================================================================================

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   FORM 10-QSB

[X]   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934

                For the quarterly period ended September 30, 2005

                         Commission file number 0-28008

                             SmartServ Online, Inc.
--------------------------------------------------------------------------------
        (Exact Name of Small Business Issuer as Specified in Its Charter)

Delaware                                                              13-3750708
--------------------------------------------------------------------------------
(State or Other Jurisdiction of             (I.R.S. Employer Identification No.)
Incorporation or Organization)

             2250 Butler Pike, Suite 150, Plymouth Meeting, PA 19462
--------------------------------------------------------------------------------
                    (Address of Principal Executive Offices)

                                 (610) 397-0689
--------------------------------------------------------------------------------
                (Issuer's Telephone Number, Including Area Code)

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days.  Yes  X     No
                                                              ------    ------

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
         Yes           No   X
             ------       ----

The number of shares of common stock, $.01 par value,  outstanding as of October
31, 2005 was 6,352,889.

Transitional Small Business Disclosure Format (check one):
         Yes           No   X
             ------       ----

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<PAGE>

                             SmartServ Online, Inc.

                                   Form 10-QSB

                                      Index

<TABLE>
<CAPTION>
<S>                                                                                                            <C>
PART 1.       FINANCIAL INFORMATION

Item 1.       Consolidated Financial Statements

         Consolidated Balance Sheets - September 30, 2005 (unaudited) and December 31, 2004.......................2

         Consolidated Statements of Operations - three months ended September 30, 2005 and 2004
         and nine months ended September 30, 2005 and 2004 (unaudited)............................................4

         Consolidated Statement of Changes in Stockholders' Equity - nine months
         ended September 30, 2005 (unaudited).....................................................................5

         Consolidated Statements of Cash Flows - nine months ended September 30, 2005 and 2004 (unaudited) .......6

         Notes to Consolidated Financial Statements (unaudited)...................................................7

Item 2.       Management's Discussion and Analysis or Plan of Operation..........................................18

Item 3.       Controls and Procedures............................................................................24

PART II.      OTHER INFORMATION

Item 1.       Legal Proceedings..................................................................................25

Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds........................................25

Item 3.       Defaults Upon Senior Securities....................................................................25

Item 6.       Exhibits ..........................................................................................25

              Signatures.........................................................................................27
</TABLE>


                                       1
<PAGE>

                             SmartServ Online, Inc.

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                   September 30,      December 31,
                                                                        2005              2004
                                                                   -------------     -------------
                                                                    (Unaudited)
<S>                                                                <C>               <C>
Assets
Current assets
   Cash and cash equivalents                                       $   1,082,500     $   1,792,856
   Investments                                                           100,743            99,697
   Accounts receivable, net                                            4,525,651            92,496
   Prepaid expenses                                                       66,589           349,040
                                                                   -------------     -------------
Total current assets                                                   5,775,483         2,334,089
                                                                   -------------     -------------

Property and equipment, net                                               23,564            73,500

Restricted cash                                                        1,000,000                --
Deferred financing costs                                               1,349,211                --
Goodwill (Note 3)                                                      1,743,819                --
Intangibles, net of accumulated amortization of $234,081 and
      $123,201 as of September 30, 2005 and December 31, 2004,
       respectively                                                      800,808           911,688
Security deposits                                                         18,787            18,237
                                                                   -------------     -------------
Total Assets                                                       $  10,711,672     $   3,337,514
                                                                   =============     =============
</TABLE>

See accompanying notes.


                                       2
<PAGE>

                             SmartServ Online, Inc.

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                    September 30,       December 31,
                                                                         2005               2004
                                                                   --------------      --------------
                                                                     (Unaudited)
<S>                                                                <C>                 <C>
Liabilities and Stockholders' Equity
Current liabilities
   Accounts payable                                                $    5,215,842      $      446,528
   Accrued liabilities                                                  2,456,880           1,419,248
   Current portion of notes payable                                     2,400,000              36,898
                                                                   --------------      --------------
Total current liabilities                                              10,072,722           1,902,674
                                                                   --------------      --------------

Notes payable                                                                  --              13,415

Commitments and Contingencies (Note 7)

Stockholders' Equity
Convertible preferred stock - $0.01 par value
   Authorized - 1,000,000 shares
   Issued and outstanding - 769,432 and 862,282 shares,
       aggregate liquidation preference of $14,843,316 and
       $14,056,639 as of September 30, 2005 and
       December31,2004, respectively
                                                                            7,694               8,623
Common stock - $.01 par value
   Authorized - 40,000,000 shares
   Issued - 6,481,942 shares and 3,978,445 shares; outstanding
       - 6,352,889 shares and 3,849,392 shares as of September
       30, 2005 and December 31, 2004, respectively                        64,820              39,785
Additional paid-in capital                                            107,069,347         103,877,486
Unearned compensation                                                  (1,024,153)         (1,363,663)
Accumulated deficit                                                  (105,315,105)       (100,977,153)
                                                                   --------------      --------------
                                                                          802,603           1,585,078
                                                                   --------------      --------------
Treasury stock, 129,053 shares at cost                                   (163,653)           (163,653)
                                                                   --------------      --------------
Total stockholders' equity                                                638,950           1,421,425
                                                                   --------------      --------------
Total Liabilities and Stockholders' Equity                         $   10,711,672      $    3,337,514
                                                                   ==============      ==============
</TABLE>

See accompanying notes.


                                       3
<PAGE>

                             SmartServ Online, Inc.

                      Consolidated Statements of Operations
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                           Three Months                         Nine Months
                                                        Ended September 30                  Ended September 30
                                                  ------------------------------      ------------------------------
                                                      2005               2004             2005              2004
                                                  ------------      ------------      ------------      ------------
<S>                                               <C>               <C>               <C>               <C>
Revenues                                          $ 13,579,708      $     80,474      $ 37,739,354      $    268,189
                                                  ------------      ------------      ------------      ------------

Costs and expenses:
   Direct  costs of revenues                       (13,449,549)         (644,762)      (37,828,325)       (1,626,357)
   Sales and marketing expenses                       (126,076)         (156,705)         (645,214)         (298,925)
   General and administrative expenses                (744,286)         (506,308)       (3,122,430)       (1,871,442)
   Stock-based compensation (Note 5)                  (113,170)          639,107          (339,510)               --
                                                  ------------      ------------      ------------      ------------

   Total costs and expenses                        (14,433,081)         (668,668)      (41,935,479)       (3,796,724)
                                                  ------------      ------------      ------------      ------------

Loss from operations                                  (853,373)         (588,194)       (4,196,125)       (3,528,535)
                                                  ------------      ------------      ------------      ------------

Other income (expense):
   Interest income                                         450             6,520             4,345            19,287
   Interest expense and other financing costs          (85,080)         (538,742)          (86,172)       (2,630,771)
   Legal settlement                                    (60,000)               --           (60,000)         (196,800)
                                                  ------------      ------------      ------------      ------------
                                                      (144,630)         (532,222)         (141,827)       (2,808,284)

Net loss                                          $   (998,003)     $ (1,120,416)     $ (4,337,952)     $ (6,336,819)
                                                  ============      ============      ============      ============

Preferred stock dividend accrued                    (1,220,671)       (1,114,366)       (3,622,209)       (3,130,460)
                                                  ------------      ------------      ------------      ------------

Net loss applicable to common shareholders        $ (2,218,674)     $ (2,234,782)     $ (7,960,161)     $ (9,467,279)
                                                  ============      ============      ============      ============

Basic and diluted loss per share                  $      (0.35)     $      (0.74)     $      (1.40)     $      (3.41)
                                                  ============      ============      ============      ============

Weighted average shares outstanding - basic
   and diluted                                       6,304,018         3,002,167         5,670,089         2,773,669
                                                  ============      ============      ============      ============
</TABLE>

See accompanying notes.


                                       4
<PAGE>

                         SmartServ Online, Inc.
        Consolidated Statement of Changes in Stockholders' Equity
                  Nine Months Ended September 30, 2005
                               (Unaudited)

<TABLE>
<CAPTION>
                                                                                            Series A Convertible
                                                             Common Stock                      Preferred Stock
                                                                                                                     Additional Paid
                                                            Shares       Par Value        Shares        Par Value      -in Capital
                                                        -------------  -------------  -------------   -------------   -------------
<S>                                                         <C>        <C>                  <C>       <C>             <C>
Balances at December 31, 2004                               3,978,445  $      39,785        862,282   $       8,623   $ 103,877,486

Issuance of common stock to acquire KPCCD, Inc.             1,000,000         10,000             --              --       1,707,143

Issuance of warrants related to debt financing                     --             --             --              --       1,229,236

Issuance of warrants as compensation for services                  --             --             --              --         938,628

Issuance of warrants to vendor                                     --             --             --              --          12,637

Issuance of common stock pursuant to an antidilution
  provision of a May 2000 stock purchase agreement            500,000          5,000         (5,000)             --              --

Series A Preferred Stock and warrants                              --             --             --              --       2,835,532

Conversion of Series A Preferred Stock                        928,497          9,285        (92,850)           (929)         (8,356)

Accretion of dividends on Series A Preferred Stock                 --             --             --              --      (2,835,532)

Dividends accrued on Series A Preferred Stock                      --             --             --              --        (786,677)

Common stock issued per settlement with former Officer         75,000            750             --              --         104,250

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

Net loss for the period                                            --             --             --              --              --
                                                        -------------  -------------  -------------   -------------   -------------
Balances at September 30, 2005                              6,481,942  $      64,820        769,432   $       7,694   $ 107,069,347
                                                        =============  =============  =============   =============   =============

<CAPTION>
                                                          Unearned
                                                        Compensation   Treasury Stock  Accumulated Deficit
                                                        -------------   -------------   -------------
<S>                                                     <C>             <C>             <C>
Balances at December 31, 2004                           $  (1,363,663)  $    (163,653)  $(100,977,153)

Issuance of common stock to acquire KPCCD, Inc.                    --              --              --

Issuance of warrants related to debt financing

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

Issuance of warrants to vendor                                     --              --              --

Issuance of common stock pursuant to an antidilution
  provision of a May 2000 stock purchase agreement                 --              --              --

Series A Preferred Stock and warrants                              --              --              --

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

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

Dividends accrued on Series A Preferred Stock                      --              --              --

Common stock issued per settlement with former Officer             --              --              --

Amortization of unearned compensation                         339,510              --              --

Net loss for the period                                            --              --      (4,337,952)
                                                        -------------   -------------   -------------
Balances at September 30, 2005                          $  (1,024,153)  $    (163,653)  $(105,315,105)
                                                        =============   =============   =============
</TABLE>

See accompanying notes.


                                       5
<PAGE>

                             SmartServ Online, Inc.

                      Consolidated Statements of Cash Flows
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                           Nine Months
                                                                                      Ended September 30
                                                                                 ----------------------------
                                                                                     2005             2004
                                                                                 -----------      -----------
<S>                                                                              <C>              <C>
Operating Activities
Net loss                                                                         $(4,337,952)     $(6,336,819)
Adjustments to reconcile net loss to net cash used for operating activities:
    Depreciation and amortization                                                    135,216           31,907
    Noncash compensation costs                                                       182,972          761,280
    Provision for doubtful accounts                                                  186,809               --
    Noncash consulting services                                                      860,656          447,859
    Noncash payments to vendors                                                       12,637          223,099
     Amortization of deferred compensation                                           339,510               --
    Amortization of deferred financing costs                                          46,525        1,231,772
     Provision for losses on loans to former officers                                     --           91,872
     Loss on disposal of equipment                                                    32,322               --
    Changes in operating assets and liabilities
       Restricted cash                                                            (1,000,000)              --
       Accounts receivable                                                        (4,619,964)           8,471
       Accrued interest receivable                                                        --           47,004
       Prepaid expenses                                                              282,451           22,827
       Prepaid compensation                                                               --          133,127
       Accounts payable and accrued liabilities                                    5,020,269         (568,815)
       Deferred revenues                                                                  --          (37,500)
       Security deposit                                                                 (550)         (11,212)
                                                                                 -----------      -----------
    Net cash used for operating activities                                        (2,859,099)      (3,955,128)
                                                                                 -----------      -----------

Investing Activities
Purchase of equipment                                                                 (6,722)        (117,346)
Purchase of KPCCD, Inc.                                                              (26,676)              --
Purchase of nReach, Inc.                                                                  --         (100,000)
Purchase of investments                                                               (1,046)
                                                                                 -----------      -----------
    Net cash used for investing activities                                           (34,444)        (217,346)
                                                                                 -----------      -----------

Financing Activities
Proceeds from issuance of senior convertible note and revolving convertible
  note                                                                             2,400,000               --
Proceeds from the issuance of series A convertible
  preferred stock and warrants - net                                                      --        8,591,275
Repayment of notes payable and accrued interest                                      (50,313)      (1,391,504)
Proceeds from issuance of notes payable
                                                                                          --           58,820
Deferred financing costs                                                            (166,500)              --
                                                                                 -----------      -----------
    Net cash provided by financing activities                                      2,183,187        7,258,591
                                                                                 -----------      -----------

(Decrease) increase in cash and cash equivalents                                    (710,356)       3,086,117
Cash and cash equivalents - beginning of period                                    1,792,856          139,178
                                                                                 -----------      -----------

Cash and cash equivalents - end of period                                        $ 1,082,500      $ 3,225,295
                                                                                 ===========      ===========
</TABLE>

See accompanying notes.


                                       6
<PAGE>

                             SmartServ Online, Inc.

              Notes to Unaudited Consolidated Financial Statements

                               September 30, 2005

1. Nature of Business and Operations

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

The Company, headquartered in Plymouth Meeting, PA, is transitioning to become a
Mobile Virtual Network Operator (MVNO) that plans to launch mobile phone service
in the first quarter of 2006 with low cost,  prepaid  minute  plans,  discounted
international  long distance and the latest in mobile content such as ringtones,
mobile games and images.

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

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

Our financial  statements  have been prepared on a going  concern  basis,  which
contemplates  the  realization of assets and the  settlement of liabilities  and
commitments in the normal course of business.  However,  substantial doubt about
the Company's ability to continue as a going concern have been raised because we
have since our inception earned limited  revenues and have incurred  substantial
recurring  operating  losses,  including net losses of  $4,337,952  for the nine
month period ended  September 30, 2005 and  $10,580,372  and $17,537,775 for the
years ended December 31, 2004 and 2003, respectively.  Additionally,  we have an
accumulated deficit of $105,315,105 at September 30, 2005.



                                       7
<PAGE>

On March 30, 2005,  after  reviewing the Company's  cash flow  projections,  the
board of  directors  approved a plan  designed  to enable us to have  sufficient
working capital to support a reduced level of operations  through March 2006. As
of March 31, 2005, the Company had $992,676 in cash and investments. Elements of
the plan  included:  1) maximizing  KPCCD's  international  calling card profits
since the  acquisition  of KPCCD on  January  7, 2005 2)  reducing  the level of
operating  expenses by relocating our hosting facility from an off site location
to an on-site location and 3) eliminating employee positions.

In April,  2005, the Company  commenced  implementing  such plan and reduced our
staff to a total of 10 people as of July 2005.  The staffing level remains at 10
people as of September 30, 2005.  The Company also  completed the  relocation of
its hosting facility to its headquarters.

The Company has been pursuing additional financing,  through some combination of
borrowings or the sale of equity or debt securities during 2005.

On August 31,  2005,  we executed  agreements  to obtain  financing  from CAMOFI
Master,   LDC,  a  Cayman  Islands  limited  duration  company  (the  "Lender"),
consisting  of a Senior  Secured  Convertible  Note in the  principal  amount of
$500,000 (the "Senior Note") and a Revolving  Convertible  Note in the principal
amount of $1,900,000 (the "Revolving Note") which availability is based upon our
eligible accounts receivable. Based on such availability, the Revolving Note may
be increased to $2,500,000.  The term of the financing is for 30 months from the
closing date.  The Senior Note and Revolving Note are senior in right of payment
to any and all of our indebtedness and are secured by a first lien on all of our
assets.  The loan is guaranteed  by our  subsidiary,  KPCCD,  Inc. We issued the
Lender five year warrants to purchase an aggregate of 3,000,000 shares of common
stock at an  exercise  price of $.50 per  share.  The  warrants  were  valued at
$1,229,236. Such warrants are exercisable on a cashless basis and are subject to
full  ratchet  antidilution   protection.   We  used  approximately   $1,010,000
(including  fees) to post a letter of credit in favor of Sprint as  required  by
the Sprint contract. The balance of the funds will be used for working capital.

We believe that our cash resources are  sufficient to fund operating  losses and
working capital  requirements for approximately the next four to five months. As
a result, we will need to raise additional  financing,  through some combination
of borrowings or the sale of equity or debt securities  during 2005 and 2006. We
are pursuing financing  alternatives to fund the Company's cash deficiency.  The
Company may not be able to raise  sufficient  additional  debt,  equity or other
capital on acceptable terms, if at all. Failure to generate  sufficient revenues
,  contain  certain  discretionary  spending,  achieve  certain  other  business
objectives or raise  additional  funds could have a material  adverse  affect on
results of operations, cash flows and financial position,  including our ability
to continue as a going  concern,  and may  require us to  significantly  reduce,
reorganize,  discontinue or shut down  operations.  Our  consolidated  financial
statements  do  not  include  any  adjustments   that  might  result  from  this
uncertainty.

2. Summary of Significant Accounting Policies

Basis of Presentation
The accompanying  unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim  financial  information,  the instructions of Form 10-QSB
and Rule 310 of Regulation S-B of the Securities  and Exchange  Commission  and,
therefore, do not include all information and notes necessary for a presentation
of results of operations,  financial  position and cash flows in conformity with
accounting  principles  generally accepted in the United States of America.  The
balance   sheet  at  December  31,  2004  has  been  derived  from  the  audited
consolidated  financial statements at that date, but does not include all of the
information and footnotes required by accounting  principles  generally accepted
in  the  United  States  of  America  for  complete  financial  statements.  The
consolidated  financial  statements  should  be read  in  conjunction  with  the
Company's  Annual Report on Form 10-KSB for the year ended December 31, 2004. In
the opinion of  management,  all  adjustments  (consisting  of normal  recurring
adjustments) necessary for a fair presentation of financial position and results
of  operations  have been  made.  Results of  operations  for the three and nine
months ended September 30, 2005 are not necessarily indicative of those expected
for the year ending December 31, 2005.



                                       8
<PAGE>

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

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

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

Prepaid International Calling Card Revenue
Prepaid  international  calling card revenue is derived from the sale of prepaid
international calling cards to distributors. Revenue is recognized upon shipment
or  delivery  of  prepaid  international  calling  cards  to  distributors  on a
non-recourse basis.

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

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

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

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

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


                                       9
<PAGE>

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

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

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

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

In August 2005, we executed  agreements to obtain  financing from CAMOFI Master,
LDC, a Cayman Islands limited  duration  company (the  "Lender").  We issued the
Lender five year warrants to purchase an aggregate of 3,000,000 shares of common
stock at an  exercise  price of $.50 per  share.  The  warrants  were  valued at
$1,229,236.  The issuance of warrants to purchase  common stock is  considered a
non-cash transaction for the purposes of the Statement of Cash Flows.

In September 2005, in connection with  consulting  services,  the Company issued
warrants to Frank Kisberg to purchase  30,000 shares of common stock at $.60 per
share and expiring in September  2008. The warrants were valued at $10,335.  The
issuance  of  warrants  to  purchase  common  stock  is  considered  a  non-cash
transaction for the purposes of the Statement of Cash Flows.

In September 2005, in connection with  consulting  services,  the Company issued
warrants to Punk Ziegel & Company L.P. to purchase 42,000 shares of common stock
at $.90 per share and expiring in September  2010.  The warrants  were valued at
$15,943.  The  issuance of warrants to purchase  common  stock is  considered  a
non-cash transaction for the purposes of the Statement of Cash Flows.

In September 2005, in connection with  consulting  services,  the Company issued
warrants to Richard Berman to purchase 25,000 shares of common stock at $.60 per
share and expiring in September  2008.  The warrants were valued at $8,949.  The
issuance  of  warrants  to  purchase  common  stock  is  considered  a  non-cash
transaction for the purposes of the Statement of Cash Flows.

In September 2005, in connection with termination agreements, the Company issued
warrants to William  Taylor and Mark Glaser for each to purchase  125,000 shares
of common stock at $.90 per share and expiring in September  2008.  The warrants
were valued at $39,017 and  $38,955,  respectively.  The issuance of warrants to
purchase  common stock is considered a non-cash  transaction for the purposes of
the Statement of Cash Flows.

On January 7, 2005, the Company acquired the business of KPCCD,  Inc., a prepaid
international  calling card distributor.  Cash paid for the business acquired is
comprised of:



                                       10
<PAGE>

Fair value of assets acquired                 $ 1,743,819
Liabilities assumed                                    --
                                              -----------
Purchase price, net of cash received            1,743,819
Common stock issued for business acquired      (1,717,143)
                                              -----------
Net cash paid for business acquired           $    26,676
                                              ===========

Concentration of Credit Risk
Financial  instruments that potentially  subject  SmartServ to concentrations of
credit risk consist of cash and cash equivalents  (including  restricted  cash),
investments  and  accounts  receivable.  The Company  places its cash  deposits,
including  investments  in  certificates  of deposit,  with high credit  quality
institutions.  From time to time, a substantial amount of the Company's cash may
exceed  federal  depository  insurance  limits.  However,  the  Company  has not
experienced  any losses in this area and  management  believes its cash deposits
are not subject to  significant  credit risk. At September 30, 2005 and December
31, 2004,  accounts  receivable consist  principally of amounts due from prepaid
international  calling  card  distributors  and from a major  telecommunications
carrier.  The Company performs periodic credit evaluations of its customers and,
if  applicable,  provides for credit losses in the financial  statements.  As of
September 30, 2005 a reserve for doubtful accounts was provided in the amount of
$186,809 related to a few distributors. As of December 31, 2004, the Company did
not believe a reserve for doubtful accounts was necessary.

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

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

Stock Based Compensation

Employee Stock Option Plans

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

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

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



                                       11
<PAGE>

SmartServ's pro forma information is as follows:

<TABLE>
<CAPTION>
                                               Three Months                     Nine Months
                                            Ended September 30               Ended September 30
                                       ----------------------------    ----------------------------
                                           2005            2004            2005            2004
                                       ------------    ------------    ------------    ------------
<S>                                    <C>             <C>             <C>             <C>
Net loss applicable to common          $ (2,218,674)   $ (2,234,782)   $ (7,960,161)   $ (9,467,279)
  shareholders

Employee stock-based
  compensation included in net loss         113,170        (639,107)        339,510              --

Employee stock-based
  compcompensation pursuant to
  SFAS 123                               (2,359,487)       (605,787)     (3,560,947)     (1,317,436)
                                       ------------    ------------    ------------    ------------

Pro forma net loss                     $ (4,464,991)   $ (3,479,676)   $(11,181,598)   $(10,784,715)
                                       ============    ============    ============    ============

Basic and diluted loss per share       $      (0.35)   $      (0.74)   $      (1.40)   $      (3.41)
                                       ============    ============    ============    ============

Pro forma basic and diluted loss per
  per share                            $      (0.71)   $      (1.16)   $      (1.97)   $      (3.89)
                                       ============    ============    ============    ============
</TABLE>

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

Non-Employee Compensation

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

Statement No. 123R

In December 2004,  the FASB issued  Statement No.  123(R),  Share-Based  Payment
("Statement  No.  123(R)").  Statement  No.  123(R)  requires  that the costs of
employee  share-based  payments be  measured at fair value on the awards'  grant
date using an  option-pricing  model and recognized in the financial  statements
over the  requisite  service  period.  Statement  No. 123(R) does not change the
accounting for stock ownership plans, which is subject to the American Institute
of  Certified  Public  Accountants  Statement  of  Position  ("SOP")  No.  93-6,
Employer's  Accounting for Employee Stock Ownership Plans.  Statement No. 123(R)
supersedes  APB No. 25, and its  related  interpretations,  and  eliminates  the
alternative to use APB No. 25's intrinsic  value method of accounting,  which we
currently use.

Statement No. 123(R) requires public  companies to adopt Statement  123(R) using
the modified prospective application for periods from the adoption date forward.
For periods before the required effective date, companies may elect to apply the
modified retrospective application method, although not required.



                                       12
<PAGE>

The modified  prospective  method requires  compensation cost for the portion of
awards  for which  the  requisite  service  has not yet been  rendered  that are
outstanding as of the adoption date to be recognized over the remaining  service
period.  The  compensation  cost for that portion of awards will be based on the
grant-date  fair value of those awards as calculated  for pro forma  disclosures
under  Statement No. 123, as originally  issued.  All new awards and awards that
are  modified,  repurchased,  or  cancelled  after  the  adoption  date  will be
accounted for under the provisions of Statement No. 123(R).

The  modified  retrospective  application  method  may be  applied to either all
periods  prior to  adoption  or only to  prior  interim  periods  in the year of
adoption,  thus allowing companies to recognize, in their prior period financial
statements,  the exact amount of compensation cost that was previously disclosed
in  their  proforma  footnote  disclosure.   However,  changes  to  the  amounts
originally disclosed in prior periods are precluded.

On April 14, 2005,  the SEC issued  Release  2005-57  which allows  companies to
implement  Statement  No.  123(R) at the  beginning  of their next fiscal  year,
instead  of the next  reporting  period  that  begins  after  June  15,  2005 as
disclosed in the original  Statement  No.  123(R)  release in December  2004. We
currently plan to apply the required modified  prospective  method upon adoption
on January 1, 2006 and we are  evaluating  the impact  Statement No. 123(R) will
have on our financial  position,  results of operations,  earnings per share and
cash flows when adopted.

3. Acquisition

On January 7, 2005 SmartServ acquired all of the issued and outstanding  capital
stock of KPCCD,  Inc.  ("KPCCD")  pursuant to a Stock Purchase  Agreement by and
among Nimesh Patel, Ashok Patel and Kala Patel (collectively, the "Sellers") and
the Company,  dated  December 19, 2004  ("Agreement").  Following the closing of
this acquisition, KPCCD is a wholly-owned subsidiary of the Company.

The Company  issued  1,000,000  shares of its common  stock,  $.01 par value per
share, valued at $1,717,143 to the Sellers as consideration for acquiring KPCCD.
Founded in 1998, KPCCD distributes international prepaid calling cards through a
network of hundreds of retail outlets along the East Coast.  The  acquisition of
KPCCD  expands the  Company's  distribution  network for the  Company's  planned
prepaid wireless products and In connection with the closing of the transactions
contemplated by the Agreement,  on January 7, 2005 KPCCD,  the Sellers and Prima
Communications,  Inc.  ("Prima"),  a company controlled by the Sellers,  entered
into a Master Vendor Agreement ("Vendor Agreement"). Under the Vendor Agreement,
Prima  sells  to  KPCCD at cost all of  KPCCD's  requirements  of  international
prepaid  calling cards for up to one year after January 7, 2005.While the Vendor
Agreement  has a one year  term,  it is subject  to early  termination  upon the
happening of certain enumerated events, including the following:

      o     Automatic  termination  30 days after the  Company  raises  over $10
            million in an equity financing (a "Significant Event").

      o     If a  Significant  Event does not occur  within nine months from the
            date of the Vendor  Agreement,  upon 30 days written notice by Prima
            if Prima is not satisfied with the Company's  then current  business
            plan.

      o     Immediately  if the employment of the sellers is terminated by KPCCD
            (other than voluntary termination by the employee).

      o     Upon 5 days notice provided by KPCCD.

Upon any such  termination,  amounts  outstanding at the time of the termination
shall be paid to Prima and, under certain circumstances,  KPCCD will be required
to purchase from Prima all  inventory  that Prima is holding and has ordered for
future sale by KPCCD. Per Prima management,  inventory held and ordered by Prima
for future  purchase by SmartServ  consisted of  international  prepaid  calling
cards  amounting  to  approximately  $1.2 million at  September  30, 2005.  Such
inventory,  in its  entirety,  has  been  purchased  by  SmartServ  and  sold to
SmartServ's  customers through the date of this filing. The balance at September
30 is representative of the approximate maximum amount that may be held by Prima
for future purchase.



                                       13
<PAGE>

The  acquisition  was accounted for using the purchase method of accounting and,
accordingly,  the purchase price has been allocated to the assets  purchased and
the liabilities assumed based upon their fair values at the date of acquisition.
The fair value of assets  acquired  was  $1,743,819  resulting in a net purchase
price of $1,743,819.  The purchase price allocation has not been finalized.  The
Company engaged an independent appraisal firm to provide appraisal services. For
any purchase price allocation that has not been finalized, the nature and amount
of any material adjustments made to the allocation of the purchase price will be
disclosed in subsequent periods.  The allocation and appraisal will be finalized
in the fourth quarter of 2005.

SmartServ's pro forma  information as if the KPCCD acquisition took place at the
beginning of the periods presented is as follows:

<TABLE>
<CAPTION>
                                                   Three Months                    Nine Months
                                                Ended September 30             Ended September 30
                                          ----------------------------    ----------------------------
                                              2005           2004             2005            2004
                                          ------------    ------------    ------------    ------------
<S>                                       <C>             <C>             <C>             <C>
      Pro forma revenues                  $ 13,579,708    $  5,019,277    $(37,739,354    $ 15,084,598

      Pro forma net loss                      (998,003)     (4,337,952)     (6,225,414)
                                                                                            (1,083,281)

      Pro forma preferred stock
      dividend accrued                      (1,220,671)     (1,114,366)     (3,622,209)     (3,130,460)
                                          ------------    ------------    ------------    ------------

      Pro forma net loss applicable
      to common shareholders              $ (2,218,674)   $ (2,197,647)   $ (7,960,161)   $ (9,355,874)
                                          ============    ============    ============    ============

      Pro forma basic and diluted loss
       per share                          $      (0.35)   $      (0.55)   $      (1.40)   $      (2.48)
                                          ============    ============    ============    ============

      Pro forma weighted average shares
       Outstanding - basic and diluted       6,304,018       4,002,167       5,670,089       3,773,669
                                          ============    ============    ============    ============
</TABLE>

4. Equity Transactions

On January 7, 2005, the Company acquired KPCCD, Inc. by issuing 1,000,000 shares
of its common stock valued at $1,717,143 in exchange for all of the  outstanding
shares of KPCCD, Inc.

On  January  10,  2005,  the  Company  granted to the  Chairman  of the Board of
Directors,  Paul J. Keeler,  warrants to purchase  250,000  shares of the Common
Stock at an exercise price of $2.10 per share, which was the closing stock price
of the common stock on the date of grant.  The warrants were valued at $424,372.
The warrants have a 5 year term and are immediately  exercisable and were issued
to Mr. Keeler for serving as the Chairman of the Board. The warrants were issued
in reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act.



                                       14
<PAGE>

In connection with consulting services provided by Steven Rosner and Brockington
Securities, Inc., the Company entered into consulting agreements dated March 31,
2004 for  warrants to  purchase  300,000  and  100,000  shares of common  stock,
respectively,  at $1.50 per share and expiring on March 31,  2007.  The warrants
were valued at $902,367 and $300,787 respectively.  During the second quarter of
2005, $75,198 and $25,066 of the warrants vested, respectively.

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

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

Obligations to Maintain Effective Registration Statements:

Vertical  Ventures  Investments,  LLC holds a warrant to  purchase  up to 22,476
shares of common stock that is subject to registration  rights. The Registration
Statement  covering the shares  underlying this warrant is no longer  effective.
The Company had until May 14, 2003 to cause the Registration  Statement to again
become effective. The Company was unable to do so by May 14, 2003, so it accrued
a fee of $8,250 for the first month of the  deficiency  and a fee of $16,500 for
each month  thereafter  until the shares  underlying the warrant are registered.
The total amount accrued as of September 30, 2005 was $202,125.

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

Obligation to File a Registration Statement:

Pursuant to the terms of the 2004 Private Placement, the Company was required to
file a  Registration  Statement  with the SEC and have it declared  effective no
later  than  120  days  after  April  30,  2004,  or by  August  29,  2004.  The
Registration  Statement  was  filed  on May 13,  2004  but it has  not yet  been
declared effective by the SEC and as a result,  the Company incurred  liquidated
damages in the form of a monthly cash  requirement  equal to 2% of the aggregate
purchase price of the offering, or approximately $266,000 per month.  Liquidated
damages  were due  monthly  until the event of  default  is cured.  The  Company
proposed a settlement to limit the liquidated damages. In December 2004, in full
settlement of the default,  the Company established a pool of 1,000,000 warrants
with an  exercise  price of $2.50  per share  and a two year  term.  The pool of
warrants  was  allocated  among  each   participant   based  on  the  investor's
proportionate  participation in the 2004 Private Placement. The Company recorded
a financing expense of $1,782,125 as of December 31, 2004 related to the pool of
warrants. As of September 30, 2005, 68% of the representative  warrant ownership
of the  1,000,000  warrants  responded to the  proposal  and of that amount,  3%
declined the proposal. The remaining 29% have not responded to the offer.

In 2004,  pursuant to an agreement  with a vendor to whom the Company  issued in
settlement  60,000 shares of common  stock,  the Company was obligated to file a
Registration Statement and have it declared effective within the same time frame
as  required  by the  terms  of the 2004  Private  Placement.  The  Registration
Statement was timely filed but it has not been declared effective by the SEC. As
a result, the Company incurred late registration  penalties of $2,000 per month,
or $14,000 as of September  30, 2005.  The late  registration  penalties are due
monthly until the event of default is cured.



                                       15
<PAGE>

On August 31,  2005,  we executed  agreements  to obtain  financing  from CAMOFI
Master,   LDC,  a  Cayman  Islands  limited  duration  company  (the  "Lender"),
consisting  of a Senior  Secured  Convertible  Note in the  principal  amount of
$500,000 (the "Senior Note") and a Revolving  Convertible  Note in the principal
amount of $1,900,000 (the "Revolving Note") which availability is based upon our
eligible accounts receivable. Based on such availability, the Revolving Note may
be increased to $2,500,000.  The Senior Note and Revolving Note are  convertible
into our common stock at $.50 per share. In connection  with such financing,  we
issued the Lender  five year  warrants to purchase  an  aggregate  of  3,000,000
shares of common stock at an exercise price of $.50 per share. Such warrants are
exercisable  on a cashless  basis and are subject to full  ratchet  antidilution
protection.  The notes and warrants  were issued in reliance  upon the exemption
from registration provided by Section 4(2) of the Act.

The Company is required to file with the SEC a registration  statement  covering
the shares of common stock  underlying  the Senior Note,  Revolving Note and the
warrants  within 30 days and have it  declared  effective  within 90 days of the
closing  date.  If the  registration  statement  is not filed  within 30 days or
declared  effective  within 90 days of the closing  date,  the Company  will pay
liquidated  damages to the lender. The damages will be paid in cash in an amount
equal to 1 1/2% of the Senior Note for the first 30 days (or part thereof) after
the 30th or 90th day, and an additional 1 1/2% for any subsequent  30-day period
(or part thereof) thereafter.

5. Stock-based Compensation

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

In January 2005, the Company issued 8,000 incentive stock options to employees.

In July 2005, the Company granted to Messrs. Pons, Wenhold and von Vital options
to  purchase  4,681,233,   3,516,863  and  2,890,616  shares  of  common  stock,
respectively,  which options have an exercise price of $.50 per share and a term
of 10  years.  The  options  vest  one-third  on the  grant  date and  quarterly
thereafter over two years commencing  December 31, 2005. The options are subject
to  shareholder  approval.  The options will vest  immediately  upon a Change of
Control (as defined in their option agreements).

Also in July 2005,  the Company  granted to directors and  employees  options to
purchase 1,726,370, shares of common stock, respectively,  which options have an
exercise  price of $.50 per  share  and a term of 10  years.  The  options  vest
one-third on the grant date and quarterly  thereafter over two years  commencing
December 31, 2005. The options are subject to shareholder approval.  The options
will vest  immediately  upon a Change of Control  (as  defined  in their  option
agreements).

In September 2005, the Company  granted to Robert  Hartnett  options to purchase
319,062,  shares of common stock. The options have an exercise price of $.50 per
share,  a term of 10 years  and the  options  vest as  follows  1)  60,000  vest
annually  and  2)  259,062  vest  one-third  on the  grant  date  and  quarterly
thereafter over two years  commencing  December 31, 2005. The latter options are
subject to shareholder approval. The options will vest immediately upon a Change
of Control (as defined in their option agreements).

Stock-based  compensation for the three and nine months ended September 30, 2005
and 2004 relate to the impact of options  granted at less than fair market value
on  the  measurement  date.  The  following  table  illustrates  the  amount  of
stock-based compensation charges that would have been recorded in the categories
of the statement of operations had stock-based  compensation not been separately
stated therein:



                                       16
<PAGE>

<TABLE>
<CAPTION>
                                            Three Months                   Nine Months
                                         Ended September 30          Ended September 30
                                      ------------------------    ------------------------
                                         2005          2004          2005          2004
                                      ----------    ----------    ----------    ----------
<S>                                   <C>           <C>           <C>           <C>
Direct costs of revenues              $  (36,563)   $  231,001    $ (109,689)   $       --

General and administrative expenses      (76,607)      408,106      (229,821)           --
                                      ----------    ----------    ----------    ----------
                                      $ (113,170)   $  639,107    $ (339,510)   $       --
                                      ==========    ==========    ==========    ==========
</TABLE>

6. Earnings Per Share

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

<TABLE>
<CAPTION>
                                                       Three Months              Nine Months
                                                    Ended September 30       Ended September 30
                                                 -----------------------   -----------------------
                                                    2005         2004         2005         2004
                                                 ----------   ----------   ----------   ----------
<S>                                              <C>          <C>          <C>          <C>
Numerator:
   Net loss applicable to common shareholders    $(2,218,674) $(2,234,782) $ (7,960,16$)$(9,467,279)
                                                 ==========   ==========   ==========   ==========

Denominator:
   Weighted average shares - basic and diluted    6,304,018    3,002,167    5,670,089    2,773,669
                                                 ==========   ==========   ==========   ==========

Basic and diluted loss per common share
                                                 $    (0.35)  $    (0.74)  $    (1.40)  $    (3.41)
                                                 ==========   ==========   ==========   ==========
</TABLE>

Outstanding  employee  stock options and other warrants to purchase an aggregate
37,513,913 and 19,210,239 shares of common stock at September 30, 2005 and 2004,
respectively,  were not  included in the  computations  of diluted  earnings per
share and neither were convertible  preferred stock,  convertible into 7,694,320
and  8,764,910   shares  of  common  stock  at  September  30,  2005  and  2004,
respectively,  because the Company reported losses for the periods and therefore
their inclusion would be antidilutive.

7. Commitments and Contingencies.

On or about August 17, 2004, Vertical Ventures Investments LLC filed a complaint
against the Company in the Supreme Court of the State of New York, County of New
York. The complaint sought payment of late registration  penalties and attorneys
fees in the total amount of $350,000.  While the Company  intends to  vigorously
defend such lawsuit, an unfavorable outcome would have a material adverse effect
on the  Company's  financial  condition,  results of  operation  and cash flows.
During 2003 former employees of SmartServ filed  complaints  against the Company
for unpaid wages arising from salary  reductions  implemented  by the Company in
2002. Claims, totaling $65,000, are pending before the Connecticut Department of
Labor and the Connecticut Superior Court.  Management believes these claims have
no merit and intends to defend the claims vigorously.


                                       17
<PAGE>

Item 2. Management's Discussion and Analysis or Plan of Operation

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

We are a Mobile Virtual Network  Operator (MVNO) which is a mobile operator that
does  not own or  operate  supporting  infrastructure  such as cell  towers  and
related  support  systems.  We intend to launch an innovative  prepaid  wireless
service in the first quarter of 2006 under the brand name UPHONIA(TM). We intend
to give  consumers a better choice in mobile phone service by bundling  flexible
prepaid  minute plans,  free mobile content and  discounted  international  long
distance. With our UPHONIA(TM) mobile phone service,  prepaid customers will get
the premium  features not usually  available at the  micro-retailers  where they
shop:

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

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

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

We have an agreement with Sprint to utilize Sprint's  Nationwide PCS Network for
its prepaid  mobile  phone  service.  Under this  agreement,  Sprint  wholesales
wireless  minutes from their  network  directly to  SmartServ  for resale to its
UPHONIA(TM)  customers.  SmartServ  benefits  from this  agreement  by receiving
access to Sprint's  enhanced  nationwide  network with turnkey  reliability  and
performance.  As an MVNO,  SmartServ has the advantage of market access  without
the  need to  build  the  telecom  infrastructure  necessary  to  originate  and
terminate domestic wireless calls. Sprint benefits by gaining a distribution and
marketing  partner  that is  focused  on market  development  in a niche that is
secondary to Sprint (i.e., the immigrant,  urban ethnic and youth markets).  The
agreement  requires  $1,000,000  in the form of a letter of credit to secure our
obligations under the Sprint contract which was posted on September 21, 2005.

We also design,  develop and  distribute  software and services  that enable the
delivery to wireless devices of various  content,  with special emphasis on cell
phones. The content which we provide includes premium content such as ringtones,
images and games,  and dynamic  changing  content  such as  horoscopes,  lottery
results and weather reports.  Historically,  we have licensed our  applications,
content,  and related  services to wireless  carriers and  enterprises.  We have
revenue  sharing  license  agreements  with  wireless  carriers  such as Verizon
Wireless,  AT&T Wireless,  Nextel, and ALLTEL Wireless, that allow us to deliver
our  services and branded  content to a wide base of consumer  cell phone users.
For enterprises,  we have in the past offered  solutions that deliver  financial
market data,  proprietary  internal  documents and other useful  information  to
mobile workers, although this no longer comprises a core part of our business or
strategy.

Our financial  statements  have been prepared on a going  concern  basis,  which
contemplates  the  realization of assets and the  settlement of liabilities  and
commitments in the normal course of business.  However,  substantial doubt about
the Company's ability to continue as a going concern have been raised because we
have since our inception earned limited  revenues and have incurred  substantial
recurring  operating  losses,  including net losses of  $4,337,952  for the nine
month period ended  September 30, 2005 and  $10,580,372  and $17,537,775 for the
years ended December 31, 2004 and 2003, respectively.  Additionally,  we have an
accumulated deficit of $105,315,105 at September 30, 2005.



                                       18
<PAGE>

On March 30, 2005,  after  reviewing the Company's  cash flow  projections,  the
Company adopted a plan designed to enable us to have sufficient  working capital
to support a reduced  level of  operations  through  March 2006. As of March 31,
2005,  the Company had  $992,676 in cash and  investments.  Elements of the plan
included:  1) maximizing  KPCCD's  international  calling card profits since the
acquisition  of KPCCD on  January  7,  2005,  2) reduce  the level of  operating
expenses by  relocating  our hosting  facility  from an off site  location to an
on-site location, and 3) elimination of employee positions.

In April,  2005, the Company  commenced  implementing  such plan and reduced our
staff to a total of 10 people as of July 2005.  Staffing remains at 10 people as
of September 30, 2005.  The Company also completed the relocation of its hosting
facility to its headquarters.

In addition, the Company has been pursuing action items to improve its liquidity
in conjunction with beginning to execute its business strategy. The action items
include pursuing sources of financing  through some combination of borrowings or
the sale of equity or debt securities during 2005.

On August 31,  2005,  we executed  agreements  to obtain  financing  from CAMOFI
Master,   LDC,  a  Cayman  Islands  limited  duration  company  (the  "Lender"),
consisting  of a Senior  Secured  Convertible  Note in the  principal  amount of
$500,000 (the "Senior Note") and a Revolving  Convertible  Note in the principal
amount of $1,900,000 (the "Revolving Note") which availability is based upon our
eligible accounts receivable. Based on such availability, the Revolving Note may
be increased to $2,500,000.  The term of the financing is for 30 months from the
closing date.  The Senior Note and Revolving Note are senior in right of payment
to any and all of our indebtedness and are secured by a first lien on all of our
assets.  The loan is guaranteed  by our  subsidiary,  KPCCD,  Inc. We issued the
Lender five year warrants to purchase an aggregate of 3,000,000 shares of common
stock at an exercise price of $.50 per share. Such warrants are exercisable on a
cashless basis and are subject to full ratchet antidilution protection.

We used approximately  $1,010,000 (including fees) to post a letter of credit in
favor of Sprint as  required  by the Sprint  contract.  The balance of the funds
will be used for working capital.

We believe that our cash resources are  sufficient to fund operating  losses and
working capital  requirements for approximately the next four to five months. As
a result, we will need to raise additional  financing,  through some combination
of borrowings or the sale of equity or debt securities  during 2005 and 2006. We
are pursuing financing  alternatives to fund the Company's cash deficiency.  The
Company may not be able to raise  sufficient  additional  debt,  equity or other
capital on acceptable terms, if at all. Failure to generate sufficient revenues,
contain  certain   discretionary   spending,   achieve  certain  other  business
objectives or raise  additional  funds could have a material  adverse  affect on
results of operations, cash flows and financial position,  including our ability
to continue as a going  concern,  and may  require us to  significantly  reduce,
reorganize,  discontinue or shut down  operations.  Our  consolidated  financial
statements  do  not  include  any  adjustments   that  might  result  from  this
uncertainty.

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



                                       19
<PAGE>

On January 7, 2005, we acquired KPCCD,  Inc., a New York City-based  distributor
of  international  prepaid  calling cards.  Founded in 1998,  KPCCD  distributes
international  prepaid  calling  cards  through a network of  hundreds of retail
outlets  along the East Coast.  We believe  that the  acquisition  of KPCCD will
expand our distribution  network for our planned prepaid  wireless  products and
services. The acquisition of KPCCD added approximately $37.7 million in revenues
during the nine months ended  September 30, 2005. In connection with the closing
of the  transaction  on January 7, 2005,  KPCCD,  the sellers of KPCCD and Prima
Communications,  Inc.  ("Prima"),  a company controlled by the sellers,  entered
into a Master Vendor Agreement ("Vendor Agreement"). Under the Vendor Agreement,
Prima  sells  to  KPCCD at cost all of  KPCCD's  requirements  of  international
prepaid calling cards for up to one year after January 7, 2005. Upon termination
of the Vendor Agreement, under certain circumstances,  KPCCD will be required to
purchase  inventory  which  Prima is holding for resale to KPCCD and which Prima
has  specifically  ordered  for  resale to KPCCD.  The Vendor  Agreement  can be
terminated prior to its one year term under certain conditions.

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

As of  September  30,  2005,  we have a total  of 10  people,  all of whom  were
employed in the United States.  Five employees are at SmartServ  headquarters in
Plymouth Meeting,  PA and 5 are employed at KPCCD in Jackson Heights,  NY. If we
are able to raise additional capital to launch our MVNO business,  we anticipate
that staffing  requirements  associated with the  implementation  of our plan of
operation  will  require  the  addition  of   approximately  3  people  and  the
replacement of our terminated headquarters employees.

Results of Operations

Quarter ended September 30, 2005 versus Quarter ended September 30, 2004

During the quarter ended September 30, 2005, we recorded revenues of $13,579,708
Sales of prepaid  international  calling cards  through our master  distributor,
KPCCD Inc. which we acquired on January 7, 2005, represented $13,558,675 of that
amount.  Revenues of $21,033 were earned  through our licensing  agreement  with
QUALCOMM.  During the quarter ended September 30, 2004, we recorded  revenues of
$80,474,  substantially all of which were earned through our licensing agreement
with QUALCOMM.

During the quarter ended September 30, 2005 we incurred direct costs of revenues
totaling   $13,449,549,   including  prepaid   international  calling  cards  of
$13,392,148.  Also included  within direct costs of revenues  during the quarter
ended September 30, 2005, were costs of services of $57,401, a decrease compared
to the $644,762 for the quarter ended  September 30, 2004.  Such costs decreased
primarily due to reductions in  personnel,  communication  costs and  consulting
expenses.  Components of the direct costs of service category consist  primarily
of prepaid  international  calling cards  ($13,392,148) and personnel costs. For
the  quarter  ended  September  30,  2004,  components  of the costs of  service
category  consist  primarily of information and  communication  costs ($64,586),
personnel costs ($311,036),  consulting and web development expenses ($205,336),
facilities  ($18,780)  and travel  costs  ($8,273).  Costs  associated  with the
operations of nReach,  that are included in the  categories  listed above,  were
$207,172 for the quarter ended September 30, 2004.



                                       20
<PAGE>

During the quarter ended  September  30, 2005,  we incurred  sales and marketing
expenses of $126,076,  a decrease of 20% over the quarter  ended  September  30,
2004.  Such costs  decreased  primarily  due to a reduction of personnel  costs.
Components of the sales and marketing  category  consist  primarily of personnel
costs ($120,866) and facilities ($5,000). During the quarter ended September 30,
2004, we incurred  sales and marketing  expenses of $156,705.  Components of the
sales and marketing  category  consisted  primarily of personnel costs ($95,138)
and trade show costs ($48,348).

During  the  quarter  ended   September  30,  2005,  we  incurred   general  and
administrative  expenses of $744,286,  an increase of 47% over the quarter ended
September 30, 2004.  Such  expenses  increased  primarily  due to,  increases in
consulting  costs,  professional  fees  and an  increase  in the  provision  for
doubtful accounts. Components of the general and administrative category consist
primarily  of  personnel  costs   ($172,644),   consulting   costs   ($124,540),
professional   fees   ($146,059),   facilities   ($37,240),   depreciation   and
amortization ($39,338), travel costs and insurance ($18,648). During the quarter
ended  September 30, 2004, we incurred  general and  administrative  expenses of
$506,308.  Components  of the  general  and  administrative  category  consisted
primarily  of  personnel   costs   ($161,060),   consulting   costs   ($62,436),
professional  fees ($94,219),  facilities  ($16,097),  a valuation  allowance in
connection  with the potential  uncollectibility  of a loan to a former  officer
($91,872),  write-off of an  uncollectible  receivable  ($35,200)  and insurance
($20,000).  These  costs were  partially  offset by  discounts  negotiated  with
vendors to settle outstanding accounts payable amounting to $50,366.

During  the  quarter  ended  September  30  2005,  the net  noncash  charge  for
stock-based compensation amounted to $113,170,  compared to a net noncash credit
of $639,107  during the quarter  ended  September  30, 2004.  Such noncash costs
increased due to the vesting of employee  stock options to management at a price
that was less than the fair market  value of our common stock on the grant date.
Such noncash  amounts are  primarily  related to the  valuation  of  stock-based
compensation  in accordance  with  Accounting  Principles  Board Opinion No. 25,
"Accounting for Stock Issued to Employees"  ("APB No. 25").  Noncash charges for
consulting  services for the  quarters  ended  September  30, 2005 and 2004 were
$35,227  and  $-0-,  respectively,  resulting  primarily  from the  issuance  of
warrants to purchase common stock to financial, marketing and investor relations
consultants.  The  value of  substantially  all of such  common  stock  purchase
warrants  has  been  recorded  in  accordance  with  the  Black-Scholes  pricing
methodology.

Interest  income for the quarters ended  September 30, 2005 and 2004 amounted to
$450 and $6,520  respectively.  Such  amounts  were  earned  primarily  from our
investments in money fund accounts. During the quarters ended September 30, 2005
and  2004,  interest  and  other  financing  costs  were  $85,080  and  $538,742
respectively.  During the quarter ended  September 30, 2005,  interest and other
financing costs were incurred in connection with the completion, in August 2005,
of a $3,000,000 financing. During the quarter ended September 30, 2004, interest
and other financing  costs were incurred in connection  with the completion,  in
February 2004, of a $10 million private offering of investment Units in the 2004
Private Placement.

Basic and diluted loss per share was $0.35 for the quarter  ended  September 30,
2005 compared to $0.74 loss per share for the quarter ended  September 30, 2004.
The loss per share for the quarter ended  September 30, 2005 includes an accrued
preferred stock dividend of $1,220,671. The loss per share for the quarter ended
September 30, 2004 includes an accrued  preferred  stock dividend of $1,114,366.
The weighted average shares outstanding  increased to 6,304,018 at September 30,
2005 from 3,002,167 at September 30, 2004.

Nine Months ended September 30, 2005 versus Nine Months ended September 30, 2004

During the nine  months  ended  September  30,  2005,  we  recorded  revenues of
$37,739,354.  Sales of prepaid  international  calling  cards through our master
distributor,  KPCCD Inc.  which we  acquired  on  January  7, 2005,  represented
$37,598,334  of that  amount.  Revenues  of  $119,454  were  earned  through our
licensing  agreement with QUALCOMM and $21,566 came from other  sources.  During
the nine months  ended  September  30, 2004,  we recorded  revenues of $268,189,
substantially  all of which were earned  through our  licensing  agreement  with
QUALCOMM. During the nine months ended September 30, 2004, we recognized $33,333
from the amortization of deferred revenues.



                                       21
<PAGE>

During the nine months  ended  September  30, 2005 we incurred  direct  costs of
revenues totaling $37,828,325,  including prepaid international calling cards of
$37,286,903  since the  acquisition  of KPCCD,  Inc on  January  7,  2005.  Also
included  within direct costs of revenues during the nine months ended September
30,  2005,  were costs of  services  of  $541,422,  a decrease  compared  to the
$1,626,357 for the nine months ended September 30, 2004. Such costs decreased in
2005  primarily due to reductions in personnel,  reductions in  information  and
communication  costs and the reduction of consulting costs. In 2005,  components
of the costs of service  category  consist  primarily of costs  associated  with
prepaid international calling cards ($37,286,903), information and communication
costs ($42,856),  personnel costs ($369,747),  consulting expenses ($85,783) and
travel costs  ($14,296).  In 2004,  components of the costs of service  category
consist primarily of costs associated with information and  communication  costs
($272,306),  personnel  costs  ($808,072),  consulting and web-site  development
expenses  ($390,334)  and  facilities  ($29,383).   Costs  associated  with  the
operations of nReach,  that are included in the  categories  listed above,  were
$668,429 for the seven months since the acquisition  within the six months ended
September 30, 2004.

During the nine months ended September 30, 2005, we incurred sales and marketing
expenses of $645,214,  an increase of 116% over the nine months ended  September
30, 2004. Such costs increased  primarily due to the acquisition of KPCCD,  Inc.
on January 7,  2005.  Components  of the sales and  marketing  category  consist
primarily of personnel  costs  ($519,309),  travel costs  ($10,227),  facilities
($27,740)  and  advertising  costs  ($17,500).  During  the  nine  months  ended
September  30,  2004,  we incurred  sales and  marketing  expenses of  $298,925.
Components of the sales and marketing  category  consist  primarily of personnel
costs  ($165,098),  consulting  costs  ($15,556),  trade shows costs  ($70,892),
travel ($12,080) and public relations costs ($34,324).

During the nine  months  ended  September  30,  2005,  we  incurred  general and
administrative  expenses of $3,122,430,  an increase of 67% over the nine months
ended September 30, 2004. Such expenses increased  primarily due to increases in
personnel costs,  professional  fees and consulting fees and warrants issued for
services.   Components  of  the  general  and  administrative  category  consist
primarily of personnel costs ($520,969), consulting fees and warrants issued for
services  ($1,070,363),  professional  fees  ($531,042),  facilities  ($67,540),
depreciation and  amortization  ($135,216) and insurance  ($67,044).  During the
nine months ended  September  30, 2004, we incurred  general and  administrative
expenses of $1,871,442.  Components of the general and  administrative  category
consist  primarily of personnel costs  ($428,115),  consulting fees  ($816,338),
professional fees ($512,405),  facilities ($63,092) and insurance  ($73,671),  a
valuation allowance in connection with the potential  uncollectibility of a loan
to  a  former  officer  ($91,872),  write-off  of  an  uncollectible  receivable
($35,200).  These  costs were  partially  offset by  discounts  negotiated  with
vendors to settle outstanding accounts payable amounting to $336,048.

During the nine months  ended  September  30, 2005,  the net noncash  charge for
stock-based  compensation  amounted to $339,510 compared to a net noncash charge
of $-0- during the nine months  ended  September  30, 2004.  Such noncash  costs
decreased  and are due to the issuance and vesting of employee  stock options to
management  at a price  that was less than the fair  market  value of our common
stock on the grant  date.  Such  noncash  amounts are  primarily  related to the
valuation of stock-based  compensation in accordance with Accounting  Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25").
Noncash charges for consulting  services for the nine months ended September 30,
2005 and 2004 were $860,656 and $-0-, respectively, resulting primarily from the
issuance of  warrants  to purchase  common  stock to  financial,  marketing  and
investor relations  consultants,  from the issuance of warrants to the Company's
former  legal  counsel  as  part  of  his  separation  agreement  and  from  the
amortization of deferred costs associated with the prior issuance of warrants to
purchase common stock to financial,  legal, marketing and technical consultants.
The value of substantially  all of such common stock purchase  warrants has been
recorded in accordance with the Black-Scholes pricing methodology.



                                       22
<PAGE>

Interest  income for the nine months ended  September 30, 2005 and 2004 amounted
to $4,345 and $19,287, respectively. Such amounts were earned primarily from our
investments in money fund accounts.  During the nine months ended  September 30,
2005 and 2004,  interest and other  financing costs were $86,172 and $2,630,771,
respectively.  During the nine months ended  September  30,  2005,  interest and
other financing costs were incurred in connection with the completion, in August
2005, of a $3,000,000 financing. During the nine months ended September 30, 2004
interest  and  other  financing  costs  were  incurred  in  connection  with the
completion,  in February 2004, of a $10 million  private  offering of investment
Units in the 2004 Private Placement.

Basic and diluted loss per share was $1.40 for the nine months  ended  September
30, 2005  compared to $3.41 loss per share for the nine months  ended  September
30, 2004.  The weighted  average  shares  outstanding  increased to 5,670,089 at
September 30, 2005 from 2,773,669 at September 30, 2004.

Capital Resources and Liquidity

Cash Flow

At September 30, 2005 and December 31, 2004,  the Company had cash of $1,082,500
and $1,792,856, respectively. Net cash used in operations was $2,859,099 for the
nine months ended  September  30, 2005  compared to  $3,955,128  during the nine
months ended September 30, 2004. The primary reason for this decrease was due to
the Company's reduction in net loss from $6,336,819 during the nine months ended
September 30, 2004 to $4,337,952  for the nine months ended  September 30, 2005.
This was primarily related to $2,630,771 of interest and financing costs related
to Private  Placement  (as defined  below) in February  2004.  Additionally  the
increase in  accounts  receivable  of  $4,619,964  and the  increase of accounts
payable  and  accrued  liabilities  of  $5,020,269  are  primarily  due  to  the
acquisition of KPCCD,  Inc. Net cash used for investing  activities  amounted to
$34,444 for the purchase of equipment and the acquisition of KPCCD,  Inc. during
the nine months ended  September 30, 2005  compared to $217,346  during the nine
months ended  September  30, 2004 for the purchase of equipment and the purchase
of nReach.  Net cash provided by financing  activities was  $2,183,187  from the
financing closed on August 31, 2005 as described below net of the repayment of a
note  payable  during the nine months ended  September 30 2005.  During the nine
months ended September 30, 2004, details of financing  activities  included cash
in the amount of $1,391,504  used for the repayment of notes payable and accrued
interest  while net cash provided by financing  activities  included  $8,569,525
from the sale of Series A and related warrants.

Capital Raising and Other Transactions

On August 31,  2005,  we executed  agreements  to obtain  financing  from CAMOFI
Master,   LDC,  a  Cayman  Islands  limited  duration  company  (the  "Lender"),
consisting  of a Senior  Secured  Convertible  Note in the  principal  amount of
$500,000 (the "Senior Note") and a Revolving  Convertible  Note in the principal
amount of $1,900,000 (the "Revolving Note") which availability is based upon our
eligible accounts receivable. Based on such availability, the Revolving Note may
be increased to $2,500,000.  The term of the financing is for 30 months from the
closing date.  The Senior Note and Revolving Note are senior in right of payment
to any and all of our indebtedness and are secured by a first lien on all of our
assets.  The loan is guaranteed  by our  subsidiary,  KPCCD,  Inc. We issued the
Lender five year warrants to purchase an aggregate of 3,000,000 shares of common
stock at an exercise price of $.50 per share. Such warrants are exercisable on a
cashless basis and are subject to full ratchet antidilution protection.

We used approximately  $1,010,000 (including fees) to post a letter of credit in
favor of Sprint as  required  by the Sprint  contract.  The balance of the funds
will be used for working capital.

We believe that our cash resources are  sufficient to fund operating  losses and
working capital  requirements for approximately the next four to five months. As
a result, we will need to raise additional  financing,  through some combination
of borrowings or the sale of equity or debt securities  during 2005 and 2006. We
are pursuing financing  alternatives to fund the Company's cash deficiency.  The
Company may not be able to raise  sufficient  additional  debt,  equity or other
capital on acceptable terms, if at all. Failure to generate sufficient revenues,
contain  certain   discretionary   spending,   achieve  certain  other  business
objectives or raise  additional  funds could have a material  adverse  affect on
results of operations, cash flows and financial position,  including our ability
to continue as a going  concern,  and may  require us to  significantly  reduce,
reorganize,  discontinue or shut down  operations.  Our  consolidated  financial
statements  do  not  include  any  adjustments   that  might  result  from  this
uncertainty.



                                       23
<PAGE>

Certain Factors That May Affect Future Results

Forward-looking  statements in this document and those made from time-to-time by
our  employees  are  made  under  the  safe  harbor  provisions  of the  Private
Securities  Litigation  Reform  Act of 1995.  These  forward-looking  statements
involve certain known and unknown risks,  uncertainties  and other factors which
may cause our actual  results,  performance  or  achievements  to be  materially
different  from any future  results,  performance or  achievements  expressed or
implied by these forward-looking statements. Certain factors that could cause or
contribute to such differences  include, and are not limited to: We may not have
sufficient  working capital in the short term. We have never been profitable and
if we do not achieve  profitability we may not be able to continue our business;
any  new  capital  will  dilute  existing  shareholders.  We may  not be able to
complete  or  successfully  integrate  acquisitions  that we seek to pursue,  or
achieve the  desired  results of such  acquisitions;  Only one of our four major
customers from 2003  continued to generate  revenues for us in 2004 and 2005; we
plan to pursue  new  streams of  revenue  from the  resale of  prepaid  wireless
airtime bundled with wireless data content,  and revenues from such business may
not materialize; We have a new CEO and executive management team; The market for
our  business  is in the  development  stage and may not  achieve  the growth we
expect;  Spencer Trask may be able to affect and exercise some manner of control
over us;  The  market  price of our common  stock may  decrease  because we have
issued,  and will likely  continue to issue, a substantial  number of securities
convertible or exercisable  into our common stock;  and other risks described in
this Quarterly  Report on Form 10-QSB,  our Annual Report on Form 10-KSB for the
year  ended  December  31,  2004  (including  the risks  described  under  "Risk
Factors") and our other filings with the Securities and Exchange Commission. You
can  identify  forward-looking  statements  by the fact that they do not  relate
strictly  to  historical  or  current  facts.  The  words  "believe,"  "expect,"
"anticipate,"  "intend"  and "plan" and  similar  expressions  are often used to
identify forward-looking  statements. We caution you not to place undue reliance
on these  forward-looking  statements.  We undertake no  obligation to update or
revise any forward-looking  statements or to publicly announce the result of any
revisions to any of the  forward-looking  statements in this document to reflect
future events or developments.

Item 3. Controls and Procedures

We maintain a system of disclosure  controls and procedures  that is designed to
provide  reasonable  assurance that information that is required to be disclosed
by us in the reports  that we file or submit under the  Securities  and Exchange
Act of 1934,  as amended (the "Act"),  is recorded,  processed,  summarized  and
reported, within the time periods specified in the Commission's rules and forms.
Our Chief  Executive  Officer and Chief  Financial  Officer have  evaluated this
system of disclosure controls and procedures as of the end of the period covered
by this  quarterly  report,  and each  believes  that the  system  is  operating
effectively  to ensure that  information  required to be  disclosed by us in the
reports we file or submit under the Act is accumulated  and  communicated to our
management,  as  appropriate  to allow timely  decisions  regarding  disclosure.
Except as described below,  there have been no changes during the nine months of
2005 in our  internal  control  over  financial  reporting,  to the extent  that
elements of internal  control  over  financial  reporting  are  subsumed  within
disclosure  controls  and  procedures  that  have  materially  affected,  or are
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.

Our management is responsible for establishing and maintaining adequate internal
control  over  financial   reporting.   Our   management's   assessment  of  the
effectiveness  of our internal  control over  financial  reporting  identified a
material weakness in the processes for deposits of collections by our subsidiary
KPCCD,  Inc.  into a blocked  account  maintained  by our  secured  lender.  The
identified  material  weakness  related to the lack of sufficient  processes and
safeguards to ensure that collections were directly  deposited into such blocked
account and not used to pay KPCCD's vendor Prima Communications. During October,
2005,  funds collected in six instances were directly  applied to reduce KPCCD's
debts to Prima Communications for merchandise.  Had correct processes been used,
such  collections  would have been deposited  directly into the blocked account,
and then we would have drawn down  monies  under our line of credit to pay Prima
Communications for such merchandise.



                                       24
<PAGE>

Our  management  has reviewed  existing  controls and  procedures  and developed
additional  controls and procedures to remediate the weakness.  These additional
controls and procedures include additional  detailed  procedures for the deposit
of collections  and  generating of reports on a daily basis to track  collection
and other activity at KPCCD. In addition,  we have extended the scope and duties
of a consultant we have used at KPCCD for 30 days (subject to renewal, if deemed
by management) to review the compliance with such processes.

Our management  believes that the changes made to address the material  weakness
are  appropriately  designed.  We will continue  testing of the internal control
changes to determine their  effectiveness,  including the remedial impact on the
material weakness,  in the fourth quarter of 2005. We will perform an evaluation
of the  effectiveness  of our  internal  control  over  financial  reporting  in
connection  with our Annual Report on Form 10-K for the year ended  December 31,
2005, to be filed with the SEC in early 2006.

There can be inherent limitations to the effectiveness of any controls system. A
controls  system,  no matter how well  designed and  operated,  can provide only
reasonable,  not absolute,  assurance that its objectives are met. Further,  the
design of a control  system  must  reflect  the fact  that  there are  limits on
resources,  and the benefits of controls  must be  considered  relative to their
costs and their impact on the business  model.  We intend to continue to improve
and refine our  internal  control  over  financial  reporting.  This  process is
ongoing, and we seek to assure an effective internal control environment.

PART 2. OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

In February 2004, the Company completed the 2004 Private Placement. The Series A
preferred stock receives  dividends at the rate of 8% per year payable quarterly
in cash or, in our sole  discretion,  in registered  shares of our common stock.
Dividends  accrued on the Series A preferred  stock amounted to $1,696,014 as of
September 30, 2005. At the Company's discretion, the dividends are to be paid in
the  form of  1,805,245  shares  of  common  stock  when the  Company's  pending
Registration Statement is declared effective by the SEC.

Item 6. Exhibits

(a) Exhibits:

      31.1  Certification of Chief Executive  Officer pursuant to Section 302 of
            the   Sarbanes-Oxley  Act  of  2002+  31.2  Certification  of  Chief
            Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act
            of 2002+

      32.1  Certification  Pursuant to Section 906 of the  Sarbanes-Oxley Act of
            2002+



                                       25
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                                   SIGNATURES

Pursuant  to the  requirements  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:

Date: November 14, 2005               /s/  Robert M. Pons
      -----------------               ------------------------------------------
                                      Robert M. Pons
                                      Chief Executive Officer

Date: November 14, 2005               /s/   Len von Vital
      -----------------               ------------------------------------------
                                      Len von Vital
                                      Chief Financial Officer

<PAGE>