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**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM10-QSB**

**(Mark One)**
| ý | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------|-----------------------------------------------------------------------------------------------|

 

**For thequarterly period ended: June 30, 2001**

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

** **

**For the transition period from:                                   to**

**Commissionfile 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.) |
|                                                                                |                                  |
| **390 North 3050 East, St. George, Utah 84790**                                     |
| ****                                                                                |
| (Address of principal  executive offices)                                           |
|                                                                                |
| **(800****)  316-3070**                                                             |
| ****                                                                                |
| (Issuer’s telephone  number)                                                   |
|                                                                                |
| **3770 Howard Hughes Parkway, Suite 175, Las Vegas, Nevada  89109**                 |
| ****                                                                                |
| (Former name, former  address and former fiscal year, if changed since last report) |

Checkwhether the issuer (1) filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the past 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.    YES ý NO o

**Applicable Only to IssuersInvolved in Bankruptcy Proceedings During the Preceding Five Years**

Checkwhether the registrant filed all documents and reports required to be filed bySection 12, 13 or 15(d) of the Exchange Act after the distribution ofsecurities under a plan confirmed by court. YES oNOo

**Applicable Only to CorporateIssuers**

Statethe number of shares outstanding of each of the issuer’s classes of commonequity, as of the latest practicable date:

| 7,066,019 shares of  common stock, $0.001 par value, as of August 12, 2001 |
|----------------------------------------------------------------------------|
|                                                                            |

**Transitional Small Business Disclosure Format (check one):**  YES o NO ý

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**FORM 10-QSB**

**TABLE OF CONTENTS**

| **PART I – FINANCIAL INFORMATION** |
|-----------------------------------------|
|                                    |
|                                    | ITEM 1. | FINANCIAL STATEMENTS |
|                                    |   |   |
|                                    |   | Condensed Consolidated Balance Sheets  (Unaudited) |
|                                    |   |   |
|                                    |   | Condensed Consolidated  Statements of Operations (Unaudited) |
|                                    |   |   |
|                                    |   | Condensed Consolidated  Statements of Cash Flows (Unaudited) |
|                                    |   |   |
|                                    |   | Notes to Condensed Consolidated Financial  Statements (Unaudited) |
|                                    |   |   |
|                                    | ITEM  2. | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|                                    |   |   |
| **PART II – OTHER INFORMATION**    |
|                                    |
|                                    | ITEM 1. | LEGAL PROCEEDINGS |
|                                    |   |   |
|                                    | ITEM 2. | CHANGES IN  SECURITIES AND USE OF PROCEEDS |
|                                    |   |   |
|                                    | ITEM 3. | DEFAULTS UPON SENIOR  SECURITIES |
|                                    |   |   |
|                                    | ITEM  4. | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS |
|                                    |   |   |
|                                    | ITEM 5. | OTHER INFORMATION |
|                                    |   |   |
|                                    | ITEM 6. | EXHIBITS AND REPORTS  ON FORM 8-K |
|                                         |  |  |  |

**PART I –****FINANCIAL INFORMATION****ITEM 1.  FINANCIALSTATEMENTS.**

**eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARIES****CONDENSEDCONSOLIDATED BALANCE SHEETS (UNAUDITED)********ASSETS**

|                                                                                                        | **December 31,**                                                                                                                                                       |            | **June 30,**    |        |
|-------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|-----------------|-------------|
|                                                                                                        | **2000**                                                                                                                                                               |            | **2001**        |        |
|                                                                                                        | ****                                                                                                                                                                   |            | ****            |        |
| **CURRENT ASSETS**                                                                                          |                                                                                                                                                                   |            |            |        |
|                                                                                                        | Cash                                                                                                                                                                   | $               |  2,811,023 |        | $ | 689,098 |   |
|                                                                                                        | Accounts receivable, net of allowance  for doubtful accounts of $24,000 and   $10,000, respectively                                                               | 773,715         |            | 265,148     |   |
|                                                                                                        | Inventories                                                                                                                                                            | 946,318         |            | 1,228,589   |   |
|                                                                                                        | Prepaid expenses and other                                                                                                                                             | 45,056          |            | 106,918     |   |
|                                                                                                        |                                                                                                                                                                   |                 |            |             |   |
|                                                                                                        | **Total Current Assets**                                                                                                                                               | 4,576,112       |            | 2,289,753   |   |
|                                                                                                        |                                                                                                                                                                   |                 |            |             |   |
| **REFRESHMENT CENTERS IN SERVICE**, net of accumulated depreciation of  $120,343 and $249,053, respectively | 1,762,245                                                                                                                                                              |            | 2,484,452       |        |
|                                                                                                        |                                                                                                                                                                        |            |                 |        |
| **PROPERTY AND EQUIPMENT**                                                                                  |                                                                                                                                                                   |            |            |        |
|                                                                                                        | Production equipment                                                                                                                                                   | 225,110         |            | 251,444     |   |
|                                                                                                        | Computer equipment                                                                                                                                                     | 216,482         |            | 237,966     |   |
|                                                                                                        | Vehicles and other                                                                                                                                                     | 67,316          |            | 78,586      |   |
|                                                                                                        |                                                                                                                                                                   |                 |            |             |   |
|                                                                                                        | 508,908                                                                                                                                                                |            | 567,996         |        |
|                                                                                                        | Less accumulated depreciation and  amortization                                                                                                                        | (323,044        | )               | (368,646    | ) |
|                                                                                                        |                                                                                                                                                                   |                 |            |             |   |
|                                                                                                        | **Net Property and  Equipment**                                                                                                                                        | 185,864         |            | 199,350     |   |
|                                                                                                        |                                                                                                                                                                        |            |                 |        |
| **INVESTMENT IN WHOLLY OWNED, UNCONSOLIDATED SUBSIDIARY**                                                   | 936,182                                                                                                                                                                |            | 742,066         |        |
|                                                                                                        |                                                                                                                                                                        |            |                 |        |
| **OTHER ASSETS**                                                                                            |                                                                                                                                                                   |            |            |        |
|                                                                                                        | Patents and license rights, net of  accumulated amortization of $290,208 and $323,958, respectively                                                                    | 182,282         |            | 148,532     |   |
|                                                                                                        | Deposits and other                                                                                                                                                     | 172,464         |            | 245,801     |   |
|                                                                                                        |                                                                                                                                                                        |            |                 |        |
|                                                                                                        | **Total Other Assets**                                                                                                                                                 | 354,746         |            | 394,333     |   |
|                                                                                                        |                                                                                                                                                                        |            |                 |        |
| **Total Assets**                                                                                            | $                                                                                                                                                                      |  7,815,149 |            | $           |  6,109,954 |   |
|                                                                                                        |                                                                                                                                                                        |            |                 |        |
| **CURRENT LIABILITIES**                                                                                     |                                                                                                                                                                   |            |            |        |
|                                                                                                        | Notes payable and current portion of  long-term debt                                                                                                                   | $               | 56,710          |        | $ | 31,237 |   |
|                                                                                                        | Current portion of capital lease  obligations                                                                                                                          | 28,091          |            | 13,822      |   |
|                                                                                                        | Accounts payable                                                                                                                                                       | 1,071,333       |            | 857,695     |   |
|                                                                                                        | Accrued liabilities                                                                                                                                                    | 438,085         |            | 457,506     |   |
|                                                                                                        | Accrued interest                                                                                                                                                       | 12,906          |            | —      |   |
|                                                                                                        | Accrued restructuring costs                                                                                                                                            | 418,606         |            | 212,832     |   |
|                                                                                                        | Customer deposits                                                                                                                                                      | 89,258          |            | 92,260      |   |
|                                                                                                        | Deferred maintenance revenue                                                                                                                                           | 72,764          |            | 78,387      |   |
|                                                                                                        |                                                                                                                                                                   |                 |            |             |   |
|                                                                                                        | **Total Current  Liabilities**                                                                                                                                         | 2,187,753       |            | 1,743,739   |   |
|                                                                                                        |                                                                                                                                                                   |                 |            |             |   |
| **LONG-TERM LIABILITIES**                                                                                   |                                                                                                                                                                   |            |            |        |
|                                                                                                        | Long-term debt, net of current portion                                                                                                                                 | 2,269           |            | 258,286     |   |
|                                                                                                        | Capital lease obligations, net of  current portion                                                                                                                     | 25,656          |            | 11,060      |   |
|                                                                                                        |                                                                                                                                                                        |            |                 |        |
|                                                                                                        | **Total Long-Term  Liabilities**                                                                                                                                       | 27,925          |            | 269,346     |   |
|                                                                                                        |                                                                                                                                                                   |                 |            |             |   |
| **COMMITMENTS AND CONTINGENCIES – NOTE 5**                                                             |                                                                                                                                                                   |            |            |        |
|                                                                                                        |                                                                                                                                                                   |            |            |        |
| **STOCKHOLDERS' EQUITY**                                                                                    |                                                                                                                                                                   |            |            |        |
|                                                                                                        | Common stock, $0.001 par value;  50,000,000 shares authorized; 7,051,019 shares and 7,066,019 shares  outstanding at December 31, 2000 and June 30, 2001, respectively | 7,051           |            | 7,066       |   |
|                                                                                                        | Additional paid-in capital                                                                                                                                             | 28,546,432      |            | 28,562,317  |   |
|                                                                                                        | Warrants and options outstanding                                                                                                                                       | 2,036,324       |            | 2,088,926   |   |
|                                                                                                        | Accumulated deficit                                                                                                                                                    | (24,990,336     | )               | (26,561,440 | ) |
|                                                                                                        |                                                                                                                                                                   |                 |            |             |   |
|                                                                                                        | **Total Stockholders’  Equity**                                                                                                                                   | 5,599,471       |            | 4,096,869   |   |
|                                                                                                        |                                                                                                                                                                   |                 |            |             |   |
| **Total Liabilities and Stockholders' Equity**                                                              | $                                                                                                                                                                      | 7,815,149       |            | $           | 6,109,954 |   |
|                                                                                                        |                                                                                                                                                                        |            |                 |        |
|                                                                                                             |                                                                                                                                                                        |                 |                 |             |  |  |  |  |

See accompanying notes to unaudited condensedconsolidated financial statements 
**eROOMSYSTEMTECHNOLOGIES, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**
 **Three  Months Ended June 30,** **Six  Months Ended June 30,**  **** ****  **2000** **2001** **2000** **2001**  **** **** **** **** **Revenue**         Product  sales$1,666,287 $864,651 $1,666,287 $891,916  Revenues  sharing arrangements53,473 144,028 62,635 278,095  Maintenance  fees48,920 88,003 88,857 144,406        **Total Revenue**1,768,680 1,096,682 1,817,779 1,314,417       **Cost  of Revenue**         Product  sales1,266,056 540,501 1,266,056 556,151  Revenue  sharing arrangements1,264 69,801 8,337 128,710  Maintenance881 57,407 7,901 197,736        **Total Cost of Revenue**1,268,201 667,709 1,282,294 882,597       **Gross  Margin**500,479 428,973 535,485 431,820      **Operating  Expenses** ** ** ** ** ** ** ** ** Selling,  general and administrative (exclusive of non-cash compensation expense)645,068 799,620 1,165,412 1,717,491  Research  and development54,600 106,025 104,388 219,045  Non-cash  compensation expense2,485 52,602 494,310 52,602       **Total Operating Expenses**702,153 958,247 1,764,110 1,989,138       **Loss  From Operations**(201,674)(529,274)(1,228,625)(1,557,318)     **Other  Income (Expense)**         Interest  expense(573,784)(5,726)(877,434)(12,803) Equity  in income (loss) of unconsolidated,         wholly  owned subsidiary73,338 (22,440)161,634 (84,838) Interest  and other income14,697 20,439 17,033 83,855        **Other Expense, Net**(485,749)(7,727)(698,767)(13,786)     **Net  Loss**(687,423)(537,001)(1,927,392)(1,571,104)**Dividends  Related to Convertible**  **Preferred Stock**(1,705,193)— (2,145,950)—      **Loss  Attributable to Common Stockholders**$(2,392,616)$(537,001)$(4,073,342)$(1,571,104)     **Basic  and Diluted Loss Per Common Share**$(1.06)$(0.08)$(1.83)$(0.22)     **Basic  and Diluted Weighted Average**  **Common   Shares Outstanding**2,258,048 7,066,019 2,227,669 7,060,135      
Seeaccompanying notes to unaudited condensed consolidated financial statements

**eROOMSYSTEMTECHNOLOGIES, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)**
 **Six  Months Ended June 30,**  ****  **2000** **2001**  **** **** **Cash  Flows From Operating Activities**     Net  loss$(1,927,392)$(1,571,104) Adjustments  to reconcile net loss to net cash used in operating activities:     Depreciation  and amortization75,475 208,062  Common  shares issued for lawsuit settlement— 15,900  Amortization  of deferred financing costs and accretion of debt discount196,832 10,545  Non-cash  compensation expense494,310 52,602  Interest  expense paid by issuance of preferred and common stock, warrants, and stock  options194,502    —     Loss  on sale of equipment7,638 —  Undistributed  equity in income (loss) of unconsolidated subsidiary(112,937)194,116  Changes  in operating assets and liabilities, net of transfers to unconsolidated  subsidiary:     Accounts  receivable(72,139)508,567  Inventories(128,799)(282,271) Prepaid  expenses, deposits and other140,074 (121,921) Accounts  payable64,340 (213,638) Accrued  liabilities321,298 6,515  Accrued  restructuring costs— (205,774) Other  liabilities168,369 8,625      **Net Cash Used In Operating Activities**(578,429)(1,389,776)**Cash  Flows From Investing Activities**     Additions  to refreshment centers in service— (850,917) Purchase  of property and equipment(7,365)(42,090)     **Net Cash Used In Investing Activities**(7,365)(893,007)**Cash  Flows From Financing Activities**     Proceeds  from borrowings2,164,169 268,065  Principal  payments on notes payable(478,060)(61,344) Principal  payments on capital lease obligations(11,170)(45,863) Other  offering and financing costs paid(938,478)—  Proceeds  from issuance of preferred stock and warrants685,831 —      **Net Cash Provided By Financing Activities**1,422,292 160,858     **Net  Increase (Decrease) In Cash**836,498 (2,121,925)**Cash  At Beginning of Period**113,252 2,811,023    **Cash  At End of Period**$949,750 $689,098    **Supplemental  Cash Flow Information**     Cash  paid for interest$7,062 $25,709     **Non-Cash Investing And Financing Activities**     Property  and equipment acquired by capital lease$— $16,998  Retirement  of common stock450,000 —  Issuance  of warrants for advertising agreement135,512 —  Accrued  interest, accounts payable and payable to stockholder converted to notes  payable56,063 —  Beneficial  conversion feature on bridge loan448,398 —  Beneficial  conversion feature on Series B Preferred Stock1,877,128 —  Accrual  of preferred stock dividends81,927 —  Value  of shares issued as a dividend on Series B Preferred Stock186,895 — 
Seeaccompanying notes to unaudited condensed consolidated financial statements

 **eROOMSYSTEMTECHNOLOGIES, INC. AND SUBSIDIARIESNOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**
**NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS**

***CondensedFinancial Statements.***  The accompanying unauditedcondensed consolidated financial statements include the accounts of eRoomSystemTechnologies, Inc. and its subsidiaries, or the Company.  These financial statements are condensedand, therefore, do not include all disclosures normally required by generallyaccepted accounting principles.  Thesestatements should be read in conjunction with the Company’s annual financialstatements included in the Company’s December 31, 2000 Annual Report on Form10-KSB.  In particular, the Company’ssignificant accounting principles were presented as Note 2 to the consolidatedfinancial statements in that report. In the opinion of management, alladjustments necessary for a fair presentation have been included in theaccompanying condensed consolidated financial statements and consist of onlynormal recurring adjustments.  Theresults of operations presented in the accompanying condensed consolidatedfinancial statements for the three and six months ended June 30, 2001 are notnecessarily indicative of the results that may be expected for the full yearending December 31, 2001.

***Recent Accounting Pronouncements.*** On July 20, 2001, the Financial AccountingStandards Board issued Statements of Financial Accounting Standards("SFAS") No. 141, "Business Combinations" and SFAS No. 142,"Goodwill and Other Intangible Assets". These pronouncementssignificantly change the accounting for business combinations, goodwill, andintangible assets.

Because the Company does not have any goodwillor intangible assets with an indefinite life, this new accounting policy willnot result in a cumulative change to the financial statements.

**NOTE 2 – BUSINESS CONDITION**

Since inception, the Company has sufferedrecurring net losses. During the year ended December 31, 2000 and the three andsix months ended June 30, 2001, the Company had net losses of  $5,702,365, $537,001 and $1,571,104,respectively. During the year ended December 31, 2000 and the six months endedJune 30, 2001, the Company used $4,285,183 and $1,389,776 of cash,respectively, in operating activities, and, during the six months ended June30, 2001, used $893,007 of cash in investing activities. These matters raisesubstantial doubt about the Company’s ability to continue as a going concern.In the future, the Company will need to obtain additional financing to provideworking capital for operations.

During March 2001, the Company received itsfirst funding in the amount of $294,000, related to its agreement with afinancing company to provide funding for Refreshment Centers which the Companyplaced with hotel customers under revenue sharing agreements.  It is anticipated that additional funding ofup to $975,000 will be completed by the end of the third quarter of 2001;provided, however, the minimum performance standards required by the financecompany are met by the Company’s customers, and the financing company has theability to provide the funding (See Note 4). In addition, management is attempting to procure debt financing for theplacement of the Company’s products during the 90-day seasoning period of therevenue sharing program.

The financial statements do not include anyadjustments relating to the recoverability and classification of asset carryingamounts or the amount and classification of liabilities that might resultshould the Company be unable to continue as a going concern.

**NOTE 3 – INVESTMENT IN WHOLLY OWNED, UNCONSOLIDATEDSUBSIDIARY**

The board of directors of RSi BRE, Inc., or RSiBRE, is comprised of one appointee from the Company, one appointee from RSGInvestments, LLC, or RSG, and one independent appointee. All operatingdecisions, including disbursements, of RSi BRE require unanimous writtenconsent of RSi BRE's board of directors. As a result, the Company does notcontrol RSi BRE. In accordance with EITF 96-16, "Investor's Accounting foran Investee When the Investor has a Majority of the Voting Interest But theMinority Shareholder or Shareholders Have Certain Approval or VetoRights," the Company has determined that RSi BRE does not qualify forconsolidation in the Company's financial statements. The Company's investmentin RSi BRE is reflected as an "Investment in Wholly Owned, UnconsolidatedSubsidiary" in the accompanying consolidated balance sheet and is beingaccounted for under the equity method of accounting.

At December 31, 2000 and June 30, 2001, theassets and liabilities of RSi BRE consisted of the following:
 **December 31,** **June 30,**  **** ****  **2000** **2001**  **** **** Cash$170,288 $157,569 Accounts receivable,  net of $36,175 allowance for doubtful accounts137,406 94,906 Refreshment centers in  service2,090,118 2,090,118 Accumulated  depreciation(492,510)(631,712)Accrued liabilities(54,505)(68,360)Notes payable(914,615)(900,455)   **Net Assets**$936,182 $742,066    
On August 15, 2000, RSi BRE held 750 unitsvalued at $737,337 that were transferred to the Company.  Also on the same date, a $914,615 obligationwas transferred to and assumed by RSi BRE. Accordingly, depreciation expensewas less and interest expense was higher for the six months ended June 30, 2001compared to the six months ended June 30, 2000.  For the six months ended June 30, 2000 and 2001, the revenues andexpenses of RSi BRE consisted of the following:
 **June 30,**  ****  **2000** **2001**  **** **** Revenue sharing  agreement revenue$357,749 $210,257 Depreciation(168,841)(139,202)Other operating  expenses(29,138)(32,470)Interest expense— (125,665)Interest income1,864 2,242    **Net Income (Loss)**$161,634 $(84,838)   
**NOTE 4 – F****INANCING AGREEMENT**

Under the terms of the amended and restatedfinancing agreement with a finance company, the finance company has agreed to fundup to 150% of the Company's product costs for each Refreshment Center that hasbeen in service for 90 days, subject to the hotel customer meeting certainrequirements and other conditions during that period. Financing of up to $340million is available to the Company under the financing agreement. The Companyis obligated to repay each funding pursuant to the financing agreement overseven years, with a formula–based variable interest rate that is fixed atthe time each financing occurs. Although the parent corporation of the financing company has filed forbankruptcy, the financing company is not included in the bankruptcyfiling.  As part of the financingagreement, the Company formed a wholly owned subsidiary, eRoomSystem SPE, Inc.,a Nevada corporation.  eRoomSystem SPE,Inc. owns and will own all of the Refreshment Centers funded by the financecompany as well as the related revenue sharing agreements. The finance companyhas and will take a senior security interest in the Refreshment Centers financedunder the financing agreement.

During March 2001, the Company received $294,220of funding relating to the Refreshment Centers placed by the Company with hotelcustomers under qualified revenue sharing agreements. This funding accruesinterest at the seven-year treasury rate plus 12.5%, or 17.57%.  This funding is collateralized byrefreshment centers with a value of $317, 917.

The financing company continues to operate andintends to adhere to the Company‘s financing agreement.  However, the financing company could belimited in its financing ability and may not be able to satisfy the Company’sfunding demands as expressed in the financing agreement.****NOTE 5 – COMMITMENTS AND CONTINGENCIES**

**Capital Leases**

In January 2001, the Company entered into acapital lease agreement to purchase computer equipment with a value of  $16,998. The lease has a term of two years. The lease payments are $300 per month for the first twelve months of thelease and $743 per month for the final twelve months of the lease.

During January 2001, the Company also paid theremaining obligation of $36,288 relating to its capital lease of various officeand computer equipment.

**Legal Matters**

On March 12, 2001, the Company reached asettlement of a lawsuit filed by a former supplier during March 1999. Under theterms of this settlement, the Company paid $85,000 in cash and issued 15,000restricted common shares, with a value of $15,900, or $1.06 per share.

On March 28, 2001, the Company received aletter from the Company’s former chairman and chief executive officer, in whichhe claims he is due certain severance and other payments pursuant to the termsof his terminated employment agreement. The matter has been submitted to binding arbitration, to be administeredby the American Arbitration Association pursuant to the terms of the terminatedemployment agreement.  Mr. Sunyichclaims that he is owed approximately $200,000 in severance payments andapproximately $1.5 million in payments related to a repurchase clause containedin his terminated employment agreement. The parties to the arbitration have selected the arbitrator.  The settlement amount estimated by theCompany has been accrued in the accompanying financial statements.  There is no assurance that the results ofthe binding arbitration will be favorable to the Company.  

**NOTE 6 – STOCK OPTIONS****AND WARRANTS**

**Amendment to Warrant Agreement**

On April 6, 2001, the Company amended itsagreement with an advertising agency whereby the Company originally issued theagency a warrant to purchase 125,000 common shares at $4.80 per share.  The amendment reduced the exercise price to$0.90 per share.   The re-pricing of thewarrants caused the fair value of the warrants to increase by $22,702 on thedate of the amendment as measured by the Black-Scholes option pricing modelwith the following assumptions: 3.9 percent risk-free interest rate, 0 percentexpected dividend yield, 89.60 percent volatility, and a 0.74 year estimatedlife. The Company charged the additional fair value of these warrants to  selling, general and administrative expenseduring the three months ended June 30, 2001.

**Non-Employee Grants**

On June 28, 2001, the Company issued options topurchase 65,000 shares of common stock to a software development company forconsulting services related to research and development. The exerciseprice  is $1.01 per share. These optionswere valued in accordance with SFAS 123 (utilizing the Black-Scholes optionpricing model with the following weighted average assumptions: risk freeinterest rate of  4.5 percent, expecteddividend yield of 0 percent, volatility of 87.99 percent, expected life of three years) at $0.46 per share. TheCompany recognized $29,900 in research and development expense relating to thegrant of these options during the three months ended June 30, 2001.

**Employee Grants**

During the six months ended June 30, 2001, theCompany issued options pursuant to its 2000 Stock Option and Incentive Plan toemployees to purchase a total of 380,700 shares of common stock. Fifty percentof these options vested on June 30, 2001 and the remaining fifty percent veston December 31, 2001.  Theseoptions are exercisable at prices ranging from $1.01 to $1.91 per share andeach expire three years from the respective date of issuance.  The issuance of such options had nofinancial effect due to the exercise price being equal to or greater than themarket value of the common stock on the date of grant. The fair value of theoptions ranged from $0.46 to $0.88 per share, based on the Black-Scholes optionpricing model with the following assumptions: risk free interest rate from 4.5to 5.7 percent, volatility from 62.5 to 87.99 percent, expected dividend yieldof 0 percent and an expected life of three years.

Pursuant to the terms of the Company’s 2000 StockOption and Incentive Plan, vested options held by terminated employees, thatare unexercised 90 days following termination, are cancelled.  As of June 30, 2001, there were 208,683unexercised options held by terminated employees that have been cancelled.  These options had no intrinsic value at thedate of issuance; therefore, no adjustment to an expense was recognized inrelation to the cancellation of these options.

After taking into account the above optionactivity, the Company had 3,213,577 options and warrants outstanding at June30, 2001, of which 2,564,505 were exercisable.****NOTE 7 – SUBSEQUENT EVENT**

On August 7, 2001, the Company received itssecond funding relating to the Refreshment Centers placed by the Company withhotel customers under qualified revenue sharing agreements.  This funding was in the amount of$123,953.75 and accrues interest at the seven-year treasury rate plus 12.5%, or17.57% per annum.
**ITEM  2.****MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS****.**
             The following discussion should beread in conjunction with our financial statements and notes to our financialstatements, included elsewhere in this report. This discussion contains forward-looking statements that involve risksand uncertainties.  Our actual resultscould differ materially from those anticipated in these forward-lookingstatements as a result of various factors discussed elsewhere in this report.

             Certain information included hereincontains statements that may be considered forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933, as amended, or theSecurities Act, and Section 21E of the Securities Exchange Act of 1934, asamended, or the Exchange Act, such as statements relating to plans for futureexpansion, capital spending, future operations, sources of liquidity andfinancing sources.  Such forward-lookinginformation involves important risks and uncertainties that could significantlyaffect anticipated results in the future, and accordingly, such results maydiffer from those expressed in any forward-looking statements made herein.  These risks and uncertainties include, butare not limited to, those relating to our liquidity requirements under our financingarrangements, the continued growth of the lodging industry, the success of ourproduct-development, marketing and sales activities, vigorous competition inthe lodging industry, dependence on existing management, leverage and debtservice (including sensitivity to fluctuations in interest rates), domestic orglobal economic conditions, the inherent uncertainty and costs of prolongedarbitration or litigation, and changes in federal or state tax laws or theadministration of such laws.  A completediscussion of these risks and uncertainties are contained in our RegistrationStatement on Form SB-2, as filed with the Securities and Exchange Commission onApril 25, 2000 (Commission File No. 333–59492).

**Overview**

             eRoomSystem Technologies, Inc. is aNevada corporation incorporated on August 31, 1999.  Our core business is the development andinstallation of an intelligent, in-room computer platform and communicationsnetwork, or the eRoomSystem, for the lodging industry.  The eRoomSystem is a computerized platformand processor-based system designed to collect and control data.  The eRoomSystem supports our fully-automatedand interactive eRoomServ Refreshment Centers, or Refreshment Centers,electronic room safes, or eRoomSafes, in-room energy management capabilities, or eRoom Energy, and other proposedapplications.  These other applicationswill include information management services, credit card/smart cardcapabilities for direct billing and remote engineering and maintenanceservices.

             Our interactive Refreshment Centersprovide hotel guests with a selection of up to 33 different beverages andsnacks and offer the lodging industry an opportunity to capture additional in–roomrevenues and reduce operating costs through our gravity-feed vendingdesign.  Our eRoomSafes have sufficientstorage space for large items such as laptop computers, personal video camerasand briefcases and generate additional revenue.  Our products interface with the hotel’s property managementsystem through our eRoomSystem communications network.  The hotel’s property management system postsusage of our products directly to the hotel guest’s room account.

             The solutions offered by oureRoomSystem and related products have allowed us to install our products andservices in several premier hotel chains, including Marriott International,Hilton Hotels, Doubletree Hotels, Carlson Hospitality Worldwide and BassHotels.  Our hotel relationships andexpandable platform will continue to provide us with the opportunity to installour eRoomSystem and related products in premier hotels.

             One of the byproducts of ourtechnology is the information we have collected since our first productinstallation.  To date, we havecollected over fourteen million room-nights of data.  Through our eRoomSystem, we are able to collect information regardingthe usage of our products on a real-time basis.  We use this information to help our customers increase theiroperating efficiencies through optimization of product pricing and selection.  We also intend to market this information tosuppliers of goods sold in our Refreshment Centers and to other users desiringinformation on the buying patterns of hotel guests for goods and services.

             We believe that our eRoomSystem anddeveloping technologies will provide a foundation for expansion into thehealthcare and time-share industries. We propose to provide healthcare facilities with a comprehensive roominformation and management system that will allow these facilities to providepatients with a wide array of in-room amenities not available to them in the past.  The list of proposed amenities includesRefreshment Centers, eRoomSafes, one plus direct dial long distance, on-demandmovies, video games and other products and services commonly found in a hotelroom.  Similar opportunities exist inthe time-share industry.  By offering adirect credit card billing system, a healthcare or time-share facility canoffer similar services available in hotels.****RESULTS OF OPERATIONS**

**COMPARISON OF THREE MONTHSENDED JUNE 30, 2000 AND 2001**

**Revenues**

             Product Sales —  Revenues from product sales were $864,651for the three months ended June 30, 2001 compared to $1,666,287 for the threemonths ended June 30, 2000, representing a decrease of $801,636, or 48%.  The decrease in revenues from product saleswas due to the reduced number of Refreshment Centers and eRoomSafes sold duringthe three months ending June 30, 2001 as compared to the three monthsended June 30, 2000.

             Revenue Sharing Arrangements — Ourrevenue from revenue sharing arrangements was $144,028 for the three monthsended June 30, 2001 compared to $53,473 for the three months ended June 30,2000, representing an increase of $90,555, or 169%.  The increase in revenue from revenue sharing arrangements was dueprimarily to the increased placement of Refreshment Centers and eRoomSafespursuant to our revenue sharing program during the twelve months ended June 30,2001.

             Maintenance Fee Revenues — Ourmaintenance fee revenues were $88,003 for the three months ended June 30, 2001compared to $48,920 for the three months ended June 30, 2000, representing anincrease of $39,083, or 80%.  Theincrease was due primarily to an increase in the number of maintenancecontracts entered into by us during the twelve months ended June 30, 2001.

**Cost ofRevenue**

             Cost of Product Sales Revenue — Ourcost of product sales revenue for the three months ended June 30, 2000 was$1,266,056 compared to $540,501 for the three months ended June 30, 2001, adecrease of $725,555, or 57%.  Thedecrease was due to the lower costs associated with the decrease in sales fromthe three months ended June 30, 2001 to the three months ended June 30,2000.  The gross margin percentage onrevenue from product sales revenue was 37% for the three months ended June 30,2001 compared to 24% for the three months ended June 30, 2000.  The increase in gross margin percentage onrevenue from product sales revenue was due primarily to increased efficiency inour production process.

             Cost of Revenue Sharing Revenue —Our cost of revenue sharing revenue was $1,264 for the three months ended June30, 2000 and $69,801 during the three months ended June 30, 2001, representingan increase of $68,537.  The increase inthe cost of revenue sharing revenue was due to increased placement of unitspursuant to our revenue sharing program. The gross margin percentage on revenue sharing revenue was 97% for thethree months ended June 30, 2000 and 52% for the three months ended June 30,2001. The decrease in gross margin percentage on revenue sharing revenue fromthe three months ended June 30, 2000 to the three months ended June 30, 2001resulted from the transfer of 750 refreshment centers and requisitedepreciation in August 2000 from RSi BRE to us.  Prior to August 2000, and in accordance with the terms of certainagreements, the depreciation for these units, which is the primary component inthe cost of revenue sharing revenue, was realized in RSi BRE and the associatedrevenue sharing realized in eRoomSystem technologies.  Since we owned the units unencumbered, both the depreciation andrevenue will be recognized on our financial statements for future periods.

             Cost of Maintenance Revenue — Ourcost of maintenance revenue was $881 for the three months ended June 30, 2000and $57,407 for the three months ended June 30, 2001 representing an increaseof $56,526.  The gross margin percentageon maintenance revenues was 98% for the three months ended June 30, 2000 and35% for the three months ended June 30, 2001. The increase in our cost of maintenance revenue and the decrease ingross margin percentages from the three months ended June 30, 2000 to the threemonths ended June 30, 2001 was primarily due to the upgrade of software for allof our units during the three months ended June 30, 2001.

**OperatingExpenses**

             Selling, General and Administrative— Selling, general and administrative expenses, exclusive of non-cashcompensation expense, were $645,068 for the three months ended June 30, 2000and $799,620 for the three months ended June 30, 2001, representing an increaseof $154,552, or 24%.  The increase inour selling, general and administrative expenses from the three months endedJune 30, 2000 to the three months ended June 30, 2001 was primarily due to theincreased payroll and advertising expense in anticipation of increased salesactivities.  In addition, we experiencedan increase in accounting, investor relations and legal expenses for the threemonths ended June 30, 2001.

             Research and Development Expenses — Research and development expenseswere $54,600 for the three months ended June 30, 2000 and $106,025 for thethree months ended June 30, 2001, representing an increase of $51,425, or94%.  Research and development expensesrepresented 3% of our total revenue for the three months ended June 30, 2000and 10% of our total revenue for the three months ended June 30, 2001.  The increase in research and developmentexpenses was primarily due to the fees paid to Tybera Development Group, Inc.and other consultants for software development.

             Non-Cash Compensation Expense  —Non-cash compensation expense was $2,485 for the three months ended June 30,2000 and $52,602 for the three months ended June 30, 2001.  The $50,117 increase in non-cashcompensation expense during the three months ended June 30, 2001 ascompared to the three months ended June 30, 2000 was a result of the issuanceof warrants to Tybera Development Group, Inc. and the repricing of warrantsissued to Hall Communications, Inc.

             **Other Expense, Net**

             Other expense, net was $485,749 forthe three months ended June 30, 2000 and $7,727 for the three months ended June30, 2001, representing a decrease of $478,022, or 98%.  Despite the equity in loss, rather thanincome, from RSi BRE, other expense, net decreased due to a substantialdecrease in expense resulting from the repayment of a substantial portion ofour loans and an increase in interest and other income.****             Loss Attributable to Common Stockholders**

             We incurred losses attributable tocommon stockholders of $2,392,616 and $537,001 during the three months endedJune 30, 2000 and 2001, respectively. The $1,855,615 decrease in the loss attributable to common stockholderswas due primarily to decreased interest expense, increased interest and otherincome and the absence of any dividends related to convertible preferred stock,offset in part by increased operating expenses.  We have continued to incur losses subsequent to June 30, 2001and, as a result, have experienced an increase in accumulated deficit.  We believe that we will continue to incurlosses for a period of time.

**COMPARISON OF SIX MONTHS ENDEDJUNE 30, 2000 AND 2001**

**Revenues**

             Product Sales —  Revenues from product sales were $891,916for the six months ended June 30, 2001 compared to $1,666,287 for the sixmonths ended June 30, 2000, representing a decrease of $774,371, or 46%.  The decrease in revenues from product saleswas due to the reduced number of Refreshment Centers and eRoomSafes sold forthe six months ending June 30, 2001 as compared to the six months endedJune 30, 2000.

             Revenue Sharing Arrangements — Ourrevenue from revenue sharing arrangements was $62,635 for the six months endedJune 30, 2000 and $278,095 for the six months ended June 30, 2001, representingan increase of $215,460, or 344%.  Theincrease in revenue from revenue sharing arrangements was due primarily to theincreased placement of Refreshment Centers and eRoomSafes pursuant to ourrevenue sharing program during the twelve months ended June 30, 2001.

             Maintenance Fee Revenues — Ourmaintenance fee revenues were $88,857 for the six months ended June 30, 2000and $144,406 for the six months ended June 30, 2001, representing an increaseof $55,549, or 63%.  The increase wasdue primarily to an increase in the number of maintenance contracts enteredinto by us during the twelve months ended June 30, 2001.

**Cost ofRevenue**

             Cost of Product Sales Revenue — Ourcost of product sales revenue for the six months ended June 30, 2000 was$1,266,056 compared to $556,151 for the six months ended June 30, 2001, adecrease of $709,905, or 56%.  Thedecrease was due to the lower costs associated with the decrease in salesduring the six months ended June 30, 2001 to the six months ended June 30,2000.  The gross margin percentage onrevenue from product sales revenue was 38% for the six months ended June 30,2001 compared to 24% for the six months ended June 30, 2000.  The increase in gross margin percentage onrevenue from product sales revenue was due primarily to increased efficiency inour production process.

             Cost of Revenue Sharing Revenue —Our cost of revenue sharing revenue was $8,337 for the six months ended June30, 2000 and $128,710 during the six months ended June 30, 2001, representingan increase of $120,373.  The increasein the cost of revenue sharing revenue was due to increased placement of units pursuantto our revenue sharing program.  Thegross margin percentage on revenue sharing revenue was 87% for the six monthsended June 30, 2000 and 54% for the six months ended June 30, 2001.  The decrease in gross margin percentage onrevenue sharing revenue from the six months ended June 30, 2000 to the sixmonths ended June 30, 2001 resulted from the transfer of 750 RefreshmentCenters and requisite depreciation in August 2000 from RSi BRE to us.  Prior to August 2000, and in accordance withthe terms of certain agreements, the depreciation for these units, which is theprimary component in the cost of revenue sharing revenue, was realized in RSiBRE and the associated revenue sharing revenue was realized in eRoomSystemTechnologies.  Since we now own theunits unencumbered, both the depreciation and revenue will be recognized on ourfinancial statements for future periods.

             Cost of Maintenance Revenue — Ourcost of maintenance revenue was $7,901 for the six months ended June 30, 2000and $197,736 for the six months ended June 30, 2001 representing an increase of$189,835.  The gross margin percentageon maintenance revenues was 91% for the six months ended June 30, 2000 and(37%) for the six months ended June 30, 2001. The increase in our cost of maintenance revenue and the decrease ingross margin percentages from the six months ended June 30, 2000 to the sixmonths ended June 30, 2001 was primarily due to the expense associated with therepair of a third party manufacturing defect, which expense may be recoverable,and upgrades to our units.

**OperatingExpenses**

             Selling, General and Administrative— Selling, general and administrative expenses, exclusive of non-cashcompensation expense, were $1,165,412 for the six months ended June 30, 2000and $1,717,491 for the six months ended June 30, 2001, representing an increaseof $552,079, or 47%.  The increase inour selling, general and administrative expenses from the six months ended June30, 2000 to the six months ended June 30, 2001 was primarily due to the increasedpayroll and advertising expense in anticipation of increased salesactivities.  In addition, we experiencedan increase in accounting, investor relations and legal expenses for the sixmonths ended June 30, 2001.

             Research and Development Expenses — Research and development expenseswere $104,388 for the six months ended June 30, 2000 and $219,045 for the sixmonths ended June 30, 2001, representing an increase of $114,657, or 110%.  Research and development expensesrepresented 6% of our total revenue for the six months ended June 30, 2000 and17% of our total revenue for the six months ended June 30, 2001.  The increase in research and developmentexpenses was primarily due to the continued development of our hardware andsoftware during the six months ended June 30, 2001, including theretention Tybera Development Group, Inc. and other consultants for softwaredevelopment.

             Non-Cash Compensation Expense  —Non-cash compensation expense was $494,310 for the six months ended June 30,2000 and $52,602 for the six months ended June 30, 2001.  The $441,708 decrease in non-cashcompensation expense during the six months ended June 30, 2001 as comparedto the six months ended June 30, 2000 resulted from the issuance of fewerwarrants to consultants during the six months ended June 30, 2001.

             **Other Expense, Net**

             Other expense was $698,767 for thesix months ended June 30, 2000 and $13,786 for the six months ended June 30,2001, representing a decrease of $684,981, or 98%.  The decrease is due primarily to the reduction of interestexpense as we have paid off a substantial portion of our loans and an increasein interest and other income.

**LossAttributable to Common Stockholders**

             We incurred losses attributable tocommon stockholders of $4,073,342 and $1,571,104 during the six months endedJune 30, 2000 and 2001, respectively. The $2,502,238, or 61%, decrease in the loss attributable to commonstockholders was due primarily to decreased interest expense, increased interestand other income, and the absence of any dividends related to convertiblepreferred stock, offset in part by increased operating expenses and equityincome loss from RSi BRE.  We havecontinued to incur losses subsequent to June 30, 2001 and, as a result, haveexperienced an increase in accumulated deficit.  We believe that we will continue to incur losses for a period oftime.****LIQUIDITY AND CAPITAL RESOURCES**

             On August 9, 2000, we consummatedour initial public offering for 1,800,000 shares of common stock.  We received gross proceeds of $11.7 millionand, after deducting the underwriting discounts and commissions and theoffering expenses, net proceeds of approximately $9.86 million.  The net offering proceeds have been and willbe used for funding the production and installation of our products andservices, the repayment of a substantial portion of our outstandingindebtedness and related accrued interest, the payment of cash dividends on ourSeries A and Series C convertible preferred stock, our advertisingand promotional expenses, additional research and development to improve ourexisting products and services and to develop our future products and services,and general corporate purposes and working capital.

             As of June 30, 2001, we had cash of$689,098 and working capital of $546,014 compared to cash of $949,750 and aworking capital deficit of $3,627,106 at June 30, 2000.  The decrease in cash reflects the continueduse of cash by our operations since our initial public offering in August 2000and, with respect to June 30, 2000, the remaining proceeds from a$1,500,000 bridge loan in April 2000. The increase in working capital was the result of cash provided by ourinitial public offering, decreases in accrued interest and preferred stock dividendspayable, increase in inventories financing costs, and the repayment of asubstantial portion of our indebtedness with the proceeds of our initial publicoffering.  Our stockholders’ equityimproved from a deficit of $144,892 at June 30, 2000 to stockholders’ equity of$4,096,869 at June 30, 2001.  Theimprovement in stockholders’ equity primarily resulted from proceeds of ourinitial public offering.  Ouraccumulated deficit increased from $17,757,383 at June 30, 2000 to $26,561,440at June 30, 2001.  The increase inaccumulated deficit resulted primarily from the triggering of a beneficialconversion feature related to our convertible preferred stock at the time ofour initial public offering and the net loss from operations for the year endedDecember 31, 2000 and for the six months ended June 30, 2001.  We anticipate that our accumulated deficitwill continue to increase for a period of time.

             As of June 30, 2001, we had cash of$689,098 compared to cash of $2,811,023 at December 31, 2000.  We used cash of $578,429 in operatingactivities during the six months ended June 30, 2000 compared to $1,389,776used by operating activities during the six months ended June 30, 2001.  The increase in the use of cash foroperating activities primarily resulted from the continued net loss fromoperations, increases in inventories, accrued liabilities, prepaid expenses anddeposits, decreases in accrued restructuring costs, accounts payable andaccrued liabilities, offset, in part, by decreases in accounts receivable andundistributed equity in loss of RSi BRE.

             Investing activities for the sixmonths ended June 30, 2000 used $7,365 of cash compared to $893,007 used duringthe six months ended June 30, 2001.  Theincrease in cash used in investing activities resulted primarily from $850,917due to additions to Refreshment Centers in service.

             Financing activities provided$1,422,292 during the six months ended June 30, 2000 compared to $160,858provided during the six months ended June 30, 2001. The primary source of cashduring the six months ended June 30, 2001 was our borrowings from AMRESCO underthe terms of our long-term equipment financing agreement, revenue generated byunits installed pursuant to our revenue sharing program and revenue fromoutstanding maintenance agreements.

             The placement of products perrevenue sharing arrangements is capital intensive.  We estimate that we must place approximately 16,000 unitspursuant to our revenue sharing program in order to become profitable.  As of August 7, 2001, 3,165 units have beenplaced pursuant to our revenue sharing program.  The first funding pursuant to our long-term equipment financingarrangement with AMRESCO Leasing Corporation, or AMRESCO, was in the principalamount of $294,220, before finance costs, and occurred on March 22, 2001.  On August 7, 2001, we received our secondfunding from AMRESCO in the principal amount of $123,954.  We anticipate that additional fundings of upto $975,000 will be completed by the end of the third quarter of 2001;provided, however, the minimum performance standards of AMRESCO must be met byour respective hotel clients during the 90-day seasoning period for suchfunding to occur, and AMRESCO has the ability to provide the funding.

             Although we are proposing tofinance our planned expansion through the proceeds our financing arrangementwith AMRESCO, we will need to have sufficient capital to fund our operationsduring the 90-day (or longer) seasoning period prior to the receipt of fundingfrom AMRESCO.  In this regard, we currentlydo not have sufficient cash on hand to finance our planned expansion and meetour capital expenditure and working capital requirements.  We are exploring financing alternatives thatmay include institutional or other lending sources and/or private placements ofdebt or equity.  There is no assurancethat we will be able to obtain additional financing in order to fund ouroperations during the 90-day (or longer) seasoning period or that our customerswill meet the minimum performance criteria established by AMRESCO as apre-requisite to receiving any funding from AMRESCO.  If we are unsuccessful in obtaining financing to fund operationsduring the 90-day (or longer) seasoning period or if we do not receivesufficient financing from AMRESCO, we may have to shift more placements of ourunits from revenue sharing arrangements to product sales.  No assurance can be given that we will beable to shift the placement of a sufficient number of our units from revenuesharing arrangements to product sales in order to provide adequateliquidity.  These matters raise doubtabout our ability to continue as a going concern.

             On January 26, 2001, we terminatedthe employment of seventeen employees in an effort to maximize operationalefficiencies and reduce monthly expenses. In addition, we expanded the responsibilities of other positions toaccount for the terminations.  We havetaken a one-time restructuring charge of $418,606 in the fourth quarter of2000, but estimate that the restructuring will result in an approximate $1.1million reduction in annual overhead over the twelve months following therestructuring.****QUALITATIVE AND QUANTITATIVEDISCLOSURES ABOUT MARKET RISK**

             Our products require a limitedamount of assembly at our facility in the United States.  We purchase refrigerators from suppliers inthe United States, Canada, Italy and China on a purchase order basis in U.S.Dollars.  All other components for ourproducts are purchased from suppliers based in the United States.  Our products are primarily marketed in theUnited States, the Bahamas and Brazil, and we intend to further expand ourmarketing to the international lodging market and to other industriesdomestically and internationally.  As aresult, our financial results could be affected by weak economic conditions inforeign markets.  Because all of ourrevenues will be denominated in U.S. Dollars, a strengthening of the dollarcould make our products less competitive in foreign markets.

             As we expand operationsinternationally, we will continue to evaluate our foreign currency exposuresand risks and develop appropriate hedging or other strategies to manage thoserisks.  We have not revised our currentbusiness practices to conform to Europe’s conversion to the Euro.****PART II – OTHER INFORMATION**

**ITEM 1. ****LEGALPROCEEDINGS****.**

             On March 28, 2001, we receiveda letter from counsel for our former chairman and chief executive officer,Steven L. Sunyich, in which counsel claims that Mr. Sunyich is duecertain severance and other payments pursuant to the terms of his terminatedemployment agreement.  The parties tothe arbitration have selected the arbitrator. Mr. Sunyich claims that he is owed approximately $200,000 in severancepayments and approximately $1.5 million in payments related to a repurchaseclause contained in his terminated employment agreement.  The matter has been submitted to bindingarbitration, to be administered by the American Arbitration Associationpursuant to the terms of Mr. Sunyich’s terminated employment agreement.  There is no assurance that the results ofthe binding arbitration will be favorable to us.  An unfavorable arbitration ruling could have a material adverseeffect on our financial results and business operations.

**ITEM 2. ****CHANGESIN SECURITIES AND USE OF PROCEEDS****.**

             **Use of Proceeds.**  On August 9, 2000, we completed the initial public offering ofour common stock.  The managingunderwriter in the offering was Donald & Co. Securities Inc.  Our shares of common stock sold in theoffering were registered under the Securities Act in a Registration Statementon Form SB-2, as amended (File No. 333-34882), or the RegistrationStatement.  The Securities and ExchangeCommission, or the Commission, declared the Registration Statement effective onAugust 2, 2000.

             The initial public offering pricewas $6.50 per share for an aggregate sales price of $11.7 million.  We paid underwriting discounts andcommissions of $906,750 and a non-accountable expense allowance of $117,000 toour underwriter and offering expenses of approximately $820,000.  None of the expenses related to the initialpublic offering were paid directly or indirectly to any of our directors,officers, general partners or their associates, or to any persons owning 10% ormore of any class of our equity securities, or to any of our affiliates.  We received net proceeds from the initialpublic offering of approximately $9.86 million after deducting the underwritingdiscounts and commissions and the offering expenses.

             From the effective date of theRegistration Statement through the six months ended June 30, 2001, we have usedapproximately $8.87 million of the $9.86 million of net proceeds from theinitial public offering as follows:
**USE OF PROCEEDS TO DATE****AMOUNT** Funding  for production and installation of eRoomSystems, Refreshment Centers and  eRoomSafes$2,471,121 Repayment  of a substantial portion of our outstanding indebtedness and related accrued  interest3,794,000 Payment  of cash dividends on our Series A convertible preferred stock226,917 Payment  of cash dividends on our Series C convertible preferred stock9,677 Advertising  and promotional expenses261,568 Research  and development to improve our existing products and services and to develop  our future products and services248,825 General  corporate purposes and working capital1,861,906   **Total****$****8,874,014**** ** **** 
**ITEM 3. ****DEFAULTSUPON SENIOR SECURITIES****.**

             None.

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

             None.

**ITEM 5. ****OTHERINFORMATION****.**

**            **On April 19, 2001, we announced our exclusive OEMagreement with INNCOM International, Inc., a leader in hotel guest-room controlsystems, through which INNCOM will private-label its e4 Smart DigitalThermostat for us as eRoom Energy and will assist in the installation andmaintenance of the units.  The e4 SmartDigital Thermostat is designed to control virtually any fan coil unit orpackaged terminal air conditioner found in hotel rooms and comes standard withan illuminated digital display, selectable Fahrenheit/Celsius control,one-touch temperature selection, off/auto, and fan and display buttons.  In addition to these user-friendly features,the e4 Smart Digital Thermostat includes five relays, optional on-boardinfrared transceiver and passive infrared occupancy sensor and is expandable toinclude functionality such as humidity control, outside temperature display,refreshment center access reporting, occupancy reporting to housekeeping andautomatic control of lights.  Throughits expandable communication capabilities, we intend to integrate the e4 SmartDigital Thermostat with our eRoomSystem using bi-directional communication thatwill permit communication from the eRoomSystem to the eRoomEnergy unit andback.  Using the bi-directionalcommunication, a property will be able to adjust the room temperature atcheck-in or check-out and to return the room temperature to preset levels whena hotel guest leaves and returns to the hotel room during his or her stay.

             On June 26, 2001, we entered intoan alliance with Tybera Development Group Inc., a software development andconsulting firm.  Through this alliance,Tybera will focus its software development and application expertise onupgrading all of our current software and hardware products and developing newapplications for future systems.  Ascompensation, Tybera has received $60,000 and options to purchase 65,000 sharesof common stock at $1.01 per share.

             On July 31, 2001, weterminated our lease for our offices that were located at 3770 Howard HughesParkway, Suite 175, Las Vegas, Nevada 89109. We have consolidated our offices and related functions to our officeslocated in St. George, Utah.

**ITEM 6. ****EXHIBITSAND REPORTS ON FORM 8-K****.**

(a)      Exhibits.

             None.

(b)      Reports on Form 8-K.

             None.

             **SIGNATURE**

             In accordance with the requirementsof the Exchange Act, the registrant caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
  **eROOMSYSTEM TECHNOLOGIES, INC.**   (Registrant)      Date:August 14, 2001By:         David S. Harkness   Its:Chief Executive Officer and Chairman 
 

 

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