**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 Washington,
        D.C. 20549
 
 **FORM
          10-QSB/A**
 (AMENDMENT
          NO. 2)
 (Mark
        One)
 x
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
  For
                  the quarterly period ended:
              March
                  31, 2005
  OR
  o
              **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
o
  **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 o NO
o
  **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:
  10,565,133
                  shares of common stock, $0.001 par value, as of May 19,
                  2005
  **Transitional
        Small Business Disclosure Format (check one):** YES
o NO
x
   
   **FORM
        10-QSB/A**
 
 **TABLE
        OF CONTENTS**
 
   **Page****PART
                I - FINANCIAL INFORMATION**
              1Item
                  1. Financial Statements.
              1Condensed
                  Consolidated Balance Sheets (Unaudited)
              1Condensed
                  Consolidated Statements of Operations (Unaudited)
              2Condensed
                  Consolidated Statements of Cash Flows (Unaudited)
              3Notes
                  to Condensed Consolidated Financial Statements (Unaudited)
              4Item
                  2. Management’s Discussion and Analysis of Financial Condition
                  and
                Results
                  of Operations.
              8Item
                  3. Controls and Procedures.
              13**PART II - OTHER
                INFORMATION**
              15Item
                  1. Legal Proceedings.
              15Item
                  2. Changes in Securities and Use of Proceeds.
              15Item
                  3. Defaults Upon Senior Securities.
              15Item
                  4. Submission of Matters to a Vote of Security Holders.
              15Item
                  5. Other Information.
              15Item
                  6. Exhibits and Reports on Form 8-K.
              15**SIGNATURE**
              16
 
   i
   **PART
        I - FINANCIAL INFORMATION**
  **Item
        1. Financial Statements.**
  **eROOMSYSTEM
                        TECHNOLOGIES, INC. AND SUBSIDIARIES****CONDENSED
                        CONSOLIDATED BALANCE SHEETS (UNAUDITED)**
  **March
                        31,**
                    
                    **December 31,****2005**
                    
                    **2004****ASSETS****CURRENT
                      ASSETS**Cash
                    
                    $
                    820,042
                    
                    $
                    646,386Cash
                        held in Escrow
                    
                    
                    -
                    
                    
                    225,000Accounts
                        receivable, net of allowance for doubtful accounts of $29,045
                        and$29,045
                        at March 31, 2005 and December 31, 2004, respectively
                    
                    
                    202,348
                    
                    
                    164,586Prepaid
                        expenses
                    
                    
                    27,043
                    
                    
                    16,317Subscription
                        receivable
                    
                    
                    10,000
                    
                    
                    -Miscellaneous
                        receivables
                    
                    
                    6,334
                    
                    
                    -**Total
                        Current Assets**
                    
                    
                    1,065,767
                    
                    
                    1,052,289**REFRESHMENT
                        CENTERS IN SERVICE**,
                        net of accumulated depreciation of$1,906,044
                        and $1,777,378 at March 31, 2005 and December 31, 2004,
                        respectively
                    
                    
                    1,741,477
                    
                    
                    1,870,143**PROPERTY
                        AND EQUIPMENT**Production
                        equipment
                    
                    
                    22,210
                    
                    
                    22,210Computer
                        equipment
                    
                    
                    77,069
                    
                    
                    76,031Vehicles
                        and other
                    
                    
                    44,153
                    
                    
                    44,153143,432
                    
                    
                    142,394Less
                        accumulated depreciation and amortization
                    
                    
                    (130,928
                    )
                    
                    (129,481
                    )**Net
                        Property and Equipment**
                    
                    
                    12,504
                    
                    
                    12,913**DEPOSITS**
                    
                    
                    75,300
                    
                    
                    95,300**Total
                        Assets**
                    
                    $
                    2,895,048
                    
                    $
                    3,030,645**LIABILITIES
                        AND STOCKHOLDERS' EQUITY****CURRENT
                        LIABILITIES**Notes
                        payable and current portion of long-term debt
                    
                    $
                    233,015
                    
                    $
                    228,337Accounts
                        payable
                    
                    
                    76,059
                    
                    
                    109,089Accrued
                        liabilities
                    
                    
                    70,046
                    
                    
                    137,492Accrued
                        interest
                    
                    
                    93,402
                    
                    
                    81,615Customer
                        deposits
                    
                    
                    11,758
                    
                    
                    11,758Deferred
                        maintenance revenue
                    
                    
                    32,324
                    
                    
                    38,516**Total
                        Current Liabilities**
                    
                    
                    516,604
                    
                    
                    606,807**LONG-TERM
                        DEBT, net of current
                        portion**
                    
                    
                    1,050,981
                    
                    
                    1,111,181**Total
                        Liabilities**
                    
                    
                    1,567,585
                    
                    
                    1,717,988**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; 10,565,133
                        sharesand
                        10,465,133 shares outstanding at March 31, 2005and
                        December 31, 2004, respectively
                    
                    
                    10,565
                    
                    
                    10,465Additional
                        paid-in capital
                    
                    
                    32,108,596
                    
                    
                    32,074,454Warrants
                        and options outstanding
                    
                    
                    1,083,990
                    
                    
                    1,109,930Note
                        receivable from shareholder
                    
                    
                    (75,578
                    )
                    
                    (74,759
                    )Accumulated
                        deficit
                    
                    
                    (31,800,110
                    )
                    
                    (31,807,433
                    )**Total
                        Stockholder's Equity**
                    
                    
                    1,327,463
                    
                    
                    1,312,657**Total
                      Liabilities and Stockholders'
                      Equity**$
                    2,895,048
                    
                    $
                    3,030,645
  See
              accompanying notes to unaudited condensed consolidated financial
              statements
   1
  **eROOMSYSTEM
        TECHNOLOGIES, INC. AND SUBSIDIARIES**  **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**


***For
                  the Three Months Ended March 31,***
              
              **2005**
              
              **2004****REVENUE**Revenue-sharing
                  arrangements
              
              $
              271,039
              
              $
              271,017Maintenance
                  fees
              
              
              85,733
              
              
              86,984Product
                  sales
              
              
              2,607
              
              
              308**Total
                  Revenue**
              
              
              359,379
              
              
              358,309**COST
                  OF REVENUE**Revenue-sharing
                  arrangements
              
              
              128,666
              
              
              128,666Maintenance
              
              
              14,285
              
              
              16,749Product
                  sales
              
              
              7
              
              
              -**Total
                  Cost of Revenue**
              
              
              142,958
              
              
              145,415**GROSS MARGIN**
              
              
              216,421
              
              
              212,894**OPERATING
                  EXPENSES**Selling,
                  general and administrative expense, including non-cash compensationof
                  $(1,698) and $27,534, respectively
              
              
              163,164
              
              
              256,753Research
                  and development expense
              
              
              1,576
              
              
              -Interest
                  expense
              
              
              48,426
              
              
              54,194Interest
                  and other income
              
              
              (4,068
              )
              
              (1,708
              )**Net
                  Operating Expenses**
              
              
              209,098
              
              
              309,239**Income
                (Loss) from
                Operations**
              
              
              7,323
              
              
              (96,345
              )Gain
                on forgiveness of liabilities and
                debt
              
              
              -
              
              
              503,475**Net
                Income**
              
              $
              7,323
              
              $
              407,130**Basic
                Earnings Per Common
                Share**
              
              $
              0.00
              
              $
              0.04**Diluted
                Earnings Per Common
                Share**
              
              $
              0.00
              
              $
              0.02


2
  **eROOMSYSTEM
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **CONDENSED
            CONSOLIDATED STATEMENTS OF CASH FLOWS
            (UNAUDITED)**
  ***For
                  the Three Months Ended March 31,***
              
              **2005**
              
              **2004****CASH
                FLOWS FROM OPERATING ACTIVITIES**Net
                  income
              
              $
              7,323
              
              $
              407,130Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation
              
              
              130,113
              
              
              133,038Gain
                  on forgiveness of debt and liabilities
              
              
              -
              
              
              (503,475
              )Interest
                  income from shareholder receivables
              
              
              (819
              )
              
              -Accretion
                  of debt discount
              
              
              16,685
              
              
              16,684Non-cash
                  compensation expense
              
              
              (1,698
              )
              
              27,534Changes
                  in operating assets and liabilities:Cash
                  released from escrow
              
              
              225,000
              
              
              -Accounts
                  receivable
              
              
              (37,762
              )
              
              (10,600
              )Miscellaneous
                  receivables
              
              
              (6,334
              )
              
              -Prepaid
                  expenses
              
              
              (10,726
              )
              
              436Accounts
                  payable
              
              
              (33,030
              )
              
              (13,182
              )Accrued
                  liabilities
              
              
              (55,659
              )
              
              4,850Customer
                  deposits and deferred maintenance revenue
              
              
              (6,192
              )
              
              1,054**Net
                  Cash Provided By Operating Activities**
              
              
              226,901
              
              
              63,469**CASH
                  FLOWS FROM INVESTING ACTIVITIES**Purchase
                  of fixed assets
              
              
              (1,038
              )
              
              -Change
                  in long term deposits and restricted funds
              
              
              20,000
              
              
              (19,000
              )**Net
                  Cash Provided by (Used In) Investing
                  Activities**
              
              
              18,962
              
              
              (19,000
              )**CASH FLOWS FROM
                FINANCING
                ACTIVITIES**Principal
                  payments on long-term debt
              
              
              (72,207
              )
              
              (241,426
              )**Net
                  Cash Used in Financing
                  Activities**
              
              
              (72,207
              )
              
              (241,426
              )**N****et
                  Increase (Decrease) in Cash**173,656
              
              
              (196,957
              )**Cash
                at Beginning of Period**
              
              
              646,386
              
              
              381,985**Cash
                at End of
                Period**
              
              $
              820,042
              
              $
              185,028**Supplemental
                  Cash Flows Information**Cash
                  paid for interest
              
              $
              19,955
              
              $
              33,839**Supplemental
                  Disclosure of Noncash Investing and Financing
                  Activities**Stock
                  options issued in settlement of accounts payable
              
              $
              -
              
              $
              8,855Exercise
                  of stock options
              
              $
              10,000
              
              $
              -
  See
          accompanying notes to unaudited condensed consolidated financial
          statements
   3
  **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 December 31, 2004 Annual Report
        on Form 10-KSB.  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 months ended March 31, 2005 are not necessarily indicative of the
        results that may be expected for the full year ending December 31, 2005.
  ***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.
  ***Cash
        Equivalents -*** ** In
        January 2004, the Company deposited $20,000 with a bank as collateral in
        order
        to effect electronic fund transfers through the bank. This certificate of
        deposit came due in January 2005, and was rolled into the checking
        account.
  ***Stock-Based
        Compensation -*** At
        March
        31, 2005, 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 three months ended March 31, 2005 and
        2004,
        the Company recognized $(1,698) and 17,334, respectively, of compensation
        expense relating to stock options and warrants and recognized $0 and $10,200,
        respectively, of compensation expense relating to stock awards. The following
        table illustrates the effect on net income and basic and diluted earnings
        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:
  4
 *For
                    the Three Months Ended March 31,*
                
                **2005**
                
                **2004**Net
                    income, as reported
                
                $
                7,323
                
                $
                407,130Add:
                    Stock-based employee and consultant compensationexpenses
                    included in net income
                
                
                (1,698
                )
                
                27,534Deduct:
                    Total stock-based employee and consultantcompensation
                    expense determined under fair value based methodfor
                    all awards
                
                
                703
                
                
                (41,790
                )Pro
                    forma net earnings
                
                $
                6,328
                
                $
                392,874Earnings
                    per common share:Basic
                    as reported
                
                $
                0.00
                
                $
                0.04Basic
                    pro forma
                
                $
                0.00
                
                $
                0.04Diluted
                    as reported
                
                $
                0.00
                
                $
                0.02Diluted
                    pro forma
                
                $
                0.00
                
                $
                0.02
  ***Net
        Earnings Per Common Share -*** Basic
        earnings per common share is computed by dividing net income by the
        weighted-average number of common shares outstanding. Unvested common shares
        are
        considered to be stock options for purposes of computing earnings per share.
         Diluted earnings per common share is computed by dividing net income 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 months ended March 31, 2005 and 2004:
  *For
                    the Three Months Ended March 31,*
                
                **2005**
                
                **2004**Basic
                    net income
                
                $
                7,323
                
                $
                407,130Interest
                    expense from convertible debt
                
                
                24,115
                
                
                24,093Diluted
                    net income
                
                $
                31,438
                
                $
                431,223Basic
                    weighted-average common shares outstanding
                
                
                10,468,466,
                
                
                10,385,911Effect
                    of dilutive securitiesStock
                    options and warrants
                
                
                4,622,479
                
                
                4,195,810Convertible
                    Debt
                
                
                7,316,667
                
                
                7,316,667Diluted
                    weighted-average common shares outstanding
                
                
                22,407,612
                
                
                21,898,388Basic
                    earnings per share
                
                $
                0.00
                
                $
                0.04Diluted
                    earnings per share
                
                $
                0.00
                
                $
                0.04
  At
        March
        31, 2005 and 2004, there were potential common stock equivalents from options,
        warrants and convertible debt of 4,003,367 and 4,546,209, respectively, which
        were not included in the computation of diluted earnings per share because
        their
        effect would have been anti-dilutive.
  5
 **eROOMSYSTEM
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
          (UNAUDITED)**
  **NOTE
        2 - BUSINESS CONDITION**
  During
        the year ended December 31, 2004 and the three months ended March 31, 2005,
        the
        Company realized a net gain of $900,072 and $7,323, respectively. During
        the
        year ended December 31, 2004 and the three months ended March 31, 2005, the
        Company's operations provided $730,322 and $226,901 of cash, respectively.
        The
        Company had a cash balance of $820,042 as of March 31, 2005. Up until the
        year
        ended December 31, 2004, the Company suffered recurring losses. Although
        the
        Company realized a significant profit in 2004 it was primarily from
        non-recurring items, specifically gains on collection of previously written
        off
        receivables and gain on forgiveness of debt. This raises 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 the financing is not assured. Management
        is also attempting to find an entity interested in purchasing or merging
        with
        the Company.  Completion of a sale or merger of the Company 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 with a hotel property owner
        that amended a previous revenue sharing lease agreement that had previously
        been
        non-performing. Under the terms of that agreement, the Company recovered
        a
        receivable that had been written off in the previous year.
  The
        new
        lease agreement terminates on December 31, 2008 at which time the hotel property
        owner takes ownership of the refreshment centers. The property is to make
        monthly payments of $7,200. The new lease agreement has been classified as
        a
        sales-type capital lease. Because the property has a history of non-performance
        and is still under the supervision of a bankruptcy court, the net investment
        in
        the capital lease has been fully allowed against. The following lists the
        components of the net investment in the sales-type lease as of March 31,
        2005:
  Total
                  minimum lease payments to be
                  received
                
                $
                $324,000Less:
                  Allowance for
                  uncollectibles
                
                
                (272,486
                )Net
                  minimum lease payments
                  receivable
                
                
                51,514Less:
                  Unearned income
                
                
                (51,514
                )Net
                  investment in sales-type
                  lease
                
                $
                -
  The
        Company recorded revenue sharing and maintenance fee revenue in the amounts
        of
        $21,600 for the three months ended March 31, 2005.
  Minimum
        lease payments for the nine months ended December 31, 2004 and each of the
        four
        succeeding fiscal years through the end of the lease term are as follows:
        $64,800 in 2005, $86,400 in 2006, $86,400 in 2007, and $86,400 in
        2008.
  6
 **eROOMSYSTEM
              TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              (UNAUDITED)**
   **NOTE
        4 - STOCKHOLDERS’ EQUITY**
  During
        the three months ended March 31, 2005, the Company granted options to purchase
        5,000 shares of common stock to an employee. These options, which vested
        immediately, have an exercise price of $0.24 per share and expire on February
        24, 2008. The Company recognized $0 of compensation expense, which was the
        intrinsic value of the options on the date granted.
  During
        the three months ended March 31, 2005, options to purchase 100,000 of common
        stock were exercised. The exercise price was $0.10 per share. The Company
        recorded a subscription receivable of $10,000 for the options. The Company
        received the funds in April 2005.
    7
 **eROOMSYSTEM
              TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              (UNAUDITED)**
   **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 24, 2005.
  **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.
  **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
  8
  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 have installed 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.
        Since the third quarter of 2002, we have failed to place any products, either
        on
        a revenue sharing or sale basis, and we cannot assure you that we will be
        successful in this effort in 2005.
  We
        have
        experienced some fluctuations in revenues in recent periods, but much less
        than
        in the past. The reason is that our revenue sources are fairly constant,
        relating to existing revenue sharing placements, maintenance and the sale
        of
        parts relating to refreshment centers previously sold to our hotel clients.
        We
        anticipate that over the next several years our revenues will be a blend
        of our
        existing products placed pursuant to our revenue-sharing program, and, to
        a
        lesser extent, from maintenance agreements and parts sales. 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 and eRoomSafes
        currently placed pursuant to 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.
  **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
  9
 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. We, however, have not placed new
        products in over two and one-half years.
  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 again fail to place additional
        equipment on a revenue sharing basis in 2005 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 $0.05 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.
  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.
  10
  **Results
        of Operations**
  **Comparison
        of Three Months Ended March 31, 2005 and 2004**
  **Revenues**
  Revenue
        Sharing Arrangements — Our revenue from revenue sharing arrangements was
        $271,039 for the three months ended March 31, 2005, compared to $271,017
        for the
        three months ended March 31, 2004, representing an increase of $22, or less
        than
        0.1%. The increase in revenue was immaterial.
  Maintenance
        Fee Revenues — Our maintenance fee revenues were $85,733 for the three months
        ended March 31, 2005, compared to $86,984 for the three months ended March
        31,
        2004, representing a decrease of $1,251, or 1.4%. The decrease was not
        material.
  Product
        Sales — Revenue from product sales was $2,607 for the three months ended March
        31, 2005, compared to $308 for the three months ended March 31, 2004,
        representing an increase of $2,299, or 746.4%. The increase in revenues,
        while
        significant from a percentage perspective, was minimal in terms of the Company’s
        overall financial results.
  **Cost
        of Revenue**
  Cost
        of
        Revenue Sharing Revenue — Our cost of revenue sharing revenue was $128,666 for
        the three months ended March 31, 2005, compared to the same amount during
        the
        three months ended March 31, 2004. The gross margin percentage on revenue
        sharing revenue was 52.5% for the three months ended March 31, 2005 as well
        as
        for the three months ended March 31, 2004. The consistency in cost of revenue
        sharing revenue and gross margin reflects a consistent number of units placed
        on
        a revenue sharing basis year-over-year.
  Cost
        of
        Maintenance Fee Revenue — Our cost of maintenance fee revenue was $14,285 for
        the three months ended March 31, 2005, compared to $16,749 for the three
        months
        ended March 31, 2004, representing a decrease of $2,464, or 14.7%. The gross
        margin percentage on maintenance fee revenues was 83.3% for the three months
        ended March 31, 2005 and 80.7% for the three months ended March 31, 2004.
        The
        decrease in our cost of maintenance fee revenue and the increase in gross
        margin
        percentages for the three months ended March 31, 2005, as compared to the
        same
        period in 2004, reflects the Company’s continuing improvement in maintaining its
        products placed in the field and the decrease in fixed overhead relating
        to the
        field operations department.
  Cost
        of
        Product Sales Revenue — Our cost of product sales revenue for the three months
        ended March 31, 2005 was $7 as compared to none for the three months ended
        March
        31, 2004, an increase of $7, or 100.0%. The gross margin percentage on revenue
        from product sales revenue was 99.7% for the three months ended March 31,
        2005
        as compared to 100% for the three months ended March 31, 2004.
  11
 The
        changes and percent changes with respect to our revenues and our cost of
        revenue
        for the three months ended March 31, 2005 and 2004 are summarized as
        follows:
 **For
                      the Three Months**
                    **Ended
                      March 31,**
                  
                  **Change**
                  
                  **Percent
                      Change****2005**
                  
                  **2004****REVENUE**Revenue-sharing
                      arrangements
                  
                  $
                  271,039
                  
                  $
                  271,017
                  
                  $
                  22
                  
                  
                  -Maintenance
                      fees
                  
                  
                  85,733
                  
                  
                  86,984
                  
                  
                  (1,251
                  )
                  
                  1.4
                  %Product
                      sales
                  
                  
                  2,607
                  
                  
                  308
                  
                  
                  2,299
                  
                  
                  746.4
                  %**Total
                      Revenue**
                  
                  $
                  359,379
                  
                  $
                  358,309
                  
                  $
                  1,070
                  
                  
                  0.3
                  %**COST
                      OF REVENUE**Revenue-sharing
                      arrangements
                  
                  
                  128,666
                  
                  
                  128,666
                  
                  
                  -
                  
                  
                  -Maintenance
                  
                  
                  14,285
                  
                  
                  16,749
                  
                  
                  (2,464
                  )
                  
                  14.7
                  %Product
                      sales
                  
                  
                  7
                  
                  
                  -
                  
                  
                  7
                  
                  
                  100.0
                  %**Total
                      Cost of Revenue**
                  
                  $
                  142,958
                  
                  $
                  145,415
                  
                  $
                  (2,457
                  )
                  
                  1.7
                  %**GROSS
                      MARGIN PERCENTAGE**Revenue-sharing
                      arrangements
                  
                  
                  52.5
                  %
                  
                  52.5
                  %Maintenance
                  
                  
                  83.3
                  %
                  
                  80.7
                  %Product
                      sales
                  
                  
                  99.7
                  %
                  
                  100.0
                  %**Total
                      Gross Margin Percentage**
                  
                  
                  60.2
                  %
                  
                  59.4
                  %
 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 March
        31,
        2005 and 2004, the trends contained therein are limited and should not be
        viewed
        as a definitive indication of our future results.
  **Operating
        Expenses**
  Selling,
        General and Administrative — Selling, general and administrative expenses,
        including non-cash compensation expense, were $163,164 for the three months
        ended March 31, 2005, compared to $256,753 for the three months ended March
        31,
        2004, representing a decrease of $93,589, or 36.5%. The decrease in our selling,
        general and administrative expenses from the three months ended March 31,
        2005
        to the three months ended March 31, 2004 reflects our ongoing commitment
        to
        further reduce fixed overhead expenses.
  Research  and
        Development Expenses — Research and development expenses were $1,576 for the
        three months ended March 31, 2005, compared to none for the three months
        ended
        March 31, 2004, representing an increase of $1,576, or 100.0%. Research and
        development expenses represented 0.4% of our total revenue for the three
        months
        ended March 31, 2005, and zero percent of our total revenue for the three
        months
        ended March 31, 2004. The increase in research and development expenses related
        to a minimal amount of research and development undertaken during the three
        months ended March 31, 2005.
  Interest
        expense was $48,426 for the three months ended March 31, 2005 as compared
        to
        $54,194 for the three months ended March 31, 2004, a decrease of $5,768,
        or
        10.6%. The decrease in interest expense related primarily to the material
        reduction in the interest rate relating to the AMRESCO loan fundings. In
        the
        fiscal quarter ended March 31, 2005, we did not realize a gain on forgiveness
        of
        liabilities and debt, as compared to a gain of $503,475 in the fiscal quarter
        ended March 31, 2004.
 12
  **Net
        Income (Loss) Attributable to Common Stockholders**
  We
        realized net income of $7,323 during the three months ended March 31, 2005
        as
        compared to net income of $407,130 during the three months ended March 31,
        2004.
        The $399,807 decrease was due primarily to the material gain on the forgiveness
        of debt and liabilities which occurred in the three months ended March 31,
        2004,
        offset, in part, by a reduction in selling, general and administrative expenses
        which occurred in the three months ended March 31, 2005. We may incur losses
        in
        the future.
  **Liquidity
        and Capital Resources**
  At
        March
        31, 2005, our principal sources of liquidity consisted of $820,042 of cash
        and
        working capital of $549,163, as compared to $646,386 of cash and working
        capital
        of $445,482 at December 31, 2004. In addition, our stockholders’ equity was
        $1,327,463 at March 31, 2005, compared to stockholders’ equity of $1,312,657 at
        December 31, 2004, an increase of $14,806. The increase in cash reflects
        the
        increase in working capital and stockholders’ equity.
  Our
        accumulated deficit decreased from $31,807,433 at December 31, 2004 to
        $31,800,110 at March 31, 2005. The $7,323 decrease in accumulated deficit
        resulted directly from the net income realized for the three months ended
        March
        31, 2005. Our accumulated deficit may increase in the future.
  Our
        operations provided net cash of $226,901 during the three months ended March
        31,
        2005, as compared to $63,469 of net cash during the three months ended March
        31,
        2004. The $163,432 increase in the net cash provided by our operating activities
        primarily resulted from the cash released from escrow in the amount of $225,000
        during the three months ended March 31, 2005, and the $503,475 gain on
        forgiveness of debt and liabilities which occurred during the three months
        ended
        March 31, 2004, offset, in part, by the decrease in net income of $399,807,
        among other items.
  Investing
        activities for the three months ended March 31, 2005 provided $18,962 of
        net
        cash, as compared to $19,000 of net cash used during the three months ended
        March 31, 2004. The increase in net cash provided related primarily to the
        $20,000 decrease in long-term deposits and restricted funds during the three
        months ended March 31, 2005 and the increase in long-term deposits and
        restricted funds during the three months ended March 31, 2004.
  Financing
        activities used $72,207 during the three months ended March 31, 2005 compared
        to
        providing net cash of $241,426 during the three months ended March 31, 2004.
        The
        decrease of $169,219 of net cash used in financing activities primarily resulted
        from the payment made to RSG Investments, LLC, or RSG, relating to our final
        settlement of an outstanding loan with RSG during the three months ended
        March
        31, 2004.
  The
        placement of products under revenue-sharing arrangements is capital intensive.
        We estimate that we must maintain approximately 6,500 units pursuant to our
        revenue-sharing program in order to provide adequate cash to sustain our
        operations. As of March 31, 2005, we had 6,630 units placed pursuant to our
        revenue-sharing program. We will require additional cash to finance future
        product placements.
  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 as existing revenue sharing
        contracts reach maturity.
  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 provide (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.
  We
        have
        made significant progress in reducing our fixed overhead expenses and we
        have
        realized several consecutive profitable quarters. However, we will require
        additional capital to place new equipment. Further, as existing revenue sharing
        contracts expire, the cash flow necessary to support our operations will
        not be
        sufficient without utilizing our existing cash reserves.
  **Contractual
        Cash Obligations and Commercial Commitments**
  The
        following table presents our contractual cash obligations and commercial
        commitments as of March 31, 2005. We have no other significant contractual
        obligations or commercial commitments either on or off balance sheet as of
        this
        date.
 
 **Contractual Cash**
                  **Obligations**
                **T****otal**
                **<
                    1**
                  **Year**
                **1-3**
                  **Years**
                **4-5**
                  **Years**
                **>5**
                  **Years**Long-term Debt
                1,691,531
                371,621
                951,190
                368,720
                -Capital
                  Lease Obligations
                1,341
                1,341
                -
                -
                -**Total**
                1,692,872
                372,962
                951,190
                368,720
                -
  **Item
                  3.**
              **Controls
                  and Procedures**
  **Evaluation
        of Disclosure Controls**
  Our
            Chief
            Executive Officer and Chief Financial Officer, after evaluating the
            effectiveness of the Company’s “disclosure controls and procedures” (as defined
            in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e)
            or
            15d-15(e)) as of the end of the period covered by this quarterly report,
            has
            concluded that our disclosure controls and procedures are effective at
            a
            reasonable assurance level based on his evaluation of these controls
            and procedures required by paragraph (b) of Exchange Act Rules 13a-15
            or
            15d-15.
  **Lack
          of Segregation of Duties**
  Management
            is aware that there is a lack of segregation of duties at the Company
            due to the
            small number of employees dealing with general administrative and financial
            matters. However, at this time management has decided that considering
            the
            abilities of the employees now involved and the control procedures in
            place, the
            risks associated with such lack of segregation are low and the potential
            benefits of adding employees to clearly segregate duties do not justify
            the
            substantial expenses associated with such increases. Management will
            periodically reevaluate this situation.
   **Changes
          in Internal Controls**
  There
            were no changes in our internal controls over financial reporting that
            occurred
            during the last fiscal quarter, *i.e.* ,
            the
            three months ended March 31, 2005, that have materially affected, or
            are
            reasonably likely to materially affect, our internal controls over financial
            reporting.
 13
  **PART
        II - OTHER INFORMATION**
  **Item
        1. Legal Proceedings.**
  We
        are,
        from time to time, parties to legal proceedings arising out of our business.
        We
        believe that there are no proceedings pending or threatened against us which,
        if
        determined adversely, would have a material adverse effect on our business,
        financial condition, and results of operations or liquidity.
  **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.
 
 14
  **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.
  **e****RoomSystem
                    Technologies, Inc.**(Registrant)Date:
                June
                    22, 2006
                By:
                /s/
                    David A. GestetnerDavid
                    A. GestetnerIts:
                Chief
                    Executive Officer and President
 
  15