UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549




**FORM
      10-KSB/A**




(AMENDMENT
          NO.
          3)


X
            ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934For
                the fiscal year ended
            December
                31, 2004TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934For
                the transition period from
            
            ToCommission
                file number
            000-31037eRoomSystem
                Technologies, Inc.(Name
                of small business issuer in its charter)Nevada
            
            87-0540713(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)1072
                Madison Ave., Lakewood, NJ
            
            08701(Address
                and telephone number of principal executive offices)
            
            (Zip
                Code)Issuer’s
                telephone number:(732)
                730-0116Securities
                registered pursuant to Section 12(b) of the Act:Title
                of each class
            
            Name
                of each exchange on which registeredSecurities
                registered pursuant to Section 12(g) of the Act:Common
                Stock, $.001 par value(Title
                of each class)(Title
                of each class)Check
                whether the issuer (1) filed all reports required to be filed by
                Section
                13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
                12
                months (or for such shorter period that the registrant was required
                to
                file such reports), and (2) has been subject to such filing requirements
                for the past 90 days.  Yes xNo
                oCheck
                if there is no disclosure of delinquent filers in response to Item
                405 of
                Regulation S-B is not contained in this form, and no disclosure will
                be
                contained, to the best of the registrant's knowledge, in definitive
                proxy
                or information statements incorporated by reference in Part III of
                this
                Form 10-KSB/A or any amendment to this Form 10-KSB/A. oState
                issuer’s revenues for its most recent fiscal year:
            $1,591,159State
                the aggregate market value of voting stock held by non-affiliates
                computed
                by reference to the price at which the common equity was sold, or
                the
                average bid and asked price of such common equity, as of a specified
                date
                within the past 60 days. $2,093,713 ($0.24 per share as of March
                8,
                2005)State
                the number of shares outstanding of each of the issuer's classes
                of common
                stock, as of the latest practicable date.Common
                Stock, $.001 par value
            
            10,465,133
                shares as of March 8, 2005**DOCUMENTS
                INCORPORATED BY REFERENCE**None.










**TABLE
      OF CONTENTS**




**Page****PART I**
              **1****ITEM
                  1.**DESCRIPTION
                  OF BUSINESS
              1**ITEM
                  2.**DESCRIPTION
                  OF PROPERTY
              8**ITEM
                  3.**LEGAL
                  PROCEEDINGS
              8**ITEM
                  4.**SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS
              9**PART II**
              **9****ITEM
                  5.**MARKET
                  FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
              9**ITEM
                  6.**MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
              11**ITEM
                  7.**FINANCIAL
                  STATEMENTS
              26**ITEM
                  8.**CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                FINANCIAL DISCLOSURE
              46**ITEM
                  8A.**CONTROLS
                  AND PROCEDURES
              46**PART III**
              **47****ITEM
                  9**.DIRECTORS,
                  EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;COMPLIANCE
                WITH SECTION 16(a) OF THE EXCHANGE ACT
              47**ITEM
                  10.**EXECUTIVE
                  COMPENSATION
              49**ITEM
                  11.**SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
              50**ITEM
                  12.**CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS
              52**ITEM
                13.**EXHIBITS
                AND REPORTS ON FORM 8-K
              55**ITEM
                  14.**PRINCIPAL ACCOUNTANT FEES AND SERVICES
              56**SIGNATURES**
              **57**


**EXHIBIT INDEX**
            **58**


-ii -





**PART
      I**




ITEM
      1.   **DESCRIPTION
      OF BUSINESS.**




**Overview**




eRoomSystem
      Technologies has developed and introduced to the lodging industry an
      intelligent, in-room computerized platform and communications network, or the
      eRoomSystem. The eRoomSystem is a computerized platform and processor-based
      system that is installed within our eRoomServ refreshment centers and designed
      to collect and control data. The eRoomSystem also supports our eRoomSafe, an
      electronic in-room safe, eRoomTray, an in-room ambient tray that can sell a
      wide
      variety of products at room temperature, and eRoomEnergy, an in-room digital
      thermostat that is designed to control virtually any fan coil unit or
      packaged-terminal air conditioner found in hotel rooms. We also intend to
      develop other applications and extensions to the eRoomSystem, including
      information management services and direct credit card billing and remote
      engineering and maintenance services.




Our
      eRoomSystem and related products deliver in-room solutions that reduce operating
      costs, enhance hotel guest satisfaction and provide higher operating profits
      to
      our customers. The solutions offered by our eRoomSystem and related products
      have allowed us to establish relationships with many premier hotel chains.
      In
      addition to providing our customers with valuable in-room solutions, we offer
      a
      revenue-sharing program that allows us to partner with our customers. Through
      our revenue-sharing program, we are able to install our products at little
      upfront cost to the hotel property and share in the recurring revenues generated
      from the sale of goods and services related to our products.




Currently,
      we have 11,396 eRoomServ refreshment centers, 7,686 eRoomSafes, 1,089 eRoomTrays
      and 503 eRoomEnergy Management products installed and active at a total of
      32
      hotel properties. Of this amount, 6,630 refreshment centers, 4,140 eRoomSafes
      and 454 eRoomTrays are installed pursuant to revenue sharing or fixed-payment
      agreements.




In
      August
      2002, we signed a strategic alliance agreement with Hospitality Safe
      Corporation, or HSC, a leading provider of in-room safes around the world,
      whereby HSC will manufacture eRoomSystem’s existing safe line on a turnkey
      private label basis. We may use HSC in the future to fulfill our stand-alone
      safe requirements.




In
      2002,
      we retained International DisplayWorks, Inc., or IDW, to manufacture our
      eRoomServ refreshment centers and eRoomTrays. IDW also is available to assist
      us
      in sourcing cabinetry for our hotel clients as well as providing its engineering
      team as an outsource group relating to new hardware designs and configurations.
      While we have not utilized IDW to manufacture product on our behalf in more
      than
      two years, we may utilize IDW’s manufacturing capabilities in the future.




**Our
      Products and Services** ****




**eRoomSystem**




Since
      our
      inception, it has been our objective to provide innovative in-room amenities
      to
      the lodging industry. Our technologies create an intelligent, in-room
      computerized platform and communications network that comprises the eRoomSystem.
      At the core of the eRoomSystem is our proprietary hardware and software that
      operate as a multi-tasking imbedded operating system. Our hardware and software
      can operate multiple devices and provide an interactive environment that allows
      the hotel guest to input and receive information.




-1-


Installed
      as part of our eRoomServ refreshment center, the eRoomSystem provides the
      communication link between the hotel guest, our products, our file server
      located at the hotel (the eRoomSystem file server), the hotel’s property
      management system, and the file server located at our headquarters (the
      eRoomSystem master file server). Our software is remotely upgradeable from
      our
      facility, which reduces the need for costly on-site visits. We can also remotely
      adjust pricing, change messages on the liquid crystal display, lock and unlock
      our units and change the input touchpad layout. From our facility, we can also determine
      whether our products are active and working properly and, in
      the
      event a participating hotel fails to pay outstanding invoices or otherwise
      violates the terms of its agreement ,
      control
      the use of our products by remotely locking the units .




The
      eRoomSystem consists of a microprocessor, memory, input/output ports,
      communications transceiver, liquid crystal display, touchpad, power supply
      and
      our proprietary software. The proprietary architecture of our circuit boards
      has
      been designed to minimize the need for hardware upgrades. The eRoomSystem
      includes an embedded system processor that handles simple instructions and
      routes all billing functions and processor-intensive instructions to the
      eRoomSystem file server.




The
      eRoomSystem provides a platform that collects information relating to the usage
      of our products. In the future, we anticipate that the eRoomSystem will be
      capable of supporting other functions such as the management of in-room energy,
      including heating, air conditioning, and lighting, television and the
      establishment of a trouble-shooting system to manage a property’s in-room
      repairs and maintenance.




**eRoomServ
      Refreshment Centers**




Our
      eRoomServ refreshment centers consist of the eRoomSystem, a small refrigeration
      unit, electronic controls, LCD display and vending racks. In conjunction with
      the outsourcing of our manufacturing to IDW, we have discontinued our
      horizontal-based multi-vending rack in favor of an upright multi-vending rack.
      The upright multi-vending rack offers greater flexibility for the snack and
      beverage products offered by hotels, and is viewed more favorably by our hotel
      clients.




The
      upright multi-vending rack displays up to 30 different beverages and/or snacks
      and provides an environment similar to that of a convenience store beverage
      cooler. Upon removal of a product, the gravity-based design uses the weight
      of
      the remaining products to cause the products to roll or slide forward. In
      addition to the upright multi-vending rack in the refreshment center, the
      eRoomTray allows hotel properties to separately vend a variety of products
      at
      room temperature within the eRoomSystem environment, including snacks, wine,
      disposable cameras, film, souvenirs, maps and other sundries.




Our
      eRoomServ refreshment center and eRoomTray communicate through the eRoomSystem,
      which uses the hotel property’s existing telephone lines, network cabling or
      cable television lines. Our eRoomServ refreshment
      centers and eRoomTray operate as follows:




·
            A
                hotel guest selects a beverage or snack from our eRoomServ refreshment
                center or eRoomTray;





·
            The
                purchase is either immediately confirmed on the liquid crystal display
                and
                acknowledged with an audible beep or subject to a countdown of a
                predetermined (by the hotel) number of seconds prior to purchase
                confirmation;





·
            Upon
                confirmation, the transaction information, such as product type,
                price and
                time of purchase, is simultaneously transferred to the eRoomSystem
                file
                server;





·
            The
                eRoomSystem file server communicates on a real-time basis with the
                hotel’s
                property management system and periodically with our eRoomSystem
                master
                file server located at our headquarters; and





·
            The
                hotel’s property management system posts the purchase to the hotel guest’s
                room account.




-2-


The
      sales
      data from the eRoomSystem is transmitted to the eRoomSystem file
      server from which hotel employees can access real-time sales reports, inventory
      levels for restocking purposes and demographic data. As for the maintenance
      of
      our refreshment centers, the repair or replacement of any component of our
      refreshment center is relatively simple and is typically provided at no
      additional charge to the property pursuant to the terms of our service and
      maintenance agreement.




**eRoomSafe**




Our
      eRoomSafes are electronic in-room safes offered in conjunction with our
      eRoomSystem. The eRoomSafes have storage space large enough for laptop
      computers, video cameras and briefcases and include an encrypted electronic
      combination that can be changed by the hotel guest. The eRoomSafes utilize
      the
      eRoomSystem to interface with the eRoomSystem file
      server that communicates with the hotel’s property management system.




**The
      following diagram represents the structure and communications network of our
      eRoomSystem, the eRoomSystem file server, the hotel property management system,
      and the eRoomSystem master file server:**











**eRoomTray**




Our
      eRoomTray is an ambient tray for dry goods. The eRoomTray has a terraced design
      and can hold three to more than twenty different products. The eRoomTray
      utilizes cross-sensing technology that provides significant flexibility in
      product selection for hotels. The eRoomTray uses the visible countdown timer
      located on the liquid crystal display of the eRoomServ Refreshment Center.
      This
      solution allows the hotel to sell music CD’s souvenirs, disposable cameras,
      maps, snacks and other highly profitable items. The eRoomTray is unique in
      that
      it can be located virtually anywhere in a guestroom.





-3-





**eRoomEnergy
      Management**




In
      2001,
      we announced our agreement with INNCOM International, Inc., a leader in hotel
      guest-room control systems, through which INNCOM private-labels its e4 Smart
      Digital Thermostat for us as eRoomEnergy and provides assistance in the
      installation and maintenance of the units. The e4 Smart Digital Thermostat
      is
      designed to control virtually any fan coil unit or packaged terminal air
      conditioner found in hotel rooms and comes standard with an illuminated digital
      display, a Fahrenheit/Celsius button, one-touch temperature selection, an
      off/auto button, fan and display buttons. In addition to these user-friendly
      features, the e4 Smart Digital Thermostat includes five relays, an optional
      on-board infrared transceiver, a passive infrared occupancy sensor, and is
      expandable to include functions such as humidity control, outside temperature
      display, refreshment center access reporting, occupancy reporting to
      housekeeping and automatic lighting control.




We
      may
      integrate the e4 Smart Digital Thermostat with our eRoomSystem using the
      bi-directional capabilities of the eRoomSystem to communicate with the
      eRoomEnergy unit. Through our eRoomSystem hardware, a hotel property could
      adjust the room temperature at check-in or check-out and cause the room
      temperature to automatically return to preset levels when a hotel guest leaves
      and returns to the hotel room during his or her stay. By adjusting the heating
      and air conditioning either up or down, typically by 4 to 8 degrees depending
      on
      the time of year, and turning off the television and lights when a room is
      unoccupied, a hotel property or other facility could realize measurable energy
      cost savings. Our eRoomEnergy Management products are installed at the Pechanga
      Resort & Casino, Temecula, California.




**eRoomData
      Management**




One
      of
      the byproducts of our technology is the information we have collected since
      our
      first product installation. To date, we have collected several million
      room-nights of data. The eRoomSystem file
      server collects information regarding the usage of our eRoomServ refreshment
      centers on a real-time basis. We use this information to help our customers
      increase their operational efficiencies. The information we obtain is unique
      because we categorize the information according to specific consumer buying
      patterns and demographics.




The
      information we collect has value in several key areas. First, we currently
      offer
      our customers, as part of our service and maintenance agreement, specific
      information about their guests’ buying patterns and provide non-confidential
      information about other hotels in similar geographic regions. Second, as we
      continue to increase our installed room base, we believe that the information
      we
      collect will have value to the suppliers of goods sold in our refreshment
      centers, such as soft drink, alcohol and candy/snack companies, among others.
      Third, we may develop information services to categorize purchases in response
      to specific in-room advertising programs by such suppliers.




Our
      lodging customers benefit in various ways from the information we provide.
      The
      hotels are responsible for restocking the goods sold from our refreshment
      centers. The real-time sales data generated by our refreshment centers helps
      the
      hotel maximize personnel efficiencies. The transfer of sales data to the hotel
      prevents guest pilferage and minimizes disputes over refreshment center usage,
      both of which are prevalent in the lodging industry, particularly with
      non-automated units. Finally, the ability to track product sales performance
      allows the hotel to stock the refreshment centers with more popular items,
      which
      generally leads to increased sales of product from the refreshment centers.
      Our
      system can provide reports on daily restocking requirements, daily, monthly
      and
      annual product sales statistics, overnight audits, inventory control and a
      variety of customized reports.




-4-


We
      may develop
      strategic relationships with companies in the information services industry
      to
      maximize our proprietary information. We will consider utilizing third parties
      to assist us in the potential roll-out of our information services products.




**Research
      and Development; Future Products and Services**




At
      the
      core of our products and services is our proprietary software and hardware
      that
      make up our eRoomSystem. Currently, all research and development projects are
      outsourced through third parties.




The
      goal
      of our research and development is to continue to improve our existing products
      line, develop new products and potentially offer value-added products and
      services to our hotel clients using the eRoomSystem platform. At this time,
      we
      are exploring various alternatives for each of the foregoing.




**Sales
      and Marketing**




Currently,
      we have 11,396 eRoomServ refreshment centers, 7,886 eRoomSafes, 1,089 eRoomTrays
      and 503 eRoomEnergy Management products installed and active at a total of
      32
      hotel properties. Our sales and marketing efforts have been extremely limited
      over the past two years. We are currently considering various alternatives
      with
      respect to our sales and marketing direction for 2005 and beyond.




**Manufacturing**




After
      an
      extensive search, in June 2002 we entered into a turnkey manufacturing
      relationship with IDW to manufacture our eRoomServ refreshment centers,
      eRoomTrays and to source cabinetry for our hotel clients. IDW’s core business is
      the manufacture and distribution of various forms of liquid crystal displays,
      modules and assemblies for customers around the world. IDW has over 400,000
      square feet of manufacturing facilities in Shenzen, China. IDW is publicly
      traded on the Nasdaq National Market as “IDWK”.





In
      2002,
      IDW manufactured 808 refreshment centers and 452 eRoomTrays on our behalf.
      Our
      refreshment center product line has been significantly improved as a result
      of
      IDW’s 18-member engineering team and its sophisticated manufacturing processes.
      Most importantly, through outsourcing the manufacture and assembly of our
      refreshment centers and eRoomTrays, we have realized product savings of more
      than 25%, while materially reducing our fixed overhead personnel expense.





The
      manufacture of our eRoomSafe product line has been outsourced through our
      strategic partner Hospitality Safe Corporation. Our agreement with HSC provides
      that it will private label four stand-alone electronic safe models for us,
      however, we have yet to source any eRoomSafes through HSC.





The
      eRoomEnergy management product line is outsourced through INNCOM International,
      Inc.





**Competition**




The
      market for in-room amenities in the lodging industry is quite competitive,
      and
      we expect competition to further intensify in the future. In addition to
      providers of refreshment centers, we face significant competition from companies
      that provide in-room video entertainment and information services, such as
      cable
      television, pay-per-view movies, video games and Internet services. We may
      also
      face competition from communications companies, such as cable companies,
      telecommunications companies and direct broadcast satellite companies, who
      may
      be able to modify their existing infrastructure to provide in-room entertainment
      and/or information services. Further, as technology is subject to rapid change,
      new technological advancements in components used for in-room services could
      adversely affect our growth strategy.




-5-


***eRoomServ
      Refreshment Centers.*** We
      face
      intense competition from suppliers of automated minibars and traditional honor
      bars, such as Bartech Systems International, Minibar Systems and Dometic
      Corporation, as well as many other smaller players that have recently entered
      the marketplace. Automated minibars permit sales to be automatically posted
      to a
      hotel guest’s room account and provide real-time information and inventory data.
      Honor bars are small refrigerators where sales are manually posted to a hotel
      guest’s room account by housekeeping services.




Bartech
      offers the e-FridgeTM network system that is similar to our system in that it has
      a processor by which the hotel property can record transaction information
      through its in-room refrigerator. The e-FridgeTM has the ability to record all
      transactions, charge the folios of hotel guests and generate automatic refill
      reports. Bartech has more than 100 different product configurations and
      aesthetic options which provides hotels with a very high level of flexibility
      in
      product alternatives. Alternatively, Dometic and Minibar Systems offer the
      Auto
      Classic automated minibar (a joint venture between Minibar Systems and Dometic)
      that provides transaction information to the hotel’s property management system
      and inventory data to the hotel and may be locked remotely. While not as
      visually appealing and diversified as Bartech’s product offering, Minibar
      Systems has been the largest provider of automated and non-automated in-room
      bars in the United States over the past 10 years.




We
      compete with each of these companies for the placement of units in hotel rooms
      on the basis of price, service, technology and financing options. Nearly all
      of
      our competitors have longer operating histories, larger customer bases, greater
      brand recognition and greater financial, research and development,
      manufacturing, marketing and technical resources.




***eRoomSafes.*** The
      in-room safe industry is very competitive with competitors throughout the world.
      Each of our competitors in the refreshment center space offer in-room safes.
      We
      believe our strategic partner, Hospitality Safe Corporation, sold more
      electronic safes in the United States in 2004 than any other safe company.
      In
      addition, ElSafe, Inc. has approximately 425,000 safes installed worldwide
      with
      installations in over 45 countries. CISA Worldwide is another competitor, with
      offices in the United States, Asia, the Middle East, Africa and Latin America.
      The principal products of each of these entities are electronic safes that
      allow
      the hotel guest to enter a combination to lock and unlock the safe in lieu
      of a
      key.




**Intellectual
      Property**




We
      rely
      on a combination of trademark and copyright law, trade secret protection and
      confidentiality and/or license agreements with our employees, customers and
      business partners to protect our proprietary rights in our products, services,
      know-how and information. We currently hold three patents, Patent Nos.
      4,857,714, 4,883,948 and 4,939,352, filed under the name “Credit Card Storage
      System,” all of which protect the use of our credit card technology. These three
      patents expire on August 14, 2006, November 27, 2006 and July 2,
      2007, respectively. These patents have not been highly utilized by us.




On
      August
      19, 2002, we were issued Patent No. 6,456,067 titled “Inductive Can Sensing for
      Vending Machine”. We have registered RoomSystems, RoomSafe, eRoomEnergy,
      eRoomData, eRoomSystem, and eRoomServ with the United States Patent and
      Trademark Office. In addition, we have pending applications for the following
      trademarks and service marks: eRoomSafe; eRoomManagement; and eRoomSystem
      Technologies. We have also registered our logo and have one pending patent
      application titled “Personalized Smart Room”, Application No. 10/126,468.




Our
      proprietary software consists of three modules and provides the operating system
      for our eRoomSystem. The first module is an operating system that permits
      messages to be scrolled on the flat panel display of our eRoomSystem and allows
      hotel guests to interface with our products. The second module is a Windows®
based program that provides a communication link between our eRoomSystem, our
      products, our eRoomSystem hotel file server and the hotel’s property management
      system. The third module is a Windows® based program that collects data from our
      eRoomSystem hotel file server and produces a wide-variety of management and
      operational reports. Two years ago, we introduced our eRoomSystem version 4
      software and thereafter our newest version 4.1 software. Currently, 30 of our
      32
      hotel clients are utilizing our version 4.1 software that provides users with
      a
      friendly, easy-to-learn graphical environment and expand the report generating
      abilities for the property.




-6-


We
      do not
      know if our future patent applications will be issued with the full scope of
      claims we seek, if at all, or whether any patents we receive will be challenged
      or invalidated. Our means of protecting our proprietary rights in the United
      States, and abroad, may not be adequate and competitors may independently
      develop similar technology. We cannot be certain that our services do not
      infringe on patents or other intellectual property rights that may relate to
      our
      services. Like other technology-based businesses, we face the risk that we
      will
      be unable to protect our intellectual property and other proprietary rights,
      and
      the risk that we will be found to have infringed on the proprietary rights
      of
      others.




**Historical
      Summary**




We
      were
      originally incorporated under the laws of the State of North Carolina on March
      17, 1993 as InnSyst! Corporation. On September 28, 1993, the operations of
      InnSyst! were transferred to RoomSystems, Inc., a Virginia corporation,
      incorporated on August 12, 1993, or RoomSystems Virginia. On April 29, 1996,
      the
      operations of RoomSystems Virginia were transferred to RoomSystems, Inc., a
      Nevada corporation, or RoomSystems. Through an agreement and plan of
      reorganization approved by a majority of our stockholders dated
      December 31, 1999, RoomSystems became the wholly owned subsidiary of
      RoomSystems International Corporation. Pursuant to this agreement and plan of
      reorganization, all shares of RoomSystems common stock, including all shares
      of
      common stock underlying outstanding options and warrants, Series A convertible
      preferred stock and Series B convertible preferred stock were exchanged for
      the
      identical number and in the same form of securities of RoomSystems International
      Corporation. On February 1, 2000, we changed our name from RoomSystems
      International Corporation to RoomSystems Technologies, Inc. Subsequently, on
      March 29, 2000, with the approval of our stockholders, we changed our name
      to eRoomSystem Technologies, Inc.




We
      have
      two wholly owned subsidiaries, eRoomSystem Services, Inc. (formerly RoomSystems)
      and eRoomSystem SPE, Inc. RSi BRE, Inc., or RSi BRE, was formerly our third
      wholly owned subsidiary, but was merged with and into eRoomSystem Technologies,
      Inc. in 2004.




eRoomSystem
      Services is our service and maintenance subsidiary that installs all of our
      products, provides electronic software upgrades to our customers, provides
      customer service and maintenance for our products and trains hotel personnel
      on
      the use and maintenance of our products. All of the outstanding shares of
      eRoomSystem Services common stock have been pledged to AMRESCO Leasing
      Corporation, or AMRESCO.




RSi
      BRE
      was formed as part of the Equipment Transfer Agreement we entered into in
      September 1998 with RSG Investments, LLC, or RSG, a privately held company.
      Previously, RSi BRE held title to 1,717 eRoomServ refreshment centers and 1,304
      eRoomSafes. On February 29, 2004, we entered into a Settlement Agreement and
      Mutual Release Agreement with RSG whereby we paid the sum of $152,823 as a
      full
      and final cancellation of the Equipment Transfer Agreement and subsequent
      Settlement Agreement dated September 1999. As a result, the Company immediately
      commenced recognizing all revenue generated from the four revenue sharing lease
      agreements relating to the 1,717 eRoomServ refreshment centers and 1,304
      eRoomSafes. RSi BRE has been merged with and into eRoomSystem Technologies,
      Inc.




eRoomSystem
      SPE was formed as part of our long-term financing arrangement with AMRESCO
      Leasing Corporation, which was terminated in August 2002. eRoomSystem SPE owns
      all of the equipment previously funded by AMRESCO under our revenue-sharing
      program, consisting of nine properties comprising 2,775 eRoomServ refreshment
      centers and 2,622 eRoomSafes. AMRESCO has taken a senior security interest
      in
      all of the assets of eRoomSystem SPE. We control eRoomSystem SPE and its
      financial results are consolidated with those of eRoomSystem Technologies and
      eRoomSystem Services.




-7-


**Government
      Regulation**




We
      are
      subject to laws and regulations applicable to businesses generally, as well
      as
      to laws and regulations directly applicable to the lodging industry and minibars
      in particular. These laws and regulations relate to qualifying to do business
      in
      the various states and in foreign nations in which we currently have, or propose
      to have, our products.




Apart
      from laws and regulations applicable to us, some of our existing and potential
      customers are subject to additional laws or regulations, such as laws and
      regulations related to liquor and gaming, which may have an adverse effect
      on
      our operations. Due to the licensing requirements relating to the sale of
      alcohol in each state, the failure of any of our revenue-sharing partners to
      obtain or maintain its liquor license would result in the loss of revenue for
      our revenue-sharing partner and us. In addition, due to the heightened
      hotel-casino regulatory environment and our ongoing marketing to hotel-casinos,
      our operations may be subject to review by a hotel-casino’s compliance committee
      to verify that its involvement with us would not jeopardize its gaming license.
      The regulatory compliance committee of a hotel-casino has broad discretion
      in
      determining whether or not to approve a transaction with a third party, which
      review typically includes the character, fitness and reputation of the third
      party and its officers, directors and principals. If our history or operations
      present problems for a hotel-casino, we would either have to expend resources
      to
      address or eliminate the concerns or forego the business.




**Employees**




We
      currently employ six full-time employees and have one consultant. None of our
      employees are subject to a collective bargaining agreement.




ITEM 2.  DESCRIPTION OF
      PROPERTY.





We
      currently lease office and warehouse space in Salt Lake City, Utah pursuant
      to a
      38-month lease that expires in December 2006. The monthly rent on our Salt
      Lake
      City facility is $1,456 in 2005 and $1,612 in 2006. In addition, we lease
      approximately 500 square feet of office space at 1072 Madison Ave., Lakewood,
      NJ
      08701. This lease is month-to-month and the monthly lease rate is $742.


ITEM
      3.  LEGAL
      PROCEEDINGS.




We
        are,
        from time to time, parties to various legal proceedings arising out of our
        business. Apart from the following discussion, we believe that there are
        no
        proceedings pending or threatened against us which, if determined adversely,
        would have a material adverse effect on our business, financial condition,
        and
        results of operations or liquidity.




On
      March
      29, 2001, we entered into an Independent Contractor Agreement with Tybera
      Development Group, or Tybera, for software services. Following the conclusion
      of
      the initial term of the agreement, we entered into an extension. In 2002, we
      began to experience a shortfall in cash flows and regrettably were forced to
      terminate our arrangement with Tybera. Under the terms of the contract with
      Tybera, at the time of termination, we owed Tybera the sum of $25,500. In June
      2003, Tybera filed a complaint in the Fourth District Court, State of Utah,
      County of Utah, against us for breach of contract. On August 27, 2003, a
      judgment was entered against us in the amount of $36,050. On February 15, 2005,
      a satisfaction of judgment was entered in the above court following our payment
      in the amount of $34,000 to Tybera in full satisfaction of all claims against
      us.




-8-


There
      is
      no pending or threatened litigation against the Company. Further, all
      outstanding accounts payable are current as of the date of filing of this Annual
      Report on Form 10-KSB/A.




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




Not
      applicable.




**PART
      II**




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




Our
      authorized capital stock consists of 50,000,000 shares of common stock, $0.001
      par value; 5,000,000 shares of preferred stock, $0.001 par value; 500,000 shares
      of Series A convertible preferred stock, $0.001 par value; 2,500,000 shares
      of
      Series B convertible preferred stock, $0.001 par value; 2,000,000 shares of
      Series C convertible preferred stock, $0.001 par value; and 2,777,778 shares
      of
      Series D convertible preferred stock, $0.001 par value. Our current authorized
      capital was effected through an amendment and restatement of our articles of
      incorporation on March 29, 2000, and the filing of a Certificate of Rights,
      Preferences and Privileges relating to the Series D convertible preferred stock
      in November 2002. As of March 8, 2005, there were 10,465,133 shares of common
      stock outstanding and no shares of any class of preferred stock
      outstanding.




**High
      And Low Closing Sale Prices Of Our Common Stock**




Prior
      to
      August 3, 2000, there was no public market for our common stock. In conjunction
      with our initial public offering, our common stock was accepted for listing
      on
      the Nasdaq SmallCap Market under the trading symbol “ERMS”. In April 2003, our
      common stock was delisted from the Nasdaq SmallCap market. Our common stock
      is
      currently quoted on the Over The Counter Bulletin Board under the same symbol.
      As of March 8, 2005, approximately 390 stockholders of record held our
      outstanding shares of common stock.




The
      following table sets forth the high and low bid information of our common stock,
      as reported by the Nasdaq SmallCap Market (and the Over The Counter Bulletin
      Board for the period April 2003 onward) during the periods
      indicated:




**Calendar
                Quarter Ended**
            
            **Low**
            
            **High**March
                31, 2002
            
            $0.27
            
            $2.45June
                30, 2002
            
            $0.86
            
            $1.94September
                30, 2002
            
            $0.15
            
            $0.90December
                31, 2002
            
            $0.15
            
            $0.64March
                31, 2003
            
            $0.11
            
            $0.20June
                30, 2003
            
            $0.13
            
            $0.34September
                30, 2003
            
            $0.11
            
            $0.21December
                31, 2003
            
            $0.14
            
            $0.33March
                31, 2004
            
            $0.15
            
            $0.22June
                30, 2004
            
            $0.16
            
            $0.37September
                30, 2004
            
            $0.31
            
            $0.41December
                31, 2004
            
            $0.25
            
            $0.37March
                31, 2005 (as of March 8, 2005)
            
            $0.23
            
            $0.31




-9-





The
      last
      reported sale price of our common stock on the Over The Counter Bulletin Board
      on March 8, 2005 was $0.24 per share. We are not aware of any public market
      for
      our options or warrants.




**Dividend
      Policy**




We
      have
      never declared or paid any cash dividends on our common stock. Our board
      presently, and for the foreseeable future, intends to retain all of our
      earnings, if any, for the development of our business. The declaration and
      payment of cash dividends in the future will be at the discretion of our board
      and will depend upon a number of factors, including, among others, our future
      earnings, operations, funding requirements, restrictions under our credit
      facility, our general financial condition and any other factors that our board
      considers important. Investors should not purchase our common stock with the
      expectation of receiving cash dividends.




**Recent
      Sales of Unregistered Securities; Use of Proceeds**




On
      November 8, 2002, we issued a promissory note to Ash Capital, LLC for proceeds
      of up to $322,500. The note bears interest at 8%. The principal and interest
      were originally due on November 8, 2003. All past due amounts and accrued
      interest thereon bear interest at 18%. During the twelve months ended December
      31, 2003, we borrowed $120,500 under the terms of the promissory note and
      transferred $25,000 from an accounts payable due to Ash Capital, which increased
      the principal amount of the promissory note to $347,500. At any time, principal
      and accrued interest on the promissory note is convertible into Series D
      Convertible Preferred Stock at $0.90 per share. Each share of the Series D
      Convertible Preferred Stock is convertible into six shares of common stock,
      at
      the rate of $0.15 per share of Series D Preferred Stock. On October 1, 2003,
      Ash
      Capital, LLC agreed to amend the terms of its secured convertible promissory
      note with us to (i) extend the maturity date to the earlier of November 8,
      2007
      or the maturity date of the Notes issued to Gestetner Group, LLC and certain
      third parties and (ii) include as an additional event of default any default
      by
      us the secured convertible promissory notes with Gestetner Group, LLC and
      certain third parties. In addition, we have issued Ash Capital, LLC a contingent
      warrant to purchase shares of common stock, exercisable at $0.13 per share
      through October 1, 2008. The terms of the warrant provide that the number of
      shares exercisable by Ash Capital, LLC will be determined by a formula, [A
      - B]
      times C, whereby (i) A equals the aggregate number of shares of our common
      stock
      that are, on the date of the exercise of the Ash Capital warrant, issued to
      and
      held by any of the Gestetner Group, LLC and certain third parties that purchased
      $250,000 of secured convertible promissory notes on October 1, 2003, (ii) B
      equals 10,000,000 and (iii) C equals .07. We have utilized all monies loaned
      by
      Ash Capital, LLC for our business operations.




In
      February 2003, Alan C. Ashton, Herbert A. Hardt, S. Leslie Flegel, John J.
      Prehn
      and James C. Savas converted their outstanding fees, relating to board,
      compensation and audit committee participation, into a total of 86,002 shares
      of
      common stock. The conversions were made at $0.18 to $0.23 per share and each
      was
      out-of-the-money.




On
      October 1, 2003, we issued secured convertible promissory notes in the original
      principal amount of $250,000, collectively, to Gestetner Group, LLC, a New
      Jersey limited liability company, and several third parties, the Noteholders.
      David A. Gestetner, our Chief Executive Officer and President is the Managing
      Member of the Gestetner Group, LLC. The terms of the Notes include (i) for
      interest to accrue at the rate of 8% per annum, (ii) a maturity date of the
      earlier of (a) October 1, 2008, (b) the date of approval of the Board of
      Directors regarding the merger of the Company with or into any third party
      or
      the sale of all or substantially all of our assets, or (c) the date of the
      closing of any financing (other than commercial credit facilities), the gross
      proceeds of which are at least $1,000,000 and (iii) the right of the
      Noteholders, at any time, to convert all outstanding principal and accrued
      and
      unpaid interest into shares of our common stock at the rate of $0.05 per share;
      provided, however, that we shall have the right to not permit the conversion
      if
      such conversion would result in the Noteholders holding, in the aggregate and
      on
      a fully-diluted basis, more than 49% of our outstanding common stock. In
      addition, the Noteholders have been issued, collectively, warrants to purchase
      5,000,000 shares of our common stock, exercisable at $0.05 per share at any
      time
      through October 1, 2008. We used the proceeds provided by the Noteholders for
      our business operations.




-10-


**ITEM
        6.** **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.**


**Overview**




eRoomSystem
      Technologies, Inc. is a Nevada corporation incorporated on August 31, 1999.
      Our core business is the development and installation of an intelligent, in-room
      computer platform and communications network, or the eRoomSystem, for the
      lodging industry. The eRoomSystem is a computerized platform and processor-based
      system designed to collect and control data. The eRoomSystem supports our fully
      automated and interactive eRoomServ refreshment centers, eRoomSafes, eRoomEnergy
      products, and the eRoomTray. Future products and services may include
      information management services, additional in-room energy management
      capabilities, credit card/smart card capabilities for direct billing and remote
      engineering and maintenance services.




Our
      products interface with the hotel’s property management system through our
      eRoomSystem communications network. The hotel’s property management system posts
      usage of our products directly to the hotel guest’s room account. The solutions
      offered by our eRoomSystem and related products have allowed us to install
      our
      products and services in several premier hotel chains, including Marriott
      International, Hilton Hotels and Carlson Hospitality Worldwide, in the United
      States and internationally.




One
      of
      the byproducts of our technology is the information we have collected since
      our
      first product installation. To date, we have collected several million
      room-nights of data. Through our eRoomSystem, we are able to collect information
      regarding the usage of our products on a real-time basis. We use this
      information to help our customers increase their operating efficiencies.
      Eventually, we may market this information to suppliers of goods sold in our
      eRoomServ refreshment centers and to other users desiring information on the
      buying patterns of hotel guests for goods and services.




**Description
      of Revenues**




Historically,
      we have received most of our revenues from the sale or placement under a
      revenue-sharing program of our products in hotels. We expect that these revenues
      will account for a substantial majority of our revenues for the foreseeable
      future. We also generate revenues from maintenance and support services. Our
      dependence on the lodging industry, including its guests, makes us extremely
      vulnerable to downturns in the lodging industry caused by the general economic
      environment. Such a downturn could result in some hotels further delaying or
      declining to purchase or place our products or failing to renew our maintenance
      agreements, or it could result in fewer purchases by hotel guests of goods
      and
      services from our products installed in hotels. Time spent by individuals on
      travel and leisure is often discretionary for consumers and may be particularly
      affected by adverse trends in the general economy. The success of our operations
      depends, in part, upon discretionary consumer spending and economic conditions
      affecting disposable consumer income such as employment, wages and salaries,
      business conditions, interest rates, availability of credit and
      taxation.




Our
      revenue-sharing program provides us with a seven-year revenue stream under
      each
      revenue-sharing agreement. Because many of our customers in the lodging industry
      traditionally have limited capacity to finance the purchase of our products,
      we
      designed our revenue-sharing program accordingly. Through our revenue-sharing
      plan, we install our products at little or no upfront cost to our customers
      and
      share in the recurring revenues generated from sales of goods and services
      related to our products. We retain the ownership of the eRoomServ refreshment
      centers and eRoomSafes throughout the term of the revenue-sharing agreements
      and
      the right to re-deploy any systems returned to us upon the expiration or earlier
      termination of the revenue-sharing agreements. In 2003 and 2004, we failed
      to
      place any products, either on a revenue sharing or sale basis, and we cannot
      assure you that we will be successful in this effort in 2005. The reason for
      the
      foregoing was partially due to lack of cash, not having a replacement to the
      AMRESCO financing line as well as our limited products line as compared to
      our
      competitors.




-11-


We
      have
      experienced substantial fluctuations in revenues from period-to-period as a
      result of limited working capital to fund the development, assembly of our
      products and to maintain sufficient component inventories. In addition to
      limited working capital, fluctuations in revenues have partially resulted from
      the transition to our revenue-sharing program under which revenues are
      recognized over the seven-year life of the contract instead of immediately
      upon
      installation of the product. We anticipate that over the next several years
      our
      revenues will be a blend of the placement of our products pursuant to our
      revenue-sharing program, along with outright sales and, to a lesser extent,
      from
      maintenance agreements. We project that we will receive approximately 60% of
      the
      recurring revenues from the sale of goods and services generated by our
      eRoomServ refreshment centers, eRoomSafes and eRoomTray solutions placed under
      the revenue-sharing agreements. Our customers receive the remainder of the
      recurring revenues. AMRESCO is paid from our portion of the revenues pursuant
      to
      our financing agreement with AMRESCO, relating solely to those units for which
      it previously provided financing.




We
      installed zero products in the years ended December 31, 2004 and
      2003




**2004**
            
            **2003****Product**
            
            **Sale**
            
            **Revenue
                Share**
            
            **Total**
            
            **Sale**
            
            **Revenue
                Share**
            
            **Total**eRoomServ
                refreshment centers
            
            None
            
            None
            
            None
            
            None
            
            None
            
            NoneeRoomSafes
            
            None
            
            None
            
            None
            
            None
            
            None
            
            NoneeRoomTrays
            
            None
            
            None
            
            None
            
            None
            
            None
            
            NoneeRoomEnergy
            
            None
            
            None
            
            None
            
            None
            
            None
            
            None







At
      some
      future point, we may bundle additional products and services with our current
      products, such as our in-room energy management system and information
      management services. We anticipate that if the installation base of our products
      increases, the marketability and value of the information we collect and manage
      will increase. To this end, we may generate revenue from the packaging and
      marketing of our information-based data as our installation base expands.




**Revenue
      Recognition**




Sales
      revenue from our products is recognized upon completion of installation and
      acceptance by the customer. Sales revenue from the placement of our eRoomServ
      refreshment centers and eRoomSafes under our revenue-sharing program are
      accounted for similar to an operating lease, with the revenues recognized as
      earned over the term of the agreement. In some instances, our revenue-sharing
      agreements provide for a guaranteed minimum daily payment by the hotel. We
      negotiate our portion of the revenues generated under our revenue-sharing
      program based upon the cost of the equipment installed and the estimated daily
      sales per unit for the specific customer. We seek a gross profit margin of
      40%
      on the sale and placement through our revenue-sharing program of eRoomServ
      refreshment centers, eRoomSafes, eRoomTrays and eRoomEnergy management
      products.




We
      typically enter into installation, maintenance and license agreements with
      our
      customers. Installation, maintenance and license revenues are recognized as
      the
      services are performed, or pro rata over the service period. We defer all
      revenue paid in advance relating to future services and products not yet
      installed and accepted by our customers.




-12-


Maintenance
      fees are expected to constitute a greater percentage of total revenues in the
      future due to our focus on revenues generated from our revenue-sharing program,
      which requires maintenance agreements and realization of reduced fixed overhead
      expenses in connection with the maintenance of our revenue sharing products.
      However, the foregoing will not occur if we fail to place additional equipment
      on a revenue sharing basis in 2005 to offset revenue sharing contracts that
      will
      expire in the next year, for which no assurance can be given. Our installation,
      maintenance and license agreements stipulate that we collect a maintenance
      fee
      per eRoomServ refreshment center per day, payable on a monthly basis. Our
      objective is to generate gross profit margins of approximately 40% from our
      maintenance-related revenues. We base this expectation on our projected cost
      of
      maintenance of approximately $0.04 per unit per day and, pursuant to our
      maintenance agreements, our projected receipt of not less than $0.08 per unit
      per day.




**Description
      of Expenses** ****




Cost
      of
      product sales consists primarily of production, shipping and installation costs.
      Cost of revenue-sharing arrangements consists primarily of depreciation of
      capitalized costs for the products placed in service. We capitalize the
      production, shipping, installation and sales commissions related to the
      eRoomServ refreshment centers, eRoomSafes, eRoomTrays and eRoomEnergy management
      products placed under revenue-sharing agreements. Cost of maintenance fee
      revenues primarily consists of expenses related to customer support and
      maintenance.




Selling,
      general and administrative expenses include selling expenses consisting
      primarily of advertising, promotional activities, trade shows, travel and
      personnel-related expenses and general and administrative expenses consisting
      primarily of professional fees, salaries and related costs for accounting,
      administration, finance, human resources, information systems and legal
      personnel.




Research
      and development expenses consist of payroll and related costs for hardware
      and
      software engineers, quality assurance specialists, management personnel, and
      the
      costs of materials used by these employees in the development of new or enhanced
      product offerings.




In
      accordance with Financial Accounting Standards Board, or FASB, Statement of
      Financial Accounting Standards, or SFAS, No. 86, “Accounting for the Costs
      of Computer Software to be Sold, Leased or Otherwise Marketed,” development
      costs incurred in the research and development of new software products to
      be
      sold, leased or otherwise marketed are expensed as incurred until technological
      feasibility in the form of a working model has been established. Internally
      generated capitalizable software development costs have not been material to
      date. We have charged our software development costs to research and development
      expense in our consolidated statements of operations.




-13-


**Results
      of Operations**




The
      following table sets forth selected statement of operations data as a percentage
      of total revenues for the years indicated:




**Year
                ended December 31,****2004**
            
            
            **2003**Statement
                of Operations Data:Revenue:Revenue
                share arrangements
            
            
            69.4
            %
            
            74.5
            %Maintenance
                fees
            
            
            22.8
            
            
            24.1Product
                sales
            
            
            7.8
            
            
            1.4Total
                revenue
            
            
            100.0
            
            
            100.0Cost
                of revenue:Revenue
                share arrangements
            
            
            32.4
            %
            
            47.8
            %Write-off
                of obsolete inventory
            
            
            0.0
            
            
            16.7Loss
                on Impairment of Refreshment Centers
            
            
            0.0
            
            
            33.2Maintenance
            
            
            4.6
            
            
            9.4Product
                sales
            
            
            0.2
            
            
            0.4Total
                cost of revenue
            
            
            37.2
            
            
            107.5Gross
                margin (loss)
            
            
            62.8
            
            
            (7.5
            %)Operating
                expenses:Selling,
                general and administrative expense
            
            
            49.3
            %
            
            98.4
            %Research
                and development expense
            
            
            2.4
            
            
            1.5Interest
                expense
            
            
            13.2
            
            
            39.4Gain
                in collection of previously written off receivables
            
            
            (19.6
            )
            
            0.0Interest
                and other income
            
            
            (0.5
            )
            
            (0.8
            )Total
                operating expenses
            
            
            44.8
            
            
            (138.6
            )Income
                (loss) from operations
            
            
            18.1
            %
            
            (146.1
            %)Other
                income (expense):Gain
                on forgiveness of liabilities and debt
            
            
            38.5
            
            
            31.2Net
                income (loss)
            
            
            56.6
            %
            
            (114.9
            %)





**Years
      Ended December 31, 2003 and** **2004**




**Revenues**




Revenue
      Sharing Arrangements — Our revenue from revenue-sharing arrangements was
      $1,103,945 in 2004 as compared to $1,116,200 for 2003, representing a decrease
      of $12,255, or 1.1%. The decrease in revenue from revenue-sharing arrangements
      was not material. During the years ended December 31, 2004 and 2003, we placed
      zero additional products on a revenue sharing basis.




Maintenance
      Fee Revenue — Our maintenance fee revenue was $363,501 for 2004 and $361,037 for
      2003, representing an increase of $2,464, or 0.7%. The increase in maintenance
      fee revenue was not material.




Product
      Sales — Our revenue from product sales was $123,713 in 2004 as compared to
      $21,622 in 2003, representing an increase of $102,091, or 472.2%. The increase
      in revenue from product sales was primarily due to the sale, in 2004, of
      $112,500 of refreshment centers to the H. Park Central Hotel in New York City,
      New York, as compared to no material equipment sales in 2003.




-14-


**Cost
      of Revenue**




Cost
        of
        Revenue-Sharing Revenue — Our cost of revenue-sharing revenue was $515,124 for
        2004 and $715,947 for 2003, representing a decrease of $200,823, or 28.0%.
        The
        decrease in the cost of revenue-sharing revenue was due to the impairment
        of
        units in 2003. The gross margin percentage on revenue-sharing revenue was
        53.3%
        in 2004 as compared to 35.9% in 2003.


Cost
      of
      Maintenance Revenue — Our cost of maintenance revenue was $72,915 for 2004 as
      compared to $141,013 for 2003, representing a material decrease of $68,098,
      or
      48.3%. The decrease in the cost of maintenance revenue was primarily due to
      fewer repair and other issues in 2004 as compared to 2003 with respect to
      equipment placed in hotels. The gross margin percentage on maintenance revenues
      was 79.9% in 2004 as compared to 60.9% in 2003.




Cost
      of
      Product Sales Revenue — Our cost of product sales revenue was $3,142 for 2004 as
      compared to $5,787 for 2003, representing a decrease of $2,645, or 45.7%. The
      decrease, while significant from a percentage standpoint, was not material.
      The
      gross margin percentage on revenue from product sales revenue was 97.5% in
      2004
      as compared to 73.2% in 2003. The high gross margin percentage in 2004 relates
      to the sale of 260 refreshment centers to the H. Park Central Hotel that were
      previously written-off and, accordingly, no cost of product sales was attributed
      to such sale.




Write-off
      of Obsolete Inventory — During 2004 and 2003, provisions were made for obsolete
      inventory of zero and $250,404, respectively, thereby reducing the carrying
      value of inventory to zero as of December 31, 2003.




Loss
      on
      Impairment of Refreshment Centers — During 2003, the Company assessed the
      carrying value of certain refreshment centers in service and recorded a loss
      due
      to impairment of $497,399. Management determined that the estimated future
      cash
      flows of several of the properties that made up this group of refreshment
      centers no longer supported the carrying value of the assets, which was $669,354
      prior to recording the impairment loss. No further losses on impairment of
      refreshment centers were recorded in 2004.




The
      changes and percent changes with respect to our revenues and our cost of revenue
      for the years ended December 31, 2004 and 2003 are as follows:





-15-


**For
                  the Years Ended****December
                  31,****2004**
              
              
              **2003**
              
              
              **Change**
              
              **Percent**
                **Change****REVENUE**Revenue-sharing
                  arrangements
              
              $
              1,103,945
              
              $
              1,116,200
              
              $
              (12,255
              )
              
              1.1
              %Maintenance
                  fees
              
              
              363,501
              
              
              361,037
              
              
              2,464
              
              
              0.7
              %Product
                  sales
              
              
              123,713
              
              
              21,622
              
              
              102,091
              
              
              472.2
              %**Total
                  Revenue**
              
              
              1,591,159
              
              
              1,498,859
              
              
              92,300
              
              
              6.2
              %**COST
                  OF REVENUE**Revenue-sharing
                  arrangements
              
              
              515,124
              
              
              715,947
              
              
              (200,823
              )
              
              28.0
              %Write-off
                  of obsolete inventory
              
              
              -
              
              
              250,404
              
              
              (250,404
              )
              
              100.0
              %Loss
                  on impairment of refreshmentcenters
              
              
              -
              
              
              497,399
              
              
              497,399
              
              
              100.0
              %Maintenance
              
              
              72,915
              
              
              141,013
              
              
              (68,098
              )
              
              48.3
              %Product
                  sales
              
              
              3,142
              
              
              5,787
              
              
              (2,645
              )
              
              45.7
              %**Total
                  Cost of Revenue**
              
              
              591,181
              
              
              1,610,550
              
              
              (1,019,369
              )
              
              63.3
              %**GROSS
                  MARGIN PERCENTAGE**Revenue-sharing
                  arrangements
              
              
              53.3
              %
              
              35.9
              %Maintenance
              
              
              79.9
              %
              
              60.9
              %Product
                  sales
              
              
              97.5
              %
              
              73.2
              %**Total
                  Gross Margin Percentage**
              
              
              62.8
              %
              
              (7.5
              %)


Although
      the preceding table summarizes the net changes and percent changes with respect
      to our revenues and our cost of revenue for the years ended December 31, 2004
      and 2003, the trends contained therein are limited to a two-year comparison
      and
      should not be viewed as a definitive indication of our future
      results.




**Operating
      Expenses** ****




Selling,
      General and Administrative — Selling, general and administrative expenses were
      $784,110 for 2004 and $1,475,116 for 2003, representing a decrease of $691,006,
      or 46.8%. Selling, general and administrative expenses represented 49.3% of
      our
      total revenues in 2004 and 98.4% of our total revenues in 2003. The decrease
      in
      selling, general and administrative expenses related to our continued reduction
      in fixed overhead expenses.




Research  and
      Development Expenses — Research and development expenses were $38,527 for 2004
      and $23,017 for 2003, representing an increase of $15,510, or 67.4%. The
      increase in research and development expenses was due to an increase in our
      development initiatives in 2004. Research and development expenses represented
      2.4% of our total revenue in 2004 and 1.5% of our total revenue in 2003.




Interest
      expense was $209,961 for 2004 as compared to $591,171 for 2003, a decrease
      of
      $381,210, or 46.8%. The decrease in interest expense related primarily to the
      material reduction in the interest rate relating to the AMRESCO loan fundings.
      In 2004 we realized a gain on collection of previously written off receivables
      in the amount of $312,500. Income from operations for 2004 was $287,308, as
      compared to a loss from operations of $2,189,569 in 2003. The Company also
      realized a gain on forgiveness of liabilities and debt of $612,718 in 2004
      as
      compared to $467,734 in 2003.





-16-





**Net
      Income (Loss) Attributable to Common Stockholders** ****




We
      realized net income attributable to common stockholders of $900,072 in 2004
      and
      a net loss of $1,721,835 in 2003. The $2,621,907 decrease in the net loss was
      due to a significant reduction in selling, general and administrative expense
      and interest expense, as well as material gains on forgiveness of liabilities
      and debt as well as previously written off receivables.




**Financing
      Arrangement with AMRESCO Leasing Corporation**




In
      1999,
      we entered into the amended and restated program agreement with AMRESCO, which
      represented an exclusive, post-installation, financing arrangement for the
      funding of units placed with domestic hotel customers under our revenue-sharing
      agreements. On May 11, 2000, we replaced this agreement with a master business
      lease financing agreement. Then, on February 23, 2001, we amended and
      restated the master business lease financing agreement and related exhibits.




In
      September 2002, we announced
      the receipt of written notice from AMRESCO
      Leasing Corporation of its intention to cease funding any future loans pursuant
      to the Amended and Restated Master Business Lease Financing Agreement. AMRESCO
      indicated that the decision to cease funding future loans was based on its
      determination that the Company was not able to meet its debt obligations in
      the
      ordinary course of business, and also that it had altered its policy not to
      originate any new loans and to only service its existing portfolio of
      loans.


Under
      the
      terms of this terminated agreement, we were able to finance up to 150% of the
      fully burdened cost to manufacture and install our products, through an
      open-ended line of credit, over the seven-year term of the agreement.




As
      part
      of the AMRESCO financing, we formed eRoomSystem SPE, a wholly owned subsidiary.
      eRoomSystem SPE owns all of the units funded by AMRESCO under revenue-sharing
      agreements, totaling $1,684,416 in original principal amount. AMRESCO has taken
      a senior security interest in the units financed under the financing agreement
      and all proceeds generated by and derived from those products.




Until
      October 1, 2003, the interest rate for the funds under the AMRESCO financing
      arrangement was based upon the seven-year treasury rate plus an additional
      incremental rate that varies depending upon the total amount outstanding under
      the financing arrangement. The incremental rate varied according to the
      thresholds provided in the following table:




**Threshold**
            
            **Interest
                Rate**Aggregate
                fundings of less than $25 million
            
            Seven-year
                treasury rate plus 12.5%Aggregate
                fundings from $25 million and equal to $125 million
            
            Seven-year
                treasury rate plus 10.0%Aggregate
                fundings of more than $125 million and equal to $150
                million
            
            Seven-year
                treasury rate plus 8.5%Aggregate
                fundings of more than $150 million and equal to $175
                million
            
            Seven-year
                treasury rate plus 7.5%Aggregate
                fundings of more than $175 million
            
            Seven-year
                treasury rate plus 6.5%




On
      October 1, 2003, as a condition to receiving $250,000 in debt financing from
      the
      Gestetner Group, LLC and several third parties, AMRESCO and the Company entered
      into an agreement for the purpose of modifying the notes payable to AMRESCO.
      The
      terms of such agreement provide that all loan fundings, and all corresponding
      notes payable, made by AMRESCO to the Company shall bear interest at the rate
      of
      8% per annum during the period October 1, 2003 to September 30, 2005. From
      October 1, 2005 until all debt obligations in favor of AMRESCO are paid in
      full,
      all promissory notes in favor of AMRESCO shall bear interest at the rate of
      10%
      per annum. The Company has, and will continue to, realize a sizable cost savings
      based upon the interest reduction from the former rate of 17.19% per annum.




-17-


In
      consideration for the interest rate reduction, the Company issued AMRESCO a
      warrant to purchase 400,000 shares of common stock, exercisable at $0.10 per
      share through October 1, 2008. If such warrant has an intrinsic value greater
      that $300,000 at any time during such period, AMRESCO has the right to exercise
      a “put” regarding the warrant to the Company for $200,000, payable in twelve
      equal monthly installments.




**Liquidity
      and Capital Resources** ****




On
      August
      9, 2000, we consummated our initial public offering for 1,800,000 shares of
      common stock. We received gross proceeds of $11,700,000 and, after deducting
      underwriting discounts and commissions and offering expenses, net proceeds
      of
      approximately $9,860,000. The net offering proceeds were used for funding the
      production and installation of our products and services, the repayment of
      a
      substantial portion of our outstanding indebtedness and related accrued
      interest, the payment of cash dividends on our Series A and Series C
      convertible preferred stock, our advertising and promotional expenses,
      additional research and development to improve our existing products and
      services and to develop our future products and services, and general corporate
      purposes and working capital, including the payment of accounts payable incurred
      prior to the closing of our initial public offering. We used the net proceeds
      from our initial public offering through the nine months ended
      September 30, 2001.




In
      addition to the funds received pursuant to our initial public offering, we
      have
      received $1,684,416 in fundings through our prior financial arrangements with
      AMRESCO in 2001 and 2002, collectively, and $1,416,029 in gross proceeds from
      our private placement of common stock in March 2002. The funds from AMRESCO
      and
      our private placement have been used to fund working capital and general
      corporate purposes.




On
      November 8, 2002, we issued a promissory note to Ash Capital, LLC for proceeds
      of up to $322,500. The note bore interest at 8%. The principal and interest
      were
      originally due on November 8, 2003. All past due amounts and accrued interest
      thereon bear interest at 18%. During the period November 8, 2002 through
      September 30, 2003, we received loan proceeds of $322,500, and also transferred
      $25,000 from an accounts payable due to Ash Capital, which increased the
      principal amount of the promissory note to $347,500. At any time, principal
      and
      accrued interest on the promissory note is convertible into Series D Convertible
      Preferred Stock at $0.90 per share. Each share of the Series D Convertible
      Preferred Stock is convertible into six shares of common stock, at the rate
      of
      $0.15 per share of Series D Preferred Stock. On October 1, 2003, Ash Capital,
      LLC agreed to amend the terms of its secured convertible promissory note with
      us
      to (i) extend the maturity date to the earlier of November 8, 2007 or the
      maturity date of the Notes issued to Gestetner Group, LLC and several third
      parties and (ii) include as an additional event of default any default by us
      the
      secured convertible promissory notes with Gestetner Group, LLC and several
      third
      parties. In addition, we have issued Ash Capital, LLC a contingent warrant
      to
      purchase shares of common stock, exercisable at $0.13 per share through October
      1, 2008. The terms of the warrant provide that the number of shares exercisable
      by Ash Capital, LLC will be determined by a formula, [A - B] times C, whereby
      (i) A equals the aggregate number of shares of our common stock that are, on
      the
      date of the exercise of the Ash Capital warrant, issued to and held by any
      of
      the Gestetner Group, LLC and several third parties that purchased, collectively,
      $250,000 of secured convertible promissory notes on October 1, 2003, (ii) B
      equals 10,000,000 and (iii) C equals .07. We have utilized all monies loaned
      by
      Ash Capital, LLC for our business operations.




-18-


On
      October 1, 2003, we issued secured convertible promissory notes in the original
      principal amount of $250,000, collectively, to Gestetner Group, LLC, a New
      Jersey limited liability company, and several third parties, the Noteholders.
      David A. Gestetner, our Chief Executive Officer and President is the Managing
      Member of the Gestetner Group, LLC. The terms of the Notes include (i) for
      interest to accrue at the rate of 8% per annum, (ii) a maturity date of the
      earlier of (a) October 1, 2008, (b) the date of approval of the Board of
      Directors regarding the merger of the Company with or into any third party
      or
      the sale of all or substantially all of our assets, or (c) the date of the
      closing of any financing (other than commercial credit facilities), the gross
      proceeds of which are at least $1,000,000 and (iii) the right of the
      Noteholders, at any time, to convert all outstanding principal and accrued
      and
      unpaid interest into shares of our common stock at the rate of $0.05 per share;
      provided, however, that we shall have the right to not permit the conversion
      if
      such conversion would result in the Noteholders holding, in the aggregate and
      on
      a fully-diluted basis, more than 49% of our outstanding common stock. In
      addition, the Noteholders have been issued, collectively, warrants to purchase
      5,000,000 shares of our common stock, exercisable at $0.05 per share at any
      time
      through October 1, 2008. We have used the proceeds provided by the Noteholders
      for our business operations.




At
      December 31, 2004, we had $646,386 of cash, $225,000 in an escrow account
      relating to a settlement, which monies has since been released to us, and
      working capital of $445,482 as compared to $381,985 of cash and a working
      capital deficit of $603,709 at December 31, 2003. In addition, our stockholders’
equity was $1,312,657 at December 31, 2004 as compared to $352,197 at December
      31, 2003, an increase of $960,460. The increase in cash, working capital and
      stockholders’ equity reflects the continued decrease in cash used in our
      operations and reduction in fixed overhead expenses along with the elimination,
      on generally favorable terms, of accounts payable and other previously existing
      current liabilities.




Our
      accumulated deficit decreased to $31,807,433 at December 31, 2004 as compared
      to
      $32,707,505 at December 31, 2003. The decrease in accumulated is a direct result
      of our net income of $900,072 for the year ended December 31, 2004.




Net
      cash
      provided by operating activities was $730,322 during the year ended December
      31,
      2004 as compared to $186,718 of net cash provided by operating activities during
      the year ended December 31, 2003. The $543,604 change in net cash from operating
      activities resulted primarily from the significant improvement in net income,
      offset by decreases in depreciation, loss due to impairment of refreshment
      centers in service, accretion of debt discount, and accrued liabilities.




Investing
      activities for the year ended December 31, 2004 used $19,716 as compared to
      providing $1,144 of net cash during the year ended December 31, 2003. The
      increase in net cash used in investing activities resulted primarily from a
      change in long-term deposits and restricted funds.




Financing
      activities used $446,205 during the year ended December 31, 2004 as compared
      to
      providing $49,764 during the year ended December 31, 2003. The increase in
      cash
      used in financing activities resulted from a significant decrease in borrowings
      and increased principal payments on long-term debt.




In
      September 2002, we announced
      the receipt of written notice from AMRESCO
      of its intention to cease funding any future loans pursuant
      to the Amended and Restated Master Business Lease Financing Agreement. AMRESCO
      indicated that the decision to cease funding future loans was based on its
      determination that the Company was not able to meet its debt obligations in
      the
      ordinary course of business, and also that it had altered its policy not to
      originate any new loans and to only service its existing portfolio of loans.
      We
      have not procured a new financing source and we must do so in order to offer
      new
      revenue sharing placements to prospective hotel clients. There can be no
      assurance that we will be successful in doing so.





-19-


On
      January 26, 2001, we terminated the employment of seventeen employees in an
      effort to maximize operational efficiencies and reduce monthly expenses. In
      addition, we expanded the responsibilities of other positions to account for
      the
      terminations. We took a one-time restructuring charge of $418,606 in the fourth
      quarter of 2000, but estimated that the restructuring would result in an
      approximate $1.1 million reduction in annual overhead over the twelve months
      following the restructuring. Subsequently, on October 11, 2001, we announced
      a
      reduction-in-force and other cost-cutting measures driven by the uncertainties
      in the weakening United States economy and the lodging industry. We terminated
      the employment of eight employees and modified the compensation of our sales
      representatives. We estimated that the measures would result in a monthly
      reduction in overhead of approximately $51,000. In the twelve months ended
      December 31, 2002, we further reduced our staff by 11 employees to reduce costs.
      In 2003, we reduced our staff count by an additional six persons. By doing
      so,
      we have significantly reduced our selling, general and administrative expenses
      and are now operating profitably.




**Qualitative
      and Quantitative Disclosures About Market Risk**




All
      of
      our products are manufactured in China through outsource manufacturing
      relationships. We do, however, pay our manufacturing partners in U.S. dollars.


Our
      financial results could be affected by weak economic conditions in foreign
      markets if we decide to focus on the international market. Because all of our
      revenues are denominated in U.S. Dollars, a strengthening of the dollar could
      make our products less competitive in foreign markets.




If
      we
      decide to expand operations internationally, we will continue to evaluate our
      foreign currency exposures and risks and develop appropriate hedging or other
      strategies to manage those risks. We have not revised our current business
      practices to conform to Europe’s conversion to the Euro.








-20-





**RISK
      FACTORS**




*We
      are subject to a high degree of risk as we are considered to be in unsound
      financial condition. The following risks, if any one or more occurs, could
      materially harm our business, financial condition or future results of
      operations. If that occurs, the trading price of our common stock could decline.*




**Risks
      Related to** **e** **RoomSystem
      Technologies**




***Although
      we realized net income in 2004, we have a history of significant operating
      losses and may experience operating losses in the future, and maintaining
      profitability is not assured***




We
      have a
      history of significant operating losses and may realize operating losses in
      the
      future. For the year ended December 31, 2004, we realized net income of
      $900,072, as compared to a net loss of $1,721,835 for the year ended December
      31, 2003. For the years ended December 31, 2004 and 2003, our operations have
      provided $730,322 and $186,718 of cash, respectively. As of December 31, 2004
      and 2003, we had accumulated deficits of $31,807,433 and 32,707,505,
      respectively.





If
      our
      revenues decline or fail to increase at a measurable rate, or if our future
      spending exceeds our expectations or cannot be adjusted to reflect slower
      revenue growth, our business will be severely harmed. We cannot assure you
      that
      revenues will grow in the future or that we will continue to generate sufficient
      revenues to sustain profitability on an ongoing basis.





***With
      the termination of our long-term financing arrangement with AMRESCO Leasing
      Corporation, it remains critical that we obtain a new financing line and at
      least $1,000,000 in additional equity or debt financing or our business
      operations could be affected***




Our
      business model relies heavily upon the placement of our products pursuant to
      our
      revenue-sharing program, and in the current economic climate hoteliers have
      been
      increasingly reticent to make significant capital expenditures for in-room
      amenities given declining occupancy rates, RevPar and travel in
      general. **** Our
      September 2002 announcement
      of the receipt of written notice from AMRESCO
      Leasing Corporation of its intention to cease funding any future loans pursuant
      to the Amended and Restated Master Business Lease Financing Agreement has
      severely hampered our ability to place products on any basis other than an
      outright sale. Moreover, we have not had success in procuring a replacement
      line
      of credit for our revenue sharing program. A key element to securing a new
      financing line is obtaining sufficient equity financing. We have been
      unsuccessful in this endeavor as well since June 2002. In the event we are
      unsuccessful in obtaining a new financing line and a minimum of $1,000,000
      of
      equity or debt financing, our business and results of operations could be
      affected.




***Due
      to the limited number of personnel that
      we have at the present time, we may fail to disclose in our periodic reports
      under the Securities Exchange Act information required to be disclosed in such
      reports, which may have an adverse effect on the price and liquidity of our
      common stock.***




Although
      management has evaluated the design of our
      disclosure controls and procedures and has concluded that they provide
      reasonable assurance that information required to be disclosed in our reports
      filed with the Securities and Exchange Commission pursuant to the Securities
      Exchange Act of 1934, as amended, is accumulated and communicated to on a timely
      basis, we have limited personnel to carry out those procedures. Such employees
      may become overwhelmed from time to time with other administrative duties,
      which
      would negatively affect their ability to execute our disclosure controls and
      procedures and, as a result, our period reports may not contain all of the
      information required to be contained therein. Such inadequate disclosure may
      cause negative perception by investors and result in a decrease in the price
      an/or liquidity of our stock.




***We
      have effected several reductions-in-force in the past three years to reduce
      fixed overhead expenses, effectively eliminating more than forty positions,
      and
      given the current composition of employees the loss of additional key personnel
      would seriously impact our operations***




We
      are
      dependent upon the abilities and efforts of certain personnel, including
      David A. Gestetner and Daniel Bird. Our future success will depend in part
      upon our ability to attract and retain qualified personnel to fill key field
      operations, sales and management positions. We currently do not carry key man
      life insurance on any of our key personnel, and we have no intention of doing
      so
      in the near future. There can be no assurance that we will be able to locate
      and
      retain replacement personnel in the event of the loss of any such key
      individuals.




-21-


***If
      we fail to retain experienced sales personnel, our future operating results
      will
      likely be further adversely affected***




As
      a
      result of the significant personnel reductions over the past three years related
      to our severe cash limitations, we have eliminated our entire sales staff.
      While
      we anticipate adding new sales personnel at some point in the future, there
      can
      be no assurance that such personnel will be available, and if so, on terms
      we
      can afford. Further, we can expect a significant period of time from the date
      of
      hire of such sales personnel, if any, to the date of placement of new products
      with hotels given our experience with the fairly long sales cycle with respect
      to the placement of our products.




***Our
      failure to maintain our current relationships with hotel chains, to develop
      new
      relationships with other hotel chains and to enter into definitive agreements
      with the franchisees of these hotel chains may result in an inability to
      increase revenues and maintain profitability***




Although
      we are a vendor of interactive computerized refreshment centers to more than
      thirty hotels, these arrangements may not generate any additional sales or
      placements of our products. Due to the franchisor-franchisee relationship
      between many hotel chains and their hotel properties, even if we establish
      a
      preferred-vendor relationship with a hotel chain, we must also enter into
      definitive agreements with the franchisees of the hotel chain for the sale
      or
      placement of our products into the actual hotel properties. Further, our
      relationships with the hotel chains are arrangements that are subject to change.
      The failure to secure one or more preferred vendor relationships with hotel
      chains and enter into definitive agreements with franchisees of these hotel
      chains will harm our ability to install additional products and services and
      may
      result in an inability to increase revenues and maintain
      profitability.




***Although
      we have entered into confidentiality and non-compete agreements with our
      employees and consultants, if we are unable to protect our proprietary
      information, such as the software and the hardware for our eRoomSystem
      technology and the information collected, against unauthorized use by others,
      our competitive position could be harmed***




We
      believe our proprietary information, including the software and the hardware
      for
      our eRoomSystem technology and the information collected is important to our
      competitive position and is a significant aspect of the products and services
      we
      provide. If we are unable to protect our proprietary information against
      unauthorized use by others, our competitive position could be harmed. We enter
      into confidentiality and/or non-compete agreements with our employees and
      consultants, and control access to and distribution of our documentation and
      other proprietary information. Despite these precautions, we cannot assure
      you
      that these strategies will be adequate to prevent misappropriation of our
      proprietary information. We could be required to expend significant amounts
      to
      defend our rights to proprietary information.




**Risks
      Related to Our Industry**




***We
      rely on the economic health of the lodging industry to generate sales and
      revenues, and any condition that may adversely impact the casino industry will
      adversely impact us***




Nearly
      all of our revenue is generated by the sale or placement of our products to
      existing hotels, new hotels or expanded hotels. The economic health of the
      lodging industry, and, therefore, our revenues, are affected by a number of
      factors beyond our control, including:


-22-




·
            general
                economic conditions;


·
              levels
                  of disposable income of the hotel
                  patrons;


·
              acts
                  of terrorism and anti-terrorism
                  efforts;


·
              increased
                  transportation costs resulting in decreased travel by patrons and
                  decreased hotel occupancy and
                  RevPar;


·
              changes
                  or proposed changes in tax
                  laws;


·
              legal
                  and regulatory issues affecting the development, operation and
                  licensing
                  of hotels; and


·
              competitive
                  conditions in the lodging industry, including the effect of such
                  conditions on the pricing of products and supplies to hotels;




These
      factors may impact the demand for our products and could materially affect
      revenues that we realize on the sale or placement of our products.




***Terrorist
      attacks or acts of war may seriously harm our
      business***




Terrorist
      attacks or acts of war may cause damage or disruption to our company, our
      employees, our facility and our customers, which could significantly impact
      our
      revenues, costs and expenses, and financial condition. The terrorist attacks
      that took place in the United States on September 11, 2001 were
      unprecedented events that have created many economic and political
      uncertainties, especially to the lodging industry, some of which have materially
      adversely affected our business, results of operations, and financial condition
      and may do so again in the future. In particular, the lodging industry has
      been
      materially affected by the downturn in the tourism industry as a result of
      the
      September 11 attacks. We have also experienced a fairly significant
      decrease in utilization of our revenue sharing products post September 11,
      particularly in the New York metro area given the lower occupancy rates. Because
      our business is closely tied to the lodging industry, the long-term effects
      on
      our company from the September 11, 2001 attacks are unknown. The potential
      for future terrorist attacks, the national and international responses to
      terrorist attacks, and other acts of war or hostility have created many economic
      and political uncertainties, which could materially adversely affect our
      business, results of operations, and financial condition in ways that we
      currently cannot predict.




The
      strength and profitability of our business depends on the overall demand for
      our
      products and growth in the lodging industry. Lodging industry revenues are
      sensitive to general economic conditions and generally rise or fall more rapidly
      in relation to the condition of the overall economy. Although we cannot
      accurately estimate the economic impact of the recent terrorist attacks at
      this
      time, the lodging industry has been negatively affected by the reduction in
      air
      travel and tourism, and we expect that the significant decline in the economic
      health of the lodging industry will continue to reduce the demand for our
      products in the near term.




***We
      have experienced loss of market share due to the intense competition from
      companies with longer operating histories, greater resources and more
      established brand names that market in-room amenities to the lodging
      industry***




The
      market for in-room amenities in the lodging industry is very competitive, and
      we
      expect competition to intensify in the future. Our competitors vary in size
      and
      in the scope and breadth of the products and services they offer. Our
      competitors include Bartech Systems International, Dometic Corporation and
      MiniBar Systems, among others. Each of our competitors have longer operating
      histories, larger customer bases, greater brand recognition, and substantially
      greater capital, research and development, manufacturing, marketing, service,
      support, technical and other resources than we currently do. As a result, our
      competitors are generally able to devote greater resources to marketing
      campaigns, adopt more aggressive pricing policies and devote substantially
      more
      resources to customer and business development than we can.




-23-


We
      also
      are experiencing additional competition from new entrants into the room
      management and related aspects of our business. In addition, we may, from time
      to time, make pricing, service or marketing decisions, or acquisitions as a
      strategic response to changes in the competitive environment. Our response
      to
      this increased competition may result in reduced operating margins and further
      loss of market share.




**Risks
      Related to Our Common Stock**




***Due
      to our need for additional financing, we will require the sale of our
      securities, in the form of debt or equity, to provide our operations with the
      necessary working capital, which invariably will have the effect of diluting
      the
      relative ownership of our existing stockholders***




We
      need
      an infusion of capital to fully fund our future operations, whether in the
      form
      of common stock, preferred stock or convertible debt. The issuance of additional
      equity or convertible debt securities will have the effect of reducing the
      percentage ownership of our current stockholders. In addition, such equity
      or
      convertible debt securities may have additional rights, preferences or
      privileges to those of our common stock, such as registration rights. Given
      the
      necessity of raising additional funds to fully support our future operations,
      we
      cannot assure our stockholders that the additional funds will be available
      on
      terms favorable to us, if at all. Since June 2002, we have been unsuccessful
      in
      our attempts to raise significant capital despite intense efforts and
      utilization of a variety of sources. If adequate funds are not available or
      are
      not available on acceptable terms, we eventually may not be able to fund
      operations or otherwise continue as a going-concern.




***Our
      executive officers and members of our board of directors beneficially own
      approximately 16.6% of the outstanding shares of our common stock and could
      limit the ability of our other stockholders to influence the outcome of director
      elections and other transactions submitted to a vote of
      stockholders***




Our
      executive officers and members of our board of directors beneficially own
      1,741,330 shares of common stock, or approximately 16.6% of the outstanding
      shares of our common stock. These stockholders may have the power to influence
      all matters requiring approval by our stockholders, including the election
      of
      directors and approval of mergers and other significant corporate transactions.




***Our
      stock price may fall as a result of the approximately 10,403,933 shares of
      common stock, or approximately 99.4% of our outstanding common stock, that
      is
      currently eligible for resale***




Sales
      of
      a substantial number of shares of common stock in the public market could cause
      the market price for our common stock to decline. Of the 10,465,133 shares
      of
      common stock outstanding as of March 8, 2005, 321,875 shares have been
      registered pursuant to a selling stockholder registration statement and
      1,800,000 shares were sold in our initial public offering, which closed on
      August 9, 2000. All of these shares, representing approximately 20.3% of our
      outstanding shares of common stock, are immediately available for resale.




In
      addition to the foregoing shares, up to 8,282,058 shares of common stock, or
      approximately 79.1% of our outstanding shares of common stock, are available
      for
      resale in accordance with Rule 144(k) under the Securities Act. These shares,
      along with the shares of common stock sold in our initial public offering and
      the shares registered in the selling stockholder offering, represent
      approximately 10,403,933 shares, or 99.4% of our outstanding shares of common
      stock. As to our remaining shares of common stock, 61,200 are currently
      ineligible for resale.




-24-


As
      of
      December 31, 2004, we had options and warrants outstanding to purchase
      8,720,846 shares of common stock at a weighted average exercise price of $0.30
      per share, all of which are immediately exercisable. Additionally, as of
      December 31, 2004, we had convertible debt that, if converted, would require
      the
      issuance of 7,316,667 shares of common stock.




The
      sale
      of a substantial number of shares of our common stock within a short period
      of
      time could cause our stock price to fall. In addition, the sale of these shares
      could impair our abilities to raise capital through the sale of additional
      common stock.





-25-





**ITEM
      7.**  **FINANCIAL
      STATEMENTS.**




**eROOMSYSTEM
      TECHNOLOGIES, INC. AND SUBSIDIARIES**





**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**







Report of Independent Certified Public
                Accountants
              27Consolidated
                Balance Sheets
              28Consolidated Statements of
                Operations
              29Consolidated Statements of
                Stockholders' Equity
              30Consolidated Statements of Cash
                Flows
              31Notes to Consolidated Financial
                Statements
              32




-26-





**H****ANSEN****,
      B****ARNETT****&
      M****AXWELL**


A
      Professional Corporation


CERTIFIED
      PUBLIC ACCOUNTANTS


5
      Triad
      Center, Suite 750


Salt
      Lake
      City, UT 84180-1128


Phone:
      (801) 532-2200


Fax:
      (801) 532-7944


www.hbmcpas.com











**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








To
      the
      Board of Directors and the Stockholders


eRoomSystem
      Technologies, Inc.





We
      have
      audited the accompanying consolidated balance sheets of eRoomSystem
      Technologies, Inc. and subsidiaries as of December 31, 2004 and 2003, and the
      related consolidated statements of operations, stockholders' equity and cash
      flows for the years then ended. These financial statements are the
      responsibility of the Company's management. Our responsibility is to express
      an
      opinion on these financial statements based on our audits.





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





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of eRoomSystem Technologies,
      Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of
      their
      operations and their cash flows for the years then ended in conformity with
      accounting principles generally accepted in the United States of
      America.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. As discussed in Note 1 to the
      financial statements, until the year ended December 31, 2004, the Company
      suffered losses from operations and had a working capital deficiency. These
      matters raise substantial doubt about the Company's ability to continue as
      a
      going concern. Management's plans in regard to these matters are also described
      in Note 1. The financial statements do not include any adjustments relating
      to
      the recoverability and classification of asset carrying amounts or the amount
      and classification of liabilities that might result should the Company be unable
      to continue as a going concern.








**HANSEN,
      BARNETT & MAXWELL**


Salt
      Lake
      City, Utah


March
      2,
      2005







-27-


**eROOMSYSTEM
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 **December
                    31,****2004**
                
                **2003****ASSETS****CURRENT
                    ASSETS**Cash
                
                $
                646,386
                
                $
                381,985Attorney's
                    Escrow
                
                
                225,000
                
                
                -Accounts
                    receivable, net of allowance for doubtful accounts of $29,045
                    and$246,465
                    at December 31, 2004 and 2003, respectively
                
                
                164,586
                
                
                226,385Prepaid
                    expenses
                
                
                16,317
                
                
                16,188**Total
                    Current Assets**
                
                
                1,052,289
                
                
                624,558**REFRESHMENT
                    CENTERS IN SERVICE**,
                    net of accumulated depreciation of$1,777,378
                    and $1,262,714 at December 31, 2004 and 2003, respectively
                
                
                1,870,143
                
                
                2,384,808**PROPERTY
                    AND EQUIPMENT**Production
                    equipment
                
                
                22,210
                
                
                22,210Computer
                    equipment
                
                
                76,031
                
                
                74,965Vehicles
                    and other
                
                
                44,153
                
                
                44,153142,394
                
                
                141,328Less
                    accumulated depreciation and amortization
                
                
                (129,481
                )
                
                (119,388
                )**Net
                    Property and Equipment**
                
                
                12,913
                
                
                21,940**DEPOSITS**
                
                
                95,300
                
                
                76,650**Total
                    Assets**
                
                $
                3,030,645
                
                $
                3,107,956**LIABILITIES
                    AND STOCKHOLDERS' EQUITY****CURRENT
                    LIABILITIES**Notes
                    payable and current portion of long-term debt
                
                $
                228,337
                
                $
                426,683Accounts
                    payable
                
                
                109,089
                
                
                540,395Accrued
                    liabilities
                
                
                137,492
                
                
                134,278Accrued
                    interest
                
                
                81,615
                
                
                59,457Customer
                    deposits
                
                
                11,758
                
                
                11,758Deferred
                    maintenance revenue
                
                
                38,516
                
                
                55,696**Total
                    Current Liabilities**
                
                
                606,807
                
                
                1,228,267**LONG-TERM
                    DEBT, net of current portion**
                
                
                1,111,181
                
                
                1,527,492**Total
                    Liabilities**
                
                
                1,717,988
                
                
                2,755,759**COMMITMENTS
                    AND CONTINGENCIES****STOCKHOLDERS'
                    EQUITY**Preferred
                    stock, $0.001 par value; 5,000,000 shares authorized; none outstanding
                
                
                -
                
                
                -Common
                    stock, $0.001 par value; 50,000,000 shares authorized; 10,465,133
                    sharesand
                    10,383,933 shares outstanding at December 31, 2004and
                    December 31, 2003, respectively
                
                
                10,465
                
                
                10,384Additional
                    paid-in capital
                
                
                32,074,454
                
                
                32,028,402Warrants
                    and options outstanding
                
                
                1,109,930
                
                
                1,092,416Note
                    receivable from shareholder
                
                
                (74,759
                )
                
                (71,500
                )Accumulated
                    deficit
                
                
                (31,807,433
                )
                
                (32,707,505
                )**Total
                    Stockholder's Equity**
                
                
                1,312,657
                
                
                352,197**Total
                    Liabilities and Stockholders' Equity**
                
                $
                3,030,645
                
                $
                3,107,956













**eROOMSYSTEM
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS**





**For
                the years ended December 31,****2004**
            
            **2003****REVENUE**Revenue-sharing
                arrangements
            
            $
            1,103,945
            
            $
            1,116,200Maintenance
                fees
            
            
            363,501
            
            
            361,037Product
                sales
            
            
            123,713
            
            
            21,622**Total
                Revenue**
            
            
            1,591,159
            
            
            1,498,859**COST
                OF REVENUE**Revenue-sharing
                arrangements
            
            
            515,124
            
            
            715,947Write-off
                of obsolete inventory
            
            
            -
            
            
            250,404Loss
                on impairment of refreshment centers
            
            
            -
            
            
            497,399Maintenance
            
            
            72,915
            
            
            141,013Product
                sales
            
            
            3,142
            
            
            5,787**Total
                Cost of Revenue**
            
            
            591,181
            
            
            1,610,550**GROSS
                MARGIN**
            
            
            999,978
            
            
            (111,691
            )**OPERATING
                EXPENSES**Selling,
                general and administrative expense, including non-cash compensationof
                $28,558 and $64,666, respectively
            
            
            784,110
            
            
            1,475,116Research
                and development expense
            
            
            38,527
            
            
            23,017Interest
                expense
            
            
            209,961
            
            
            591,171Gain
                on collection of previously written off receivables
            
            
            (312,500
            )
            
            -Interest
                and other income
            
            
            (7,428
            )
            
            (11,426
            )**Net
                Operating Expenses**
            
            
            712,670
            
            
            2,077,878287,308
            
            
            (2,189,569
            )**Net
                Income (Loss)**
            
            
            612,764
            
            
            467,734**Basic
                Earnings (Loss) Per Common Share**
            
            $
            900,072
            
            $
            (1,721,835
            )**Diluted
                Earnings (Loss) Per Common Share**
            
            $
            0.09
            
            $
            (0.16
            )$
            0.04
            
            $
            (0.16
            )















**eROOMSYSTEM
      TECHNOLOGIES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY**


**FOR
      THE YEARS ENDED DECEMBER 31, 2004 AND 2003**





**Shares**
            
            **Amount****2004**
            
            
            **2003**
            
            
            **2004**
            
            
            **2003****COMMON
                STOCK**Balance at
                Beginning of Year
            
            
            10,383,933
            
            
            10,897,931
            
            $
            10,384
            
            $
            10,898Exercise of
                stock
                options
            
            
            20,000
            
            
            -
            
            
            20
            
            
            -Issuance to
                directors for services
            
            
            60,000
            
            
            86,002
            
            
            60
            
            
            86Issuance to
                consultant for services
            
            
            1,200
            
            
            -
            
            
            1
            
            
            -Cancellation
                in
                settlement of shareholder note receivable
            
            
            -
            
            
            (600,000
            )
            
            -
            
            
            (600
            )Balance
                at End of Year
            
            
            10,465,133
            
            
            10,383,933
            
            
            10,465
            
            
            10,384**ADDITIONAL
                PAID-IN-CAPITAL**Balance at
                Beginning of Year
            
            
            
            
            
            
            
            
            32,028,402
            
            
            31,570,454Exercise of
                stock
                options
            
            
            
            
            
            
            
            
            3,380
            
            
            -Issuance to
                directors for services
            
            
            
            
            
            
            
            
            10,140
            
            
            18,915Issuance to
                consultant for services
            
            
            
            
            
            
            
            
            443
            
            
            -Cancellation
                in
                settlement of shareholder note receivable
            
            
            
            
            
            
            
            
            -
            
            
            (169,034
            )Beneficial
                conversion option of related party debt
            
            
            
            
            
            
            
            
            -
            
            
            156,786Expiration
                of
                warrants and options
            
            
            
            
            
            
            
            
            32,089
            
            
            451,281Balance
                at End of Year
            
            
            
            
            
            
            
            
            32,074,454
            
            
            32,028,402**WARRANTS
                AND OPTIONS OUTSTANDING**Balance at
                Beginning of Year
            
            
            
            
            
            
            
            
            1,092,416
            
            
            1,028,897Expiration
                of
                warrants and options
            
            
            
            
            
            
            
            
            (32,089
            )
            
            (451,281
            )Issuance of
                stock
                options in settlement of accrued liabilities
            
            
            
            
            
            
            
            
            31,688
            
            
            142,464Increase in
                value
                of variable options
            
            
            
            
            
            
            
            
            4,244
            
            
            -Issuance of
                options
                and warrants related to consulting services and financing
                activities
            
            13,671
            
            
            372,336Balance
                at End of Year
            
            
            
            
            
            
            
            
            1,109,930
            
            
            1,092,416**NOTES
                RECEIVABLE FROM SHAREHOLDER**Balance at
                Beginning of Year
            
            
            
            
            
            
            
            
            (71,500
            )
            
            (232,050
            )Cancellation
                in
                settlement of shareholder note receivable
            
            
            
            
            
            
            
            
            -
            
            
            169,634Interest
                accrued
            
            
            
            
            
            
            
            
            (3,259
            )
            
            (9,084
            )Balance
                at End of Year
            
            
            
            
            
            
            
            
            (74,759
            )
            
            (71,500
            )**ACCUMULATED
                DEFICIT**Balance at
                Beginning of Year
            
            
            
            
            
            
            
            
            (32,707,505
            )
            
            (30,985,670
            )Net gain
                (loss)
            
            
            
            
            
            
            
            
            900,072
            
            
            (1,721,835
            )Balance
                at End of Year
            
            
            
            
            
            
            
            
            (31,807,433
            )
            
            (32,707,505
            )**Total
                Stockholders' Equity at End of Year**
            
            
            
            
            
            
            
            $
            1,312,657
            
            $
            352,197












**eROOMSYSTEM
      TECHNOLOGIES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**







**For
                the years ended December 31,****2004**
            
            **2003****CASH
                FLOWS
                FROM OPERATING ACTIVITIES**Net
                income (loss)
            
            $
            900,072
            
            $
            (1,721,835
            )Adjustments
                to reconcile net income (loss) to net cash provided by operating
                activities:Depreciation
            
            
            524,758
            
            
            767,502Gain
                on forgiveness of debt and liabilities
            
            
            (612,764
            )
            
            (467,734
            )Interest
                income from shareholder receivables
            
            
            (3,259
            )
            
            -Loss
                on disposal of assets
            
            
            -
            
            
            46,462Loss
                due to impairment of refreshment centers in service
            
            
            -
            
            
            497,399Accretion
                of debt discount
            
            
            67,665
            
            
            323,859Non-cash
                compensation expense
            
            
            28,558
            
            
            64,665Changes
                in operating assets and liabilities:Attorney's
                escrow
            
            
            (225,000
            )
            
            -Accounts
                receivable
            
            
            61,799
            
            
            100,294Inventories
            
            
            -
            
            
            253,561Prepaid
                expenses
            
            
            (129
            )
            
            104,935Accounts
                payable
            
            
            (82,795
            )
            
            (2,547
            )Accrued
                liabilities
            
            
            88,597
            
            
            258,046Customer
                deposits and deferred maintenance revenue
            
            
            (17,180
            )
            
            (37,889
            )**Net
                Cash Provided By Operating Activities**
            
            
            730,322
            
            
            186,718**CASH
                FLOWS
                FROM INVESTING ACTIVITIES**Purchase
                of
                fixed assets
            
            
            (1,066
            )
            
            (1,356
            )Proceeds
                from sale of equipment
            
            
            -
            
            
            2,500Change
                in long term deposits and restricted funds
            
            
            (18,650
            )
            
            -**Net
                Cash Provided by (Used In) Investing Activities**
            
            
            (19,716
            )
            
            1,144**CASH
                FLOWS
                FROM FINANCING ACTIVITIES**Proceeds
                from borrowings
            
            
            -
            
            
            370,500Principal
                payments on long-term debt
            
            
            (449,605
            )
            
            (320,736
            )Proceeds
                from exercise of options
            
            
            3,400
            
            
            -**Net
                Cash Provided by (Used in) Financing Activities**
            
            
            (446,205
            )
            
            49,764**Net
                Increase in Cash**
            
            
            264,401
            
            
            237,626**Cash
                at
                Beginning of Period**
            
            
            381,985
            
            
            144,359**Cash
                at End
                of Period**
            
            $
            646,386
            
            $
            381,985**Supplemental
                Cash Flows Information**Cash
                paid for interest
            
            $
            94,052
            
            $
            231,327**Supplemental
                Disclosure of Noncash Investing and Financing Activities**Conversion
                of accounts payable into note payable
            
            $
            -
            
            $
            25,000Stock
                options issued in settlement of accounts payable
            
            $
            31,688
            
            $
            306,826Cancellation
                of common stock in settlement of notes receivable from
                shareholder
            
            $
            -
            
            $
            169,634




-31-


**eROOMSYSTEM
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**NOTE
      1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING
      POLICIES**





***Organization,
      Nature of Operations and Business Condition*** **-** eRoomSystem
      Services, Inc. was organized under the laws of the state of Nevada in 1993.
      In
      1999, eRoomSystem Services, Inc. was reorganized as a wholly-owned subsidiary
      of
      eRoomSystem Technologies, Inc., also a Nevada corporation. During 1999 and
      2000,
      RSi BRE, Inc. (“RSi BRE”) and eRoom System SPE, Inc. (“SPE”) were formed,
      respectively, as wholly-owned subsidiaries of eRoomSystem Technologies, Inc.
      eRoomSystem Technologies, Inc. and its subsidiaries are collectively referred
      to
      as the “Company.” In 2004 the Company liquidated and merged RSi BRE into
      eRoomSystem Technologies, Inc.




The
      Company markets a complete line of fully-automated eRoomServ refreshment centers
      and eRoomSafes traditionally installed in hotels. The eRoomServ refreshment
      centers and eRoomSafes use proprietary software that integrates with a data
      collection computer in each hotel.




Up
      until
      the year ended December 31, 2004, the Company had suffered recurring losses.
      During the years ended December 31, 2004 and 2003, the Company realized a net
      gain of $900,072 and a net loss of $1,721,835, respectively. During the years
      ended December 31, 2004 and 2003, the Company's operations provided $730,322
      and
      $186,718 of cash, respectively. The Company had cash of $646,386 as of December
      31, 2004. At December 31, 2004, the Company had working capital of $445,482.




On
      October 1, 2003 the Company had a change in management and issued secured
      convertible promissory notes in the original principal amount of $250,000.
      There
      is still some doubt about the Company’s ability to continue as a going concern.
      The accompanying financial statements do not include any adjustments relating
      to
      the recoverability and classification of asset carrying amounts or the amount
      and classification of liabilities that might result should the Company be unable
      to continue as a going concern.




***Principles
      of Consolidation*** **-** The
      accompanying consolidated financial statements include the accounts of
      eRoomSystem Technologies, Inc. and its wholly-owned subsidiaries. Intercompany
      accounts and transactions have been eliminated in consolidation.




One
      of
      the Company’s subsidiaries, RSi BRE is a special purpose entity in which the
      Company did not have operating control at December 31, 2003. In January 2003,
      the Financial Accounting Standards Board ("FASB") issued FASB Interpretation
      No.
      46, Consolidation of Variable Interest Entities an Interpretation of Accounting
      Research Bulletin No. 51 (“FIN 46”). FIN 46 defined variable interest entities
      and modified the requirements for their consolidation from ownership of a
      controlling voting interest to holding a majority variable interest and being
      the primary beneficiary of the variable interest entity. The Company adopted
      FIN
      46 at December 31, 2002 and has presented RSi BRE on a consolidated basis.




On
      February 29, 2004, the Company reached a settlement agreement with RSG
      Investments, LLC, under which RSi BRE has come completely under the control
      of
      the Company’s management. As part of the settlement agreement, the Company has
      paid $152,823 in full satisfaction of the obligation to RSG Investments, LLC.
      As
      a result of the full settlement, the Company has recognized a gain on
      forgiveness of debt of $162,718 for the year ended December 31, 2004.




***Use
      of Estimates in the Preparation of Financial
      Statements*** - The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities, disclosure of contingent
      assets and liabilities at the date of the financial statements and the reported
      amounts of revenues and expenses during the reporting period. Actual results
      could differ from these estimates.




***Cash
      Equivalents and Fair Value of Financial Instruments*** - Cash
      equivalents include highly liquid debt investments with original maturities
      of
      three months or less, readily convertible to known amounts of cash. The Company
      had $73,688 and $73,688 of restricted cash to be distributed as loan repayments
      to a financing company as of December 31, 2004 and 2003, respectively.




-32-




**eROOMSYSTEM
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


In
      January 2004, the Company deposited $20,000 with a bank as collateral in order
      to effect electronic fund transfers through the bank. This certificate of
      deposit came due in January 2005, and was rolled into the checking
      account.




The
      carrying amounts reported in the accompanying consolidated financial statements
      for cash, accounts receivable and accounts payable approximate fair values
      because of the immediate or short-term maturities of these financial
      instruments. The carrying amounts of the Company's debt obligations approximate
      fair value based on current interest rates available to the Company, with the
      exception of one convertible note payable, issued during 2003, that had a
      discounted carrying value of $62,603 and $12,603 at December 31, 2004 and 2003,
      respectively, as compared to an approximate fair value of $250,000, which is
      the
      face amount of the note.




***Inventory*** **** -
      Inventory included direct materials, direct labor and manufacturing overhead
      costs and was stated at the lower of cost (using the first-in, first-out method)
      or market value. Provisions, when required, were made to reduce excess and
      obsolete inventories to their estimate net realizable values.




An
      analysis of inventory was performed to determine obsolescence and estimated
      net
      realizable value. As a result of that analysis, the entire remaining carrying
      value of inventory was determined to be obsolete. The Company wrote off the
      full
      remaining carrying value of inventory and recognized a charge of $250,404 that
      was classified as a cost of revenue during the year ended December 31,
      2003.




***eRoomServ
      Refreshment Centers in Service and Property and
      Equipment*** **-** eRoomServ
      refreshment centers (including eRoomSafes, if applicable) and property and
      equipment are stated at cost, less accumulated depreciation and amortization.
      Major additions and improvements are capitalized, while minor equipment (with
      a
      cost less than $1,000) as well as repairs and maintenance costs are expensed
      when incurred. Depreciation and amortization are computed using the
      straight-line method over the estimated useful lives of the related assets,
      after taking into consideration residual values for eRoomServ refreshment
      centers, which lives are as follows:




eRoomServ
                  refreshment centers in service
              7
                  yearsProduction
                  equipment
              3
–
5
                  yearsComputer
                  and office
                  equipment
              3
–
7
                  yearsVehicles
                  and
                  other
              7
                  years





Depreciation
      and amortization expense related to eRoomServ refreshment centers in service
      and
      property and equipment was $524,758 and $767,502 for the years ended December
      31, 2004 and 2003, respectively.




On
      retirement or disposition of property and equipment, the cost and related
      accumulated depreciation and amortization are removed from the accounts and
      any
      resulting gain or loss is recognized in the statement of operations. In the
      year
      ended December 31, 2003, the Company disposed of equipment with a carrying
      value
      of $48,963 and received proceeds of $2,500.




***Capitalized
      Software Costs*** - In
      accordance with FASB Statement of Financial Accounting Standards (“SFAS”) No.
      86, *Accounting
      for the Costs of Computer Software to be Sold, Leased or Otherwise
      Marketed* ,
      development costs incurred in the research and development of new software
      products to be sold, leased or otherwise marketed are expensed as incurred
      until
      technological feasibility in the form of a working model has been established.
      Internally generated capitalizable software development costs have not been
      material for the years ended December 31, 2004 and 2003. The Company has charged
      its software development costs to research and development expense in the
      accompanying consolidated statements of operations.




***Deferred
      Offering and Financing Costs*** - The
      Company capitalizes direct costs associated with the acquisition of debt
      financing. These costs are amortized over the life of the related debt as
      additional interest expense. If the underlying debt is repaid or extinguished
      prior to the scheduled maturity, the costs are removed from the accounts and
      considered in the determination of the gain or loss from extinguishment. The
      Company also capitalizes direct costs associated with the acquisition of equity
      financing which are netted against the actual equity proceeds.




-33-




**eROOMSYSTEM
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


***Impairment
      of Long-Lived Assets*** **-** The
      carrying values of the Company's long-lived assets were reviewed for impairment.
      When projections indicate that the carrying value of the long-lived asset is
      not
      recoverable, the carrying value of the long-lived asset is reduced by the
      estimated excess of the carrying value over the projected discounted cash flows.




The
      Company assessed the carrying value of certain refreshment centers in service
      and recorded a loss on impairment of $497,399 during December 2003. The
      estimated net future cash flows of several of the properties that made up this
      group of refreshment centers no longer supported the carrying value of the
      assets, which was $669,354 prior to recording the impairment loss. No additional
      impairment was deemed necessary at December 31, 2004.




***Revenue
      Recognition*** **-** The
      Company generates revenues from either the sale of eRoomServ refreshment centers
      and eRoomSafes or from leases of eRoomServ refreshment centers and eRoomSafes
      under revenue-sharing agreements. Under the revenue-sharing agreements, the
      Company receives a non-guaranteed portion of the sales generated by the units.
      The Company also generates revenues from maintenance services.




Revenue
      from the sale of eRoomServ refreshment centers and eRoomSafes is recognized
      upon
      completion of installation and acceptance by the customer. The revenue-sharing
      agreements are accounted for as operating leases with revenue being recognized
      as earned over the lease period. Maintenance revenue is recognized as the
      services are performed or pro rata over the service period. With respect to
      the
      sale of products, the maintenance services are not integral to the functionality
      of the eRoomServ refreshment centers and are at the option of the customer.
      Maintenance services are mandatory for eRoomServ refreshment centers placed
      under revenue-sharing agreements and are incorporated into those agreements.
      In
      connection with the revenue-sharing agreements, a portion of the revenues
      received by the Company are classified as maintenance fee revenue based upon
      vendor-specific objective evidence of fair value. The Company defers customer’s
      deposits paid in advance relating to future services and products not yet
      installed and accepted by the customer.




***Stock-Based
      Compensation*** **-** At
      December 31, 2004, the Company has one stock-based employee compensation plan,
      which is described more fully in Note 9. The Company accounts for the plan
      under
      the recognition method and measurement principles of APB Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      related Interpretations. During the years ended December 31, 2004 and 2003,
      the
      Company recognized compensation expense relating to stock options and warrants
      of $28,558 and $64,666, respectively. The following table illustrates the effect
      on net loss and basic and diluted loss per common share if the Company had
      applied the fair value recognition provisions of FASB Statement No. 123, *Accounting
      for Stock-Based Compensation* ,
      to
      stock-based employee and consultant compensation:




For the years
                ending December 31,
            **2004**
            **2003**Net income
                (loss),
                as reported
            $
                      900,072
            $
                (1,721,835)Add: Stock-based
                employee and consultant compensationexpenses
                included in net income (loss)
            28,558
            64,666Deduct: Total
                stock-based employee and consultantcompensation
                expense determined under fair value based methodfor
                all awards
            (74,204)
            (64,666)Pro forma net
                earnings (loss)
            $
                      854,426
            $
                (1,721,835)Earnings (loss)
                per
                common share:Basic
                as reported
            $
                            0.09
            $
                         (0.16)Basic
                pro forma
            $
                            0.09
            $
                         (0.16)Diluted
                as reported
            $
                            0.04
            $
                         (0.16)Diluted
                pro forma
            $
                            0.04
            $
                         (0.16)






-34-
 
 **eROOMSYSTEM
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




***Income
      Taxes*** **-** The
      Company recognizes an asset or liability for the deferred tax consequences
      of
      all temporary differences between the tax bases of assets or liabilities and
      their reported amounts in the financial statements that will result in taxable
      or deductible amounts in future years when the reported amounts of the assets
      or
      liabilities are recovered or settled. These deferred tax assets or liabilities
      are measured using the enacted tax rates that will be in effect when the
      differences are expected to reverse. Deferred tax assets are reviewed
      periodically for recoverability and valuation allowances are provided, as
      necessary.


***Net
          Earnings (Loss) per Common Share*** **-** Basic
          earnings (loss) per common share is computed by dividing net income (loss)
          by
          the weighted-average number of common shares outstanding. Diluted earnings
          (loss) per common share is computed by dividing net income (loss), adjusted
          to
          add back interest associated with convertible debt, by the weighted-average
          number of common shares and dilutive potential common share equivalents
          outstanding. Potential common share equivalents consist of shares issuable
          upon
          the exercise of stock options and warrants, and shares issuable upon the
          conversion of debt.
  The
          following table is a reconciliation of the numerators and denominators
          used in
          the calculation of basic and diluted weighted-average common shares outstanding
          for the years ending December 31, 2004 and 2003:


**2004**
            **2003**Basic
                net income (loss)
            $
                             900,072
            $
                    (1,721,835)Interest
                expense from convertible debt
            97,910
            -Diluted
                net income(loss)
            $
                             997,982
            $
                    (1,721,835)Basic
                weighted-average common shares outstanding
            10,433,772
            10,871,401Effect
                of dilutive securitiesStock
                options and warrants
            4,811,116
            -Convertible
                debt
            7,316,667
            -Diluted
                weighted-average common shares outstanding
            22,561,555
            10,871,401Basic
                earnings (loss) per share
            $
                                   0.09
            $
                             (0.16)Diluted
                earnings (loss) per share
            $
                                   0.04
            $
                             (0.16)




As
      of
      December 31, 2004 and 2003, there were potential common stock equivalents from
      options, warrants and convertible debt of shares 3,909,730 and 15,893,686,
      respectively that were not included in the computation of diluted earnings
      (loss) per common share because their effect would have been
      anti-dilutive.




***Recent
      Accounting Pronouncements -*** ** In
      December 2004, FASB issued SFAS No. 123(R), "Share-Based Payment” (“SFAS
      123(R)”). SFAS 123(R) revises FASB Statement No. 123, "Accounting for
      Stock-Based Compensation,” and supersedes APB Opinion No. 25, "Accounting for
      Stock Issued to Employees.” SFAS 123(R) focuses primarily on accounting for
      transactions in which an entity obtains employee services in share-based payment
      transactions. SFAS 123(R) requires companies to recognize in the statement
      of
      operations the cost of employee services received in exchange for awards of
      equity instruments based on the grant-date fair value of such awards (with
      limited exceptions). SFAS 123(R) is effective as of the first reporting period
      beginning after June 15, 2005 for large business issuers, and December 15,
      2005
      for small business issuers. Accordingly, the Company will adopt SFAS 123(R)
      in
      first quarter of fiscal 2006. The Company is currently evaluating the provisions
      of SFAS 123(R) and does not expect the implementation of the provisions of
      these
      pronouncements to have a materially significant effect on the Company’s
      consolidated financial statement presentation.




**NOTE
      2 --** **INVESTMENT
      SPECIAL PURPOSE ENTITIES**





During
      2000, eRoom System Technologies, Inc. formed eRoom System SPE, Inc. ("SPE"),
      as
      a wholly owned subsidiary. SPE was formed for the purposes of purchasing certain
      revenue-sharing agreements and related eRoomServ refreshment centers from
      eRoomSystem Technologies, Inc., obtaining the rights, through licensing, to
      certain intellectual property relating to the use of the eRoomServ refreshment
      centers and obtaining financing secured by pledging the revenue-sharing
      agreements and refreshment centers.





-35-
 
  **eROOMSYSTEM
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


During
      1999, eRoomSystem Technologies, Inc. formed RSi BRE, Inc. (“RSi BRE”) as a
      wholly-owned subsidiary to own and operate certain eRoomServ refreshment center
      units under the terms of related revenue-sharing agreements. RSi BRE was formed
      as a condition of an obligation under a financing agreement referred to as
      the
      Equipment Transfer Agreement (the "Transfer Agreement") with RSG Investments,
      LLC (“RSG”) whereby the ownership of 2,270 eRoomServ refreshment center units
      and the related revenue-sharing agreements were transferred to RSi BRE. The
      board of directors of RSi BRE comprised of one appointee from the Company,
      one
      appointee from RSG and one independent appointee. All operating decisions,
      including disbursements, of RSi BRE required unanimous consent of RSi BRE's
      board of directors. As a result, the Company did not control RSi BRE. On
      February 29, 2004, the Company reached a settlement agreement with RSG
      Investments, LLC, under which RSi BRE has come completely under the control
      of
      the Company’s management.




Under
      the
      terms of the Transfer Agreement, RSG received $0.57 per refreshment center
      unit
      per day of the revenue realized from the revenue-sharing agreements held by
      RSi
      BRE over the remaining life of their seven-year revenue-sharing agreements.
      However, the $0.57 per unit per day was paid to RSG only after $0.11 per unit
      per day had been paid to the Company to cover property taxes and maintenance.
      To
      the extent that at least $0.68 per unit per day in revenue was not realized
      from
      the refreshment center units, the Company had no obligation to pay the
      difference to RSG. Rather, RSG was subject to the risk that revenues generated
      from the refreshment center units were not at least $0.68 per unit per day.
      To
      the extent that the revenue per unit per day exceeded $0.68, the incremental
      amount was paid to the Company.




During
      2003, the Company’s estimate of future net cash flows decreased due to the
      deterioration of profitability of several revenue-sharing agreements.





The
      Company determined that its inability to repay scheduled debt payments with
      future net cash flows required treatment similar to a troubled debt
      restructuring. The Company recorded a gain on forgiveness of debt related to
      the
      RSG obligation of $303,373, and reduced the obligation to its new carrying
      amount which was $315,541 as of December 31, 2003





Due
      to
      the decrease in the estimate of future net cash flows of refreshment centers
      related to the RSG obligation, the Company assessed the carrying value of the
      refreshment centers in service and recorded a loss on impairment of $497,399
      as
      of December 31, 2003. The carrying value of the assets was $669,354 prior to
      recording the impairment loss.





As
      of
      December 31, 2003, RSi BRE had accounts receivable net of allowance for doubtful
      accounts of $30,132.





On
      February 29, 2004, the Company negotiated a settlement of the RSG obligation
      for
      a cash payment of $152,823. The Company recognized a gain on forgiveness of
      $162,718 during 2004. The Company is in the process of liquidating or merging
      RSi BRE into eRoomSystem Technologies, Inc.




-36-


**eROOMSYSTEM
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      3 -** **NOTES
      PAYABLE AND LONG-TERM DEBT**




Notes
      payable and long-term debt consists of the following:


For
                  the Years Ending December 31,
              **2004**
              **2003**Notes
                  payable to financing company, interest at 8% per annum through,September
                  30, 2005 going to 10% thereafter, secured by eRoomServrefreshment
                  centers held by SPE, less unamortized discount of $75,838and
                  $93,503 as of December 31, 2004 and 2003
              $
                         929,415
              $
                      1,208,531Notes
                  payable to financing company, secured by eRoomServ refreshmentcenters
                  held by RSi BRE, interest computed at 31% during 2002, 0%
                  thereafter,settled
                  as discussed in Note 2
              -
              315,541Convertible
                  note payable to stockholder, 8%, secured by all assetsof
                  the Company, subordinate to notes payable to financing company,due
                  November 8, 2007
              347,500
              347,500Convertible
                  note payable 8%, due October 1, 2008, net of unamortizeddiscount
                  of $187,397 and $237,397 as of December 31, 2004 and 2003
              62,603
              12,603Note
                  payable to supplier, in default, 28% default interest rate,
                  settledin
                  January 2004
              -
              70,000Total
                  Notes Payable and Long-Term Debt
              1,339,518
              1,954,175Less:
                  Current Portion of Long-Term Debt
              (228,337)
              (426,683)Long-Term
                  Debt, Net of Current Portion
              $
                      1,111,181
              $
                      1,527,492
    Years
                  ending
                  December 31,2005
              $
                      228,3372006
              251,6972007
              522,4132008
              337,071Total
              $
                   1,339,518


***Gestetner
        Group Secured Promissory Notes*** **-** On
        October 1, 2003, the Company issued secured convertible promissory notes
        (“Notes”), in the original principal amount of $250,000, collectively, to
        Gestetner Group, LLC, a New Jersey limited liability company, and several
        third
        parties (collectively, the “Note Holders”). David A. Gestetner, the Chief
        Executive Officer and President of the Company, is the Managing Member of
        the
        Gestetner Group, LLC. The terms of the Notes include, inter alia, (i) for
        interest to accrue at the rate of 8% per annum, (ii) a maturity date of the
        earlier of (a) October 1, 2008, (b) the date of approval of the Board of
        Directors regarding the merger of the Company with or into any third party
        or
        the sale of all or substantially all of the assets of the Company, or (c)
        the
        date of the closing of any financing (other than commercial credit facilities),
        the gross proceeds of which are at least $1,000,000 and (iii) the right of
        the
        Note Holders, at any time, to convert all outstanding principal and accrued
        and
        unpaid interest into shares of common stock of the Company at the rate of
        $0.05
        per share; provided, however, that the Company shall have the right to not
        permit the conversion if such conversion would result in the Note Holders
        holding, in the aggregate and on a fully-diluted basis, more than 49% of
        the
        outstanding common stock of the Company. In addition, the Note Holders have
        been
        issued, collectively, warrants to
        purchase 5,000,000 shares of common stock of the Company, exercisable at
        $0.05
        per share at any time through October 1, 2008.




-37-


**eROOMSYSTEM
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


The
      proceeds were allocated between the Notes and warrants based on their relative
      fair values, with $42,389 allocated to the Notes and $207,611 allocated to
      the
      warrants. In addition, the Note Holders received a beneficial conversion option
      of $42,389. The resulting $250,000 discount to the Notes will be amortized
      over
      the expected five-year term of the Notes as interest expense.




***Amresco
      Financing Agreement*** - Under
      the terms of a financing agreement with AMRESCO Leasing Corporation, (the
“finance company”), the finance company had agreed to fund up to 150% of the
      Company’s product costs for each eRoomServ refreshment center that had been in
      service for 90 days, subject to the related hotel customer meeting certain
      requirements and conditions during that period. As part of the financing
      agreement, the Company formed eRoomSystem SPE, Inc. (“SPE”), a wholly owned,
      consolidated subsidiary. SPE owns all of the eRoomServ refreshment centers
      funded by the finance company as well as the related revenue-sharing agreements.
      The finance company has a senior security interest in the eRoomServ refreshment
      centers financed under the financing agreement and the corresponding revenue
      sharing agreements. SPE is obligated to repay the amount borrowed under the
      terms of a note payable corresponding to each funding, pursuant to the financing
      agreement over seven years, plus interest, at a variable interest rate
      determined at the time of each funding.




The
      notes
      payable are collateralized by eRoomServ refreshment centers with a carrying
      value of $1,088,513 at December 31, 2004. SPE holds payments from hotel
      customers in several restricted bank accounts for payment to the finance company
      and to the Company. As of December 31, 2004, the Company had $70,645 of
      restricted cash and non-current deposits of $73,688 that were designated for
      this purpose.




On
      September 18, 2002, management was notified by the finance company of its
      intention to cease funding loans to the Company. There is no assurance that
      management will be successful in obtaining a new source of financing, and if
      successful, that the terms of such new financing will be favorable to the
      Company. If a new financing relationship is not procured, the financial
      condition and results of operation of the Company will likely be adversely
      affected.




As
      a
      requirement of the October 1, 2003, Gestetner Group, LLC funding arrangement,
      the Company entered into an agreement that amended the terms of the notes
      payable due to AMRESCO Leasing Corporation. The amendment states that for the
      two-year period commencing on October 1, 2003, the rate at which interest is
      accruing on debt obligations owed by the Company to AMRESCO shall be reduced
      to
      eight percent per annum, and from October 1, 2005 until the debt obligations
      have been paid in full, the rate at which interest is accruing will be ten
      percent per annum. Previously, the debt obligations were accruing interest
      at
      the seven-year treasury rate plus 12.5 percent.




In
      consideration for the reduction in the interest rate, the Company issued AMRESCO
      a warrant to purchase 400,000 shares of common stock, exercisable at $0.10
      per
      share through October 1, 2008. If at anytime after December 31, 2005, the
      warrant has an intrinsic value greater than $300,000 based upon the then current
      trading price of the Company’s common stock, then AMRESCO will have the right to
“put” the warrant back to the Company in exchange for $200,000 payable in 12
      equal consecutive monthly installments with the first payment to be made on
      the
      last day of the month in which the “put” occurs. The warrants to purchase
      400,000 shares of common stock were recognized in October 2003 as a troubled
      debt restructuring, with the $97,956 fair value of the warrants recorded as
      a
      discount to the notes payable to be amortized over the remaining life of the
      notes as a charge to interest expense.




***Convertible
      Note Payable to Stockholder*** - On
      November 8, 2002, the Company entered into a promissory note with Ash Capital,
      LLC for proceeds of up to $322,500. The note bears interest at 8%. All past
      due
      amounts and accrued interest thereon bear interest at 18%. During the year
      ended
      December 31, 2003, the Company borrowed $120,500 under the terms of the
      promissory note and transferred $25,000 from an accounts payable due to Ash
      Capital, which increased the principal amount of the promissory note to
      $347,500.




At
      any
      time, principal and accrued interest on the promissory note is convertible
      into
      Series D Convertible Preferred Stock at $0.90 per share. Each share of the
      Series D Convertible Preferred Stock is convertible into six shares of common
      stock, at the rate of $0.15 per share of Series D Preferred Stock. The
      promissory note may be converted into 17.8% of the lesser of the authorized
      capital stock or the outstanding capital stock of the Company. The Company
      has
      agreed not to increase the outstanding capital stock of the Company or issue
      securities convertible into capital stock without prior consent of Ash
      Capital.




-38-
 
  **eROOMSYSTEM
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


The
      Company determined that Ash Capital LLC received a beneficial conversion option
      valued at $322,500 on November 8, 2002. Accordingly, the Company has allocated
      all of the $120,500 of proceeds received during the year ended December 31,
      2003
      to the beneficial conversion option that resulted in an offsetting discount
      to
      the note payable. The discount on the note payable was amortized to interest
      expense from the dates proceeds were received through November 8, 2003, in
      accordance with EITF 98-5, *Accounting
      for Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Ratios* ,
      and
      EITF 00-27, *Application
      of Issue No. 98-5 to Certain Convertible Instruments* ,
      and
      amounted to $304,082 of accretion of the discount during the year ended December
      31, 2003, which included $183,582 of unamortized discount from the beneficial
      conversion option that remained at December 31, 2002.




As
      a
      requirement of the October 1, 2003, Gestetner Group, LLC funding arrangement,
      Ash Capital, LLC agreed to amend the terms of its secured convertible promissory
      note with the Company to (i) extend the maturity date to the earlier of November
      8, 2007 or the maturity date of the Gestetner Group Notes issued to the Note
      Holders and (ii) include as an additional event of default any default of the
      Company under the Gestetner Group Notes.




In
      addition, the Company issued Ash Capital, LLC a contingent warrant to purchase
      shares of common stock, exercisable at $0.13 per share through October 1, 2008.
      The terms of the warrant provide that on the dates exercised, Ash Capital,
      LLC
      may purchase seven percent of the aggregate number of shares of the Company’s
      common stock issued to and held on that date by any of the Gestetner Group
      Note
      Holders in excess of 10,000,000 common shares. If and when the contingent
      warrants are exercised, the Company will record the fair value of the warrants
      as a discount to the note payable to be amortized over the remaining life of
      the
      note as a charge to interest expense.




On
      October 1, 2003, Ash Capital, LLC and Gestetner Group, LLC entered into an
      Intercreditor and Collateral Agency Agreement that provides for the secured
      obligations of the Company to both parties to rank equally. Ash Capital is
      to
      serve on its own behalf and as the agent for Gestetner Group, LLC, based upon
      its written instruction, to foreclose upon, collect and dispose of all or any
      portion of the collateral set forth in Ash Capital’s secured convertible
      promissory note and the Gestetner Group Notes, should a default occur by the
      Company under the terms of such agreements. In
      addition, for the term of the Gestetner Group Notes, Ash Capital has agreed,
      subject to obtaining the prior written consent of Gestetner Group, LLC
      otherwise, to vote or to cause any of its affiliates or subsidiaries to vote
      all
      of its or their shares of common stock of the Company (i) for the election
      of
      any two nominees of the Gestetner Group Note Holders and (ii) against any
      increase in the size of the Board of Directors of the Company above four
      members.




***Note
      Payable to Supplier -*** During
      January 2004, a note payable with a carrying value of $70,000 plus accrued
      interest of $17,218 was purchased by an outside party who subsequently cancelled
      the note and released the Company from any obligation to pay the note or accrued
      interest. The Company has recorded a gain on forgiveness of debt of $87,218
      during the year ending December 31, 2004.




**NOTE
      4 - NET INVESTMENT IN SALES-TYPE LEASE**




During
      June 2004, the Company entered into an agreement with a hotel property owner
      that amended a previous revenue sharing lease agreement that had previously
      been
      non-performing. Under the terms of that agreement, the Company recovered a
      receivable that had been written off in the previous year. The Company has
      recorded a gain in the amount of $200,000 during the year ended December 31,
      2004.




The
      new
      lease agreement terminates on December 31, 2008 at which time the hotel property
      owner takes ownership of the refreshment centers. The property is to make
      monthly payments of $7,200. The new lease agreement has been classified as
      a
      sales-type capital lease. Because the property has a history of non-performance
      and is still under the supervision of a bankruptcy court, the net investment
      in
      the capital lease has been fully allowed against. The following lists the
      components of the net investment in the sales-type lease as of December 31,
      2004:







-39-
 
 **eROOMSYSTEM
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




Total minimum
                    lease
                    payments to be received
                
                $
                              345,600Less: Allowance
                    for
                    uncollectibles
                
                (290,651)Net minimum
                    lease
                    payments receivable
                
                54,949Less: Unearned
                    income
                
                (54,949)Net investment
                    in
                    sales-type lease
                
                $
                                        -
 The
          Company recorded revenue-sharing and maintenance fee revenue in the amounts
          of
          $50,400 for the year ended December 31, 2004.




Minimum
      lease payments through the end of the lease term are as follows: $86,400 in
      2005, $86,400 in 2006, $86,400 in 2007, and $86,400 in 2008.




NOTE
      5 -ACCOUNTSPAYABLE
      AND ACCRUED LIABILITIES




In
      the
      year ended December 31, 2004, the Company settled outstanding payables to
      vendors and contractors in the amount of $430,386 and outstanding accrued
      payroll in the amount of $51,007. Of the liabilities settled, $72,205 was
      settled through the issuance of warrants and options to purchase 172,000 shares
      of common stock (see Note 9). Gain on forgiveness of debt was recognized in
      the
      amount of $362,828.




The
      gain
      on forgiveness of debt for the year ended December 31, 2004 consisted of the
      following:




RSG
                  Investments (Note 2)
              $
                     162,718Note payable
                  to
                  supplier (Note 3)
              87,218Accounts
                  payable
                  and accrued liabilities
              362,828Total gain
                  on
                  forgiveness of debt
              $
                     612,764




**NOTE
      6 -** **COMMITMENTS
      AND CONTINGENCIES**




***Employment
      and Consulting Agreements*** **-** On
      October 1, 2003, the Company entered into a two-year employment agreement with
      its chief executive officer and president. The agreement provides for an annual
      salary of $100,000. If the chief executive officer is terminated without cause,
      the agreement provides for one year’s annual salary as severance pay. The
      agreement requires that the chief executive officer may not compete with the
      Company during the term of employment and for three years subsequent to
      termination.





On
      November 24, 2003, the Company entered a two-year consulting agreement for
      design services in return for monthly payments of $1,700 and stock options
      to
      purchase 100,000 shares of common stock at an exercise price of $0.15 per share,
      expiring three years from the date of the agreement. These options were valued
      at $15,000, based upon their fair value measured using the Black-Scholes option
      pricing model with the following assumptions: 2.1 percent risk-free rate, 0
      percent expected dividend yield, 171 percent volatility and a three year
      estimated life.




***Employment
      Agreement Terminations*** **-** As
      a
      condition of the Gestetner Group, LLC funding arrangement discussed in Note
      3,
      on October 1, 2003, the employment of three officers was terminated and the
      Company entered into termination and release agreements with the three former
      officers that provided for the redemption of 600,000 shares of common stock
      from
      the former officers in exchange for the Company surrendering promissory notes
      receivable from the former officers totaling $156,000 and related accrued
      interest of $13,634. The Company also released 637,500 shares of common stock
      and other assets that were being held as security for the promissory notes.
      The
      common shares were originally issued and the promissory notes were received
      upon
      exercise of stock options as described more fully in Note 8. The redeemed common
      shares were cancelled. In addition, the Company settled $306,826 of accrued
      compensation payable to the three former officers by issuing options to them
      to
      purchase 600,000 shares of common stock at $0.26 per share through October
      1,
      2008. These options were valued at $142,464 based upon their fair value measured
      using the Black-Scholes option pricing model with the following assumptions:
      2.8
      percent risk-free rate, 0 percent expected dividend yield, 173 percent
      volatility and a five year estimated life. The Company recognized a $164,362
      gain on forgiveness of liabilities from the settlement of the accrued
      compensation.




-40-


**eROOMSYSTEM
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




***Registration
      Rights*** **-** The
      Company has granted certain common stock and warrant holders the right, subject
      to applicable terms and conditions, to require the Company to register their
      common stock (or equivalent common shares upon the exercise of the warrants)
      on
      a best efforts basis under the Securities Act for offer to sell to the public.




***Legal*** **-**  In
      November 2002, a former landlord in St. George, Utah filed a lawsuit against
      the
      Company that alleged breach of a lease agreement. On March 6, 2003, summary
      judgment in the amount of $47,442 was granted to the former landlord. The
      Company had accrued $41,000 as of December 31, 2003. In March 2004, the Company
      paid $10,000 in complete settlement of this lawsuit. A gain on extinguishment
      of
      debt was recorded for $31,000, which is included in the amount disclosed in
      Note
      5.




***Operating
      Leases as Lessor*** **-** The
      Company accounts for its revenue-sharing agreements as operating leases. As
      of
      December 31, 2004, the Company had three revenue-sharing agreements for which
      the customers were contractually obligated to pay minimum monthly payments.
      Carrying value of these leased assets was $416,688 as of December 31, 2004.
      Agreements with all other customers provide for an allocation of revenues to
      the
      Company with no minimum monthly payment. Accordingly, the Company is unable
      to
      estimate future amounts to be received under these agreements.




Future
      minimum payments to be received under contracts that provide for minimum monthly
      amounts were as follows as of December 31, 2004:




Years ending
                December 31,2005
            $
                  296,1542006
            296,1542007
            136,6292008
            48,266Total
            $
                  777,203




***Operating
        Leases as Lessee*** **-** The
        month-to-month operating lease of the Company's facilities in Draper, Utah
        was
        discontinued. In November 2003 the Company moved to a new facility in Salt
        Lake
        City, Utah. The Company entered into a 38-month lease agreement that will
        terminate in December 2006. The lease provides for monthly rent payments
        with a
        scheduled yearly escalation: $1,456 for 2005 and $1,612 for 2006. Future
        minimum
        payments are as follows as of December 31, 2004:


Years ending
                  December 31,2005
              $
                    17,4722006
              19,344Total
              $
                    36,816


Rent
      expense for the years ended December 31, 2004 and 2003 was $28,124 and $47,117,
      respectively. ****




-41-
 
  **eROOMSYSTEM
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL
            STATEMENTS**


**NOTE
      7** **--
      INCOME TAXES**




The
      Company has paid no federal or state income taxes. The significant components
      of
      the Company's deferred income tax assets as of December 31, 2004 and 2003 are
      as
      follows:




For the
                  years
                  ending December 31,
              
              **2004**
              
              **2003**Deferred
                  Income Tax
                  Assets:Net operating
                  loss
                  carryforwards
              
              $
                        8,870,695
              
              $
      8,844,892Reserves
                  and
                  accrued liabilities
              
              38,346
              
              48,741Inventory
                  impairment
              
              -
              
              379,713Other
                  assets
              
              10,655
              
              115,775Total Deferred
                  Income Tax Assets
              
              $
                        8,919,696
              
              $
      9,389,121Valuation
                  Allowance
              
              (8,491,798)
              
              (8,684,628)Deferred
                  Income Tax
                  Liability - Depreciation and Amortization
              
              (427,898)
              
              (704,493)Net Deferred
                  Income
                  Tax Asset
              
              $
                                     -
              
              $
                                     -
 The
        amount of, and ultimate realization of, the deferred income tax assets are
        dependent, in part, upon the tax laws in effect, the Company's future earnings,
        and other future events, the effects of which cannot be determined. The Company
        has established a valuation allowance against its deferred income tax assets.
        Management believes that, based on a number of factors, the available objective
        evidence creates sufficient uncertainty regarding the realizability of these
        deferred income tax assets to warrant the valuation
        allowance.


The
      following is a reconciliation of the amount of tax benefit that would result
      from applying the federal statutory rate to pretax loss with the benefit from
      income taxes:




For the
                years
                ending December 31,
            
            **2004**
            
            **2003**Benefit at
                statutory rate (34%)
            
            $
                         306,024
            
            $
                        (585,424)Other
                non-deductible expenses and adjustments
            
            (124,805)
            
            113,690Change in valuation
                allowance
            
            (192,830)
            
            493,946State tax benefit,
                net of federal tax benefit
            
            11,611
            
            (22,212)Net Benefit
                From
                Income Taxes
            
            $
                                   -
            
            $
                                   -




The
      following summarizes the tax net operating loss carryforwards and their
      respective expiration dates as of December 31, 2004:




For the
                  years
                  ending December 31,2010
              
              
              
              $
                           624,3972011
              
              
              
              2,188,0742017
              
              
              
              1,082,3732018
              
              
              
              3,642,8572019
              
              
              
              3,298,0472020
              
              
              
              5,087,6502021
              
              
              
              2,704,3792022
              
              
              
              3,600,8052023
              
              
              
              2,907,987Total net
                  operating
                  loss carryforwards
              
              
              
              $
                      25,136,569




**NOTE
      8 --** **STOCKHOLDERS'
      EQUITY**




The
      Company issued 60,000 shares of common stock valued at $10,200 ($0.17 per share)
      and 86,002 shares of common stock valued at $19,000 ($0.22 per share) to its
      Board of Directors for services rendered during the years ending December 31,
      2004 and 2003, respectively.




-42-


**eROOMSYSTEM
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      9 --** **STOCK
      OPTIONS AND WARRANTS**




***Employee
      Grants -*** During
      2000, the stockholders of the Company approved adoption of the 2000 Stock Option
      Plan (the "2000 Plan"). During 2002, the stockholders of the Company approved
      an
      amendment to the 2000 Plan to increase the authorized number of shares of common
      stock reserved for issuance upon the exercise of stock options under the 2000
      Plan from 2,400,000 shares to 2,700,000. During November 2004 ,
      the
      stockholders of the Company approved a second amendment to the 2000 Plan to
      increase the authorized number of shares of common stock reserved for issuance
      upon the exercise of stock options under the 2000 Plan from 2,700,000 shares
      to
      3,000,000 shares.




The
      2000
      Plan, as amended, provides for both the direct award of shares and the grant
      of
      options to purchase shares. The Company's compensation committee administers
      the
      plan and has discretion in determining the employees, directors, independent
      contractors and advisors who receive awards, the type of awards (stock,
      incentive stock options or non-qualified stock options) granted, and the term,
      vesting and exercise prices. The exercise price for the options may be paid
      in
      cash or in shares of the Company's common stock that have been outstanding
      for
      more than six months, which shares are valued at their fair value on the
      exercise date. In the event of a change in control (as defined in the Plan),
      all
      restrictions on awards issued under the 2000 Plan will lapse and unexercised
      options will become fully vested.




On
      January 7, 2002, the Company offered to exchange all options held by current
      employees, directors, independent sales representatives and key consultants
      to
      purchase shares of the Company’s common stock with an exercise price per share
      of $1.50 or more for new options to be granted under the Company’s 2000 Plan on
      or promptly after the first trading day that was at least six months and one
      day
      after the date the tendered options were accepted for exchange and cancelled.
      As
      a result of the tender offer, options to purchase 1,367,855 shares of common
      stock exercisable from $1.51 to $9.60 per share were cancelled during January
      2002.




During
      the year ended December 31, 2002, the Company granted options to purchase
      1,534,748 shares of common stock to certain officers and employees of the
      Company pursuant to the 2000 Plan, including 1,367,855 granted in accordance
      with the tender offer. These options vested on the dates granted. The related
      exercise prices range from $0.37 to $1.54 per share. The options are exercisable
      through 2012.




In
      accordance with FASB Interpretation No. 44, the Company indirectly reduced
      the
      exercise price of 736,703 fixed options by canceling options in January 2002
      in
      connection with the tender offer and by granting options to the same persons
      at
      lower exercise prices on December 31, 2001. As a result, the options have been
      accounted for as variable options.




On
      December 31, 2001, officers (and a related entity owned by a director to whom
      an
      officer assigned 300,000 options), directors and a non-employee consultant
      exercised options to purchase 950,000 shares of common stock (including 636,578
      variable options) at $0.26 per share under the terms of options granted on
      December 31, 2001, by payment of $26,000 in February 2002 and by issuing
      $221,000 of 5% full-recourse promissory notes to the Company. Principal and
      accrued interest on the promissory notes is due on December 31, 2005. In
      addition to the shares purchased with the notes, the notes are secured by
      637,500 shares of common stock that have been held by the officers or the
      related entity for more than six months and by other assets.




Inasmuch
      as the security for the notes was for the
      full amount of the notes and the officers and the related entity had sufficient
      assets or other means beyond the shares purchased to justify the recourse nature
      of the notes, the legal form of the recourse notes arrangement was respected
      for
      accounting purposes and the options were considered to have been exercised.
      The
      options exercised on December 31, 2001 included the early exercise of 400,000
      unvested options. The common shares issued upon the early exercise were subject
      to contingent repurchase call options held by the Company that lapsed when
      the
      options vested on December 31, 2002.




As
      discussed in Note 6, three of the officers that were note holders were
      terminated on October 1, 2003, and per their termination settlements, the
      officers returned 600,000 shares of common stock that secured the notes for
      cancellation. The Company recorded the forgiveness of the notes receivable
      from
      stockholders and relinquishment of the related 600,000 shares of common stock
      by
      reversing the notes receivable to common stock and additional paid-in capital,
      which resulted in no gain or loss. In addition, the Company granted 25,000
      stock
      options to a director on October 1, 2003.




-43-


**eROOMSYSTEM
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




During
      the year ended December 31, 2004, the Company granted options to purchase
      135,000 shares of common stock to employees and members of the Board of
      Directors. These options, which vested immediately, have exercise prices ranging
      from $0.15 to $0.26 per share, and are exercisable through November 15, 2014.
      The Company recognized compensation expense of $200, which was the intrinsic
      value of the options on the date granted.




During
      the year ended December 31, 2004, the Company granted options and warrants
      to
      purchase 71,000 shares of common stock to consultants. These options and
      warrants, which vested immediately, have exercise prices ranging from $0.10
      to
      $0.26 per share and are exercisable through February 1, 2009. These options
      and
      warrants were valued at $19,456 using the Black-Scholes option pricing model
      with the following assumptions: risk free interest rate ranging from 2.97%
      to
      3.36%, dividend yield of 0.0%, volatility ranging from 146% to 173%, and
      expected average life ranging between 3 and 5 years. In addition, the Company
      granted options to purchase 20,000 shares of common stock to a consultant
      contingent on contract performance. These options, which have not vested, have
      an exercise price of $0.37 per share and are exercisable for a period of 3
      years. These options were valued at $6,000 using the Black-Scholes option
      pricing model with the following assumptions: risk free interest rate of 2.85%,
      dividend yield of 0.0%, volatility of 149%.




During
      the year ended December 31, 2004, the Company granted options to purchase
      172,000 shares of common stock to vendors in settlement of $72,205 of accounts
      payable. These options, which vested immediately, have exercise prices ranging
      from $0.25 to $0.35 per share and are exercisable through March 31, 2008. These
      options were valued at $31,688 using the Black-Scholes option pricing model
      with
      the following assumptions: risk free interest rate ranging from 1.95% to 3.02%,
      dividend yield of 0.0%, volatility ranging from 152% to 153%, and expected
      life
      ranging between 3 and 4 years. The Company recognized a gain on extinguishment
      of debt in the amount of $42,519 relating to such vendors.




During
      the year ended December 31, 2004, options to purchase 214,173 shares of common
      stock expired. The Company recognized the value of these options in the amount
      of $32,089 as additional paid in capital.




***Outstanding
      Stock Options and Warrants*** -A
      summary of stock option and warrant activity for the years ended December 31,
      2004 and 2003 is as follows:




Weighted
                -Options
                and
            
            
            
            
            
            
            
            Average
                ExerciseWarrants
            
            Exercise
                Price Range
            
            PriceBalance,
                December 31, 2002
            
            $
                          3,064,657
            
            $
                  0.20
            
            -
            
            $
                  12.80
            
            $
                               2.26Granted
            
            6,315,000
            
            0.05
            
            -
            
            0.26
            
            0.07Forfeited
            
            (116,327)
            
            0.20
            
            -
            
            1.01
            
            0.58Expired
            
            (686,311)
            
            4.00
            
            -
            
            12.80
            
            6.72Balance,
                December 31, 2003
            
            8,577,019
            
            0.05
            
            -
            
            12.80
            
            0.31Granted
            
            378,000
            
            0.10
            
            -
            
            0.35
            
            0.23Exercised
            
            (20,000)
            
            0.17
            
            -
            
            0.17
            
            0.17Expired
            
            (214,173)
            
            0.36
            
            -
            
            1.91
            
            0.86Balance,
                December 31, 2004
            
            $
                          8,720,846
            
            $
                  0.05
            
            -
            
            $
                    7.80
            
            $
                               0.30Exercisable,
                December 31, 2004
            
            $
                          8,720,846
            
            $
                  0.05
            
            -
            
            $
                    7.80
            
            $
                               0.30Weighted-average
                fair value of options granted during the year endedDecember
                31,2003
            
            
            
            
            
            
            
            
            
            $
                               0.24Weighted-average
                fair value of options granted during the year endedDecember
                31,2004
            
            
            
            
            
            
            
            
            
            $
                               0.09




The
      fair
      value of stock options was determined at the grant dates using the Black-Scholes
      option-pricing model with the following weighted-average assumptions for the
      years ended December 31, 2004 and 2003, respectively: risk-free interest rate
      of
      3.0 and 2.8 percent, dividend yield of 0 and 0 percent, volatility of 153 and
      173 percent, and expected lives of 4.8 and 4.3 years.




A
      summary
      of stock option and warrant grants with exercise prices less than, equal to
      or
      greater than the estimated fair value on the date of grant during the years
      ended December 31, 2004 and 2003 is as follows:




-44-
 
  **eROOMSYSTEM
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


Weighted
                  - AverageOptions
                  and
              
              Weighted
                  -
              
              Fair
                  Value ofWarrants
              
              Average
                  Exercise
              
              Options
                  andGranted
              
              Price
              
              WarrantsFor the
                  Year
                  Ended December 31, 2004Grants
                  with exercise price less thanmarket
                  value
              
              60,000
              
              $
                                       0.10
              
              $
                                          0.19Grants
                  with exercise price equal tomarket
                  value
              
              75,000
              
              $
                                       0.26
              
              $
                                          0.26Grants
                  with exercise price greater thanmarket
                  value
              
              243,000
              
              $
                                       0.25
              
              $
                                          0.18For the
                  Year
                  Ended December 31, 2003Grants
                  with exercise price less thanmarket
                  value
              
              5,715,000
              
              $
                                       0.05
              
              $
                                          0.24Grants
                  with exercise price greater thanmarket
                  value
              
              600,000
              
              $
                                       0.26
              
              $
                                          0.24


A
      summary
      of the options and warrants outstanding and exercisable as of December 31,
      2004
      follows:




Outstanding
              
              ExercisableWeighted
                  - Average
              
              Weighted
                  -
              
              
              
              Weighted
                  -Range
                  of
              
              Number
              
              Remaining
              
              Average
              
              Number
              
              AverageExercise
                  Prices
              
              Outstanding
              
              Contractual
                  Life
              
              Exercise
                  Price
              
              Exercisable
              
              Exercise
                  Price$
                  0.05 - 0.37
              
              8,527,203
              
              4.4
                  years
              
              $
                                 0.14
              
              8,527,203
              
              $
                                  0.140.90
                  -
                  1.91
              
              13,643
              
              7.5
                  years
              
              0.94
              
              13,643
              
              0.947.80
              
              180,000
              
              0.6
                  years
              
              7.80
              
              180,000
              
              7.80$
                  0.05
                  - 7.80
              
              8,720,846
              
              4.4
                  years
              
              $
                                 0.30
              
              8,720,846
              
              $
                                  0.30




**NOTE
      10 --** **CONCENTRATION
      OF CREDIT RISK AND SIGNIFICANT CUSTOMERS**




The
      Company's historical revenues and receivables have been derived solely from
      the
      lodging industry. The Company offers credit terms on the sale of its eRoomServ
      refreshment centers and in connection with its revenue-sharing contracts. The
      Company performs ongoing credit evaluations of its customers' financial
      condition and does not require collateral from its customers. The Company
      maintains an allowance for uncollectible accounts receivable based upon a
      percentage of accounts receivable at year end.


At
      December 31, 2004, the Company had cash in excess of federally insured limits
      of
      $477,419.




During
      the year ended December 31, 2004, revenues from one customer accounted for
      11%
      of total revenues.







-45-





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




Not
      applicable.




**ITEM
      8A.**  **CONTROLS
      AND PROCEDURES.**




**Evaluation
      of Disclosure Controls**




Our
          Chief
          Executive Officer and Chief Financial Officer, after evaluating the
          effectiveness of the Company's "disclosure controls and procedures" (as
          defined
          in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or
          15d-15(e)) as of the end of the period covered by this annual report, has
          concluded that our disclosure controls and procedures are not effective
          at a
          reasonable assurance level based on his evaluation of these controls and
          procedures required by paragraph (b) of Exchange Act Rules 13a-15 or
          15d-15.
 The
            evaluation by our Chief Executive Officer and Chief Financial Officer
            revealed
            that our disclosure controls and procedures were subject to significant
            design
            and operational deficiencies that did not ensure that the Company reported
            all
            the information required to be disclosed by us in this report and the
            procedures
            in place failed to result in our disclosure of all such required information.
            Specifically, we failed to have the disclosure required by Items 307
            and 308 of
            Regulation S-B and failure to include the certification by our Chief
            Executive
            Officer and Chief Financial Officer required by SEC Rules
            13a-14(a) and 15d-14(a).
  The
            deficiencies in our disclosure controls and procedures specifically resulted
            from not having sufficient resources allocated to disclosure functions,
            insufficient training of personnel regarding disclosure matters, and
            the absence
            of multiple parties confirming the Company’s disclosures against the
            Commission’s rules and regulations.


**Lack
      of Segregation of
      Duties**




Management
      is aware that there is a lack of segregation
      of duties at the Company due to the small number of employees dealing with
      general administrative and financial matters. However, at this time management
      has decided that considering the abilities of the employees now involved and
      the
      control procedures in place, the risks associated with such lack of segregation
      are low and the potential benefits of adding employees to clearly segregate
      duties do not justify the substantial expenses associated with such increases.
      Management will periodically reevaluate this situation.






-46-


**Changes
      in Internal Controls**




There
      were no changes in our internal controls over financial reporting that occurred
      during the last fiscal quarter, *i.e.* ,
      the
      quarter ended December 31, 2004, that have materially affected, or are
      reasonably likely to materially affect, our internal controls over financial
      reporting.




**PART
      III**




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




The
      following information is furnished with respect to each member of our board
      and
      our executive officers who are not directors. There are no family relationships
      between or among any of our directors or executive officers. Each of our
      executive officers is an employee of eRoomSystem Technologies and serves at
      the
      discretion of our board.




**Directors
      and Executive Officers**




**Name**
            **Age**
            **Position**David
                A. Gestetner
            32
            President,
                Chief Executive Officer, Secretary and Chairman of the BoardHerbert
                A. Hardt
            62
            DirectorJames
                C. Savas
            44
            DirectorLawrence
                K. Wein
            62
            Director





Set
      forth
      below is a description of the background of each of our executive officers
      and
      directors:




*David
      A. Gestetner* has
      served as our president, chief executive officer, secretary and chairman of
      the
      board since October 1, 2003. Throughout his career, Mr. Gestetner has been
      involved in various applications of technology, both as an operator as well
      as a
      financier, including founding and operating a telecommunications business
      abroad. Mr. Gestetner has received awards for his innovations and advance
      applications of technology, including the Howard Golden Award for an intuitive
      scientific invention consisting of a system that enables emergency call routing
      in telephone systems. Mr. Gestetner possesses a Master’s degree from The Aron
      Kotler Higher Institute of Learning in New Jersey.




*Herbert
      A. Hardt* has
      served as one of our directors since June 13, 2002. Mr. Hardt is a
      co-founder and principal of Monness, Crespi, Hardt & Co., Inc. Prior to
      co-founding Monness, Crespi, Hardt & Co., Inc. in 1979, Mr. Hardt served as
      vice president of Fidelity Management and Research Bermuda from 1971 to 1978.
      Mr. Hardt received his Bachelor of Arts with a concentration in Engineering
      and
      Applied Physics from Harvard College in 1965 and his Master of Business
      Administration from Harvard University in 1971.




*James
      C. Savas* has
      served as one of our directors since June 13, 2002. For more than seven years,
      Mr. Savas has been a member of Savas Greene & Company, LLC, an accounting
      and business consulting firm located in Salt Lake City, Utah. From 1988 to
      1995,
      Mr. Savas was a tax accountant for Price Waterhouse. Since April 1999, Mr.
      Savas
      has also served as co-manager of Providence Management, LLC, which is manager
      of
      Ash Capital, LLC, an investment company controlled by Dr. Alan C.
      Ashton, a former director and the largest stockholder of the Company. Mr. Savas
      also serves on the boards of Bullfrog Spas International and Vortex Products,
      both privately-held companies. Mr. Savas received his Bachelor of Science
      in Accounting from the University of Utah.




*Lawrence
      K. Wein* has
      served as one of our directors since October 2003. Mr. Wein held several key
      positions at AT&T for over 30 years. Mr. Wein received his Master’s in
      Business Administration from Harvard Business School, and his Bachelor of
      Science in Engineering from Columbia University.




-47-


**Committees
      of the Board of Directors** ****




Our
      board
      has authorized two standing committees, an audit committee and a compensation
      committee.




*Audit
      Committee* *.* The
      audit
      committee, which was formed on August 18, 2000, is currently comprised of
      Messrs. Hardt and Savas. The chairman of the audit committee is Mr. Hardt.
      The audit committee met four times during the fiscal year ended
      December 31, 2004. The audit committee has the responsibility
      to:




·
            recommend
                the firm that will serve as our independent public
                accountants;


·
              review
                  the scope and results of the audit and services provided by the
                  independent public
                  accountants;


·
              meet
                  with our financial staff to review accounting procedures and policies
                  and
                  internal controls; and


·
              perform
                  the other responsibilities set forth in its written
                  charter.




The
      audit
      committee is comprised exclusively of directors who are not our salaried
      employees and a majority of who are, in the opinion of our board, free from
      any
      relationship that would interfere with the exercise of independent judgment
      as a
      committee member.




*Compensation
      Committee* .
      The
      compensation committee, which was formed on August 18, 2000, is currently
      comprised of Messrs. Hardt and Wein. The compensation committee met once during
      the fiscal year ended December 31, 2004. In general, the compensation
      committee’s authority and oversight extends to total compensation, including
      base salaries, bonuses, stock options, and other forms of compensation. More
      specifically, the compensation committee has the responsibility to:




·
            recommend
                executive compensation policy to our
                board;


·
              determine
                  compensation of our senior
                  executives;


·
              determine
                  the performance criteria and bonuses to be granted; and


·
              administer
                  and approve stock option grants.




In
      recommending executive compensation, the compensation committee has the
      responsibility to ensure that the compensation program for executives of
      eRoomSystem Technologies is effective in attracting and retaining key officers,
      links pay to business strategy and performance, and is administered in a fair
      and equitable fashion in the stockholder’s interest.




**Board
      of Directors Meetings**




Our
      board
      generally meets quarterly, and during the fiscal year ended December 31,
      2004, our board held a total of six meetings. All of the incumbent directors
      attended at least 80% of the total number of meetings of the board held during
      the period for which they have been a director, and the total number of the
      meetings held by all committees of our board on which they served.




**Director
      Compensation**




Our
      non-employee directors receive stock options to purchase 25,000 shares of our
      common stock at each annual meeting. Directors who are our employees do not
      receive compensation for their services as directors.




-48-


**Compensation
      Committee Interlocks and Insider Participation**




The
      compensation of executive officers is established by our board pursuant to
      recommendations from the compensation committee. No member of our compensation
      committee will serve as a member of a board of directors or compensation
      committee of any entity that has one or more of its executive officers serving
      as a member of our board or compensation committee. However, David A.
      Gestetner, our president, chief executive officer secretary and chairman of
      the
      board, is the managing member of Gestetner Group, LLC.




**Section
      16(** **a)** **Beneficial
      Ownership Reporting Compliance**




Section
      16(a) of the Securities Exchange Act of 1934, as amended, requires our reporting
      directors and executive officers, and persons who own more than ten percent
      of a
      registered class of our equity securities, to file initial reports of ownership
      and reports of changes in ownership of common stock and other equity securities
      of eRoomSystem Technologies with the Securities and Exchange Commission, or
      the
      Commission. Officers, directors and stockholders holding more than 10% of the
      class of stock are required to furnish us with copies of all Section 16(a)
      forms
      they file with the Commission.




To
      our
      knowledge, based solely on review of the copies of such reports furnished to
      us
      and written representations that no other reports were required, during the
      fiscal year ended December 31, 2003.




**ITEM
      10.**  **EXECUTIVE
      COMPENSATION.**




**Summary
      Compensation Table**




The
      following table sets forth summary information concerning the total remuneration
      paid or accrued by eRoomSystem Technologies, to or on behalf of our chief
      executive officer and our executive officers whose total annual salary exceeded
      $100,000 during the fiscal years ended December 31, 2004, 2003 and 2002. In
      accordance with the rules of the Commission, the compensation described in
      this
      table does not include perquisites and other personal benefits received by
      the
      executive officers named in the table below which does not exceed the lesser
      of
      $50,000 or 10% of the total salary and bonus reported for the executive
      officers.




**Annual
                Compensation**
            
            **Long-Term
                Compensation**
            
            **Other
                Compensation****Name
                and Principal Position**
            
            **Year**
            
            **Salary**
            
            **Bonus**
            
            **Securities
                Underlying Options/Sirs**David
                A. Gestetner
              President,
                Chief Executive Officer, Secretaryand Chairman of the Board
            
            2004
            
            $
                  100,000
            
            $
                  50,000
            
            0
            
            $
                          2,4002003
            
            $
                    25,000
            
            $
                           0
            
            0
            
            $
                             6002002
            
            $
                             0
            
            $
                           0
            
            0
            
            $
                                 0




David
      A.
      Gestetner commenced serving in the capacities of President, Chief Executive
      Officer, Secretary and Chairman of the Board on October 1, 2003. Mr. Gestetner
      receives an annual salary of $100,000 and a monthly car allowance of $200.
      In
      addition, in conjunction with the investment of the Gestetner Group, LLC of
      $50,000 in convertible secured promissory notes, Gestetner Group, LLC holds
      a
      warrant to purchase 400,000 shares of common stock, exercisable at $0.05 per
      share through October 1, 2008. In addition, the secured convertible promissory
      note held by the Gestetner Group, LLC is convertible into 1,000,000 shares
      of
      common stock at the rate of $0.05 per share. Mr. Gestetner serves as the
      managing member of the Gestetner Group, LLC.





-49-


**2000
      Stock Option and Incentive Plan**




The
      2000
      Stock Option and Incentive Plan, or the 2000 Plan, was adopted by our board
      on
      February 3, 2000 and approved by our stockholders on March 29, 2000.
      The 2000 Plan was amended by our stockholders on May 7, 2001 when the shares
      of
      common stock authorized under the 2000 Plan were increased from 2,000,000 shares
      to 2,400,000 shares, amended on July 29, 2002 by our stockholders effectively
      increasing the number of shares issuable hereunder to 2,700,000, and amended
      further on November 15, 2004 by our stockholders effectively increasing the
      number of shares issuable thereunder to 3,000,000. The 2000 Plan provides us
      with the vehicle to grant to employees, officers, directors and consultants
      stock options and bonuses in the form of stock and options. Under the 2000
      Plan,
      we can grant awards for the purchase of up to 3,000,000 shares of common stock
      in the aggregate, including “incentive stock options” within the meaning of
      Section 422 of the United States Internal Revenue Code of 1986 and non-qualified
      stock options. As of March 8, 2005, we have options to purchase 2,588,946 shares
      of our common stock outstanding under the 2000 Plan.




The
      compensation committee has authority to determine the persons to whom awards
      will be granted, the nature of the awards, the number of shares to be covered
      by
      each grant, the terms of the grant and with respect to options, whether the
      options granted are intended to be incentive stock options, the duration and
      rate of exercise of each option, the option price per share, the manner of
      exercise and the time, manner and form of payment upon exercise of an
      option.




**Option/SAR
      Grants in Last Fiscal Year** ****




The
      following table sets forth information regarding grants of stock options during
      the fiscal year ended December 31, 2004 made to our executive officers.




**Individual
                  Grants****Name**
              
              **Number
                  of Securities Underlying Options/Sirs Granted**
              
              **Percent
                  of Total Options/Sirs Granted to Employees in Fiscal
                  Year**
              
              **Exercise
                  or Base Price ($/Share)**
              
              **Expiration
                  Date**David
                  A. Gestetner
              
              N/A
              
              N/A
              
              N/A
              
              N/A
    **Aggregated
        Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR
        Values**




The
      following table sets forth information related to the exercise of stock options
      by Messr. Gestetner and information related to the fiscal year-end value of
      unexercised stock options held by our named executive officers. We have not
      issued any stock appreciation rights.




**Name**
              
              **Shares
                  Acquired on Exercise (#)**
              
              **Value
                  Realized ($)**
              
              **Number
                  of Securities Underlying Unexercised Options/SARs at Fiscal
                  Year-End**
              
              **Value
                  of Unexercised in-the-Money Options/SARs at Fiscal
                  Year-End****Exercisable/Unexercisable**
              
              **Exercisable/Unexercisable**David
                  A. Gestetner
              
              N/A
              
              N/A
              
              N/A
              N/A
              
              N/A
              N/A




-50-





**Employment
      Agreements**




The
      employment agreement of Messr. Gestetner was issued on October 1, 2003. The
      term
      of the employment agreement is two (2) years, with successive one (1) year
      renewable options. The employment agreement of Messr. Harkness was terminated
      on
      October 1, 2003 upon his resignation as Chief Executive Officer, President
      and
      Chairman of the Board.




**Report
      on Repricing of Options/SARs**




During
      the fiscal year ended December 31, 2002, we conducted a stock option exchange
      program whereby the holders of eligible stock options were allowed to surrender
      their stock options in exchange for the issuance of new stock options at least
      six months and one day after we accepted the surrendered stock options for
      cancellation, *i.e.* ,
      on or
      following July 22, 2002. Eligible stock options were those stock options issued
      under the 2000 Plan to current employees, directors, independent sales
      representatives and consultants with an exercise price of $1.50 or more. Of
      the
      stock options to purchase 1,367,855 shares of common stock eligible for
      surrender, holders of eligible stock options surrendered stock options to
      purchase all 1,367,855 shares of common stock. On July 23, 2002, we reissued
      options to purchase 1,366,102 shares of common stock exercisable at $0.37 per
      share through July 23, 2012.




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




The
      following table is a list of the beneficial ownership of common stock as of
      March 8, 2005 of (i) all persons who beneficially owned more than 5% of our
      outstanding common stock, (ii) all directors, (iii) all executive
      officers and (iv) all directors and executive officers as a group,
      according to record-ownership listings as of that date, according to the Forms
      3, 4 and 5 and Schedules 13D and 13G, of which we have received copies, and
      according to verification as of March 8, 2005 which we have solicited and
      received from each director and executive officer. The beneficial ownership
      is
      calculated based on 10,465,133 shares of common stock outstanding as of March
      8,
      2005. Beneficial ownership is determined in accordance with the rules of the
      Commission and generally includes voting or investment power with respect to
      securities and, accordingly, includes shares issuable upon exercise of options
      that are exercisable or become exercisable within 60 days of March 8,
      2005.




Unless
      otherwise indicated, the persons identified in this table have sole voting
      and
      sole investment power with regard to the shares beneficially owned with the
      following address, c/o eRoomSystem Technologies, Inc., 1072 Madison Ave.,
      Lakewood, NJ 08701.




**Executive
                  Officer or Director**
              
              **Amount
                  and Nature of Beneficial Ownership**
              
              **Percent
                  of Class**David
                  A. Gestetner
              
              5,004,0001
              
              47.82%James
                  C. Savas
              
              1,526,7832
              
              14.59%Herbert
                  A. Hardt
              
              640,8213
              
              6.12%Lawrence
                  K. Wein
              
              80,0004
              
              0.76%Executive
                  Officers and Directors, as a group (4 individuals)
              
              7,251,604
              
              69.29%**Stockholders
                  with Beneficial Ownership of 5% or More**David
                  A. Gestetner
              
              5,004,0001
              
              47.82%James
                  C. Savas
              
              1,526,7832
              
              14.59%Ash
                  Capital, LLC
              
              1,389,2705
              
              13.28%Peter
                  S. Lynch
              
              880,2316
              
              8.41%Herbert
                  A. Hardt
              
              640,8213
              
              6.12%




-51-


__________________


1 Reflects
      the direct ownership of 4,000 shares of common stock. In addition, also includes
      the following immediately exercisable securities: (i) a warrant to purchase
      4,000,000 shares of common stock at an exercise price of $0.05 per share, and
      (ii) a secured convertible promissory note, in the original principal amount
      of
      $50,000, into 1,000,000 shares of common stock at the rate of $0.05 per
      share.




2 Reflects
      the direct ownership of 48,321 shares of common stock and options to purchase
      55,000 shares of common stock, the beneficial ownership of 19,231 shares of
      common stock and an option to purchase 14,961 shares of common stock held by
      Providence Management, LLC, an entity for which Mr. Savas is co-manager and
      50%
      owner, and the beneficial ownership of 1,243,957 shares of common stock and
      an
      option to purchase 145,313 shares of common stock held by Ash Capital, LLC,
      or
      Ash Capital, an entity for which Providence Management, LLC is manager and
      holds
      a 20% profits interest. Mr. Savas disclaims any beneficial ownership of the
      shares of common stock and options to purchase shares of common stock
      beneficially owned as a result of his affiliation with Ash Capital. Does not
      reflect the conversion of a secured convertible promissory note in the original
      principal amount of $347,500 held by Ash Capital, the terms of which provide
      for
      (i) interest to accrue at the rate of 8% per annum, (ii) a maturity date of
      the
      earlier of November 8, 2007 or the maturity date of the convertible secured
      promissory notes held by the Gestetner Group, LLC, and several third parties
      issued on October 1, 2003, (iii) the  right
      to
      convert the principal and accrued interest into Series D Preferred Stock at
      $0.90 per share with each share of the Series D Preferred Stock convertible
      into
      six shares of common stock, at $0.15 per share on a common share equivalent
      basis. In addition, does not reflect the contingent warrant to purchase shares
      of common stock issued to Ash Capital on October 1, 2003, exercisable at $0.13
      per share through October 1, 2008. The terms of such contingent warrant provide
      that the number of shares exercisable by Ash Capital will be determined by
      a
      formula, [A - B] times C, whereby (a) A equals the aggregate number of shares
      of
      the Company’s common stock that are, on the date of the exercise of the Ash
      Capital warrant, issued to and held by any of the Gestetner Group, LLC and
      several third parties, (b) B equals 10,000,000 and (c) C equals .07.




3 Reflects
      the direct ownership of 395,821 shares of common stock and options to purchase
      55,000 shares of common stock, and the beneficial ownership of options to
      purchase 190,000 shares of common stock held by Monness, Crespi & Hardt, an
      entity of which Mr. Hardt is a principal.




4 Reflects
      the direct ownership of 30,000 shares of common stock and options to purchase
      50,000 shares of common stock.




5 Reflects
      the direct ownership of 1,243,957 shares of common stock and an option to
      purchase 145,313 shares of common stock. Ash Capital, LLC is controlled by
      Alan
      C. Ashton, a former member of our board of directors, audit and compensation
      committees.




6 Reflects
      the beneficial ownership of 880,231 shares of common stock, as reported on
      Schedule 13G filed with the Commission on February 17, 2004.





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




**Transactions
      Involving Ash Capital, LLC**




On
      November 8, 2002, the Company entered into a secured convertible promissory
      note
      with Ash Capital for proceeds of up to $322,500. The note bears interest at
      8%.
      The principal and interest are due on the earlier of (i) November 8, 2003,
      (ii)
      a default under the secured convertible promissory note, (iii) five days after
      the date of any breach by the Company of any agreement with Ash Capital or
      any
      affiliate of Ash Capital, unless the secured convertible promissory note has
      been converted. All past due amounts and accrued interest thereon shall bear
      interest at 18%.





-52-


At
      any
      time, Ash Capital has the right to convert the principal and accrued interest
      into Series D Preferred Stock at $0.90 per share. Each share of the Series
      D
      Preferred Stock is convertible into six shares of common stock, at $0.15 per
      share on a common share equivalent basis. If the conversion date is after
      November 8, 2003, and the Series D Preferred Stock has not been authorized
      by
      all requisite corporate action, the promissory note can be converted into 17.8%
      of the authorized capital stock or such lesser amount representing 17.8% of
      the
      issued and outstanding shares of the capital stock of the Company calculated
      on
      a fully diluted basis if the Company provides a covenant not to increase the
      issued and outstanding shares of capital stock of the Company (or securities
      convertible thereto) without prior consent of Ash Capital which shall not be
      unreasonably withheld.





On
      October 1, 2003, Ash Capital, LLC and the Company agreed to modify the terms
      of
      the secured convertible promissory note with the Company to (i) extend the
      maturity date to the earlier of November 8, 2007 or the maturity date of the
      convertible secured promissory notes of the Gestetner Group, LLC, and several
      third parties, or the Gestetner Group Notes and (ii) include as an additional
      event of default any default of the Company under the Gestetner Group Notes.




In
      addition, the Company also issued Ash Capital, LLC a contingent warrant to
      purchase shares of common stock, exercisable at $0.13 per share through October
      1, 2008. The terms of the warrant provide that the number of shares exercisable
      by Ash Capital, LLC will be determined by a formula, [A - B] times C, whereby
      (i) A equals the aggregate number of shares of the Company’s common stock that
      are, on the date of the exercise of the Ash Capital warrant, issued to and
      held
      by any of the Gestetner Group, LLC and the other lenders that purchased the
      $250,000 secured convertible promissory note on October 1, 2003, (ii) B equals
      10,000,000 and (iii) C equals .07. The shares of common stock underlying the
      Ash
      Capital warrant include registration rights that provide Ash Capital, under
      certain circumstances and in conjunction with Gestetner Group, LLC and several
      third parties, to register such underlying shares of common stock.




On
      October 1, 2003, Ash Capital, LLC and Gestetner Group, LLC entered into an
      Intercreditor and Collateral Agency Agreement that provides for the secured
      obligations of the Company to both parties to rank equally. Ash Capital is
      to
      serve on its own behalf and as the agent for Gestetner Group, LLC, based upon
      its written instruction, to foreclose upon, collect and dispose of all or any
      portion of the collateral set forth in Ash Capital’s secured convertible
      promissory note and the Gestetner Group Notes, should a default occur by the
      Company under the terms of such agreements. In
      addition, for the term of the Gestetner Group Notes, Ash Capital has agreed,
      subject to obtaining the prior written consent of Gestetner Group, LLC
      otherwise, to vote or to cause any of its affiliates or subsidiaries to vote
      all
      of its or their shares of common stock of the Company (i) for the election
      of
      any two nominees of the Gestetner Group Noteholders and (ii) against any
      increase in the size of the Board of Directors of the Company above four
      members.




**Transactions
      Involving Gestetner Group, LLC**




On
      October 1, 2003, we issued secured convertible promissory notes in the original
      principal amount of $250,000, collectively, to Gestetner Group, LLC, a New
      Jersey limited liability company, and several third parties, or the Gestetner
      Group Noteholders. David A. Gestetner, our Chief Executive Officer and President
      is the Managing Member of the Gestetner Group, LLC. The terms of the Notes
      include (i) for interest to accrue at the rate of 8% per annum, (ii) a maturity
      date of the earlier of (a) October 1, 2008, (b) the date of approval of the
      Board of Directors regarding the merger of the Company with or into any third
      party or the sale of all or substantially all of our assets, or (c) the date
      of
      the closing of any financing (other than commercial credit facilities), the
      gross proceeds of which are at least $1,000,000 and (iii) the right of the
      Gestetner Group Noteholders, at any time, to convert all outstanding principal
      and accrued and unpaid interest into shares of our common stock at the rate
      of
      $0.05 per share; provided, however, that we shall have the right to not permit
      the conversion if such conversion would result in the Gestetner Group
      Noteholders holding, in the aggregate and on a fully-diluted basis, more than
      49% of our outstanding common stock.




-53-


In
      addition, the Gestetner Group Noteholders have been issued, collectively,
      warrants to purchase 5,000,000 shares of our common stock, exercisable at $0.05
      per share at any time through October 1, 2008. Specifically, the Gestetner
      Group, LLC holds a warrant to purchase 4,000,000 shares of common stock on
      the
      terms set forth above, and holds a secured convertible promissory note in the
      original principal amount of $50,000.




The
      shares of common stock underlying the secured convertible promissory notes,
      as
      well as the warrants to purchase shares of common stock, issued to the Gestetner
      Group Noteholders include registration rights that provide, under certain
      circumstances, for the registration of such shares of common stock.




We
      are
      using the proceeds provided by the Gestetner Group Noteholders for our business
      operations.




**Transactions
      Involving RSG Investments, LLC**




On
      July
      17, 1998, we entered into an agreement with RSG Investments through which RSG
      Investments loaned us $1.5 million. RSG Investments is a privately-held company
      in which John J. Prehn, one of our former directors, is a member.
      Mr. Prehn previously served as the managing director of AMRESCO. At the
      time of these agreements, RSG Investments and AMRESCO were not affiliated with
      us, and Mr. Prehn did not serve on our board of directors.




The
      purpose of the $1.5 million loan was to fund the production of approximately
      2,270 eRoomServ refreshment centers. As an inducement, we issued to the
      principals of RSG Investments warrants to purchase 46,875 shares of common
      stock
      and agreed to pay interest at the rate of 15% per annum. Our obligation was
      secured by the eRoomServ refreshment centers, our other assets and by shares
      of
      our common stock held by our officers, directors and consultants. Due to the
      inability to satisfy our obligations under the loan, we entered into a
      settlement with RSG Investments in the form of an equipment transfer agreement
      dated September 28, 1999.




Pursuant
      to the equipment transfer agreement, we formed a bankruptcy-remote entity,
      RSi
      BRE, Inc., transferred ownership of 2,270 eRoomServ refreshment centers to
      RSi
      BRE, Inc., and granted RSG Investments the right to receive $0.57 per eRoomServ
      refreshment center per day of the revenue realized from 2,270 of the eRoomServ
      refreshment centers. As part of the settlement, the RSi BRE, Inc. board of
      directors was to consist of three individuals, a representative of eRoomSystem
      Technologies, a representative of RSG Investments and a third independent
      director. In addition, we paid $250,000 to RSG Investments, converted $500,000
      of our obligation to RSG Investments into 166,667 shares of our Series B
      convertible preferred stock and executed a promissory note in the principal
      amount of $750,000 bearing an interest rate of 10% per annum. Pursuant to this
      settlement, RSG Investments terminated the security interest granted under
      the
      original obligation and received a security interest in all of the assets of
      RSi
      BRE, Inc.




Pursuant
      to the terms of this promissory note, we transferred 829 additional refreshment
      centers to RSi BRE, Inc. We were obligated to satisfy this promissory note
      in
      full on May 1, 2000, which was extended to August 15, 2000. On
      August 15, 2000, the promissory note was satisfied and paid in full. As a
      result, 829 units were transferred from RSi BRE, Inc. to us and the remaining
      obligations owed to RSG Investments were assumed by RSi BRE, Inc.




On
      February 29, 2004, we entered into a global Settlement and Mutual Release
      Agreement, or Settlement and Release Agreement, with RSG Investments, LLC,
      or
      RSG. The Settlement and Release Agreement provides for the payment of $152,823
      by the Company to RSG as a full and final cancellation of the Equipment Transfer
      Agreement and subsequent settlement agreement dated September 1999. As a result,
      the Company has commenced recognizing all revenue generated from the four
      revenue sharing lease agreements relating to the 1,717 eRoomServ refreshment
      centers and 1,304 eRoomSafes. We have merged RSi BRE with and into eRoomSystem
      Technologies, Inc.




-54-


**Financial
      Advisory Agreement with Monness, Crespi & Hardt**




On
      December 31, 2001, we entered into a financial advisory agreement with Monness,
      Crespi & Hardt, or MCH. Herbert A. Hardt is a principal of MCH and was
      appointed to our board of directors in June 2002. The agreement provides that
      MCH will assist us in structuring and/or placing debt or equity securities
      in
      private or public transactions, and advise us on mergers, acquisitions and
      strategic partnerships. In consideration, MCH was issued a warrant to purchase
      100,000 shares of common stock exercisable at $0.26 per share.




**Grant
      and Exercise of Stock Options on December 31, 2001 AND Related Matters Involving
      Messrs. Harkness, Hrncir and Ellis**




On
      December 31, 2001, we issued to David S. Harkness, Gregory L. Hrncir, Derek
      K.
      Ellis (each of which are former executive officers of the Company) and Ash
      Capital options to purchase 300,000 shares, 225,000 shares, 75,000 shares and
      250,000 shares of common stock, respectively, at $0.26 per share, the closing
      price of our common stock on December 31, 2001. As of the same date, Mr.
      Harkness assigned, as a gift, his options to AK Holding Company, a
      limited-liability company affiliated with Dr. Alan C. Ashton. In addition,
      as of the same date, Messrs. Hrncir and Ellis, Ash Capital and AK Holding
      Company exercised their options to purchase an aggregate of 950,000 shares
      of
      common stock (including 636,578 variable options) by payment of $26,000 in
      February 2002 and by issuing $221,000 of 5% full-recourse promissory notes
      to
      us. The principal and accrued interest on the promissory notes originally had
      a
      maturity date of December 31, 2005. In addition to the shares purchased with
      the
      notes, the notes were secured by 637,500 shares of common stock that have been
      held by Messrs. Hrncir and Ellis, Ash Capital and AK Holding Company for more
      than six months and by other assets of each of the foregoing parties.




On
      October 1, 2003, David S. Harkness entered into a Termination and Release
      Agreement that provides for the surrender by the Company of a promissory note,
      previously issued by Mr. Harkness in the original principal amount of $78,000,
      in exchange for the surrender by Mr. Harkness of 300,000 shares of common stock.
      In conjunction with the surrender of accrued compensation owed to Mr. Harkness
      for the period April 1, 2003 to October 1, 2003, the Company issued Mr. Harkness
      an option to purchase 300,000 shares of common stock at $0.26 per share pursuant
      to the 2000 Plan. Under the terms of the Termination and Release Agreement,
      Mr.
      Harkness resigned as Chief Executive Officer, President and Chairman of the
      Board of Directors, as well as all officer and director positions held in the
      Company’s subsidiaries.




On
      October 1, 2003, Gregory L. Hrncir entered into a Termination and Release
      Agreement that provides for the surrender by the Company of a promissory note,
      previously issued by Mr. Hrncir in the original principal amount of $58,500,
      in
      exchange for the surrender by Mr. Hrncir of 225,000 shares of common stock.
      In
      conjunction with the surrender of accrued compensation owed to Mr. Hrncir for
      the period April 1, 2003 to October 1, 2003, the Company issued Mr. Hrncir
      an
      option to purchase 225,000 shares of common stock at $0.26 per share pursuant
      to
      the 2000 Plan. Under the terms of the Termination and Release Agreement, Mr.
      Hrncir resigned as Chief Operating Officer, General Counsel and Secretary of
      the
      Company, as well as all officer and director positions held in the Company’s
      subsidiaries. In addition, on October 1, 2003, the Company entered into a
      three-month Consulting Agreement with Mr. Hrncir that provides for the issuance
      of an option to purchase 100,000 shares of common stock, exercisable at $0.10
      per share for a period of five years. The monthly consulting fee is $6,000.




On
      October 2, 2003, Derek K. Ellis entered into a Termination and Release Agreement
      that provides for the surrender by the Company of a promissory note, previously
      issued by Mr. Ellis in the original principal amount of $19,500, in exchange
      for
      the surrender by Mr. Ellis of 75,000 shares of common stock. In conjunction
      with
      the surrender of past compensation by Mr. Ellis for the period April 1, 2003
      to
      July 31, 2003, the Company issued Mr. Ellis an option to purchase 75,000 shares
      of common stock at $0.26 per share pursuant to the 2000 Plan. Previously, on
      July 31, 2003, Mr. Ellis had resigned as Chief Financial Officer and Treasurer
      of the Company. In addition, on October 2, 2003, the Company entered into a
      Consulting Agreement with Mr. Ellis that provides for the issuance of a
      five-year option to purchase up to 180,000 shares of common stock, which option
      vests upon the occurrence of certain events, at $0.10 per share and the payment
      of a monthly consulting fee of $10,000 for the first month and $3,120 for a
      minimum of five, and maximum of seven, subsequent months subject to the
      occurrence of certain events.




-55-


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




(a)
            Exhibits




See
      exhibits listed on the Exhibit Index following the signature page of this Annual
      Report on Form 10-KSB/A, which is incorporated herein by reference.




(b)
            Reports
                on Form 8-K




None.




**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.**




The
      information required by this item is as follows:




Hansen,
      Barnett & Maxwell, or HB&M, has served as our independent registered
      public accounting firm since 2000, and specifically for the fiscal years ended
      December 31, 2004 and 2003. HB&M was selected by our board and a
      majority of our stockholders as our independent registered public accounting
      firm for the fiscal year ending December 31, 2004.




Our
      board
      is responsible for pre-approving all audit and permissible non-audit services
      provided by HB&M, with certain limited exceptions. Our board of directors
      has concluded that the non-audit services provided by HB&M are compatible
      with maintaining auditor independence. In 2004, no fees were paid to HB&M
      pursuant to the “de minimus” exception to the pre-approval policy permitted
      under the Exchange Act.




For
      the
      fiscal years ended December 31, 2004 and 2003, the fees for services provided
      by
      HB&M were as follows:




**2004**
              
              **2003**Audit
                  fees
                (1)
              $
    35,285
              
              $
  38,835Audit-related
                  fees (2)
              -
              
              -Tax
                  fees (3)
              -
              
              -All
                  other fees
              -
              
              -$
    35,285
              
              $
  38,835


(1)
              Audit
                  fees: Fees for the professional services rendered for the audit
                  of our
                  annual financial statements, review of financial statements included
                  in
                  our Form 10-QSB filings, and services normally provided in connection
                  with
                  statutory and regulatory filings or
                  engagements.


(2)
              Audit-related
                  fees: Fees for assurance and related services that are reasonably
                  related
                  to the performance of the audit or review of our financial
                  statements.
 
 (3)
              Tax
                fees: Fees for professional services rendered with respect to tax
                compliance, tax advice and tax planning. This includes preparation
                of tax
                returns, claims for refunds, payment planning and tax law interpretation.





-56-





SIGNATURES





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




**e****RoomSystem
                  Technologies, Inc.**By:
              /s/
                  David A. GestetnerDavid
                  A. GestetnerIts:
              President,
                  Chief Executive Officer, Secretary and Chairman of the
                  BoardDate:
              August
                  3, 2006






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




**Signature**
                
                **Title**
                
                **Date**/s/
                    David A. Gestetner
                
                President,
                    Chief Executive Officer, Secretary and Chairman of the Board
                
                August
                      3, 2006David
                    A. Gestetner
                
                (Principal
                    Executive Officer and Principal
                  Financial
                    and Accounting Officer)/s/
                    Herbert A. Hardt
                
                Director
                
                August
                      3, 2006Herbert
                    A. Hardt/s/
                    James C. Savas
                
                Director
                
                August
                      3, 2006James
                    C. Savas/s/
                    Lawrence K. Wein
                
                Director
                
                August
                      3, 2006


-57-









**EXHIBIT
      INDEX**


**Exhibit
Number**
              **Document
                  Name**
              **Page**1.01
              Form
                  of Underwriting Agreement relating to the registrant’s initial public
                  offering that closed on August 9, 2000
              (3)2.01
              Agreement
                  and Plan of Reorganization by and between RoomSystems International
                  Corporation and RoomSystems, Inc. dated December 31, 1999
              (1)2.02
              Transfer
                  Pricing Agreement by and between RoomSystems International Corporation
                  and
                  RoomSystems, Inc. dated December 31, 1999
              (1)3.01
              Amendment
                  and Restatement of Articles of Incorporation
              (1)3.02
              Certificate
                  of Correction dated May 30, 2000
              (2)3.03
              Amended
                  and Restated Certificate of Designation, Preferences, Rights and
                  Limitation of Series A convertible preferred stock
              (1)3.04
              Amended
                  and Restated Certificate of Designation, Preferences, Rights and
                  Limitation of Series B convertible preferred stock
              (1)3.05
              Certificate
                  of Designation, Preferences, Rights and Limitation of Series C
                  convertible
                  preferred stock
              (1)3.06
              Amended
                  and Restated Bylaws
              (2)3.07
              Second
                  Amendment and Restatement of Articles of Incorporation
              (3)3.08
              Second
                  Amended and Restated Bylaws
              (3)4.01
              Form
                  of Common Stock Certificate
              (1)4.02
              Form
                  of Certificate for Series A convertible preferred stock
              (1)4.03
              Form
                  of Certificate for Series B convertible preferred stock
              (1)4.04
              Form
                  of Certificate for Series C convertible preferred stock
              (1)10.01
              Amended
                  and Restated 2000 Stock Option and Incentive Plan
              (2)10.02
              Lease
                  Agreement by and between RoomSystems Finance Corporation and 3770
                  Howard
                  Hughes Parkway Associates Limited Partnership dated October 8, 1997
              (1)10.02A
              Exhibits
                  to Lease Agreement by and between RoomSystems Finance Corporation
                  and 3770
                  Howard Hughes Parkway Associates Limited Partnership dated October 8,
                  1997
              (2)10.03
              Lease
                  Agreement by and between RoomSystems, Inc. and Pam Joy Realty,
                  Inc. dated
                  October 10, 1997
              (2)10.04
              Master
                  Corporate Agreement by and between Innco Corporation and RoomSystems,
                  Inc.
                  dated April 6, 1998
              (1)10.04A
              Exhibits
                  to Master Corporate Agreement by and between Innco Corporation
                  and
                  RoomSystems, Inc. dated April 6, 1998
              (2)10.05
              Indemnification
                  Agreement by and between RoomSystems, Inc. and Alan C. Ashton dated
                  August 17, 1999
              (1)10.06
              Agreement
                  of Understanding by and between RoomSystems, Inc. and Ash Capital,
                  LLC,
                  C&W/RSI Partners, LLC, SKM Investment, LLC and Thunder Mountain
                  Investments, LC dated August 17, 1999
              (1)10.06A
              Exhibits
                  to Agreement of Understanding by and between RoomSystems, Inc.
                  and Ash
                  Capital, LLC, C&W/RSI Partners, LLC, SKM Investment, LLC and Thunder
                  Mountain Investments, LC dated August 17, 1999
              (2)
  -58-
 **Exhibit
                  Number**
                **Document
                  Name**
                **Page**10.07
                First
                    Amendment to Agreement of Understanding by and between RoomSystems,
                    Inc.
                    and Ash Capital, LLC, C&W/RSI Partners, LLC, SKM Investment, LLC and
                    Thunder Mountain Investments, LC dated September 30, 1999
                (1)10.08
                Promissory
                    Note Repurchase Agreement by and between Steven L. Sunyich and
                    RoomSystems, Inc. dated September 1, 1999
                (1)10.09
                Indemnification
                    Agreement by and between RSi BRE, Inc. and Donnelly Prehn dated
                    September 27, 1999
                (1)10.10
                Equipment
                    Transfer Agreement by and between RoomSystems, Inc., RoomSystems
                    International Corporation, RSi BRE, Inc. and RSG Investments,
                    LLC dated
                    September 28, 1999
                (1)10.10A
                Exhibits
                    to Equipment Transfer Agreement by and between RoomSystems, Inc.,
                    RoomSystems International Corporation, RSi BRE, Inc. and RSG
                    Investments,
                    LLC dated September 28, 1999
                (2)10.11
                Amendment
                    to Equipment Transfer Agreement by and between RoomSystems, Inc.,
                    RoomSystems International Corporation, RSi BRE, Inc. and RSG
                    Investments,
                    LLC dated November 23, 1999
                (1)10.12
                Conversion
                    Agreement by and between Steven L. Sunyich and RoomSystems, Inc.
                    dated
                    December 30, 1999
                (1)10.13
                Loan
                    and Security Agreement by and between RoomSystem Technologies,
                    Inc. and
                    Ash Capital, LLC dated February 15, 2000
                (1)10.13A
                Exhibits
                    to Loan and Security Agreement by and between RoomSystem Technologies,
                    Inc. and Ash Capital, LLC dated February 15, 2000
                (2)10.14
                Letter
                    Agreement by and between eRoomSystem Technologies, Inc. and Hall
                    Communications, Inc. dated March 30, 2000
                (1)10.15
                Form
                    of Hotel Revenue-Sharing Lease Agreement
                (2)10.16
                Form
                    of Noncompetition and Nondisclosure Agreement (Sales)
                (1)10.17
                Form
                    of Consulting Agreement
                (1)10.18
                Form
                    of Sales Representation Agreement
                (1)10.19
                Form
                    of Executive Employment Agreement
                (1)10.20
                Form
                    of Offshore Loan Subscription Agreement dated as of April 13, 2000
                (1)10.21
                Form
                    of Secured Subordinated Promissory Note dated as of April 13, 2000
                (1)10.22
                Form
                    of Installation, Co-Maintenance and Software Licensing and Upgrade
                    Agreement
                (2)10.23
                +
                    Master Business Lease Financing Agreement by and among AMRESCO
                    Leasing
                    Corporation, eRoomSystem SPE, Inc., RoomSystems, Inc. and eRoomSystem
                    Technologies, Inc. dated May 11, 2000
                (4)10.24
                Indemnification
                    Agreement by and between eRoomSystem Technologies, Inc. and John
                    J. Prehn
                    dated May 31, 2000
                (2)10.25
                Amended
                    and Restated Executive Employment Agreement of Steven L. Sunyich
                    dated
                    June 6, 2000
                (2)10.26
                Second
                    Amended and Restated Executive Employment Agreement of Steven
                    L. Sunyich
                    dated July 12, 2000
                (3)10.27
                Amended
                    and Restated Executive Employment Agreement of Derek K. Ellis dated
                    July 12, 2000
                (3)
  -59-
 Exhibit
                    Number
                  Document
                    Name
                  Page10.28
                  Executive
                      Employment Agreement of Stephen M. Nelson dated July 12,
                      2000
                  (4)10.29
                  Amended
                      and Restated Executive Employment Agreement of Gregory L. Hrncir
                      dated
                      July 12, 2000
                  (3)10.30
                  Shareholders’
                      Agreement and Proxy by and among Ash Capital, LLC, RoomSystems,
                      Inc. and
                      certain stockholders of RoomSystems, Inc. dated August 17, 1999
                  (1)10.31
                  Employment
                      Agreement of David S. Harkness dated as of December 20,
                      2000
                  (6)10.32
                  Employment
                      Agreement of Stephen M. Nelson dated as of January 29,
                      2001
                  (7)10.33
                  Employment
                      Agreement of Derek K. Ellis dated as of January 29, 2001
                  (7)10.34
                  Employment
                      Agreement of Gregory L. Hrncir dated as of January 29,
                      2001
                  (7)10.35
                  +
                      Amended and Restated Master Business Lease Financing Agreement
                      by and
                      among AMRESCO Leasing Corporation, eRoomSystem SPE, Inc., RoomSystems,
                      Inc. and eRoomSystem Technologies, Inc. dated February 23,
                      2001
                  (7)10.36
                  Employment
                      Agreement of David S. Harkness dated as of December 31,
                      2001
                  (8)10.37
                  Consulting
                      Agreement by and between eRoomSystem Technologies, Inc. and
                      Ash Capital,
                      LLC dated as of December 31, 2001
                  (8)10.38
                  Stock
                      Purchase Agreement by and between eRoomSystem Technologies,
                      Inc. and AshCapital,
                      LLC dated November 8, 2002
                  (9)10.39
                  Secured
                      Convertible Promissory Note issued in favor of Ash Capital,
                      LLC dated
                      November8,
                      2002.
                  (9)10.40
                  Note
                      Purchase Agreement between eRoomSystem Technologies, Inc.,
                      Gestetner
                      Group, LLC and Other Lenders dated October 1, 2003
                  (10)10.41
                  Amendment
                      Agreement between eRoomSystem Technologies, Inc., eRoomSystem
                      Services,
                      Inc., eRoomSystem SPE, Inc., RSi BRE, Inc., AMRESCO Commercial
                      Finance,
                      Inc., AMRESCO Leasing Corporation and Gestetner Group, LLC
                      dated October
                      1, 2003
                  (10)10.42
                  Agency
                      Agreement between Gestetner Group, LLC and Other Lenders dated
                      October 1,
                      2003
                  (10)10.43
                  Warrant
                      to Purchase Shares of Common Stock issued in favor of AMRESCO
                      Commercial
                      Finance, Inc. dated October 1, 2003
                  (10)10.44
                  Warrant
                      to Purchase Shares of Common Stock issued in favor of Ash Capital,
                      LLC
                      dated October 1, 2003
                  (10)10.45
                  Intercreditor
                      and Collateral Agency Agreement between Gestetner Group, LLC,
                      Ash Capital,
                      LLC and eRoomSystem Technologies, Inc. dated October 1, 2003
                  (10)10.46
                  Investors
                      Rights Agreement between eRoomSystem Technologies, Inc., Ash
                      Capital, LLC,
                      and certain security holders dated October 1, 2003
                  (10)10.47
                  Termination
                      and Release Agreement between eRoomSystem Technologies, Inc.
                      and David S.
                      Harkness dated October 1, 2003
                  (10)10.48
                  Termination
                      and Release Agreement between eRoomSystem Technologies, Inc.
                      and Gregory
                      L. Hrncir dated October 1, 2003
                  (10)10.49
                  Consulting
                      Agreement between eRoomSystem Technologies, Inc. and Gregory
                      L. Hrncir
                      dated October 1, 2003
                  (10)10.50
                  Termination
                      and Release Agreement between eRoomSystem Technologies, Inc.
                      and Derek K.
                      Ellis dated October 1, 2003
                  (10)
  -60-
 **Exhibit
                      Number**
                    **Document
                      Name**
                    **Page**10.51
                    Consulting
                        Agreement between eRoomSystem Technologies, Inc. and DM Family
                        Limited
                        Partnership dated October 1, 2003
                    (10)10.52
                    Secured
                        Convertible Promissory Note issued in favor of Adele Schwarty
                        dated
                        October 1, 2003
                    (10)10.53
                    Secured
                        Convertible Promissory Note issued in favor of David Heller
                        dated October
                        1, 2003
                    (10)10.54
                    Secured
                        Convertible Promissory Note issued in favor of Evelyn Gestetner
                        dated
                        October 1, 2003
                    (10)10.55
                    Secured
                        Convertible Promissory Note issued in favor of Frieda Wolman
                        dated October
                        1, 2003
                    (10)10.56
                    Secured
                        Convertible Promissory Note issued in favor of Gestetner
                        Group, LLC dated
                        October 1, 2003
                    (10)10.57
                    Secured
                        Convertible Promissory Note issued in favor of Hannah Sarah
                        Frenkel dated
                        October 1, 2003
                    (10)10.58
                    Secured
                        Convertible Promissory Note issued in favor of Helmsbridge
                        Holdings
                        Limited dated October 1, 2003
                    (10)10.59
                    Secured
                        Convertible Promissory Note issued in favor of Leah Weinstein
                        dated
                        October 1, 2003
                    (10)10.60
                    Secured
                        Convertible Promissory Note issued in favor of Liba Pappenheim
                        dated
                        October 1, 2003
                    (10)10.61
                    Secured
                        Convertible Promissory Note issued in favor of Maurice B.
                        Brenig dated
                        October 1, 2003
                    (10)10.62
                    Secured
                        Convertible Promissory Note issued in favor of Rose Kaminer
                        dated October
                        1, 2003
                    (10)10.63
                    Warrant
                        to Purchase Shares of Common Stock issued in favor of Adele
                        Schwarty dated
                        October 1, 2003
                    (10)10.64
                    Warrant
                        to Purchase Shares of Common Stock issued in favor of David
                        Heller dated
                        October 1, 2003
                    (10)10.65
                    Warrant
                        to Purchase Shares of Common Stock issued in favor of Evelyn
                        Gestetner
                        dated October 1, 2003
                    (10)10.66
                    Warrant
                        to Purchase Shares of Common Stock issued in favor of Frieda
                        Wolman dated
                        October 1, 2003
                    (10)10.67
                    Warrant
                        to Purchase Shares of Common Stock issued in favor of Gestetner
                        Group, LLC
                        dated October 1, 2003
                    (10)10.68
                    Warrant
                        to Purchase Shares of Common Stock issued in favor of Hannah
                        Sarah Frenkel
                        dated October 1, 2003
                    (10)10.69
                    Warrant
                        to Purchase Shares of Common Stock issued in favor of Helmsbridge
                        Holdings
                        Limited dated October 1, 2003
                    (10)10.70
                    Warrant
                        to Purchase Shares of Common Stock issued in favor of Leah
                        Weinstein dated
                        October 1, 2003
                    (10)10.71
                    Warrant
                        to Purchase Shares of Common Stock issued in favor of Liba
                        Pappenheim
                        dated October 1, 2003
                    (10)
  -61-
 **Exhibit
                      Number**
                    **Document
                      Name**
                    **Page**10.72
                    Warrant
                        to Purchase Shares of Common Stock issued in favor of Maurice
                        B. Brenig
                        dated October 1, 2003
                    (10)10.73
                    Warrant
                        to Purchase Shares of Common Stock issued in favor of Rose
                        Kaminer dated
                        October 1, 2003
                    (10)16.01
                    Letter
                        regarding Change in Certifying Accountant
                    (1)21.01
                    List
                        of Subsidiaries
                    6331.1
                    Certifications
                        Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
                        (18 U.S.C.
                        Section 1350)
                    6432.1
                    Certifications
                        Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
                        (18 U.S.C.
                        Section 1350)
                    65(1)
                    Previously
                        filed as an exhibit to the registrant’s Registration Statement on Form
                        SB-2, as filed withthe
                        Commission on April 14, 2000.(2)
                    Previously
                        filed as an exhibit to the registrant’s Pre-Effective Amendment No. 1 to
                        its Registration Statement on Form SB-2, as filed with the
                        Commission on
                        June 9, 2000.(3)
                    Previously
                        filed as an exhibit to the registrant's Pre-Effective Amendment
                        No. 2 to
                        its Registration Statement on Form SB-2, as filed with the
                        Commission on
                        July 14, 2000.(4)
                    Previously
                        filed as an exhibit to the registrant's Pre-Effective Amendment
                        No. 3 to
                        its Registration Statement on Form SB-2, as filed with the
                        Commission on
                        July 19, 2000.(5)
                    Previously
                        filed as an exhibit to the registrant’s Registration Statement on Form
                        SB-2, as filed withthe
                        Commission on December 22, 2000.(6)
                    Previously
                        filed as an exhibit to the registrant’s Pre-Effective Amendment No. 1 to
                        its Registration Statement on Form SB-2, as filed with the
                        Commission on
                        February 5, 2000.(7)
                    Previously
                        filed as an exhibit to the registrant’s Annual Report on Form 10-KSB, as
                        filed with the Commission on April 2, 2001.(8)
                    Previously
                        filed as an exhibit to the registrant’s Annual Report on Form 10-KSB, as
                        filed with the Commission on April 1, 2002.(9)
                    Previously
                        filed as an exhibit to the registrant’s Quarterly Report on Form 10-QSB,
                        as filed with the Commission on November 14, 2002.(10)
                    Previously
                        filed as an exhibit to the registrant’s Annual Report on Form 10-KSB, as
                        filed with the Commission on March 30, 2004.+
                    Confidential
                        treatment has been granted with respect to certain portions
                        of this
                        agreement, including
                      the
                        exhibits thereto, of which certain portions have been omitted
                        and filed
                        separately with the
                        Commission.





-62-