UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-QSB

(Mark One)



QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

|For the quarterly period ended: | June 30, 2004
|------------------------------- | -------------

OR

TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

|For the transition period from: |  | to | 
|------------------------------- |  | -- | 



|Commission file number: | 000-31037
|----------------------- | ---------



eRoomSystem Technologies, Inc.

(Exact name of small business issuer as
specified 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 of principal executive offices)                                          
|                                                                                  
|(732) 730-0116                                                                    
|(Issuers telephone number)                                                       
|                                                                                  
|                                                                                  
|(Former name, former address and former fiscal year, if changed since last report)



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



Applicable Only to Issuers Involved in Bankruptcy Proceedings During the Preceding Five Years

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by court.  YES  NO



Applicable Only to Corporate Issuers

State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date:

|10,443,933 shares of common stock, $0.001 par value, as of August 10, 2004
|--------------------------------------------------------------------------



Transitional Small Business Disclosure Format (check one):YES  NO X



#





---



FORM 10-QSB



TABLE OF CONTENTS





PAGE

PART I  FINANCIAL INFORMATION

1

Item 1.  Financial Statements.

2

Condensed Consolidated Balance Sheets (Unaudited)

2

Condensed Consolidated Statements of Operations (Unaudited)

4

Condensed Consolidated Statements of Cash Flows (Unaudited)

5

Notes to Condensed Consolidated Financial Statements (Unaudited)

6

Item 2.  Managements Discussion and Analysis of Financial Condition and

Results of Operations

11

PART II  OTHER INFORMATION

20

Item 1.  Legal Proceedings.

20

Item 2.  Changes in Securities and Use of Proceeds.

20

Item 3.  Defaults Upon Senior Securities.

21

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

21

Item 5.  Other Information.

21

Item 6.  Exhibits and Reports on Form 8-K.

21



1



---

PART I  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)



ASSETS





|                                                                   | June 30,                                                                       | December 31,      
|------------------------------------------------------------------ | ------------------------------------------------------------------------------ | ------------------
|                                                                   |                                                                                | 2004              
|                                                                  
|CURRENT ASSETS                                                     |                                                                               
|                                                                   | Cash                                                                           | $          235,084
|                                                                   | Restricted cash                                                                | 200,000           
|                                                                   | Accounts receivable, net of allowance for doubtful accounts of $35,950 and     |                   
|                                                                   | $246,465 at June 30, 2004 and December 31, 2003, respectively                  | 205,849           
|                                                                   | Prepaid expenses                                                               | 14,910            
|                                                                   | Total Current Assets                                                           | 655,843           
|REFRESHMENT CENTERS IN SERVICE, net of accumulated depreciation of |                                                                               
|                                                                   | $1,520,047 and $1,262,714 at June 30, 2004 and December 31, 2003, respectively | 2,127,475         
|PROPERTY AND EQUIPMENT                                             |                                                                               
|                                                                   | Production equipment                                                           | 22,210            
|                                                                   | Computer equipment                                                             | 74,965            
|                                                                   | Vehicles and other                                                             | 44,153            
|                                                                   | 141,328                                                                        | 141,328           
|                                                                   | Less accumulated depreciation and amortization                                 | (125,914)         
|                                                                   | Net Property and Equipment                                                     | 15,414            
|DEPOSITS                                                           | 95,650                                                                         | 76,650            
|Total Assets                                                       | $       2,894,382                                                              | $     3,107,956   





See accompanying notes to condensed consolidated financial statements (unaudited).

2



---



eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)



LIABILITIES AND STOCKHOLDERS' EQUITY



|                                           | June 30,                                                                               | December 31,      
|------------------------------------------ | -------------------------------------------------------------------------------------- | ------------------
|                                           |                                                                                        | 2004              
|CURRENT LIABILITIES                        |                                                                                       
|                                           | Notes payable and current portion of long-term debt                                    | $          218,366
|                                           | Accounts payable                                                                       | 167,564           
|                                           | Accrued liabilities                                                                    | 89,177            
|                                           | Accrued interest                                                                       | 57,519            
|                                           | Customer deposits                                                                      | 11,758            
|                                           | Deferred maintenance revenue                                                           | 55,689            
|                                           | Total Current Liabilities                                                              | 600,073           
|LONG-TERM DEBT, net of current portion     | 1,227,205                                                                              | 1,527,492         
|Total Liabilities                          | 1,827,278                                                                              | 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; 10,443,933 shares        |                   
|                                           | and 10,383,933 shares outstanding at June 30, 2004 and December 31, 2003, respectively | 10,444            
|                                           | Additional paid-in capital                                                             | 32,068,379        
|                                           | Warrants and options outstanding                                                       | 1,112,668         
|                                           | Notes receivable from shareholders                                                     | (73,121)          
|                                           | Accumulated deficit                                                                    | (32,051,266)      
|                                           | Total Stockholder's Equity                                                             | 1,067,104         
|                                           |                                                                                       
|Total Liabilities and Stockholders' Equity | $       2,894,382                                                                      | $     3,107,956   





See accompanying notes to condensed consolidated financial statements (unaudited).

3



---





eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)



|                                            | For the Three Months
Ended June 30,                     |                      | For the Six Months
Ended June 30,
|------------------------------------------- | ------------------------------------------------------- | -------------------- | ---------------------------------
|                                            |                                                         |                      |                                  
|                                            |                                                        
|REVENUE                                     |                                                         |                      |                                  
|                                            | Revenue-sharing arrangements                            | $       268,160      | $         313,995                
|                                            | Maintenance fees                                        | 91,105               | 68,418                           
|                                            | Product sales                                           |                      | 7,390                            
|                                            | Total Revenue                                           |                      | 366,655                          
|COST OF REVENUE                             |                                                        
|                                            | Revenue-sharing arrangements                            | 129,126              | 178,761                          
|                                            | Maintenance                                             |                      | 20,076                           
|                                            | Product sales                                           |                      | 2,940                            
|                                            | Total Cost of Revenue                                   |                      | 152,142                          
|Gross Margin                                |                                                         | 214,513              | 173,722                          
|                                            |                                                         |                     
|EXPENSES AND OTHER INCOME                   |                                                        
|                                            | Selling, general and administrative expense             | 192,306              | 421,634                          
|                                            | Research and development expense                        | 10,500               | 3,226                            
|                                            | Interest expense                                        | 55,851               | 217,113                          
|                                            | Gain on collection of previously written off receivable | (200,000)            | -                                
|                                            | Interest and other income                               | (1,263)              | (30,784)                         
|                                            | Net Expenses                                            |                      | 57,394                           
|Income (Loss) from Operations               | 157,119                                                 | (437,467)            |                                  
|                                           
|Gain on forgiveness of liabilities and debt | 91,990                                                  | -                    |                                  
|                                           
|Net Income (Loss)                           | $       249,109                                         | $       (437,467)    |                                  
|                                            |                                                         |                      |                                  
|Basic Earnings (Loss) Per Common Share      | $             0.02                                      | $             (0.04) |                                  
|Diluted Earnings (Loss) Per Common Share    | $             0.01                                      | $             (0.04) |                                  



See accompanying notes to condensed consolidated financial statements (unaudited).

4



---





eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



|                                                                      | For the Six Months                                                                  
|--------------------------------------------------------------------- | ------------------------------------------------------------------------------------
|                                                                      |                                                                                     
|                                                                      |                                                                                     
|                                                                      |                                                                                     
|CASH FLOWS FROM OPERATING ACTIVITIES                                  |                                                                                     
|                                                                      | Net income (loss)                                                                   
|                                                                      | Adjustments to reconcile net income (loss) to net cash used in operating activities:
|                                                                      | Depreciation                                                                        
|                                                                      | Gain on forgiveness of debt and liabilities                                         
|                                                                      | Interest income from shareholder receivables                                        
|                                                                      | Loss on disposal of assets                                                          
|                                                                      | Amortization of deferred offering costs and accretion of debt discount              
|                                                                      | Non-cash compensation expense                                                       
|                                                                      | Changes in operating assets and liabilities:                                        
|                                                                      |                                                                                     
|                                                                      | Accounts receivable                                                                 
|                                                                      | Inventories                                                                         
|                                                                      | Prepaid expenses                                                                    
|                                                                      | Accounts payable                                                                    
|                                                                      | Accrued liabilities                                                                 
|                                                                      |                                                                                     
|Net Cash Provided By (Used In) Operating Activities                   | 181,539                                                                             
|CASH FLOWS FROM INVESTING ACTIVITIES                                  |                                                                                     
|                                                                      | Change in long-term deposits and restricted funds                                   
|Net Cash Provided by (Used in) Investing Activities                   | (19,000)                                                                            
|CASH FLOWS FROM FINANCING ACTIVITIES                                  |                                                                                     
|                                                                      | Proceeds from borrowings                                                            
|                                                                      | Principal payments on long-term debt                                                
|                                                                      | Principal payments on capital lease obligations                                     
|Net Cash Provided by (Used in) Financing Activities                   | (309,440)                                                                           
|                                                                      |                                                                                     
|Net Decrease in Cash                                                  | (146,901)                                                                           
|Cash at Beginning of Period                                           | 381,985                                                                             
|                                                                      |                                                                                     
|Cash at End of Period                                                 | $      235,084                                                                      
|                                                                      |                                                                                     
|Supplemental Cash Flows Information                                   |                                                                                     
|                                                                      | Cash paid for interest                                                              
|                                                                      |                                                                                     
|Supplemental Disclosure of Noncash Investing and Financing Activities |                                                                                     
|                                                                      | Stock options issued in settlement of accounts payable                              

---

eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



NOTE 1  BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Condensed Financial Statements -The accompanying unaudited condensed consolidated financial statements include the accounts of eRoomSystem Technologies, Inc. and its subsidiaries (the Company). These financial statements are condensed and, therefore, do not include all disclosures normally required by generally accepted accounting principles.  These statements should be read in conjunction with the Companys annual financial statements included in the Companys Annual Report on Form 10-KSB for the period ended December 31, 2003.  In particular, the Companys organization, nature of operations and significant accounting principles were presented in Note 1 to the consolidated financial statements in that report. In the opinion of management, all adjustments necessary for a fair presentation have been included in the accompanying unaudited condensed consolidated financial statements and consist of only normal recurring adjustments.  The results of operations presented in the accompanying unaudited condensed consolidated financial statements for the three and six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2004.

Principles of Consolidation -The accompanying unaudited condensed 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 in the six months ended June 30, 2004. The Company is in the process of liquidating or merging RSi BRE into eRoomSystem Technologies, Inc.

Deposits In January 2004, the Company deposited $20,000 with a bank as collateral in order to effect electronic fund transfers through the bank.

Stock-Based Compensation -At June 30, 2004, the Company has one stock-based employee compensation plan. 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 six months ended June 30, 2004 and 2003, the Company recognized $18,401 and zero, respectively, of compensation expense relating to stock options and warrants and recognized $10,200 and $19,000, respectively, of compensation expense relating to stock awards. The following table illustrates the effect on net income (loss) and basic and diluted earnings (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 compensation:

6



---

eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(CONTINUED)



|                                                              | For the Three Months |                     | For the Six Months
|------------------------------------------------------------- | -------------------- | ------------------- | ------------------
|                                                              | Ended June 30,       |                     | Ended June 30,    
|                                                              | 2004                 | 2003                |                   
|                                                             
|Net income (loss), as reported                                | $       249,109      | $      (437,467)    |                   
|Add: Stock-based employee and consultant compensation        
|expenses included in net income (loss)                        | 1,067                | -                   |                   
|                                                              |                     
|Deduct: Total stock-based employee and consultant             |                      |                    
|compensation expense determined under fair value based method |                      |                    
|for all awards                                                | (29,696)             | -                   |                   
|Pro forma net earnings (loss)                                 | $       220,480      | $      (437,467)    |                   
|Earnings (loss) per common share:                            
|Basic as reported                                             | $             0.02   | $            (0.04) |                   
|Basic pro forma                                               | $             0.02   | $            (0.04) |                   
|Diluted as reported                                           | $             0.01   | $            (0.04) |                   
|Diluted pro forma                                             | $             0.01   | $            (0.04) |                   



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 three and six months ended June 30, 2004 and 2003:

|                                                   | For the Three Months |                  | For the Six Months
|-------------------------------------------------- | -------------------- | ---------------- | ------------------
|                                                   | Ended June 30,       |                  | Ended June 30,    
|                                                   |                      |                  |                   
|Basic net income (loss)                            |                      | $     249,109    |                   
|Interest expense from convertible debt             |                      | 24,515           |                   
|Diluted net income (loss)                          |                      | $     273,624    |                   
|Basic weighted-average common shares outstanding   |                      | 10,443,933       |                   
|Effect of dilutive securities                      |                      |                 
|Stock options and warrants                         |                      | 4,725,761        |                   
|Convertible debt                                   |                      |                  | 7,316,667         
|Diluted weighted-average common shares outstanding |                      | 22,486,361       |                   
|Basic earnings (loss) per share                    |                      | $           0.02 |                   
|Diluted  earnings (loss) per share                 |                      | $           0.01 |                   
|                                                  



7





---

eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(CONTINUED)



For the six months ended June 30, 2004 and 2003, there were potential common stock equivalents from options, warrants and convertible debt of 4,190,804 and 4,075,401, respectively, that were not included in the computation of diluted earnings (loss) per share because their effect would have been anti-dilutive. For the three months ended June 30, 2004 and 2003, there were potential common stock equivalents from options, warrants and convertible debt of 3,968,410 and 4,075,401, respectively, that were not included in the computation of diluted earnings (loss) per share because their effect would have been anti-dilutive.

NOTE 2  BUSINESS CONDITION

Up until first quarter 2004, the Company had suffered recurring losses. During the year ended December 31, 2003 and the six months ended June 30, 2004, the Company realized a net loss of $1,721,835 and net income of $656,239, respectively. Of the $656,239 net income, $595,465 was related to the gain on forgiveness of liabilities and debt, and $200,000 was related to the gain on collection of a previously written off receivable. During the year ended December 31, 2003 and the six months ended June 30, 2004 the net cash provided by the Companys operations was $186,718 and $181,539, respectively. The Company had a cash balance of $235,084 as of June 30, 2004.  These matters raise substantial doubt about the Companys ability to continue as a going concern. Management is attempting to obtain debt and equity financing for use in its operations. Realization of profitable operations or proceeds from financing is not assured. Management is also attempting to find third parties interested in investing in the Company. Completion of such financing is not assured.  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.

NOTE 3  NET INVESTMENT IN SALES-TYPE LEASE

During June 2004, the Company entered into an agreement 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 revenue in the amount of $200,000 during the six months ended June 30, 2004. This was paid into an attorneys escrow account during the three months ended June 30, 2004 and has been recorded as restricted cash. The funds were released from escrow on July 17, 2004.

The new lease agreement terminates on December31, 2008 at which time the property 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 June 30, 2004:



Total minimum lease payments to be received

$

388,800

Less:  Allowance for uncollectibles

(326,983)

Net minimum lease payments receivable

61,817

Less:  Unearned income

(61,817)



Net investment in sales-type lease

$         -



Minimum lease payments for the six months ended December 31, 2004 and each of the four succeeding fiscal years through the end of the lease term are as follows:  $43,200 in 2004, $86,400 in 2005, $86,400 in 2006, $86,400 in 2007, and $86,400 in 2008.

8





---

eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(CONTINUED)



NOTE 4  NOTES 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 principal or accrued interest.  The Company has recorded a gain on forgiveness of debt of $87,218 in the six months ended June 30, 2004.

NOTE 5  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

In the six months ended June 30, 2004, the Company settled outstanding payables to vendors and contractors in the amount of $391,560 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 7).  Gain on forgiveness of debt was recognized in the amount of $345,529.

NOTE 6  COMMITMENTS AND CONTINGENCIES

Legal Matters 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.

NOTE 7  STOCKHOLDERS EQUITY

On March 29, 2004 the Company issued a total of 60,000 shares of common stock valued at $10,200 ($0.17 per share) to two members of its Board of Directors for services rendered during the six months ended June 30, 2004.

During the six months ended June 30, 2004, the Company granted options to purchase 60,000 shares of common stock to employees. These options, which vested immediately, have exercise prices ranging from $0.15 to $0.26 per share, and are exercisable through May 27, 2007. The Company recognized compensation expense of $200, which was the intrinsic value of the options on the date granted.

During the six months ended June 30, 2004, the Company granted options to purchase 65,000 shares of common stock to consultants. These options, which vested immediately, have an exercise price ranging from $0.10 to $0.26 per share and are exercisable through February 1, 2009. These options were valued at $18,202 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 152% to 173%, and expected average life ranging between 3 and 5 years.

During the six months ended June 30, 2004, the Company granted options to purchase 172,000 shares of common stock to vendors in settlement of $73,283 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.

9





---

eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(CONTINUED)



During the six months ended June 30, 2004, options to purchase 179,848 shares of common stock expired. The Company recognized the value of these options in the amount of $29,837 as additional paid in capital.

NOTE 8  GAIN ON FORGIVENESS OF LIABILITIES AND DEBT

The gain on forgiveness of debt for the six months ended June 30, 2004 consisted of the following:

RSG Investments (Note 1)

$    162,718

Note payable to supplier (Note 4)

87,218

Accounts payable and accrued liabilities (Note 5)

345,529

Total gain on forgiveness of debt

$    595,465





10





---





Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our financial statements and notes to our financial statements, included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors discussed elsewhere in this report.

Certain information included herein contains statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, such as statements relating to our anticipated revenues, gross margin and operating results, future performance and operations, plans for future expansion, capital spending, sources of liquidity and financing sources.  Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, such results may differ from those expressed in any forward-looking statements made herein.  These risks and uncertainties include, but are not limited to, those relating to our liquidity requirements, the continued growth of the lodging industry, the success of our product-development, marketing and sales activities, vigorous competition in the lodging industry, dependence on existing management, leverage and debt service (including sensitivity to fluctuations in interest rates), domestic or global economic conditions, the inherent uncertainty and costs of prolonged arbitration or litigation, and changes in federal or state tax laws or the administration of such laws.  A complete discussion of these risks and uncertainties are contained in our Annual Report on Form 10-KSB, as filed with the Securities and Exchange Commission on March 30, 2004.

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.  Following the establishment of our core business, we also intend to 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.

11





---

ACCOUNTING POLICIES

The preparation of financial statements in conformity with generally accepted accounting principles requires our management to make estimates and assumptions that affect reported amounts and disclosures, some of which may require revision in future periods. the most sensitive estimates affecting our financial statements include future volatility used in valuing equity instruments, allowance for bad debts, depreciable lives of refreshment centers in service and property and equipment, deferred maintenance revenue and accrued liabilities.  By their nature, these judgments are subject to an inherent degree of uncertainty. Our judgments are based on our historical experience, terms of existing contracts, our observance of industry trends, information provided by or gathered from our customers and information available from other outside sources, as appropriate. There can be no assurance that actual results will not differ from our estimates.  The following is a summary of what management believes are the critical accounting policies related to our operations.  The application of these policies, in some cases, requires our management to make subjective judgments regarding the effect of matters that are inherently uncertain.

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 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.

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, 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 2004. The reason for the foregoing was the lack of available capital, including the termination of the AMRESCO financing line in 2002.

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.

12





---

At some future point, we anticipate bundling 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 increase, 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.

Profit margins may increase as a result of greater placement of our products pursuant to our revenue share program as well as further reductions in manufacturing costs and staff.  We may also improve our future profit margins if we are successful in obtaining revenues through the sale of higher-priced, higher-margin, value added products such as our in-room energy management system and our information management services.

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 2004 to offset revenue sharing contracts that will expire over the next several fiscal quarters. 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 to $0.05 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.

13





---

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.

RESULTS OF OPERATIONS

COMPARISON OF THREE MONTHS ENDED JUNE 30, 2004 AND 2003

Revenues

Revenue Sharing Arrangements  Our revenue from revenue sharing arrangements was $268,160 for the three months ended June 30, 2004, compared to $313,995 for the three months ended June 30, 2003, representing a decrease of $45,835, or 14.6%.  The decrease in revenue from revenue sharing arrangements was due primarily to a reduction in the number of revenue sharing units in service during the three months ended June 30, 2004 as compared to the three months ended June 30, 2003.

Maintenance Fee Revenues  Our maintenance fee revenues were $91,105 for the three months ended June 30, 2004, compared to $68,418 for the three months ended June 30, 2003, representing an increase of $22,687, or 33.2%. The increase was due in to an increase in units under maintenance contract.

Product Sales   Revenues from product sales were $7,390 for the three months ended June 30, 2004, compared to $4,768 for the three months ended June 30, 2003, representing an increase of $2,622, or 55.0%.  The increase, while significant in percentage terms, is not otherwise material given the extremely limited sales volume.

Cost of Revenue

Cost of Revenue Sharing Revenue  Our cost of revenue sharing revenue was $129,126 for the three months ended June 30, 2003, compared to $178,761 during the three months ended June 30, 2003, representing a decrease of $49,635, or 27.8%. The decrease in cost of revenue sharing revenue is due to a decreased number of refreshment centers in service.  Meanwhile, the gross margin percentage on revenue sharing revenue was 51.8% for the three months ended June 30, 2004 and 43.1% for the three months ended June 30, 2003. The increase in gross margin percentage reflects better operational efficiencies through further decreases in fixed overhead expenses.

Cost of Maintenance Fee Revenue  Our cost of maintenance fee revenue was $20,076 for the three months ended June 30, 2004, compared to $34,698 for the three months ended June 30, 2003, representing a decrease of $14,622, or 42.1%.  The gross margin percentage on maintenance fee revenues was 78.0% for the three months ended June 30, 2004 and 49.3% for the three months ended June 30, 2003. The marked decrease in our cost of maintenance fee revenue and the increase in gross margin percentages for the three months ended June 30, 2004, as compared to the same period in 2003, was due to the Companys improved efficiencies in maintaining its products placed in the field and the decrease in fixed overhead relating to the field operations department.

14





---

Cost of Product Sales Revenue  Our cost of product sales revenue for the three months ended June 30, 2004 was $2,940 as compared to none for the three months ended June 30, 2003, an increase of $2,940, or 100.0%.  The gross margin percentage on revenue from product sales revenue was 60.2% for the three months ended June 30, 2004 as compared to 100%% for the three months ended June 30, 2003.  While the percentage change in cost of product sales revenue is material, given the extremely limited product sales in the two periods, the change from period to period is immaterial.

The changes and percent changes with respect to our revenues and our cost of revenue for the three months ended June 30, 2004 and 2003 are summarized as follows:



|                              | For the Three Months
Ended June 30, |  | Change    |  | Percent Change
|----------------------------- | ----------------------------------- |  | --------- |  | --------------
|                              | 2004                                |  | 2003      | 
|REVENUE                       |                                     |  |           |  |               
|Revenue-sharing arrangements  | $
268,160                           |  | $
313,995 |  | $
(45,835)    
|Maintenance fees              | 91,105                              |  | 68,418    |  | (22,687)      
|Product sales                 | 7,390                               |  | 4,768     |  | 2,622)        
|Total Revenue                 | $
366,655                           |  | $
387,181 |  | $
(20,526)    
|                              |                                     |  |           |  |               
|COST OF REVENUE               |                                     |  |           |  |               
|Revenue-sharing arrangements  | 129,126                             |  | 178,761   |  | (49,635)      
|Maintenance                   | 20,076                              |  | 34,698    |  | (14,622)      
|Product sales                 | 2,940                               |  | -         |  | 2,940         
|Total Cost of Revenue         | $
152,142                           |  | $
213,459 |  | $
(61,317)    
|                              |                                     |  |           |  |               
|GROSS MARGIN PERCENTAGE       |                                     |  |           |  |               
|Revenue-sharing arrangements  | 51.8%                               |  | 43.1%     |  |               
|Maintenance                   | 78.0%                               |  | 49.3%     |  |               
|Product sales                 | 60.2%                               |  | 100.0%    |  |               
|Total Gross Margin Percentage | 58.5%                               |  | 44.9%     |  |               



Although the preceding table summarizes the net changes and percent changes with respect to our revenues and our cost of revenue for the three months ended June 30, 2004 and 2003, the trends contained therein are limited and should not be viewed as a definitive indication of our future results.

Expenses and Other Income

Selling, General and Administrative  Selling, general and administrative expenses were $192,306 for the three months ended June 30, 2004, compared to $421,634 for the three months ended June 30, 2003, representing a decrease of $229,328, or 54.4%.  The decrease in our selling, general and administrative expenses from the three months ended June 30, 2004 to the three months ended June 30, 2003 reflects our ongoing efforts to further reduce fixed overhead expenses.

Researchand Development Expenses  Research and development expenses were $10,500 for the three months ended June 30, 2004, compared to $3,226 for the three months ended June 30, 2003, representing an increase of $7,274, or 225.5%.  Research and development expenses represented 2.9% of our total revenue for the three months ended June 30, 2004 and 0.8% of our total revenue for the three months ended June 30, 2003.  The increase in research and development expenses was due to undertaking new research and development projects for the three months ended June 30, 2004.

Interest Expense for the three months ended June 30, 2004 was $55,851 as compared to $217,113 for the same period in 2003, a decrease of $161,262 or 74.3%.  In the three months ended June 30, 2004, the Company realized a gain on collection of a previously written off receivable in the amount of $200,000. Income from operations was $157,119 for the second quarter of 2004 as compared to a loss from operations of $437,467 for the same period in 2003. The Company also realized a gain on forgiveness of liabilities and debt of $91,990 in the three months ended June 30, 2004.



15





---

Net Income (Loss) Attributable to Common Stockholders

We realized net income of $249,109 during the three months ended June 30, 2004 as compared to a net loss of $437,467 during the three months ended June 30, 2003.  The $686,576 increase was due primarily to materially better gross margins, continued reductions in selling, general and administrative expense, material gains on the forgiveness of debt and liabilities and on the collection of a previously written of receivable. We may incur losses in the future.

COMPARISON OF SIX MONTHS ENDED JUNE 30, 2004 AND 2003

Revenues

Revenue Sharing Arrangements  Our revenue from revenue sharing arrangements was $539,177 for the six months ended June 30, 2004, compared to $605,736 for the six months ended June 30, 2003, representing a decrease of $66,559, or 11.0%.  The decrease in revenue from revenue sharing arrangements was due primarily to a reduction in the number of revenue sharing units in service during the six months ended June 30, 2004 as compared to the six months ended June 30, 2003.

Maintenance Fee Revenues  Our maintenance fee revenues were $178,089 for the six months ended June 30, 2004, compared to $155,815 for the six months ended June 30, 2003, representing an increase of $22,274, or 14.3%. The increase was due in to an increase in units under maintenance contract.

Product Sales  Revenues from product sales were $7,698 for the six months ended June 30, 2004, compared to $11,934 for the six months ended June 30, 2003, representing a decrease of $4,236, or 35.5%.  The decrease, while significant in percentage terms, is not otherwise material given the extremely limited sales volume.

Cost of Revenue

Cost of Revenue Sharing Revenue  Our cost of revenue sharing revenue was $257,792 for the six months ended June 30, 2003, as compared to $358,242 for the six months ended June 30, 2003, representing a decrease of $100,450, or 28.0%. The gross margin percentage on revenue sharing revenue was 52.2% for the six months ended June 30, 2004 and 40.9% for the six months ended June 30, 2003.

Cost of Maintenance Fee Revenue  Our cost of maintenance fee revenue was $36,825 for the six months ended June 30, 2004, compared to $86,314 for the six months ended June 30, 2003, representing a decrease of $49,489, or 57.3%.  The gross margin percentage on maintenance fee revenues was 79.3% for the six months ended June 30, 2004 and 44.6% for the six months ended June 30, 2003. The marked decrease in our cost of maintenance fee revenue and the increase in gross margin percentages for the six months ended June 30, 2004, as compared to the six months ended June 30, 2003, was due to much improved operational efficiencies and a material reduction in fixed overhead relating to our field operations department.

16





---

Cost of Product Sales Revenue  Our cost of product sales revenue for the six months ended June 30, 2004 was $2,940 as compared to $39,809 for the six months ended June 30, 2003, a decrease of $36,869, or 92.6%.  The gross margin percentage on revenue from product sales revenue was 61.8% for the six months ended June 30, 2004 as compared to (233.6)% for the six months ended June 30, 2003.  The significant decrease in our cost of product sales revenue, as well as the significant increase in our gross margin percentage was primarily due to the lack of new product placements and atypical expenses associated with product sales in the six months ended June 30, 2003.

The changes and percent changes with respect to our revenues and our cost of revenue for the six months ended June 30, 2004 and 2003 are summarized as follows:



|                              | For the Six Months
Ended June 30, |  | Change    |  | Percent Change
|----------------------------- | --------------------------------- |  | --------- |  | --------------
|                              | 2004                              |  | 2003      | 
|REVENUE                       |                                   |  |           |  |               
|Revenue-sharing arrangements  | $
539,177                         |  | $
605,736 |  | $
(66,559)    
|Maintenance fees              | 178,089                           |  | 155,815   |  | 22,274        
|Product sales                 | 7,698                             |  | 11,934    |  | (4,236)       
|Total Revenue                 | $
724,964                         |  | $
773,485 |  | $
(48,521)    
|                              |                                   |  |           |  |               
|COST OF REVENUE               |                                   |  |           |  |               
|Revenue-sharing arrangements  | 257,792                           |  | 358,242   |  | (100,450)     
|Maintenance                   | 36,825                            |  | 86,314    |  | (49,489)      
|Product sales                 | 2,940                             |  | 39,809    |  | (36,869)      
|Total Cost of Revenue         | $
297,557                         |  | $
484,365 |  | $
(186,808)   
|                              |                                   |  |           |  |               
|GROSS MARGIN PERCENTAGE       |                                   |  |           |  |               
|Revenue-sharing arrangements  | 52.2%                             |  | 40.9%     |  |               
|Maintenance                   | 79.3%                             |  | 44.6%     |  |               
|Product sales                 | 61.8%                             |  | (233.6)%  |  |               
|Total Gross Margin Percentage | 59.0%                             |  | 37.4%     |  |               



Although the preceding table summarizes the net changes and percent changes with respect to our revenues and our cost of revenue for the six months ended June 30, 2004 and 2003, the trends contained therein are limited and should not be viewed as a definitive indication of our future results.

Expenses and Other Income

Selling, General and Administrative  Selling, general and administrative expenses were $449,059 for the six months ended June 30, 2004, compared to $851,830 for the six months ended June 30, 2003, representing a decrease of $402,771, or 47.3%. The decrease in our selling, general and administrative expenses from the six months ended June 30, 2004 to the six months ended June 30, 2003 reflects our continued efforts to further reduce fixed overhead expenses.

Researchand Development Expenses  Research and development expenses were $10,500 for the six months ended June 30, 2004, compared to $20,724 for the six months ended June 30, 2003, representing a decrease of $10,224, or 49.3%.  Research and development expenses represented 1.4% of our total revenue for the six months ended June 30, 2004 and 2.7% of our total revenue for the six months ended June 30, 2003.  The decrease in research and development expenses is due to not undertaking any research and development projects for the three months ended March 31, 2004, but research and development projects have been initiated in the three months ended June 30, 2004.

17





---

Interest Expense for the six months ended June 30, 2004 was $110,045 as compared to $405,811 for the same period in 2003, a decrease of $295,766 or 72.9%.  In the six months ended June 30, 2004, the Company realized a gain on collection of a previously written off receivable in the amount of $200,000. Income from operations was $60,774 for the first half of 2004 as compared to a loss from operations of $928,456 for the same period in 2003. The Company also realized a gain on forgiveness of liabilities and debt of $595,465 for the six months ended June 30, 2004.

Net Income (Loss) Attributable to Common Stockholders

We realized net income of $656,239 during the six months ended June 30, 2004 as compared to a net loss of $928,456 during the six months ended June 30, 2003.  The $1,584,695 increase was due to each of the factors noted in Other Income (Expense), Net, however, we may incur losses in the future.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2004, our principal sources of liquidity consisted of $235,084 of cash and working capital of $55,770, 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 $1,067,104 at June 30, 2004, compared to stockholders equity of $352,197 at December 31, 2003, an increase of $714,907.  The decrease in cash has been offset by a material increase in working capital and stockholders equity.

Our accumulated deficit decreased from $32,707,505 at December 31, 2003 to $32,051,266 at June 30, 2004.  The decrease in accumulated deficit resulted directly from the net income realized for the six months ended June 30, 2004. Our accumulated deficit may increase in the future.

Our operations provided net cash of $181,539 during the six months ended June 30, 2004, as compared to using $88,323 of net cash during the six months ended June 30, 2003.  The $269,862 decrease in the use of net cash in operating activities primarily resulted from the increase in net income of $1,584,695, offset, in part, by the $595,465 gain on forgiveness of debt and liabilities and the $200,000 gain on the collection of a previously written of receivable.

Investing activities for the six months ended June 30, 2004 used net cash of $19,000, as compared to none during the six months ended June 30, 2003.

Financing activities used $309,440 during the six months ended June 30, 2004 as compared to providing net cash of $60,528 during the six months ended June 30, 2003.  The increase of $369,968 of net cash used in financing activities resulted from a decrease of $233,236 from proceeds of borrowings and an increase of $139,337 in principal payments on long-term debt. The primary source of cash during the six months ended June 30, 2004 was the revenue sharing revenue generated by the Companys equipment installed pursuant to revenue sharing contracts.

The placement of products under a revenue sharing or fixed-payment arrangement is capital intensive.  We estimate that we must have approximately 6-7,000 units pursuant to our revenue sharing or fixed-payment programs, along with the outright sale and placement of our products in order to provide adequate cash to sustain our operations.  As of June 30, 2004, we had 5,339 units placed pursuant to our revenue-sharing program.  We will require additional cash to finance our planned expansion and capital expenditures.

18





---

On September 18, 2002, we were notified by AMRESCO Leasing Corporation of its intention to cease funding loans to us.  We believe a new financing relationship is an absolute requirement to compete in our sector and to offer hotel clients a revenue sharing alternative. There can be no assurance that we will be successful in procuring a new financing line, and if successful that the terms of such new financing will be favorable to us.  If a new financing relationship is not procured, our financial condition and results of operation will likely be adversely affected.

In addition to procuring a new financing line, there is a need for additional working capital to fund our business operations. To this end, On October 1, 2003, we received a total of $250,000 from Gestetner Group, LLC and other third-party lenders (the Noteholders) in consideration for which the Company issued secured convertible promissory notes (Notes), in the original principal amount of $250,000, collectively.  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 Noteholders, 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.  In addition, the Noteholders 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.

The interim financing proceeds have been placed in a third party trust account to fund the Companys ongoing operational expenses, but such account is not under the Companys control and therefore is not subject to execution by the Companys creditors.

While we have made significant progress in further reducing our fixed overhead expenses, we will require additional capital to remain viable and to achieve our long-term business objectives. There can be no assurance that such financing will be made available, or if it is made available, on acceptable terms. If such future equity financing is procured, the shareholdings of the current stockholders of the Company will be diluted.

CONTRACTUAL CASH OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following table presents our contractual cash obligations and commercial commitments as of June 30, 2004.  We have no other significant contractual obligations or commercial commitments either on or off balance sheet as of this date.

|Contractual Cash
Obligations |            | Payments Due by Period
|---------------------------- | ---------- | ----------------------
|Total                        |            | < 1 Year              
|Long-term Debt               | $2,054,568 |                       
|Capital Lease Obligations    | 1,341      |                       
|Total                        |            | $2,055,909            



RECENT DOWNTURNS IN THE AIRLINE, TRAVEL AND LODGING INDUSTRIES

Due to the weakening economy and the events of September 11, 2001, the travel and lodging industries have experienced unprecedented downturns.  More specifically, the lodging industry has experienced lower hotel occupancy rates due to reduced business and leisure travel.

19





---

Since the success of our business is directly linked to the performance of the travel and lodging industries, the substantial layoffs in these industries, the postponement of future hotel renovations and projects, the substantial drop-off in guest occupancy and the reduction in business and leisure travel, including convention traffic, have hurt our ability to finalize contracts with hotel properties with which we have been meeting and negotiating.  While the hospitality market has improved over the last year, in terms of occupancy rates, REVPAR and ADR numbers, the market remains materially weaker overall than prior to September 11, 2001.  In this regard, there is no assurance that we will be able to close contracts with our current potential customers or that we will be successful in starting discussions with other hotel properties.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

All of our products are now manufactured and assembled in China.  Our contract manufacturer, International Display Works Ltd., or IDW, purchases all components of our refreshment center and eRoomTray products in China.  Our safe manufacturer, Hospitality Safe Corporation, or HSC, manufactures and assembles our eRoomSafes in China as well.  We pay IDW and HSC in U.S. dollars.

Our products are primarily marketed in the United States, but we eventually intend to further expand our marketing to the international lodging market and to other industries domestically and internationally.  As a result, our financial results could be affected by weak economic conditions in foreign markets.  Because all of our revenues will be denominated in U.S. Dollars, a strengthening of the dollar could make our products less competitive in foreign markets.

As we 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.

PART II  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

In April 2004, we settled the outstanding judgment in the amount of $47,442 in favor of PamJoy Realty, Inc. for the sum of $10,000. The matter has been formally dismissed with prejudice.

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. The judgment remains outstanding. We are attempting to negotiate a mutually amicable resolution of this judgment.

The following represents threatened litigation against the Company with respect to outstanding invoices. In each case, no formal litigation has ensued:

C.H. Robinson, Chicago South, or CH Robinson, is currently owed $11,500, plus interest, for services rendered.  We have spoken with C.H. Robinson and to date have successfully avoided being sued.  There can be no assurance that CH Robinson will not initiate proceedings against us in the future.

Business Wire, or BW, is currently owed $3,354, plus interest, for press release, EDGAR and other services rendered on our behalf. While we have spoken with representatives of BW, there can be no assurance that BW will not initiate proceedings against us in the future.

20





---

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

Not applicable.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

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

Not applicable.

ITEM 5.  OTHER INFORMATION.

Not applicable.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

(a)

Exhibits.

31

Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32

Certification of President and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

(b)

Reports on Form 8-K.

None.

21





---

SIGNATURE

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

|      |                 | eROOMSYSTEM TECHNOLOGIES, INC.
|----- | --------------- | ------------------------------
|      |                 | (Registrant)                  
|      |                 |                               
|Date: | August 16, 2004 | By:                           
|      |                 |                               
|      |                 | Its:                          



24