered into agreements with certain warrant holders
pursuant to which,  among other things, the Company (i) agreed to acquire on the
date the Further  Placement  commences  warrants to purchase  801,175  shares of
Common Stock from such holders in exchange for the issuance by the Company of an
aggregate of 342,842  shares of Common Stock (the "Warrant  Redemption"),  which
shares may not be sold  (except  privately)  for a period of fifteen (15) months
following  the final  closing of the Further  Placement  or  September  1, 2000,
whichever is earlier,  and (ii) has issued  50,000 shares of Common Stock to the
holders of  $1,669,000  of Prepaid  Warrants in  consideration  of such  holders
agreeing to similar restrictions on the exercise of the Prepaid Warrants and the
resale of the shares of Common Stock  issuable upon such  exercise.  The Company
will  record  appropriate  charges  for such  transactions  during the period in
which they are completed.


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

None.


                                      -39-
<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 the  executive
officers and directors of SmartServ Online, Inc.
<TABLE>
<CAPTION>

Name                           Age      Position
----                           ---      --------

<S>                           <C>    <C>                                                            
Sebastian E. Cassetta           50      Chief Executive Officer, Chairman of the Board, Secretary and
                                        Class III Director
Thomas W. Haller, CPA           44      Vice President, Treasurer and Chief Financial Officer
Mario F. Rossi                  60      Vice President of Operations and Class II Director
Claudio Guazzoni                35      Class I Director
L. Scott Perry                  50      Class I Director
Robert Steele                   59      Class II Director
Catherine Cassel Talmadge       46      Class I Director
Charles R. Wood                 57      Class III Director

</TABLE>

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

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

Mario F.  Rossi has been Vice  President  of  Operations  of the  Company  since
December 1994. Mr. Rossi was appointed a director of the Company on February 23,
1998.  From  January  1989 to December  1994,  Mr.  Rossi was Vice  President of
Operations of MVS Inc., a fiber optic systems company.

Claudio  Guazzoni  was  appointed a director of the Company on January 11, 1998.
Since 1993, Mr. Guazzoni has been President of The Zanett Securities Corporation
and Zanett Capital,  Inc. providing financial and strategic  consulting services
to growth companies. Prior to joining the Zanett organization,  Mr. Guazzoni was
a Money Manager with Delphi  Capital  Management,  Inc.  (1992) and an associate
with Salomon  Brothers,  Inc. from 1985 to 1991.  Since March 1996, Mr. Guazzoni
has been a member of the Board of Directors of American BioMed, Inc.

L. Scott Perry has been a director of the Company  since  November  1996.  Since
June 1998, Mr. Perry has been Vice President,  Strategy /Alliances-ATT Solutions
and Vice President, Strategic Alliance Relationships. From December 1995 to June
1998,  Mr. Perry had been Vice  President,  Advanced  Platform  Services of AT&T
Corp. From January 1989 to December 1995, Mr. Perry held various  positions with
AT&T including Vice President -- Business  Multimedia  Services,  Vice President
(East) -- Business Communications Services and Vice President --

                                      -40-
<PAGE>

Marketing,  Strategy and Technical  Support for AT&T Data Systems  Group.  Since
February 1996, Mr. Perry has also been the Chief Executive  Officer of GeoSphere
Communications,  a networking software company. Mr. Perry serves on the Board of
Directors  of  Junior  Achievement  of New  York,  is a  member  of the  Cornell
University Engineering College Advisory Council and serves on the Board of INEA,
a private financial planning software company based in Toronto, Canada.

Robert  Steele was  appointed a director of the  Company on February  23,  1998.
Since  February 1998, Mr. Steele has been Vice Chairman of the John Ryan Company
("John Ryan"), an international bank support and marketing company. From 1992 to
February 1998, Mr. Steele was a Senior Vice President with John Ryan. Mr. Steele
is the  former  President  of Dollar Dry Dock  Savings  Bank and a member of the
Board of Directors  of Moore  Medical  Corp.,  Scan  Optics,  Inc.  Accent Color
Sciences, Inc. and NLC Insurance Companies, Inc.

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

Charles R. Wood was appointed a director of the Company in September  1998.  Mr.
Wood has been Senior Vice  President of Data  Transmission  Network  Corporation
("DTN") since 1989 and President of its Financial  Services Division since 1996.
As  described  in Item 1, the  Company has entered  into an  agreement  with DTN
whereby DTN will pay the Company a minimum of  $2,000,000  during the three year
term of the agreement for the license to market three of the Company's  Internet
products.

The Board of Directors consists of seven directors divided into three classes of
directors:  Class I Directors,  Class II Directors, and Class III Directors. The
Company's  Class I Directors,  Class II Directors,  and Class III Directors will
serve until the annual meeting of the Company's stockholders to be held in 1999,
2000, and 1998,  respectively,  and until their  respective  successors are duly
elected and qualified or until their earlier  resignation or removal.  Directors
of each Class are elected  for a full term of three years (or any lesser  period
representing  the  balance of the  previous  term of such Class) and until their
respective  successors  are duly elected and  qualified  or until their  earlier
resignation  or  removal.  Officers  are  appointed  annually  and  serve at the
discretion of the Board for one year.  Mr.  Cassetta  serves as Chief  Executive
Officer,  Chairman of the Board,  and  Secretary  of the Company  pursuant to an
employment agreement.

Mr.  Cassetta and Mr.  Rossi,  each an officer and director of the Company,  Mr.
Haller, an officer of the Company, and Ms. Talmadge and Mr. Perry,  directors of
the  Company,  failed to file an Annual  Statement  of  Beneficial  Ownership of
Securities  on Form 5 for the fiscal year ended June 30, 1998,  each  reflecting
one purchase and the receipt of certain stock options. Messrs. Guazzoni,  Steele
and Wood, each a director of the Company, failed to file an Initial Statement of
Beneficial Ownership Securities on Form 3 when he became a director. The Company
anticipates  that each of such officers and  directors  will take such action as
may be necessary to promptly file appropriate Forms 3 and 5.


                                      -41-

<PAGE>


Item 10.   Executive Compensation
-------

The  following  table sets forth  information  concerning  annual and  long-term
compensation,  paid or  accrued,  for the Chief  Executive  Officer  (the "Named
Executive  Officer") for services in all  capacities  to the Company  during the
last three fiscal  years.  No other  executive  officer of the Company  received
compensation in excess of $100,000 in fiscal 1998.
<TABLE>
<CAPTION>

                                      Summary Compensation Table (1) (2)
                                      ----------------------------------
                                                                                     Securities
Name and                        Fiscal                          Other Annual         Underlying      All Other
Principal Position               Year       Salary     Bonus  Compensation (3)        Options       Compensation
------------------               ----       ------     -----  ----------------        -------       ------------
<S>                        <C>       <C>                         <C>              <C>                  
Sebastian E. Cassetta        1998      $   125,000      --         $ 9,750          37,500(4)          --
Chief Executive Officer      1997      $   125,000      --         $ 9,750          16,666             --
                             1996      $   125,000      --         $ 9,750          16,666(5)          --
</TABLE>

(1)  The Named Executive  Officer did not receive any Restricted Stock Awards or
     LTIP Payouts in 1998, 1997, or 1996.

(2)  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 Officer.

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

(4)  On both August 7, 1998 and October 8, 1998, the  Compensation  Committee of
     the Board of  Directors  canceled  the  stock  options  representing  these
     underlying shares and granted new options to Mr. Cassetta.

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


Stock Options

The following table sets forth information with respect to stock options granted
to the Named Executive Officer during fiscal year 1998:
<TABLE>
<CAPTION>

                                              Option Grants in Fiscal 1998
                                                (Individual Grants) (1)
                                              ----------------------------


                                   Number of             % of Total Options
                            Securities Underlying        Granted to Employees      Exercise    Expiration
                          Underlying Options Granted      in Fiscal 1998           Price        Date (2)           
                          --------------------------      -------------------      --------    ----------                          
Name                                                                                 
----                                                                              
<S>                       <C>                               <C>                 <C>          <C>
Sebastian E. Cassetta         37,500(2)(3)(4)                   18.54%              $12.00      10/7/08

</TABLE>

(1)  No  stock   appreciation   rights   ("SARs")  were  granted  to  the  Named
     Executive Officer during fiscal 1998.

                                      -42-
<PAGE>


(2)  On September 24, 1997, the Compensation Committee granted new stock options
     to employees  conditional upon  cancellation of all of their existing stock
     options.  As a  consequence  of this  action and upon  cancellation  of the
     options described above, Mr. Cassetta received an option to purchase 16,666
     shares of the Company's  Common Stock  exercisable at a price of $12.00 per
     share  expiring on September 23, 2007.  The option  becomes  exercisable in
     full on the first anniversary of the grant date.

(3)  On February 23, 1998, the Compensation  Committee of the Board of Directors
     granted Mr.  Cassetta a new stock option to purchase  20,833  shares of the
     Company's  Common  Stock  exercisable  at the  price of  $12.00  per  share
     expiring on February 22, 2008. The option becomes exercisable to the extent
     of 50% on the first  anniversary of the date of grant and 50% on the second
     anniversary of the date of grant.

(4)  On both  August 7, 1998 and  October 8, 1998,  the  Compensation  Committee
     voted to cancel the outstanding employee and non-employee  director options
     and  reissue  options  covering a like  number of shares to  employees  and
     non-employee directors at an exercise price not less than the fair value at
     that date. As a  consequence  of this action and upon  cancellation  of the
     options described above, Mr. Cassetta received an option to purchase 37,500
     shares of the Company's  Common Stock  exercisable  at a price of $1.29 per
     share expiring on October 7, 2008.

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 fiscal year end:
<TABLE>
<CAPTION>

                                  Aggregated Option Exercises in Last Fiscal Year and
                                            Fiscal Year End Option Value (1)
                                  -----------------------------------------------------
                                                                                                      Value of      
                                                                      Number of Unexercised         Unexercised
                                                                      Securities Underlying        In-The-Money
                                                                        Options at Fiscal           Options at
                                                                             Year End             Fiscal Year End
                                 Shares Acquired          Value          Exercisable/            Exercisable/
 Name                              on Exercise          Realized          Unexercisable            Unexercisable
 ----                             ---------------        --------     ----------------------      ---------------
                           
<S>                              <C>               <C>                  <C>                         <C>  
Sebastian E. Cassetta                  --                 --               0/37,500                    $0/$0
</TABLE>

(1)  No  SARs were  granted  to, or  exercised  by, the  Named Executive Officer
     during fiscal 1998.

(2)  Value is based  on the  closing  price  of the  Company's  Common  Stock as
     reported  by the OTC  Bulletin  Board on June  30,  1998  ($9.00)  less the
     exercise price of the option.


                                      -43-
<PAGE>


Employment Agreements

The Company and Sebastian E.  Cassetta are parties to an  Employment  Agreement,
effective  January 31, 1994,  which  expires on January 31, 1999.  The Agreement
provides for (i) an annual base salary of $125,000, (ii) a performance bonus for
each fiscal year between  June 30, 1995 and June 30,  1998,  payable in cash and
Common Stock of the Company,  in the event the Company achieves specified levels
of  earnings  before  interest,  income  taxes,  depreciation  and  amortization
("EBITDA") provided therein and (iii) any additional amount as determined by the
Board  or an  outside  compensation  board.  The  Company  did not  achieve  the
specified  EBITDA goals.  Mr.  Cassetta is also entitled to  participate  in any
present or future insurance,  pension, retirement,  profit sharing or bonus plan
or other  compensation  or incentive plan adopted by the Company for the general
and overall  benefit of full-time  principal  executives  of the  Company,  such
participation  to be upon the same terms and  conditions as generally  relate to
such full-time principal executives. In the event that Mr. Cassetta's employment
is  terminated  without  cause,  the  Company is  obligated  to make a severance
payment to Mr.  Cassetta in the amount of $250,000  within 30 days following the
date of such termination.


Item 11.   Security Ownership of Certain Beneficial Owners and Management
-------

The following table sets forth, as of January 14, 1999 certain  information with
respect to the beneficial ownership of the Common Stock by (i) each person known
by the Company to beneficially own more than 5% of the outstanding  shares, (ii)
each director of the Company,  (iii) each Named  Executive  Officer and (iv) all
executive officers and directors of the Company as a group.  Except as otherwise
indicated,  each person listed below has sole voting and  investment  power with
respect to the shares of Common Stock set forth opposite such person's name.

<TABLE>
<CAPTION>

           Name and Address of           Amount and Nature of                Percent of
            Beneficial Owner             Beneficial Ownership (2)      Outstanding Shares (3)
            ----------------             ------------------------      ----------------------
<S>                                     <C>                               <C>
Steven T. Francesco
23 Lakeview Avenue
New Canaan, Connecticut 06840                  229,241                             18.84%

Sebastian E. Cassetta
c/o SmartServ Online, Inc.
Metro Center, One Station Place
Stamford, CT 06902                              62,753                              5.23%

The Optimum Fund                                59,524                              4.96%
c/o U.S. Milestone Corp.
417 Surf Avenue
Staten Island, New York 10307

Claudio Guazzoni                                63,013(4)                           4.99%

L. Scott Perry                                   5,833(5)                           *

Catherine Cassel Talmadge                        5,416(5)                           *

Robert H. Steele                                 4,166(6)                           *

Mario F. Rossi                                     750                              *

                                      -44-
<PAGE>

Charles R. Wood                                  1,000                              *

All executive officers and directors
as a group (8 persons)                         143,766(7)                          11.26%
</TABLE>

*    Less than 1%

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

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

(3)  Represents  the number of shares of Common Stock  beneficially  owned as of
     January 14, 1999,  by each named person or group, expressed as a percentage
     of the sum of all of the shares of such class  outstanding  as of such date
     and the number of shares not outstanding,  but  beneficially  owned by such
     named person or group.

(4)  Includes  4,166  shares  subject to  currently  exercisable  options.  Also
     includes 58,847 shares subject to currently  exercisable  warrants owned by
     Zanett. Mr. Guazzoni disclaims  beneficial ownership of these shares to the
     extent  they  exceed his  interest  in Zanett.  Mr.  Guazzoni is a managing
     director and principal of Zanett. Zanett has entered into an agreement with
     the Company pursuant to which, among other things, the Company will, on the
     date of the  commencement  of the Further  Placement,  purchase  all of the
     outstanding  warrants  owned by Zanett  for  shares of Common  Stock of the
     Company.  None of  such  shares  will  be  issued  to Mr.  Guazzoni  or his
     affiliates.

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

(6)  Includes 4,166 shares subject to currently exercisable options.

(7)  Includes  77,346  shares  subject  to currently  exercisable  warrants  and
     options.

Changes in Control

The Company and each of Messrs.  Cassetta  and  Francesco  have  entered into an
agreement  with Zanett  Capital,  Inc.  ("ZCI")  dated  September  29, 1997,  as
subsequently amended, which provides, among other things, that for a period of 5
years,  if there is an event of default under the Prepaid  Warrant,  the Company
will,  at the request of ZCI,  appoint  such number of  designees  of ZCI to its
Board of  Directors so that the  designees of ZCI will  constitute a majority of
the members of the Board of Directors of the Company.  Further, Messrs. Cassetta
and  Francesco  have agreed to vote their shares of Common  Stock,  representing
approximately  22.95% of the  outstanding  stock of the Company,  and any shares
they may acquire in the future,  in favor of the designees of ZCI at each Annual
Meeting of Stockholders of the Company at which Directors are elected.

The Company has entered into agreements with certain warrant holders pursuant to
which,  among  other  things,  the Company (i) agreed to acquire on the date the
Further Placement  commences warrants to

                                      -45-
<PAGE>

purchase  801,175  shares of Common  Stock from such holders in exchange for the
issuance by the Company of an aggregate of 342,842 shares of Common Stock, which
shares may not be sold (except  privately)  for a period of eighteen (18) months
following  the final  closing of the Further  Placement  or  September  1, 2000,
whichever is earlier,  and (ii) has issued  50,000 shares of Common Stock to the
holders of  $1,669,000  of Prepaid  Warrants in  consideration  of such  holders
agreeing to similar restrictions on the exercise of the Prepaid Warrants and the
resale of the  shares of Common  Stock  issuable  upon such  exercise.  Any such
shares sold privately will remain subject to the above  restrictions  on resale.
One of the holders of Prepaid  Warrants  has given  Sebastian  Cassetta  (or his
successor  as chief  executive  officer of the  Company)  an  irrevocable  proxy
through  January 30,  1999 to vote that  number of shares of Common  Stock to be
issued to such holder as described in this paragraph  which exceeds 4.99% of the
outstanding Common Stock.

In addition,  ZCI has  temporarily  waived its rights to designate a majority of
the  members of the Board of  Directors  of the Company and its right to approve
certain  corporate  expenditures.  In the event that the  Further  Placement  is
consummated  by  January  1, 1999 and the  Company's  Common  Stock is listed on
NASDAQ by March 1, 1999, these waivers will become permanent.

Item 12.   Certain Relationships and Related Transactions
-------

On July 30, 1998, the Company entered into an agreement with, among others,  ZCI
and  Zanett,  pursuant  to which the  Company  agreed to acquire on the date the
Further Placement  commences warrants to purchase 111,700 shares of Common Stock
from  Zanett in  exchange  for the  issuance  by the Company of shares of Common
Stock  to  certain  principals  of  Zanett.  Pursuant  to  the  agreement,   ZCI
temporarily  waived its rights to  designate  a majority  of the  members of the
Board of Directors of the Company under certain  circumstances  and the right to
approve certain  corporate  expenditures.  In the event the Further Placement is
consummated  by January 1, 1999 and the Company's  Common Stock is listed on the
NASDAQ by March 1, 1999, these waivers will become permanent.  Claudio Guazzoni,
a director of the Company,  is a principal of ZCI and Zanett.  Mr. Guazzoni will
not  receive  any of the shares of Common  Stock of the  Company  issuable  upon
acquisition by the Company of warrants from Zanett.

The Company believes that the terms of the transactions  described above were no
less   favorable  to  the  Company  than  would  have  been   obtained   from  a
non-affiliated third party for similar transactions at the time of entering into
such transactions. In accordance with the Company's policy, such transaction was
approved  by a  majority  of  the  independent  disinterested  directors  of the
Company.


                                      -46-

<PAGE>


Item 13.   Exhibits and Reports on Form 8-K
-------

(a)      Index to Exhibits

Exhibit           Description
-------           -----------

3.1               Amended  and  Restated  Certificate  of  Incorporation  of the
                  Company**
3.2               By-laws of the Company, as amended**
4.1               Specimen Certificate of the Company's Common Stock**
4.2               Form of Underwriter's Warrant**
4.3               Form of Warrant Agent Agreement**
4.4               Form of Redeemable Warrant**
4.5               Form of Warrant  Agreement  used by the Company  for  warrants
                  issued to John E. Herzog,  Emanuel E. Geduld,  Andrew  DaPonte
                  and Anchung Sammy Chung and Fong-Chi Alison Tsao**
4.6               Warrant  dated  February  1, 1994 issued by the Company to Tri
                  Cap International**
4.7               Form of Prepaid Common Stock Purchase Warrant****
4.8               Warrant issued to The Zanett Securities Corporation****
4.9               Warrant issued to Bruno Guazzoni****
10.1              Information  Distribution  License  Agreement dated as of July
                  18, 1994 between the Company and S&P ComStock, Inc.**
10.2              New York Stock Exchange, Inc. Agreement for Receipt and Use of
                  Market  Data dated as of August 11,  1994  between the Company
                  and the New York Stock Exchange, Inc.**
10.3              The Nasdaq Stock  Market,  Inc.  Vendor  Agreement for Level 1
                  Service and Last Sale Service  dated as of September  12, 1994
                  between  the  Company  and The  Nasdaq  Stock  Exchange,  Inc.
                  ("Nasdaq")**
10.4              Amendment  to Vendor  Agreement  for Level 1 Service  and Last
                  Sale Service  dated as of October 11, 1994 between the Company
                  and Nasdaq**
10.5              Non-Exclusive  Agency  Agreement  dated as of November 1, 1994
                  between the Company and Dun & Bradstreet, Inc.**
10.6              Services  Agreement dated as of February 1, 1995,  between the
                  Company and Federal Express Corporation**
10.7              Information  Provider  Agreement  dated as of March  13,  1995
                  between the Company and The Argus Group, Inc.**
10.8              Metromail National Directory Assistance Reseller Agreement For
                  Electronic  Services  Providers  dated  as of March  13,  1995
                  between the Company and Metromail Corporation**
10.9              Reuters NewMedia,  Inc. On-Line Services Agreement dated as of
                  November  13, 1995  between the Company and Reuters  NewMedia,
                  Inc.**
10.10             Lease Agreement dated as of March 4, 1994, between the Company
                  and One Station Place, L.P. regarding the Company's  Stamford,
                  Connecticut, offices**
10.11             Lease Modification and Extension Agreement,  dated February 6,
                  1996,   between  the  Company  and  One  Station  Place,  L.P.
                  regarding the Company's Stamford, Connecticut, offices***
10.12             Employment  Agreement  (the "Cassetta  Employment  Agreement")
                  dated  of  January  31,  1994 by and  among  the  Company  and
                  Sebastian E. Cassetta**
10.13             Amendment No. 1 to the Cassetta Employment  Agreement dated as
                  of June 30,  1994 by and among the Company  and  Sebastian  E.
                  Cassetta**
10.14             Form of Registration  Rights Agreement between the Company and
                  certain investors**
10.15             Form of Consulting  Agreement between the Company and Rickel &
                  Associates**
10.16             Agreement dated as of January 31, 1996 between the Company and
                  Henry Snow**


                                      -47-
<PAGE>

10.17             Memorandum  of  Understanding  dated  February 7, 1996 between
                  Northern Telecom Inc. and the Company**
10.18             Subscriber  Agreement  dated  February  16,  1996  between the
                  Company and the Cunningham Group Inc. dba Lottery USA.com**
10.19             Memorandum of Understanding,  dated June 26, 1996, between the
                  Company and CIDCO Incorporated***
10.20             Form of 1996 Stock Option Plan*****
10.21             Form of Registration  Rights Agreement issued to purchasers of
                  Prepaid Common Stock Purchase Warrants****
10.22             Consulting Agreement with Bruno Guazzoni****
10.23             Agreement  between   Sprint/United   Management   Company  and
                  SmartServ Online, Inc. dated September 26, 1997 *
10.24             Asset Purchase  Agreement between  SmartServ Online,  Inc. and
                  Data  Transmission  Network   Corporation,   dated  April  23,
                  1998******
25                Financial Data Schedule +


+        Filed herewith

*        Filed  as  an exhibit to the Company's Annual Report on Form 10-KSB for
         the fiscal year ended June 30, 1997

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

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

****     Filed as an  exhibit to the  Company's Current Report on Form 8-K/A for
         an event dated September 30, 1997

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

******   Filed  as  an  exhibit to the Company's Quarterly Report on Form 10-QSB
         for the period ended March 31, 1998

(b)      Reports on Form 8-K

         None


                                      -48-

<PAGE>
                                   Signatures



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


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


                                              By: /s/Sebastian E. Cassetta
                                                  ------------------------------
                                                     Sebastian E. Cassetta
                                                     Chairman of the Board
                                                     Chief Executive Officer


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

         Signature                                 Title                                  Date
         ---------                                 -----                                  ----

<S>                                     <C>                                   <C>             
/s/ Sebastian E. Cassetta                 Chairman of the Board,                  December 1, 1998
---------------------------------------
    Sebastian E. Cassetta                 Chief Executive Officer,
                                          Secretary and Director

/s/ Mario F. Rossi                        Vice President and                      December 1, 1998
---------------------------------------
    Mario F. Rossi                        Director

/s/ Thomas W. Haller                      Vice President, Treasurer               December 1, 1998
---------------------------------------
    Thomas W. Haller                      and Chief Financial Officer

/s/                                       Director                                December 1, 1998
--------------------------------------
    Claudio Guazzoni

/s/ Robert H. Steele                      Director                                December 1, 1998
---------------------------------------
    Robert H. Steele

/s/ L. Scott Perry                        Director                                December 1, 1998
---------------------------------------
    L. Scott Perry

/s/ Catherine Cassel Talmadge             Director                                December 1, 1998
---------------------------------------
    Catherine Cassel Talmadge

/s/ Charles R. Wood                       Director                                December 1, 1998
---------------------------------------
    Charles R. Wood

</TABLE>