Eroomsystem Technologies Inc – ‘10KSB40’ for 12/31/00

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Annual Report — Small Business — [x] Reg. S-B Item 405   —   Form 10-KSB
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10KSB40     Annual Report -- Small Business -- [x] Reg. S-B       62    387K 
                          Item 405                                               
 2: EX-10.32    Material Contract                                      9     40K 
 3: EX-10.33    Material Contract                                     10     41K 
 4: EX-10.34    Material Contract                                     10     42K 
 5: EX-10.35    Material Contract                                    249    782K 

10KSB40   —   Annual Report — Small Business — [x] Reg. S-B Item 405
Document Table of Contents

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 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

------------

 FORM 10-KSB

  X     ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
-------- OF 1934                                                                

                       For the fiscal year ended     December 31, 2000
                                                     ---------------------------

        TRANSITION REPORT UNDER 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.
--------------------------------------------------------------------------------
(Name of small business issuer in its charter)

Nevada                                   87-0540713 
--------------------------------------    --------------------------------------
(State or other jurisdiction of                (I.R.S. Employer         
incorporation or organization)                Identification No.)     

3770 Howard Hughes Parkway, Suite 175, Las Vegas, Nevada          89109   
---------------------------------------------------------------  ---------------
(Address and telephone number of principal executive offices)     (Zip Code)  

Issuer's telephone number:                    (800) 316-3070                    
                                ------------------------------------------------

Securities registered pursuant to Section 12(b) of the Act:                     

       Title of each class             Name of each exchange on which registered

-----------------------------------    -----------------------------------------
-----------------------------------    -----------------------------------------

Securities registered pursuant to Section 12(g) of the Act:                     

 Common Stock, $.001 par value
--------------------------------------------------------------------------------
 (Title of each class)

--------------------------------------------------------------------------------
 (Title of each class)

        Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 
12 months (or for such shorter period that the registrant was required to file  
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes /X/  No/ /                                                         

     Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained in this form, and no disclosure will
be contained, to the best of the registrant's knowledge, in definitive proxy or 
information statements incorporated by reference in Part III of this Form 10-K  
or any amendment to this Form 10-KSB. /X/                                       

         State issuer's revenues for its most recent fiscal year:     $2,983,640

         State the aggregate market value of voting stock held by non-affiliates
computed by reference to the price at which the common equity was sold, or the  
average bid and asked price of such common equity, as of a specified date within
the past 60 days. $5,658,308 ($0.875 per share as of March 29, 2001)            

        State the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.                             

   Common Stock, $.001 par value       7,066,019 shares as of March 29, 2001

 DOCUMENTS INCORPORATED BY REFERENCE

    The information required by Part III of this Annual Report on Form
10-KSB is incorporated by reference from the issuer's Proxy Statement on        
Schedule 14A to be filed with the Securities and Exchange Commission not later  
than 120 days after the end of the fiscal year covered by this report.          

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PART I

ITEM 1.       DESCRIPTION OF BUSINESS.                                          

OVERVIEW                                                      

      eRoomSystem Technologies has developed and introduced to the lodging
industry an intelligent, in-room computerized platform and communications       
network, or the eRoomSystem. The eRoomSystem is a computerized platform and     
processor-based system designed to collect and control data that supports our   
Refreshment Centers, eRoomSafes and other applications. These other applications
will include in-room energy management capabilities, information management     
services and direct credit card billing.                                        

         Our eRoomSystem delivers in-room solutions that reduce operating costs,
enhance hotel guest satisfaction and provide higher operating profits to our    
customers. The solutions offered by our eRoomSystem and related products have   
allowed us to establish relationships with premier hotel chains.                

  We have installed more than 13,500 Refreshment Centers and 5,500
eRoomSafes. These include installations in many of the Marriott International   
flagship properties, such as the New York Marriott Marquis, the J.W. Marriott in
Washington D.C., the Marriott Camelback Inn and others. We are negotiating with 
Bass Hotels, operator of Holiday Inn, Crowne Plaza and the Hotel                
Inter-Continental, and Carlson Hospitality Worldwide, operator of Radisson      
Hotels Worldwide, Regent International Hotels and Country Inn and Suites, to    
become their exclusive or preferred vendor. We have also installed our products 
in the Hilton, Best Western, Ramada and other established hotel chains. We      
believe that these relationships provide us with the opportunity to install our 
eRoomSystem worldwide.                                                          

       Our business model focuses on our revenue sharing program that allows
us to partner with our customers with respect to our products. Through our      
revenue sharing program, we install our products at little or no upfront cost to
our customers and share in the recurring revenues generated from sales of goods 
and services related to our products.                                           

LODGING MARKET                                                

   According to the 1999 HORWATH WORLDWIDE HOTEL INDUSTRY STUDY, the
worldwide hotel marketplace consists of approximately 11.7 million hotel rooms. 
Of the 11.7 million hotel rooms, 4.7 million hotel rooms are located in Europe  
and 3.5 million hotel rooms are located in the United States.                   

In addition, according to the 1999 DIRECTORY OF HOTEL & MOTEL 
COMPANIES; HOTELS MAGAZINE - CORPORATE 300 RANKING, JULY 1999, and the TRAVEL   
RESEARCH INTERNATIONAL LIMITED; LODGING HOSPITALITY MAGAZINE - THE BRANDS       
REPORT, AUGUST 1999, approximately three million hotel rooms are owned, managed 
or franchised by the ten largest hotel chains. These hotel chains include:      

        -        Cendant, the operator of Ramada, Days Inn and Howard Johnson;

         -        Bass Hotels, the operator of Holiday Inn, Crowne Plaza and the
Hotel Inter-Continental;                    

-        Marriott International, the operator of Ritz-Carlton,
Marriott, Renaissance and Residence Inn;    

     -        Accor, the operator of Sofitel, Novatel and Red Roof Inns;

        -        Choice Hotels, the operator of Comfort Inns & Suites, Clarion
and Econolodge;                             

-        Best Western International;                          

        -        Hilton Hotels Corporation, the operator of Hilton, Doubletree
Hotels, Embassy Suites and Hampton Inn;     

    -        Starwood Hotels, the operator of Sheraton, Westin and St.
Regis;                                      

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         -        Carlson Hospitality Worldwide, the operator of Radisson Hotels
               Worldwide, Regent International Hotels and Country Inns and
Suites; and                                 

 -        Hyatt Hotels, the operator of Hyatt and Hyatt Regency.

        Of these hotel chains listed above, we have installed more than 11,000
Refreshment Centers and 4,500 eRoomSafes in hotels operated by Marriott         
International, Hilton Hotels Corporation, Bass Hotels, Best Western             
International and Cendant.                                                      

       Many hotel properties are rated through either Automobile Association
of America's diamond rating or Mobil's star rating. In order to obtain a four-  
or five-diamond rating from Automobile Association of America, the hotel        
properties are required to have Refreshment Centers in all of their hotel rooms.
Under Mobil's star-rating, the presence of Refreshment Centers in a property's  
hotel rooms provides points that can be used toward a four- or five-star rating.
Therefore, we believe that we can market our products to the lodging industry as
an in-room amenity to enhance a hotel's ability to receive a four- or           
five-diamond rating or a four- or five-star rating.                             

OUR PRODUCTS AND SERVICES                                     

eROOMSYSTEM                                                   

        Since our inception, it has been our objective to innovate the in-room
amenities offered by the lodging industry. Our proprietary technologies create  
an intelligent, in-room computerized platform and communications network that   
comprise our eRoomSystem. At the core of our eRoomSystem is our proprietary     
hardware and software that operate as a multi-tasking imbedded operating system.
Our hardware and software can operate multiple devices and provide an           
interactive environment. The interactive environment provided through our       
eRoomSystem allows the hotel guest to input and receive information. Interactive
features for the hotel guest include locking and unlocking our products,        
receiving pricing information from the liquid crystal display as well as other  
functions.                                                                      

   The eRoomSystem provides the communication link between the hotel
guest, our products, the eRoomSystem file server located at the hotel, the      
hotel's property management system, and the file server located at our          
headquarters, or the eRoomSystem master file server. Our software is remotely   
upgradeable from our facilities. We can also remotely adjust prices, change     
messages on the liquid crystal display and change the input touchpad layout.    
From our facilities, we can control the use of our products in the event a      
participating hotel fails to pay any fees or otherwise violates the terms of its
agreement, as well as determine whether our products are active and working     
properly.                                                                       

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

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

eROOMSERV REFRESHMENT CENTERS                                 

       Historically, our primary source of revenue has been from the sale or
revenue sharing of our Refreshment Centers. In 2000, we placed 3,924 Refreshment
Centers and 3,010 eRoomSafes, of which 1,820 Refreshment Centers and 2,103      
eRoomSafes were pursuant to revenue-sharing arrangements and 2,104 Refreshment  
Centers and 907 eRoomSafes were purchases. We currently have orders on-hand for 
1,610 Refreshment Centers, 792 of which include eRoomSafes. With respect to our 
orders on-hand, 792 Refreshment Centers and 792 eRoomSafes are to be placed     
under revenue sharing agreements, and 818 Refreshment Centers are being         
purchased.                                                                      

Refreshment Centers are modular in design and consist of our  
eRoomSystem, a small absorption compression or, thermoelectric refrigeration    
unit and our unique multi-vending rack. Our multi-vending rack displays up to 33

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different beverages and/or snacks and maintains a full appearance through a     
gravity-based design. Historically, we have only offered a horizontal vending   
rack, but we intend to introduce in the near future an upright vending rack and 
a combination upright/ horizontal vending rack. Upon removal of a product from  
the Refreshment Center, the gravity-based design of our vending racks uses the  
weight of the remaining products to cause such products to roll or slide        
forward. The repair or replacement of any component of our Refreshment Center is
relatively simple and is typically provided at no additional charge to the      
property pursuant to the terms of our service and maintenance agreement. The    
Refreshment Center communicates through the eRoomSystem, which uses the hotel's 
existing telephone lines, cable television lines or electrical power outlets.   

Our Refreshment Centers operate as follows:                   

         -        A hotel guest selects a beverage or snack from our Refreshment
Center;                                     

      -        The purchase is immediately confirmed on the liquid crystal
display and acknowledged by an audible beep;

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

        -        The eRoomSystem file server communicates on a real-time basis
                with the hotel's property management system and periodically
with our eRoomSystem master file server; and

       -        The hotel's property management system posts the purchase to
the hotel guest's room account.             

       The sales data from the eRoomSystem is transmitted to the eRoomSystem
file server from which hotel employees can access periodic sales activities,    
inventory levels for restocking purposes and demographic data.                  

eROOMSAFE                                                     

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

         A common problem with in-room safes occurs at checkout when a guest may
leave the safe locked or forget to remove his or her valuables. With our        
competitors' room safes, the locked safe would typically go unnoticed until a   
subsequent hotel guest attempts to use the safe. Through the eRoomSystem, our   
eRoomSafe automatically notifies the hotel at checkout that the safe door is    
locked, providing the guest with an opportunity to remove any valuables before  
leaving the hotel.                                                              

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       THE FOLLOWING DIAGRAM REPRESENTS THE STRUCTURE AND COMMUNICATIONS NETWORK
   OF OUR eROOMSYSTEM, THE eROOMSYSTEM FILE SERVER, THE HOTEL PROPERTY
MANAGEMENT SYSTEM, AND THE eROOMSYSTEM MASTER FILE              
 SERVER:

[GRAPHIC] 

eROOMDATA MANAGEMENT                                          

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

      The information we collect has value in several key areas. First, we
currently offer our customers, as part of our service and maintenance agreement,
specific information about their guests' buying patterns and provide            
non-confidential information about other hotels in similar geographic regions.  
Second, as we continue to increase our installed room base, we believe that the 
information we collect will have value to the suppliers of goods sold in our    
Refreshment Centers, such as Coca-Cola, PepsiCo, Anheuser-Busch, Miller Brewing,
Frito-Lay, Mars and others. Third, we are developing information services to    
categorize purchases in response to specific in-room advertising programs by    
such suppliers.                                                                 

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

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

FUTURE PRODUCTS AND SERVICES                                  

      Our research and development and marketing departments are analyzing
additional value added products and services to be delivered to our customers   
using the platform of our eRoomSystem. We believe that such additional products 
and services can be bundled with our eRoomSystem or separately marketed to      
lodging industry customers to provide additional revenue sources for us.        
Although the development and delivery schedules vary for each new product and   
service, we believe that each of the following will be ready for marketing      
within the next nine months:                                                    

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      eROOMENERGY MANAGEMENT. We are negotiating with an energy management
provider to private label energy management products for us. We anticipate      
offering energy management products in the third quarter of 2001. These products
will detect in-room movement through heat and/or motion sensors. Our eRoomSystem
will communicate with the energy management products through an infrared        
communications portal. When a room is occupied, our eRoomSystem will give the   
guest complete control of the heating and air conditioning, lighting, television
and other facilities in the room. When the room is unoccupied, the eRoomSystem  
will control each of these systems and adjust each according to the most energy 
efficient settings. When a guest opens the door to re-enter the room, our       
eRoomSystem will adjust all devices to their original settings. By adjusting the
heating and air conditioning either up or down, typically 5 to 10 degrees,      
depending on the time of year, and turning off the television and lights when a 
room is unoccupied, a hotel or other facility can realize measurable energy cost
savings.                                                                        

    eROOMMAINTENANCE. Through the eRoomSystem, we also intend to offer
remote engineering and maintenance services. The eRoomSystem links each room to 
other areas of the property. By connecting each room to the front desk and to   
the engineering departments, we will create a management tool and communication 
link. When an in-room maintenance problem is discovered by engineering or       
housekeeping, the hotel employee will enter a code on the touchpad of our       
eRoomSystem, which will transmit the information to engineering and inform the  
front desk of a problem. If the problem is of a material nature, the front desk 
will hold the room until the repairs have been made. As soon as the problem is  
resolved, engineering or housekeeping will enter a code that notifies the front 
desk that the room has been repaired and is available for a guest.              

 eROOMPERSONNEL. We intend to design our eRoomSystem to dispatch
housekeeping in the most efficient manner while prioritizing the rooms that need
to be cleaned. eRoomPersonnel will permit housekeepers to enter a room and input
their personal codes on the eRoomSystem touchpad. eRoomPersonnel then proceeds  
to time how long it takes housekeeping to prepare the room. When completed,     
housekeeping inputs their codes again. The system then informs them which room  
needs to be cleaned next. If occupancy is high, eRoomPersonnel can direct       
housekeeping personnel to an unoccupied room that is scheduled for check-out. If
occupancy is low and additional clean rooms are currently available,            
eRoomPersonnel can direct housekeepers to rooms that are temporarily unoccupied 
by guests who have elected to stay another night. This process optimizes        
housekeeping operations, minimizes guest disturbances and in turn saves both    
time and money.                                                                 

         eROOMMANAGEMENT. Our eRoomSystem has the capability to support standard
credit card and smart card readers for direct billing to a customer's credit    
card, as well as other point of sale and automated teller-type functions. When  
we enter the healthcare and time-share industries, we propose to offer a direct 
credit card billing process. By placing a credit card reader adjacent to a      
hospital bed or in a time-share room, we propose to offer a billing solution    
previously unavailable. This billing process will allow healthcare and          
time-share properties to offer services and products similar to those found in  
hotel rooms, such as Refreshment Centers, eRoomSafes, on-demand movies, direct  
dial long distance and video games.                                             

SALES AND MARKETING                                           

       Historically, we have derived our revenues from the lodging industry.
To date, we have installed more than 13,500 Refreshment Centers and 5,500       
eRoomSafes. We have established relationships with Marriott International,      
Promus Hotel Corporation (purchased by Hilton Hotels Corporation) and Carlson   
Worldwide Hospitality. Due to the franchisor-franchisee relationship between    
many hotel chains and their hotel properties, even if we establish exclusive or 
preferred vendor relationships with the hotel chains, we must also enter into   
definitive agreements with the franchisees of these hotel chains for the sale or
placement of our products into the actual hotel properties.                     

      All of our relationships with hotel chains are open-ended, including
the arrangement with Promus Hotel Corporation that terminates on April 6, 2003, 
but is subject to earlier termination upon 90 days written notice from Promus.  
With the acquisition of Promus by Hilton Hotels Corporation, we entered into    
discussions with Hilton on the role of our relationship with Promus as to the   
entire Hilton company. On March 29, 2001, we were advised by Hilton that it has 
elected to recommend to its franchisees other vendors for minibars and          
refreshment centers. However, we will continue to negotiate and install our     
products with franchisees of the Hilton chain on a property-by-property basis.  

     In fiscal year 2000, we installed 2,104 Refreshment Centers and 907
eRoomSafes pursuant to purchase orders and 1,820 Refreshment Centers and 2,103  
eRoomSafes on a revenue sharing basis. We have shifted our business model to a  
revenue sharing program where we generate revenues over the seven-year term of  
each revenue sharing agreement. We expect that the concentration of revenues    
will shift to revenue sharing as our business model matures.                    

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     Our sales and marketing program consists of the following strategic
initiatives:                                                                    

         RETENTION OF SENIOR MARKETING EXECUTIVES. We are attempting to fill the
position of executive vice president of sales and marketing to oversee the      
implementation of our sales and marketing program.                              

         DEPLOYMENT OF AN EXPANDED REGIONAL SALES FORCE. We currently employ two
regional sales managers and eight independent sales representatives. We intend  
to hire six additional independent sales representatives.                       

     CONTINUED MARKETING OF THE REVENUE SHARING PROGRAM. Emphasis on our
revenue sharing program is a critical part of our sales and marketing strategy. 
Historically, the lodging industry has been resistant to purchase our products  
because of the initial capital expenditure required. In addition to product     
sales, we now offer our products through a revenue sharing program. Our revenue 
sharing program allows us to become partners with hotels by installing our      
products at little or no upfront cost and sharing the revenues generated from   
goods sold from, and usage of, our products. AMRESCO Leasing Corporation, or    
AMRESCO, will finance up to 150% of the cost of our products placed under our   
revenue sharing program, subject to satisfaction of funding requirements. Our   
products will secure the financing of AMRESCO, which is payable over seven      
years. The emphasis of our business model on a revenue sharing program          
significantly increases our need for long-term financing. Our first funding from
AMRESCO in the principal amount of $294,220.08 occurred on March 22, 2001. If   
our customers fail to meet AMRESCO's funding requirements or if AMRESCO were to 
delay or refuse to provide our required financing, we cannot assure you that    
other long-term financing will be available in sufficient amounts, on terms     
acceptable to us or at all. Our inability to obtain long-term financing may     
prevent us from placing additional products under our revenue sharing program or
manufacturing products for sale.                                                

 CONTINUED IMPLEMENTATION OF THE CORPORATE ACCOUNT STRATEGY. Our
corporate account strategy involves the negotiation and implementation of       
agreements with corporate hotel chains, brands, management companies and real   
estate investment trusts whereby we become the exclusive or a preferred vendor  
for the corporate hotel chain. Although the franchisees of these corporate hotel
chains may not be required to purchase our products or have them placed on a    
revenue sharing basis, the corporate entity would recommend to its franchisees  
the use of our products.                                                        

      We have installed our eRoomSystem in a number of flagship properties
for Marriott International, including the New York Marriott Marquis, the J.W.   
Marriott in Washington, D.C., the J.W. Marriott Lenox in Atlanta, the Marriott  
Camelback Inn, the New York Marriott Financial Center and, in April 2001, the   
New York Marriott World Trade Center. In addition, we were selected as a        
recommended vendor for Carlson Worldwide Hospitality, representing Radisson     
Hotels Worldwide, Regent International and Country Inn and Suites.              

     For the past six months, a limited number of our products have been
installed in The Bellagio - The Resort, a hotel-casino of MGM Mirage, Inc.,     
on a trial basis. On January 30, 2001, we were advised by MGM Mirage, Inc.      
that we were not selected to install our products in its hotel-casino           
properties. Although we were not selected by MGM Mirage, Inc., we are           
negotiating with several other hotel-casinos in Las Vegas, Nevada to install    
our products.                                                                   

CREATION AND ENHANCEMENT OF STRATEGIC MARKETING ALLIANCES. In 
conjunction with our corporate account strategy, our objective is to enter into 
a number of marketing alliance plans. A marketing alliance plan is a strategic  
relationship with a third-party whereby a finder's fee is paid to the party for 
its efforts in closing a sale or revenue sharing transaction.                   

        IMPLEMENTATION OF A COMPREHENSIVE DOMESTIC AND INTERNATIONAL MARKETING
PLAN. We are implementing a comprehensive marketing strategy. To this end, we   
have engaged an advertising and marketing company which has developed brochures,
a corporate name and logo, an interactive website, signage, a trade show booth, 
corporate video and compact disc presentations, media advertisements and other  
services relative to product design and corporate communications.               

       We intend to implement our international marketing strategy utilizing
the core marketing structure that we are developing domestically, including     
website, support materials, trade show materials and industry specific          
advertisements, to support our global growth strategy.                          

        We have hired a marketing coordinator who oversees our advertising and
promotional efforts by primarily utilizing hospitality trade publications. Our  
objective is to establish an international presence through partnering with     

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various trade publications. In addition, we plan to attend trade shows and      
pursue promotional activities through a strong public-relations program.        

SUPPLIERS AND ASSEMBLY                                        

     We purchase various electrical and mechanical components, injection
molded parts and basic cube refrigerators from various manufacturers and        
electronics firms. For example, we purchase our basic cube refrigerators from   
Absocold, Sanyo Corporation, Avanti, Indel-B or Vittrifrigo. Although we propose
to establish two or more turnkey manufacturing sources, we currently obtain our 
components on a purchase order basis. Historically, our suppliers have been     
dependable and able to meet delivery schedules on time. We believe that, in the 
event we cannot obtain our components from our current suppliers, alternate     
suppliers can be located without incurring significant costs or delays. We do   
not rely on any one supplier, the loss of which would inhibit our ability to    
assemble our products on a timely basis.                                        

        Our eRoomSystems, Refreshment Centers and eRoomSafes require a limited
amount of assembly. This assembly involves electronic assembly, wiring and      
testing. At our St. George, Utah facility, we are able to assemble up to 2,000  
units monthly. Since our existing facility is not sufficient to meet our        
projected growth, we will either have to establish turnkey manufacturing        
sources, expand our assembly facility or hold orders for our products           
unfulfilled. In the event that our current facility is insufficient to meet our 
projected growth, we propose to establish two or more third party turnkey       
manufacturing sources with contract manufacturers.                              

COMPETITION                                                   

   eROOMSYSTEM. As for other companies that provide in room services
through an in-room refrigerator, Bartech, Inc., a supplier of minibars that     
recently relocated to Maryland, offers the e-Fridge-TM- network system. This    
system is similar to our eRoomSystem in that it has a processor by which the    
property can record transaction information through its in-room refrigerator. In
addition, there are several companies that provide in-room video entertainment  
and information services, such as cable television, pay-per-view movies, video  
games and Internet services. We may also face competition from communications   
companies, such as cable companies, telecommunications companies and direct     
broadcast satellite companies, who may be able to modify their existing         
infrastructure to provide in-room entertainment and/or information services.    
Further, as technology is subject to rapid change, new technological            
advancements in components used for in-room services could adversely affect our 
growth strategy.                                                                

      eROOMSERV REFRESHMENT CENTERS. We face competition from suppliers of
automated minibars, such as Bartech, Inc., MiniBar America, Inc. and Dometic    
Corporation, and suppliers of honor bars, such as Dometic and MiniBar America.  
The automated minibars permit sales to be automatically posted to a hotel       
guest's room account and provide real-time information and inventory data. Honor
bars are small refrigerators where sales are manually posted to a hotel guest's 
room account by housekeeping services.                                          

       We face direct competition from suppliers of automated refrigerators,
such as the e-Fridge-TM- of Bartech and the Auto Classic of Dometic. Bartech    
offers the e-Fridge-TM- as part of its e-Fridge-TM- network system that records 
all transactions, charges the folios of hotel guests and generates automatic    
refill reports. In addition, Bartech offers a revenue sharing program which     
offers properties the ability to install Bartech's products with no cash        
expenditure. Recently, we were advised that MGM Mirage, Inc. selected Bartech to
install its products at certain of its properties after a successful test       
installation by Bartech at The Bellagio - The Resort. The Auto Classic of       
Dometic provides transaction information to the hotel's property management     
system and inventory data to the hotel and may be locked remotely. In contrast  
to Bartech and Dometic who offer automated minibars and honor bars, MiniBar     
America is principally a manufacturer of honor bars.                            

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

         eROOMSAFES. The in-room safe industry is a very competitive market with
competitors throughout the world. ElSafe, Inc. is the market leader with        
approximately 400,000 safes installed worldwide with installations in over 45   
countries. CISA Worldwide is another competitor which maintains offices in the  
United States, Asia, the Middle East, Africa and Latin America. The principal   
products of ElSafe and CISA Worldwide are electronic safes, which allow the     

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hotel guest to enter a combination to lock and unlock the safe instead of a key.
Although these competitors offer stand-alone electronic safes, our fully        
electronic safes work in conjunction with our eRoomSystem. We compete with these
companies on the basis of price, service, technology and financing options.     

INTELLECTUAL PROPERTY                                         

       We rely on a combination of trademark and copyright law, trade secret
protection and confidentiality and/or license agreements with our employees,    
customers and business partners to protect our proprietary rights in our        
products, services, know-how and information. We currently hold three patents,  
Patent Nos. 4,857,714, 4,883,948 and 4,939,352, filed under the name "Credit    
Card Storage System," all of which protect the use of our credit card           
technology. These three patents expire on August 14, 2006, November 27, 2006 and
July 2, 2007, respectively. These patents have not been highly utilized in the  
lodging industry, but we believe they are important to our future product       
offerings in the healthcare and time-share industries. In addition, we applied  
for trademarks and service marks for eRoomSystem, eRoomServ Refreshment Center, 
eRoomSafe, eRoomManagement, eRoomEnergy, eRoomData, eRoomMaintenance and        
eRoomPersonnel. We have also registered our logo and have submitted two patent  
applications with respect to our Refreshment Centers.                           

     Our proprietary software consists of three modules and provides the
operating system for our eRoomSystem. The first module is an operating system   
that permits messages to be scrolled on the flat panel display of our           
eRoomSystem and allows hotel guests to interface with our products. The second  
module is a Windows-Registered Tradmark- based program that provides a          
communication link between our eRoomSystem, our products, our eRoomSystem hotel 
file server and the hotel's property management system. The third module is a   
Windows-Registered Tradmark- based program that collects data from our          
eRoomSystem hotel file server and provides a variety of management and          
operational reports to us and our customers.                                    

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

RESEARCH AND DEVELOPMENT                                      

       We currently have three software developers and one hardware engineer
on our staff. Our research and development department focuses on upgrading our  
proprietary software and hardware that make up our eRoomSystem. As our          
customers, current and future, use a wide range of property management systems, 
we must continuously monitor and update our proprietary software so that the    
software remains stable and works with the relevant property management system. 
In addition, as we expand our business, we will need to increase the size of our
research and development department in order to integrate additional services   
into our eRoomSystem and modify our eRoomSystem, as needed, to serve other      
markets.                                                                        

HISTORICAL SUMMARY                                            

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

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   We have three wholly-owned subsidiaries, RoomSystems, RSi BRE and
eRoomSystem SPE. RoomSystems is our service and maintenance subsidiary that     
installs all of our products, provides electronic software upgrades to our      
customers, provides customer service and maintenance for our products and trains
hotel personnel on the use and maintenance of our products. All of the          
outstanding shares of RoomSystems common stock have been pledged to AMRESCO.    

   RSi BRE was formed as part of the Equipment Transfer Agreement we
entered into with RSG Investments, LLC, a privately-held company. RSi BRE       
currently holds approximately 2,270 Refreshment Centers and approximately 1,860 
eRoomSafes. RSG Investments was granted the right to receive a maximum of $0.57 
per Refreshment Center per day of the revenue realized from 2,050 of the        
Refreshment Centers held by RSi BRE. We have pledged the outstanding shares of  
RSi BRE common stock to RSG Investments and do not have control over RSi BRE.   
The board of directors of RSi BRE consists of a majority of outside directors.  
RSi BRE may not make cash distributions without the unanimous approval of its   
board of directors. We will gain control over RSi BRE when we satisfy our       
remaining obligations to RSG Investments. Once we make all such payments, or    
once RSG Investments accepts an offer of a lump-sum discounted present value of 
the payments, the ownership of the Refreshment Centers that are subject to the  
Equipment Transfer Agreement will be transferred from RSi BRE to us. We         
anticipate that RSi BRE would then be dissolved.                                

    eRoomSystem SPE was formed as part of our long-term financing with
AMRESCO. eRoomSystem SPE will own all the products funded by AMRESCO under our  
revenue sharing program. AMRESCO will take a senior security interest in all of 
the assets of eRoomSystem SPE. Unlike RSi BRE, we control eRoomSystem SPE and   
its financial results will be consolidated with those of eRoomSystem            
Technologies and RoomSystems.                                                   

GOVERNMENT REGULATION                                         

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

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

EMPLOYEES                                                     

        On January 26, 2001, we terminated the employment of fifteen employees
in an effort to maximize operational efficiencies and reduce monthly expenses.  
In addition, we expanded the responsibilities of other positions to account for 
the terminations. We took a one-time restructuring charge of $418,606 in the    
fourth quarter of 2000, but estimate that the restructuring will result in a    
$1.1 million reduction in annual overhead. As part of our restructuring, we     
relocated our software development department to Las Vegas, Nevada.             

        As a result of the restructuring, we currently employ thirty full-time
and three part-time employees in our St. George, Utah facility and three        
full-time employees in our Las Vegas office. We anticipate the largest growth in
employees will occur in the area of field operations. None of our employees is  
subject to a collective bargaining agreement. Of our employees, we currently    
have three employees engaged in product assembly and propose to hire temporary  
employees as needed. Our in-house staff installs our products at our customers' 
properties. Our in-house staff, which currently consists of seven employees,    
also performs physical maintenance of our products under our maintenance        
agreements. Eventually, we will outsource a portion of the installation and     
maintenance of our products.                                                    

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ITEM 2.       DESCRIPTION OF PROPERTY.                                          

     We maintain an office at 3770 Howard Hughes Parkway, Suite 175, Las
Vegas, Nevada. We lease the office space pursuant to a six-month lease at the   
rate of $1,634 per month. The lease began on October 31, 2000 and ends on April 
30, 2001. We also have offices and a research and development and assembly      
facility located at 390 North 3050 East, St. George, Utah. This lease commenced 
on November 1, 1997 and expires on October 31, 2002. The current monthly lease  
rate is $9,500.                                                                 

ITEM 3.       LEGAL PROCEEDINGS.                                                

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

     On September 27, 1999, Royal W. Minson II, our former president and
chief operating officer, filed for protection in the United States Bankruptcy   
Court for the Northern District of California, Case No. 99-47533-TD-7, under    
Chapter 7 of the United States Bankruptcy Code. Prior to the filing, Mr. Minson 
received 121,875 shares of our common stock upon the exercise of options and    
executed demand promissory notes in the aggregate original principal amount of  
$568,750 to pay for the shares. The bankruptcy schedules list Mr. Minson's      
shares as an asset and the demand promissory notes as liabilities. On January 5,
2000, the Bankruptcy Court entered a discharge order. We filed a proof of claim 
for the demand promissory notes executed by Mr. Minson, plus accrued interest on
such notes. On November 8, 2000, we submitted to the bankruptcy trustee a cash  
offer of $180,000 relating to the acquisition of the 121,875 shares of common   
stock. Subsequently, we withdrew our purchase offer and have agreed to assist   
the trustee in the sale of such shares in the public market through the         
registration of the 121,875 shares pursuant to our selling stockholder          
registration statement. We anticipate that the sale of the 121,875 shares will  
occur during the second and third quarter of 2001.                              

    On March 2, 1999, Willow Creek Systems, Inc., a former supplier of
circuit boards, brought an action against us that is currently pending in Salt  
Lake County Third District Court, State of Utah, Civil No. 99-0902417. Willow   
Creek is no longer an operating entity. In its complaint, Willow Creek alleged  
breach of contract and seeks payment in the amount of approximately $125,000    
from us for materials delivered pursuant to purchase orders. On March 12, 2001, 
we settled the Willow Creek matter in consideration for a one-time cash payment 
of $85,000 and 15,000 restricted shares of our common stock.                    

     On March 28, 2001, we received a letter from counsel for our former
chairman and chief executive officer, Steven L. Sunyich, in which counsel claims
that Mr. Sunyich is due certain severance and other payments pursuant to the    
terms of his terminated employment agreement. We are in discussions with Mr.    
Sunyich and his counsel as to the claims made in the March 28, 2001 letter.     

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

Not applicable.                                               

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 PART II

ITEM 5.       MARKET FOR COMMON EQUITY RELATED STOCKHOLDER MATTERS.             

         eRoomSystem's authorized capital stock consists of 50,000,000 shares of
common stock, $0.001 par value; 5,000,000 shares of preferred stock, $0.001 par 
value; 500,000 shares of Series A convertible preferred stock, $0.001 par value;
2,500,000 shares of Series B convertible preferred stock, $0.001 par value; and 
2,000,000 shares of Series C convertible preferred stock, $0.001 par value. Our 
current authorized capital was effected through an amendment and restatement of 
our articles of incorporation on March 29, 2000. As of March 29, 2001, there    
were 7,066,019 shares of common stock outstanding and no shares of any class of 
preferred stock outstanding                                                     

HIGH AND LOW CLOSING SALE PRICES OF OUR COMMON STOCK          

        As of March 29, 2001, our outstanding shares of common stock were held
by approximately 725 stockholders. Our common stock is quoted and traded on the 
Nasdaq SmallCap Market under the trading symbol "ERMS" since August 3, 2000. The
following table sets forth the high and low closing sale prices of our common   
stock, as reported by the Nasdaq SmallCap Market, during the periods indicated. 

                                                                [Download Table]

       CALENDAR QUARTER ENDED                 LOW               HIGH       
--------------------------------------  ----------------  -----------------
                                                                           
     September 30, 2000                      $4.5000            $6.3750    
     December 31, 2000                       $1.3125            $4.8750    
     March 31, 2001 (through                 $0.8750            $2.8750    
       March 29, 2001)                                                     

         The last reported sale price of our common stock on the Nasdaq SmallCap
Market on March 29, 2001 was $0.8750 per share. We are not aware of any public  
market for the warrants held by warrant holders.                                

DIVIDEND POLICY                                               

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

 The terms of our Series A convertible preferred stock, Series B
convertible preferred stock and Series C convertible preferred stock provided   
for annual cumulative dividends of 8%, 6% and 7%, respectively. Upon the        
consummation of our initial public offering on August 9, 2000, $250,124,        
$275,677 and $15,016 in accrued dividends on our Series A, Series B and Series C
convertible preferred stock, respectively, were due and payable. In addition,   
the previously outstanding shares of Series A convertible preferred stock,      
Series B convertible preferred stock and Series C convertible preferred stock   
were converted into shares of our common stock at that time. All remaining      
accrued dividends of shares of common stock have been paid and all accrued      
dividends of cash will be paid upon the receipt from the remaining holders of   
the stock certificates for Series A convertible preferred stock for conversion  
into shares of common stock.                                                    

RECENT SALES OF UNREGISTERED SECURITIES                       

         In August 2000, we issued 21,841 shares of common stock as a payment of
interest to holders of outstanding notes issued by us. This issuance of         
securities was exempt from registration in reliance on Section 4(2) of the      
Securities Act.                                                                 

In September 2000, we issued 12,176 shares of common stock to 
stockholders who possessed anti-dilution protection from our prior reverse stock
splits. Due to an oversight by us, the shares of common stock were not issued   

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until September 2000. This issuance of securities was exempt from registration  
in reliance on Section 4(2) of the Securities Act.                              

         In October 2000, we issued 5,670 shares of common stock as a payment of
interest to an employee who loaned us funds. The shares were valued at $14,250, 
or $3.46 per share. This issuance of securities was exempt from registration in 
reliance on Section 4(2) of the Securities Act.                                 

     No underwriters were involved in the foregoing sales of securities.
These sales were made in reliance upon an exemption from the registration       
provisions of the Securities Act set forth in Section 4(2) thereof relative to  
sales by an issuer not involving any public offering or the rules and           
regulations thereunder, or, in the case of options to purchase common stock     
granted pursuant to our stock option plan, Rule 701 of the Securities Act. All  
of the foregoing securities are deemed restricted securities for purposes of the
Securities Act.                                                                 

USE OF PROCEEDS FROM OUR INITIAL PUBLIC OFFERING              

    On August 9, 2000, we completed the initial public offering of our
common stock. The managing underwriter in the offering was Donald & Co.         
Securities Inc. Our shares of common stock sold in the offering were registered 
under the Securities Act in a Registration Statement on Form SB-2, as amended   
(File No. 333-34882). The Securities and Exchange Commission, or the Commission,
declared the Registration Statement effective on August 2, 2000.                

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

   From the effective date of the Registration Statement through the
end of the fiscal year ended December 31, 2000, we have used approximately      
$7.05 million of the $9.86 million of net proceeds from the initial public      
offering as follows:                                                            

                                                        [Enlarge/Download Table]

                            USE OF PROCEEDS TO DATE                                  AMOUNT   
                                                                                              
Funding for production and installation of eRoomSystems, Refreshment Centers                  
      and eRoomSafes........................................................    $      945,506
Repayment of a substantial portion of our outstanding indebtedness and related                
      accrued interest......................................................         3,728,593
Payment of cash dividends on our Series A convertible preferred stock.......           203,295
Payment of cash dividends on our Series C convertible preferred stock.......             9,677
Advertising and promotional expenses........................................           200,000
Research and development to improve our existing products and services and to                 
      develop our future products and services..............................           100,000
General corporate purposes and working capital..............................         1,861,606
                                                                                --------------
                                     TOTAL                                      $    7,048,977
                                                                                ==============

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ITEM 6.                                                                         

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.                      

 The following discussion should be read in conjunction with our
financial statements and the notes thereto.                                     

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, or Refreshment Centers, electronic room safes, or eRoomSafes, and other
proposed applications. These other applications will include information        
management services, in-room energy management capabilities, credit card/smart  
card capabilities for direct billing and remote engineering and maintenance     
services.                                                                       

 Our interactive Refreshment Centers provide hotel guests with a
selection of up to 33 different beverages and snacks and offer the lodging      
industry an opportunity to capture additional in-room revenues and reduce       
operating costs. Our eRoomSafes have sufficient storage space for large items   
such as laptop computers, personal video cameras and briefcases and generate    
additional revenue. 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, Doubletree Hotels and Bass     
Hotels. We believe that our hotel relationships will provide us with the        
opportunity to install our eRoomSystem and related products in premier hotels.  

    One of the byproducts of our technology is the information we have
collected since our first product installation. To date, we have collected over 
fourteen million room-nights of data. Through our eRoomSystem, we are able to   
collect information regarding the usage of our products on a real-time basis. We
use this information to help our customers increase their operating             
efficiencies. Following the establishment of our core business, we also intend  
to market this information to suppliers of goods sold in our Refreshment Centers
and to other users desiring information on the buying patterns of hotel guests  
for goods and services.                                                         

  We believe that our eRoomSystem and developing technologies will
provide a foundation for expansion into the healthcare and time-share           
industries. We propose to provide healthcare facilities with a comprehensive    
room information and management system that will allow these facilities to      
provide patients with a wide array of in-room amenities not available to them in
the past. These amenities will include Refreshment Centers, eRoomSafes, direct  
dial long distance, on-demand movies and other products and services commonly   
found in a hotel room. Similar opportunities exist in the time-share industry.  
By offering a direct credit card billing system, a healthcare or time-share     
facility can offer similar services available in hotels.                        

DESCRIPTION OF REVENUES                                       

     We have received substantially all of our revenues from the sale or
placement under a revenue sharing program of our products in hotels, and 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 their   
guests, makes us 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 typically 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.                                                                   

    Historically, we have been restricted in our ability to market our
products due to limited working capital. Prior to 1998, our marketing efforts   
focused primarily on selling our products. In 1998, as a result of the lodging  
industry's general lack of available financing or capital for the purchase of   
equipment, we modified our business model to emphasize our revenue sharing      
program as our primary product placement program. As a result of our shift in   
focus to our revenue sharing program, our gross revenues decreased in 1998 and  
1999 and significantly greater capital requirements were added                  

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to our business model. However, our revenue sharing program provides us with an 
ongoing seven-year revenue stream under each revenue sharing agreement. Because 
many of our customers in the lodging industry traditionally have limited        
capacity to finance the purchase of our products, we designed our revenue       
sharing program accordingly.                                                    

        Through our revenue sharing plan, we install our products at little or
no upfront cost to our customers and share in the recurring revenues generated  
from sales of goods and services related to our products. Ownership of the      
Refreshment Centers and eRoomSafes is retained by us throughout the term of the 
revenue sharing agreements. We retain the right to re-deploy any systems        
returned to us upon the expiration or earlier termination of the revenue sharing
agreements. We believe that our revenue sharing program will increase future    
placements of our products; however, we cannot assure you that we will be       
successful in this effort.                                                      

We have experienced substantial fluctuations in revenues from 
period-to-period as a result of limited working capital to fund the assembly of 
our products and to maintain sufficient component inventories. In addition to   
limited working capital, fluctuations in revenues have partially resulted from  
the transition to our revenue sharing program under which revenues are          
recognized over the seven-year life of the contract instead of immediately upon 
installation of the product. We anticipate that the majority of our revenues    
will result from the placement of our products pursuant to our revenue sharing  
program, followed by sales and, to a lesser extent, from maintenance agreements.
We project that we will receive approximately 60% of the recurring revenues from
the sale of goods and services generated by the Refreshment Centers and         
eRoomSafes placed under the revenue sharing agreements. Our customers receive   
the remainder of the recurring revenues. AMRESCO will be paid from our portion  
of the revenues.                                                                

  We have installed more than 13,500 Refreshment Centers and 5,500
eRoomSafes primarily in the United States, as well as in Brazil, Canada and the 
Bahamas. We intend to continue to offer our products domestically and           
internationally to the lodging industry, and will tailor our products and       
services for introduction into the healthcare and time-share industries.        

   Following the establishment of our core business, we also plan to
increase our revenues by bundling additional products and services with our     
current products, such as our in-room energy management system and information  
management services. We anticipate that as the installation base of our products
increases, the marketability and value of the information we collect and manage 
will increase. We also expect to generate revenue from the packaging and        
marketing of our information-based data as our installation base expands.       

REVENUE RECOGNITION                                           

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

         We 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.                                        

   We anticipate profit margins will increase as a result of greater
placement of our products pursuant to our revenue share program. We also expect 
to 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 proposed in-room energy management system and our information management    
services.                                                                       

     Maintenance fees are expected to constitute a greater percentage of
total revenues in the future due to our focus on revenues generated from our    
revenue sharing program, which requires maintenance agreements. Our             
installation, maintenance and license agreements stipulate that we collect a    
maintenance fee per Refreshment Center per day to be paid monthly. We expect to 
generate gross profit margins of approximately 40% from our maintenance-related 
revenues. We base this expectation on our historical cost of maintenance of     
approximately $0.04 per unit per day and, pursuant to our maintenance           
agreements, our projected receipt of $0.08 per unit per day.                    

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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 Refreshment Centers and eRoomSafes 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 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.               

RESULTS OF OPERATIONS                                         

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

                                                        [Enlarge/Download Table]

                                                                  Year ended December 31,
                                                                    1999         2000    
                                                                  --------     --------  
                                                                                         
Statement of Operations Data:                                                            
Revenue:                                                                                 
   Product sales ...............................................      26.7%        85.6% 
   Revenue share arrangements ..................................      39.5          8.9  
   Maintenance fees ............................................      33.8          5.5  
                                                                  --------     --------  
      Total revenue ............................................     100.0        100.0  
                                                                  --------     --------  
Cost of revenue:                                                                         
   Product sales ...............................................      21.8         64.5  
   Revenue share arrangements ..................................      30.7          3.1  
   Maintenance .................................................      14.6          4.6  
                                                                  --------     --------  
      Total cost of revenue ....................................      67.1         72.2  
                                                                  --------     --------  
Gross margin ...................................................      32.9         27.8  
                                                                  --------     --------  

Operating expenses:                                                                      
   Selling and general and administrative ......................     461.2        137.6  
   Restructuring costs .........................................      14.0         14.0  
   Research and development (exclusive of non-cash compensation)      50.2         12.2  
                                                                  --------     --------  
      Total operating expenses .................................     511.4        163.9  
                                                                  --------     --------  
Loss from operations ...........................................    (478.5)      (136.1) 
                                                                  --------     --------  
Other income (expense):                                                                  
   Interest expense ............................................    (267.2)        46.0  
   Write-off of note receivable ................................        --        (13.4) 
   Equity in income of unconsolidated, wholly owned subsidiary .      27.3         (0.5) 
   Interest and other income ...................................      39.0          4.9  
                                                                  --------     --------  
      Other expense, net .......................................    (200.9)       (55.0) 
                                                                  --------     --------  
Loss before income taxes and extraordinary loss ................    (679.4)      (191.1) 
Loss before extraordinary loss .................................    (679.4)          --  
Extraordinary loss, net of income taxes ........................        --           --  
                                                                  --------     --------  
Net loss .......................................................    (679.4)%     (191.1) 
                                                                  ========     ========  
Dividends related to convertible preferred stock ...............    (112.3)      (187.8) 
                                                                  ========     ========  
Loss attributable to common stockholders .......................    (791.7)%     (378.9) 
                                                                  ========     ========  

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YEARS ENDED DECEMBER 31, 2000 AND 1999                        

REVENUES                                                      

 Product Sales -- Our revenue from product sales was $144,282 in
revenues from product sales in 1999 compared to $2,552,578 in 2000, representing
an increase of $2,408,296. The increase in revenue from product sales was due to
increased orders and the fulfillment of orders that we were previously unable to
install due to our pre-initial public offering cash constraints.                

  Revenue Sharing Arrangements -- Our revenue from revenue sharing
arrangements was $213,654 for 1999 and $266,730 for 2000, representing an       
increase of $53,076, or 25%. The increase in revenue from revenue sharing       
arrangements was due primarily to increase placements of our products pursuant  
to our revenue sharing program.                                                 

         Maintenance Fee Revenue -- Our maintenance fee revenue was $182,581 for
1999 and $164,332 for 2000, representing a decrease of $18,249, or 10%. The     
decrease in maintenance for revenue was due primarily to the expiration of      
maintenance contracts representing 753 units and the transfer of Refreshment    
Centers to RSi BRE, an unconsolidated subsidiary in 1999.                       

COST OF REVENUE                                               

        Cost of Product Sales Revenue -- Our cost of product sales revenue was
$118,010 for 1999 compared to $1,926,333 for 2000, an increase of $1,808,323.   
The increase in cost of product sales revenue was due to the sale of 1,624      
Refreshment Centers and 907 eRoomSafes during 2000. The gross margin percentage 
on revenue from product sales revenue was 25% in 2000 compared to 18% for 1999. 
The increase in gross margin percentage on product sales revenue resulted from  
efficiencies obtained in increased production volume.                           

        Cost of Revenue Sharing Revenue -- Our cost of revenue sharing revenue
was $165,995 for 1999 and $91,558 for 2000, representing a decrease of $74,437, 
or 45%. The decrease in the cost of revenue sharing revenue was due to the      
transfer of Refreshment Centers to RSi BRE. The gross margin percentage on      
revenue sharing revenue was 22% in 1999 and 66% in 2000. The increase in gross  
margin percentage on revenue sharing revenue resulted from the increased sales  
generated by properties in comparison to the capital invested by RSi BRE.       

    Cost of Maintenance Revenue -- Our cost of maintenance revenue was
$78,518 for 1999 and $137,770 for 2000, representing an increase of $59,252, or 
75%. The gross margin percentage on maintenance revenues was 57% in 1999 and 16%
in 2000. The increase in our cost of maintenance revenue and the decrease in    
gross margin percentage was primarily due to the expense associated with the    
repair of a third party manufacturing defect and hardware and software upgrades.

OPERATING EXPENSES                                            

Selling, General and Administrative -- Selling, general and   
administrative expenses, exclusive of non-cash compensation expense, were       
$2,492,816 for 1999 and $4,246,021 for 2000, representing an increase of        
$1,753,205, or 70%. Selling, general and administrative expenses represented    
462% of our total revenues in 1999 and 142% of our total revenues in 2000. The  
increase in selling, general and administrative expenses was primarily due to   
the increased payroll and advertising expense in anticipation of increased sales
activities. In addition, we experienced an increase in legal, accounting and    
investor relations expenses in 2000, which expenses we expect to decrease as a  
percentage of total revenue.                                                    

        Research and Development Expenses -- Research and development expenses
were $271,230 for 1999 and $364,960 for 2000, representing an increase of       
$93,730, or 35%. As our revenue increases, we expect research and development   
expenses to increase as well. Research and development expenses represented 50% 
of our total revenue in 1999 and 12% of our total revenue in 2000. The decrease 
in research and development expenses as a percentage of total revenue resulted  
from increased sales.                                                           

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    Non-Cash Compensation Expense -- Non-cash compensation expense was
$105,005 for 1999 and $564,674 for 2000, an increase of $459,669, or 438%. The  
increase in non-cash compensation expense is due primarily to the number of     
options and warrants issued in 2000.                                            

      Other Income (Expense), Net -- Other expense was $1,086,123 for 1999
and $1,641,355 for 2000, representing an increase of $555,232, or 51%. The      
increase in other expense is due primarily to interest expense and the write-off
of a stockholder receivable of $399,000 which became uncollectable in 2000.     

LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS                      

      We incurred losses attributable to common stockholders of $4,279,444
and $11,306,295 during 1999 and 2000, respectively. The $7,026,851 increase in  
the loss attributable to common stockholders was due primarily to increased     
selling, general and administrative expenses, the non-cash compensation expense 
discussed above, increased interest expense, the write-off of a $399,000        
stockholder receivable and a $4,996,661 increase in dividends related to        
convertible preferred stock. We have continued to incur losses subsequent to    
December 31, 2000 and, as a result, have experienced an increase in accumulated 
deficit. We believe that we will continue to incur losses for a period of time. 

DIVIDENDS RELATED TO CONVERTIBLE PREFERRED STOCK              

        During 1998, we obtained equity capital through the issuance of Series
A convertible preferred stock which provides for annual cumulative dividends of 
8%. The outstanding shares of Series A convertible preferred stock were         
converted to common stock upon the closing of our initial public offering. In   
connection with the Series A convertible preferred stock, we have recorded an   
additional dividend of $1.8 million to reflect the contingent beneficial        
conversion feature of our Series A convertible preferred stock, a conversion    
feature that provides for conversion at a ratio greater than one-to-one. The    
dividends on Series A convertible preferred stock represented $18,541 in 1998,  
$144,000 in 1999 and $87,585 in the nine months ended September 30, 2000. We    
have paid $146,410 of these dividends through December 31, 2000.                

        During 1999, we obtained equity capital through the issuance of Series
B convertible preferred stock which provides for annual cumulative dividends of 
6%. The dividends on the Series B convertible preferred stock are payable in    
shares of common stock and represented $141,899 in 1999 and $275,679 in 2000.   
The outstanding shares of Series B convertible preferred stock were converted   
into 2,135,056 shares of common stock upon the closing of our initial public    
offering. The holders of Series B convertible preferred stock received a        
$1,249,008 beneficial conversion feature at the date of issuance and an         
additional $2,498,016 beneficial conversion feature on March 29, 2000 in        
connection with the modification of the conversion rate. The Company recognized 
dividends of $3,425,654 during 2000 related to the beneficial conversion feature
of the Series B convertible preferred stock.                                    

     During March and April 2000, we obtained equity capital through the
issuance of Series C convertible preferred stock which provides for annual      
cumulative dividends of 7%. The outstanding shares of Series C convertible      
preferred stock were converted into 178,318 shares of common stock upon the     
closing of our initial public offering. Upon the closing of our initial public  
offering, $15,016 of dividends were payable, of which $6,124 have been paid     
through December 31, 2000. The remaining dividends will be released upon the    
receipt from the holders of stock certificates for Series C convertible         
preferred stock for conversion into common stock.                               

FINANCING ARRANGEMENT WITH AMRESCO LEASING CORPORATION        

     In 1999, we entered into the amended and restated program agreement
with AMRESCO which represented an exclusive, post-installation, financing       
arrangement for the funding of units placed with domestic hotel customers under 
our revenue sharing agreements. On May 11, 2000, we replaced this agreement with
a master business lease financing agreement. Finally, on February 23, 2001, we  
amended and restated the master business lease financing agreement and related  
exhibits. Under the terms of this agreement, we can finance up to 150% of the   
fully burdened cost to manufacture and install our products, through an         
open-ended line of credit, over the seven-year term of the agreement. AMRESCO   
may securitize a portion or all of the outstanding funds under the financing    
arrangement. In the event of a securitization, a portion of the outstanding     
funds under the financing arrangement would become asset-backed securities      
secured by the units and the revenues generated by the units. The funding under 
our financing arrangement with AMRESCO is made on a property-by-property basis  
and, with respect to the funding for each property, may be prepaid.             

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         As part of the financing, we have formed a new entity, eRoomSystem SPE,
Inc., a Nevada corporation and wholly-owned subsidiary. eRoomSystem SPE will own
all the units funded by AMRESCO under revenue sharing agreements. AMRESCO will  
take a senior security interest in the units financed under the financing       
agreement, and all proceeds generated by and derived from those products, and   
has a pledge of all common stock outstanding of eRoomSystem SPE.                

    The interest rate for the funds under the financing arrangement is
based upon the seven-year treasury rate plus an additional incremental rate that
varies depending upon the total amount outstanding under the financing          
arrangement. The incremental rate will vary according to the thresholds provided
in the following table:                                                         

                                                        [Enlarge/Download Table]

THRESHOLD                                                                  INTEREST RATE         
------------------------------------------------------------------  -----------------------------
                                                                                                 
Aggregate funds outstanding of less than $10 million                  Seven-year treasury rate   
                                                                             plus 12.5%          
Aggregate funds outstanding from $10 million until the first          Seven-year treasury rate   
    securitization by AMRESCO                                                plus 10.0%          
Aggregate funds outstanding after the first securitization by         Seven-year treasury rate   
    AMRESCO and less than $125 million                                       plus 9.5%           
Aggregate funds outstanding of more than $125 million and equal       Seven-year treasury rate   
    to $150 million                                                          plus 8.5%           
Aggregate funds outstanding of more than $150 million and equal       Seven-year treasury rate   
    to $175 million                                                          plus 7.5%           
Aggregate funds outstanding of more than $175 million                 Seven-year treasury rate   
                                                                             plus 6.5%           

The actual interest rate for the funding is determined on the date of funding by
AMRESCO. The first AMRESCO financing, which occurred on March 22, 2001 in the   
principal amount of $249,220.08, accrues interest at the rate of 17.57% per     
annum, which is equal to the seven-year treasury rate of 5.07% plus 12.5%.      

        In order for us to qualify for funding under our financing arrangement
with AMRESCO, we first identify properties that maintain specific performance,  
occupancy and liquidity standards to qualify for funding. Once we identify a    
qualified property, we enter into a revenue share agreement with the property,  
install our products and submit a preliminary application for funding to        
AMRESCO. Upon the approval of our preliminary application for funding and upon  
the successful completion of a 90-day seasoning period, we submit a final       
application for funding to AMRESCO. Within seven days, AMRESCO notifies us as to
whether the minimum performance standards, as they relate to the property, have 
been met and whether our final application for funding is approved. Once        
approval is obtained, we will transfer the lease and ownership of the units to  
eRoomSystem SPE simultaneous with the receipt of funding from AMRESCO.          

 A property will satisfy the minimum performance criteria if the
property retains a minimum of 20% of the gross daily revenue generated on a per 
unit per day basis during the 90-day period and remains current in its payments.
By requiring the property to retain a minimum of 20% of the gross daily revenue,
AMRESCO attempts to provide the property with sufficient cash flow such that the
property would not, in the event of bankruptcy, terminate the revenue sharing   
arrangement and, as a result, preserve the revenue stream under the revenue     
sharing arrangement. Although we modify the basic structure of our revenue      
sharing program to reflect the particular demographics of each property, our    
basic revenue sharing program provides that we collect an average of 90% of the 
initial $0.78 generated by each unit per day and 15% of all revenue generated by
each unit per day over the initial $0.78 generated. The revenue generated by    
each unit per day is calculated by dividing the gross revenues generated by all 
units in the property on a monthly basis by the number of days in the month and 
the total number of units installed at the property.                            

       Under our basic revenue sharing program, a property must have average
revenues of $0.90 per unit per day to satisfy the performance criteria of       
AMRESCO and to qualify for funding under this financing arrangement. The minimum
average revenue of $0.90 is calculated as follows:                              

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                                                        [Enlarge/Download Table]

                                   MINIMUM GROSS REVENUES    AMOUNT TO eROOMSYSTEM                        
       COLLECTION RATE                    PER DAY                 TECHNOLOGIES        AMOUNT TO PROPERTY  
-------------------------------  --------------------------- -----------------------  --------------------
                                                                                                          
    90% of the first $0.78                  $0.90                      $0.702                 $0.078      
   15% above the first $0.78                $0.90                      $0.018                 $0.102      
                                 =========================== =======================  ====================
                                            TOTAL                      $0.720                 $0.180      

Accordingly, if a property were to generate revenues of $0.90 per unit per day, 
we would receive $0.72 per unit per day and the property would receive $0.18 per
unit per day. Due to the historical performance of our units, we believe that   
the units placed pursuant to our basic revenue sharing program will meet the    
performance criteria of AMRESCO and qualify for funding under our financing     
arrangement with AMRESCO.                                                       

       The placement of products per revenue sharing arrangements is capital
intensive. We estimate that we must place approximately 16,000 units pursuant to
our revenue sharing program in order to become profitable. Although we are      
proposing to finance our planned expansion through the proceeds our financing   
arrangement with AMRESCO, we will need to have sufficient capital to fund our   
operations during the 90-day seasoning period. In this regard, we may have      
insufficient cash on hand to finance our planned expansion and meet our capital 
expenditure and working capital requirements. There is no assurance that we will
be able to obtain additional capital in order to fund our operations during the 
90-day seasoning period or that our customers will meet the minimum performance 
criteria established by AMRESCO as a pre-requisite to receiving any funding from
AMRESCO. If we do have sufficient capital to fund operations during the 90-day  
seasoning period or if we do not receive sufficient financing from AMRESCO, we  
may have to shift more placements of our units from revenue sharing to sales.   
These matters raise doubt about our ability to continue as a going concern.     

LIQUIDITY AND CAPITAL RESOURCES                               

   On August 9, 2000, we consummated our initial public offering for
1,800,000 shares of common stock. We received gross proceeds of $11.7 million   
and, after deducting the underwriting discounts and commissions and the offering
expenses, net proceeds of approximately $9.86 million. We also registered       
270,000 shares of common stock pursuant to the same registration statement as   
part of an over-allotment option granted to the underwriters. The underwriters  
had 30 days from the effective date of the registration statement, or until     
September 1, 2000, to exercise the over-allotment option, but did not do so. The
net offering proceeds have been and will be used for funding the production and 
installation of our products and services, the repayment of a substantial       
portion of our outstanding indebtedness and related accrued interest, the       
payment of cash dividends on our Series A and Series C convertible preferred    
stock, our advertising and promotional expenses, additional research and        
development to improve our existing products and services and to develop our    
future products and services, and general corporate purposes and working        
capital.                                                                        

        As of December 31, 2000, we had cash of $2,811,023 and working capital
of $2,388,359 compared to cash of $113,252 and a working capital deficit of     
$2,650,616 at December 31, 1999. The increases in cash and working capital were 
the result of cash provided by our initial public offering, net of cash being   
used in operations, investment in RSi BRE, increases in inventories and         
decreases in deferred offering and financing costs. These uses of cash were     
offset, in part, by the proceeds from our Series C convertible preferred stock  
offering and the proceeds from the issuance of promissory notes. Our            
stockholders' equity improved from a deficit of $23,852 at December 31, 1999 to 
stockholders' equity of $5,559,471 at December 31, 2000. The improvement in     
stockholders' equity primarily resulted from proceeds of our initial public     
offering. Our accumulated deficit increased from $13,684,041 at December 31,    
1999 to $24,990,336 at December 31, 2000. The increase in accumulated deficit   
resulted primarily from the triggering of a beneficial conversion feature       
related to our convertible preferred stock at the time of our initial public    
offering and the net loss from operations for the year ended December 31, 2000. 
We anticipate that our accumulated deficit will continue to increase for a      
period of time.                                                                 

       Our current cash on hand and the anticipated funds from our long-term
equipment financing arrangement with AMRESCO may not be sufficient to meet our  
capital expenditures and working capital requirements, including those from our 
planned expansion, through the conclusion of fiscal year 2001. The sufficiency  
of our current cash on hand and the anticipated funds from our long-term        
equipment financing arrangement with AMRESCO depends upon our rate of growth and
the mix between the number of product sales and products placed under revenue   
sharing arrangements. To the extent that we have insufficient funds to meet our 
capital expenditure and working capital                                         

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requirements, we will be forced to seek short-term financing to fund            
operations during the 90-day seasoning period and to change the mix in favor    
of product sales over revenue sharing arrangements. We cannot assure you that   
short-term financing will be available to us in amounts or on terms             
acceptable to us, if at all. The first funding pursuant to our long-term        
equipment financing arrangement with AMRESCO was in the principal amount of     
$249,220.08 occurred on March 22, 2001. We anticipate that additional           
fundings of approximately $600,000 and $1 million will be completed in the      
second and third quarters of 2001, respectively; provided, however, that the    
minimum performance standards of AMRESCO are met by our customers. We may       
also need to raise additional funds to support more rapid expansion, respond    
to competitive pressures, invest in our new technology offerings and other      
product offerings or respond to unanticipated requirements. We cannot assure    
you that additional financing will be available to us in amounts or on terms    
acceptable to us. If sufficient funds are not available, or are not available   
on acceptable terms, our ability to fund our expansion, take advantage of       
additional product development opportunities, develop or enhance our products   
or services, or otherwise respond to competitive pressures could be             
significantly limited.                                                          

       Our net cash used in operating activities for the year ended December
31, 2000 was $4,285,183. Cash used in operating activities was primarily        
attributable to a net loss of $5,702,365, excluding non-cash compensation       
expense of $564,674. Our net cash used in operating activities for the year     
ended December 31, 1999 was $2,304,807. Cash used in operating activities was   
primarily attributed to increases in inventory and offset by increases in       
accrued liabilities.                                                            

 Our primary investing activities have historically consisted of
expenditures relating to our revenue sharing program and for property and       
equipment. Net cash used in investing activities was $2,295,888 and $1,094,245  
in the year ended December 31, 1999 and 2000, respectively. Investing activities
for the year ended December 31, 2000 consisted of an increase of refreshment    
centers placed in service, purchases of property and equipment and additional   
investments in RSi BRE. Investing activities for the year ended December 31,    
1999 consisted of additions to refreshment centers in service and purchases of  
property and equipment. We expect our investing activity to continue to increase
in 2001 due to an increased placement of our products under our revenue sharing 
program. Additionally, we anticipate that we will experience an increase in our 
capital expenditures and lease commitments for property and equipment consistent
with anticipated growth in operations, infrastructure and personnel.            

         Our financing activities provided $8,077,199 of cash for the year ended
December 31, 2000 compared to $4,712,775 for the year ended December 31, 1999.  
For the year ended December 31, 2000, cash provided from financing activities   
consisted of $1,767,021 from borrowings, $627,489 received from the sale of     
preferred stock and $9,766,759 received from our initial public offering. For   
the year ended December 31, 1999, cash provided from financing activities       
consisted of $477,669 from borrowings, $299,195 received from the sale of notes 
payable to officers and stockholders and $4,439,775 received from the sale of   
preferred stock.                                                                

        As of December 31, 2000, our debt, secured by our assets, consisted of
$27,500 in notes issued in a 1997 private debt/equity offering and $25,000 in   
notes issued in a 2000 private debt/equity offering. As of December 31, 2000,   
our unsecured debt consisted of $6,479 in notes payable to a bank and secured by
vehicles. As of December 31, 2000, we have paid off a significant portion of our
prior debt obligations.                                                         

With respect to our material commitments, we have entered into
operating leases for our facilities and equipment and have entered into         
employment agreements with certain officers and key employees. We operate our   
facilities and equipment under non-cancelable operating leases with future      
minimum rental payments of $119,836 and $104,030 for the years ending December  
31, 2001 and 2002, respectively. The future minimum lease payments on           
capitalized leases are calculated to be $35,728 and $28,091 for the years ending
December 31, 2001 and 2002, respectively. Under our current employment          
agreements with our officers and key employees, we will pay base salaries of    
$664,500 and $540,010 for the years ending December 31, 2001 and 2002,          
respectively. The decrease in base salaries for the year ended December 31, 2002
relates to the expiration of a number of our current agreements with our        
officers and key employees during such period. In addition, the Company intends 
to hire an executive vice president of sales and marketing at a negotiated      
salary.                                                                         

        On January 26, 2001, we terminated the employment of fifteen employees
in an effort to maximize operational efficiencies and reduce monthly expenses.  
In addition, we expanded the responsibilities of other positions to account for 
the terminations. We have taken a one-time restructuring charge of $418,606 in  
the fourth quarter of 2000, but estimate that the restructuring will result in a
$1.1 million reduction in annual overhead.                                      

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RECENT ACCOUNTING PRONOUNCEMENTS                              

         In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative 
Instruments and Hedging Activities," or SFAS 133. SFAS 133 establishes new      
accounting and reporting standards for companies to report information about    
derivative instruments, including derivative instruments embedded in other      
contracts, or collectively referred to as derivatives, and for hedging          
activities. This statement is effective for financial statements issued for all 
fiscal quarters of fiscal years beginning after June 15, 2000. We do not expect 
this statement to have a material impact on our results of operations, financial
position or liquidity.                                                          

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK    

      Our products require a limited amount of assembly at our facility in
the United States. We purchase refrigerators from suppliers in Mexico, Italy and
China on a purchase order basis in U.S. Dollars. All other components for our   
products are purchased from suppliers based in the United States. Our products  
are primarily marketed in the United States. We intend to further expand our    
marketing into the international lodging market and to other industries         
domestically and internationally. As a result, our financial results could be   
affected by weak economic conditions in foreign markets. Because all of our     
revenues will be denominated in U.S. Dollars, a strengthening of the dollar     
could make our products less competitive in foreign markets. As we expand       
operations internationally, we will continue to evaluate our foreign currency   
exposures and risks and develop appropriate hedging or other strategies to      
manage those risks.                                                             

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RISK FACTORS

       WE ARE SUBJECT TO A HIGH DEGREE OF RISK AS WE ARE CONSIDERED TO BE IN
UNSOUND FINANCIAL CONDITION. THE FOLLOWING RISKS, IF ANY ONE OR MORE OCCURS,    
COULD MATERIALLY HARM OUR BUSINESS, FINANCIAL CONDITION OR FUTURE RESULTS OF    
OPERATIONS. IF THAT OCCURS, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE.

 RISKS RELATED TO eROOMSYSTEM TECHNOLOGIES

  WE HAVE A HISTORY OF SIGNIFICANT OPERATING LOSSES AND ANTICIPATE
CONTINUED OPERATING LOSSES, AND WE MAY BE UNABLE TO ACHIEVE PROFITABILITY       

  We have a history of significant operating losses and anticipate
continued operating losses for the foreseeable future. For the years ended      
December 31, 1999 and 2000, we have incurred losses attributable to common      
stockholders of $4,279,444 and $11,306,295, respectively, and our operations    
have used $2,304,807 and $4,285,183 of cash, respectively. As of December 31,   
1999 and 2000, we had accumulated deficits of $13,684,041 and $24,990,336,      
respectively.                                                                   

         If our revenues decline or grow at a slower rate than we anticipate, or
if our spending levels exceed our expectations or cannot be adjusted to reflect 
slower revenue growth, our business would be severely harmed. We cannot assure  
you that revenues will grow in the future or that we will generate sufficient   
revenues for profitability, or that profitability, if achieved, can be sustained
on an ongoing basis.                                                            

       GIVEN OUR RECURRING LOSSES AND ACCUMULATED DEFICITS, WE MAY BE UNABLE
TO CONTINUE AS A GOING CONCERN                                                  

Our independent auditors issued a report on their audit of our
consolidated financial statements for the years ended December 31, 1999 and     
2000. Their report contains an explanatory paragraph in which they state that   
our history of recurring losses, our working capital and stockholders'          
deficits and our defaults under many of our debt agreements raise substantial   
doubt regarding our ability to continue as a going concern. Although we have    
satisfied many of the defaults under our debt agreements through the proceeds   
raised in our initial public offering, we continue to experience significant    
operating losses. If we continue to generate significant losses from our        
operations, we may be unable to continue as a going concern.                    

    SINCE OUR REVENUE SHARING PROGRAM INCREASED OUR NEED FOR LONG-TERM
FINANCING, OUR ABILITY TO INCREASE REVENUE OR ACHIEVE PROFITABILITY IS DEPENDENT
UPON THE SATISFACTION BY OUR CUSTOMERS OF MINIMUM PERFORMANCE CRITERIA DURING A 
90-DAY SEASONING PERIOD BEFORE AMRESCO WILL FUND ANY INDIVIDUAL LOANS UNDER OUR 
LONG-TERM FINANCING ARRANGEMENT WITH THEM                                       

 The emphasis of our business model on a revenue sharing program
significantly increases our need for long-term financing because we offer our   
products at little or no upfront cost to our customers. In order to address our 
long-term capital needs, we have entered into an exclusive post-installation    
financing arrangement with AMRESCO. Under the financing arrangement, AMRESCO    
will finance up to 150% of our costs for the Refreshment Centers and eRoomSafes 
installed at a property upon the completion of a 90-day seasoning period        
following installation and the satisfaction of pre-funding requirements. Our    
first funding from AMRESCO in the principal amount of $294,220.08 occurred on   
March 22, 2001.                                                                 

       Prior to submitting a preliminary application for funding to AMRESCO,
we identify properties that satisfy minimum performance, occupancy and liquidity
requirements. Once an appropriate property is identified, we enter into a lease 
with the property, install our products and submit a preliminary application for
funding. If our preliminary application is approved by AMRESCO, and following a 
90-day seasoning period, we must submit a final application for funding to      
AMRESCO. In order to obtain final approval for funding, the property must have  
maintained its initial performance, occupancy and liquidity standards and must  
have retained a minimum of 20% of the gross daily revenue on a per unit basis,  
per day, during the seasoning period.                                           

         If our customers fail to meet AMRESCO's requirements or if AMRESCO were
to delay or refuse to provide our required financing, we cannot assure you that 
other long-term financing will be available in sufficient amounts or on terms   
acceptable to us, or at all. Our inability to obtain long-term financing may    
prevent us from placing additional products under our revenue sharing program or
manufacturing products for sale. In addition to our long-term financing         
arrangement and the remaining proceeds of our initial public offering, we may   
require additional short-term financing to cover the costs of the production and
installation of our products until the completion of the 90-day seasoning       
period.                                                                         

         IN SHIFTING OUR BUSINESS MODEL FROM SALES TO A REVENUE SHARING PROGRAM,
WE MAY BE UNABLE TO INCREASE OUR REVENUES OR ACHIEVE PROFITABILITY IF WE CANNOT 
SUCCESSFULLY IMPLEMENT OUR REVENUE SHARING PROGRAM OR IF THE                    

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PARTICIPATING PROPERTIES DO NOT COMPLY WITH THE COVENANTS REGARDING THE         
PLACEMENT OF OUR PRODUCTS AND COMPETING VENDING MACHINES                        

       We have traditionally relied upon the sale of our products. Recently,
we shifted the focus of our business model from product sales to our revenue    
sharing program. Our business model is new and our ability to generate revenues 
or profits is unproven. Under our revenue sharing program, we offer our products
at little or no upfront cost to our customers and share the revenue generated by
our products over a seven-year period. Our success under our revenue sharing    
program is dependent upon the participating hotel's compliance with covenants   
regarding the placement of our Refreshment Centers, the location in the hotel   
and quantity of competing vending machines that sell goods similar to those in  
our Refreshment Centers, and the price of goods sold through the vending        
machines. We cannot assure you that our portion of the revenues generated will  
be sufficient to cover the costs to produce, install, maintain and finance our  
products.                                                                       

        THE INTEREST RATE FOR OUR LONG-TERM FINANCING WITH AMRESCO WILL RESULT
IN A HIGHER INTEREST RATE THAN WE MAY HAVE BEEN ABLE TO NEGOTIATE IF WE WERE    
STRONGER FINANCIALLY WHICH WILL RESULT IN REDUCED OPERATING AND PROFIT MARGINS  

        The financing arrangement we negotiated with AMRESCO will result in an
interest rate higher than the interest rate we may have been able to negotiate  
if we were stronger financially. Due to the exclusive nature of this financing  
arrangement in the domestic lodging industry, our ability to obtain financing   
for revenue sharing agreements at more advantageous interest rates during the   
seven-year term of the financing arrangement will be contractually restricted.  
The funds obtained through our financing arrangement will initially bear an     
interest rate equal to the seven-year treasury rate plus 12.5%. Our initial     
funding with AMRESCO accrues interest at the rate of 17.57% per annum. Upon     
reaching certain predetermined thresholds of funds outstanding, the rate may be 
subsequently reduced as low as the seven-year treasury rate plus 6.5%.          

         WE MAY EXPERIENCE REDUCED SALES IF WE ARE UNABLE TO CONTINUOUSLY MODIFY
AND UPDATE OUR SOFTWARE SO THAT IT IS COMPATIBLE WITH THE PROPERTY MANAGEMENT   
SYSTEMS OF OUR CURRENT AND FUTURE CLIENTS                                       

        Our eRoomSystem, Refreshment Centers and eRoomSafes directly interface
with the hotel's property management system. As a result, we must continuously  
monitor and update our proprietary software so that the software remains stable 
and works smoothly with the relevant property management system. If our software
is incompatible or has problems interacting with a hotel's property management  
system, we may experience reduced sales.                                        

      WE MAY EXPERIENCE REDUCED OPERATING MARGINS AND LOSS OF MARKET SHARE
DUE TO THE INTENSE COMPETITION FROM COMPANIES WITH LONGER OPERATING HISTORIES,  
GREATER RESOURCES AND MORE ESTABLISHED BRAND NAMES THAT MARKET IN-ROOM AMENITIES
TO THE LODGING INDUSTRY                                                         

The market for in-room amenities in the lodging industry is   
competitive, and we expect competition to intensify in the future. Our          
competitors vary in size and in the scope and breadth of the products and       
services they offer. Our competitors include Bartech, Inc., Dometic Corporation,
MiniBar America, Inc. and ElSafe, Inc. We have been advised that Bartech, who   
offers an automated minibar and a software-based network system, was recently   
selected by MGM Mirage, Inc. to install its products at certain of its          
properties after a successful test installation at The Bellagio - The Resort.   
Our competitors have longer operating histories, larger customer bases, greater 
brand recognition, and substantially greater capital, research and development, 
manufacturing, marketing, service, support, technical and other resources than  
we do. As a result, our competitors may be able to devote greater resources to  
marketing campaigns, adopt more aggressive pricing policies or devote           
substantially more resources to customer and business development than we can.  

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

    WE HAVE RECEIVED A CLAIM FOR SEVERANCE AND OTHER PAYMENTS FROM OUR
FORMER CHIEF EXECUTIVE OFFICER AND MAY RECEIVE ADDITIONAL CLAIMS RELATED TO THE 
TERMINATION OF FIFTEEN EMPLOYEES ON JANUARY 26, 2001 AND, IF ANY OF THESE CLAIMS
ARE SUCCESSFUL, WE MAY BE REQUIRED TO MAKE PAYMENTS TO THESE FORMER EMPLOYEES   

        On January 26, 2001, we terminated the employment of fifteen employees
in an effort to maximize operational efficiencies and reduce monthly expenses.  
In addition, we terminated our former chief executive officer, Steven L.        
Sunyich, with cause. As a result of these terminations, we have received a claim
for severance and other payments from                                           

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Mr. Sunyich. It is possible that other employees may make a claim for           
severance and other payments. If Mr. Sunyich's claim is successful, as well as  
any other claim made by a terminated employee, we may be liable for severance   
and other payments, which could have a material adverse effect upon our         
financial condition and results of operation.                                   

         OUR FAILURE TO MAINTAIN OUR CURRENT RELATIONSHIPS WITH HOTEL CHAINS, TO
DEVELOP NEW RELATIONSHIPS WITH OTHER HOTEL CHAINS AND TO ENTER INTO DEFINITIVE  
AGREEMENTS WITH THE FRANCHISEES OF THESE HOTEL CHAINS MAY RESULT IN OUR         
INABILITY TO INCREASE REVENUES OR ACHIEVE PROFITABILITY                         

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

        OUR ABILITY TO ESTABLISH TWO OR MORE THIRD PARTY TURNKEY MANUFACTURING
SOURCES TO MEET OUR PROJECTED DEMAND IS DEPENDENT UPON OUR LIMITED EXPERIENCE IN
DEALING WITH TURNKEY MANUFACTURERS AND MAY AFFECT THE NUMBER OF INSTALLATIONS   
UNDER OUR REVENUE SHARING PROGRAM                                               

         Our Refreshment Centers require a limited amount of assembly at our St.
George, Utah facility. Since our existing facility is not sufficient to meet our
projected growth, we will either have to establish two or more third party      
turnkey manufacturing sources, expand our assembly facility or hold orders for  
our products unfulfilled. We presently intend to establish third party turnkey  
manufacturing sources to meet our projected demand.                             

       If our installations increase significantly, our ability to establish
sufficient turnkey manufacturing sources will be critical to our future success.
The selection of suitable turnkey manufacturers is subject to our limited       
experience in dealing with turnkey manufacturers and is dependent upon our      
ability to identify turnkey manufacturers who can assemble our products on a    
timely basis and in a quality manner. We have had preliminary discussions with  
several third parties to establish turnkey manufacturing arrangements, but we   
have not entered into an agreement with any of them. We cannot assure you that  
we will be able to locate satisfactory turnkey manufacturing sources and, if    
located, that the additional costs of such turnkey manufacturing sources will   
not erode our ability to achieve profitability.                                 

   WE WILL BE UNABLE TO DELIVER AND INSTALL OUR PRODUCTS TO MEET OUR
PROJECTED GROWTH UNLESS WE SUCCESSFULLY EXPAND OUR EXISTING INFRASTRUCTURE AND  
RECRUIT ADDITIONAL PERSONNEL FROM THE SMALL LABOR MARKET OF SOUTHERN UTAH       

   By utilizing our financing arrangement with AMRESCO, we intend to
expand our customer base for our current products and to develop and market new 
products and services. If we are successful, our business will require the      
implementation of expanded operational and financial systems, procedures and    
controls, billing functions, the training of a larger employee base, and        
increased coordination among our software, hardware, accounting, finance,       
marketing, sales and field service staffs. We will be unable to deliver and     
install our products to meet our projected growth unless we expand our existing 
infrastructure on a timely basis.                                               

     Our assembly and service and installation departments are presently
insufficient to assemble, install, manage and service our projected growth.     
While we are actively recruiting personnel for our assembly and service and     
installation departments to meet our future needs, southern Utah has a          
relatively small population base from which to hire qualified employees. If we  
cannot recruit additional personnel to meet our projected growth, or find one or
more suitable third parties to assist us, we will not be able to deliver and    
install our products on a timely basis.                                         

  WE MAY NOT BE SUCCESSFUL IN THE EXPANSION OF OUR BUSINESS TO THE
HEALTHCARE AND TIME-SHARE INDUSTRIES AS WE HAVE HISTORICALLY OPERATED IN THE    
LODGING INDUSTRY                                                                

    We have traditionally focused our marketing efforts on the lodging
industry. We are proposing to expand the marketing of our eRoomSystem,          
Refreshment Centers and eRoomSafes to the healthcare and time-share industries. 
As we have little or no experience in these new industries, we may not be       
successful in marketing our products and services outside of the lodging        
industry. As a result, we will be confronted with challenges and competition    
that we have never faced before. We cannot assure you that we will be able to   
meet the new challenges and competitors associated with these new industries.   

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      WE MAY NOT BE SUCCESSFUL IN THE EXPANSION OF OUR BUSINESS AS WE HAVE
LITTLE OR NO EXPERIENCE WITH RESPECT TO OUR PROPOSED NEW PRODUCTS AND SERVICES, 
SUCH AS IN-ROOM ENERGY MANAGEMENT AND COORDINATION OF HOUSEKEEPING AND          
ENGINEERING ACTIVITIES                                                          

    Part of our growth strategy consists of expanding our offerings to
include products and services we have not provided in the past. For example,    
following the establishment of our core business, we plan to offer new products 
and services, such as in-room energy management and coordination of housekeeping
and engineering activities. As we have little or no experience with respect to  
these new products and services, we may not be successful in expanding our      
product offerings. As a result, we cannot assure you that we will be successful 
in expanding our products and services or that we will be able to meet the new  
challenges and competitors associated with the expansion of our products and    
services.                                                                       

ALTHOUGH WE HAVE ENTERED INTO CONFIDENTIALITY AND NON-COMPETE 
AGREEMENTS WITH OUR EMPLOYEES AND CONSULTANTS, IF WE ARE UNABLE TO PROTECT OUR  
PROPRIETARY INFORMATION, SUCH AS THE SOFTWARE AND THE HARDWARE FOR OUR          
eROOMSYSTEM AND THE INFORMATION COLLECTED BY OUR eROOMSYSTEM, AGAINST           
UNAUTHORIZED USE BY OTHERS, OUR COMPETITIVE POSITION COULD BE HARMED            

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

         OUR ABILITY TO MARKET OUR eROOMSYSTEM SUCCESSFULLY TO THE INTERNATIONAL
LODGING INDUSTRY IS SUBJECT TO OUR INEXPERIENCE WITH, AND LACK OF KNOWLEDGE OF, 
THE INTERNATIONAL LODGING INDUSTRY, THE RELATIONSHIP ESTABLISHED BY OUR         
COMPETITORS WITH HOTEL OPERATORS IN EUROPE AND THE DIFFICULTIES ASSOCIATED WITH 
THE INSTALLATION OF OUR PRODUCTS                                                

         Part of our growth strategy is to expand into the international lodging
market. Our ability to initiate and maintain successful operations in           
international markets include, among others, compliance with foreign laws and   
regulations, fluctuations in foreign currency, general political and economic   
trends, and language and cultural differences. As the international lodging     
market represents only a small portion of our current business, we will have to 
allocate significant resources in order to promote our products internationally.
Revenues from our current operations, let alone revenues from our proposed      
international operations, may not offset the expense of establishing and        
maintaining these international operations.                                     

       We do not have sufficiently experienced management or sales personnel
with relationships in international markets or a knowledge of the respective    
laws, political and economic environment, language and cultural differences or  
buying patterns of customers in those markets to effectively market and sell our
products in international markets. For example, Bartech, Inc. and MiniBar       
America, Inc. are the leaders in the minibar industry in Europe based on their  
established relationships with numerous hotels and correspondents. We may be    
required to enter into distributorship or other similar agreements for          
particular geographic areas. If so, we cannot assure you that we will be        
successful in soliciting the best distributors, or that if distributors are     
selected, that the additional costs of such distributors will not erode our     
ability to achieve profitable sales or revenue sharing arrangements for the     
placement of our products.                                                      

RISKS RELATED TO THE MARKET FOR OUR COMMON STOCK

       OUR COMMON STOCK HAS TRADED PUBLICLY ONLY SINCE AUGUST 3, 2000 ON THE
NASDAQ SMALLCAP MARKET AND, AS A RESULT, THERE CAN BE NO ASSURANCE THAT AN      
ACTIVE OR LIQUID TRADING MARKET WILL DEVELOP OR, IF DEVELOPED, WILL BE SUSTAINED

    Prior to August 3, 2000, there was no public market for our common
stock. In conjunction with our initial public offering, our common stock was    
accepted for listing on the Nasdaq SmallCap Market. Although our common stock is
currently quoted on the Nasdaq SmallCap Market, there can be no assurance that  
an active or liquid trading market in our common stock will develop or, if      
developed, be sustained. Further, if the minimum bid price of our common stock  
price falls below $1.00 per share for a period of 30 days, our common stock may 
be delisted from the Nasdaq SmallCap Market.                                    

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OUR EXECUTIVE OFFICERS AND MEMBERS OF OUR BOARD OF DIRECTORS  
BENEFICIALLY OWN APPROXIMATELY 18.9% OF THE OUTSTANDING SHARES OF OUR COMMON    
STOCK AND COULD LIMIT THE ABILITY OF OUR OTHER STOCKHOLDERS TO INFLUENCE THE    
OUTCOME OF DIRECTOR ELECTIONS AND OTHER TRANSACTIONS SUBMITTED TO A VOTE OF     
STOCKHOLDERS                                                                    

Our executive officers and members of our board of directors  
beneficially own 1,506,333 shares of common stock, or approximately 18.9% of the
outstanding shares of our common stock. These stockholders will have the power  
to influence all matters requiring approval by our stockholders, including the  
election of directors and approval of mergers and other significant corporate   
transactions. This concentration of ownership may also have the effect of       
delaying or preventing a change in control of eRoomSystem Technologies.         

        OUR STOCK PRICE MAY FALL AS A RESULT OF THE 4,743,451 SHARES OF COMMON
STOCK, OR APPROXIMATELY 64.1% OF OUR OUTSTANDING COMMON STOCK, THAT IS CURRENTLY
ELIGIBLE FOR SALE                                                               

       Sales of a substantial number of shares of common stock in the public
market could cause the market price for our common stock to decline. Upon the   
assumption that all of the shares of common stock registered pursuant to our    
current selling stockholder registration statement on Form SB-2 (Commission File
No. 333-52656) are sold, there will be 7,392,199 outstanding shares of common   
stock, of which 541,180 shares have been registered pursuant to the selling     
stockholder registration statement and 1,800,000 shares were sold in our initial
public offering which closed on August 9, 2000. All of these shares,            
representing approximately 31.7% of our outstanding shares of common stock, are 
immediately available for resale.                                               

In addition to these shares and in light of existing lock-up  
arrangements, up to 2,402,271 shares, or approximately 32.5% of our outstanding 
shares of common stock, will be immediately available for resale in accordance  
with Rule 144(k) under the Securities Act. These shares, along with the shares  
of common stock sold in our initial public offering and the shares registered in
the selling stockholder offering, represent approximately 50.6% of our          
outstanding shares of common stock. As result, a total of 4,743,451 shares of   
common stock are currently eligible for sale in the public market, representing 
approximately 64.1% of our outstanding shares of common stock. In addition, on  
February 2, 2001, a six-month lock-up expired and resulted in an additional     
770,687 shares of common stock being immediately available for sale in          
accordance with Rule 144(k), and 233,865 shares of common stock becoming        
eligible for sale in the public market, subject to volume limitations, pursuant 
to Rule 144. On May 2, 2001, a nine-month lock-up will expire and 890,985 shares
of common stock will be available for sale in the public market, subject to     
volume limitations, pursuant to Rule 144. On August 2, 2001, a twelve-month     
lock-up will expire with respect to 167,828 shares of common stock, all of which
will be eligible for sale in the public market, subject to volume limitations,  
pursuant to Rule 144.                                                           

         Further, we have options and warrants outstanding to purchase 2,925,470
shares of our common stock, of which options and warrants to purchase 2,385,858 
shares are immediately exercisable. The underlying shares of common stock will  
be available for sale one year after the date of exercise subject to the        
restrictions set forth in Rule 144 under the Securities Act, excluding options  
issued under our 2000 Stock Option and Incentive Plan which will be registered  
on Form S-8 and may be exercised on a cashless basis.                           

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

   DUE TO THE OUTSTANDING OPTIONS AND WARRANTS TO PURCHASE 2,925,470
SHARES OF COMMON STOCK, INCLUDING OPTIONS GRANTED TO OUR CURRENT AND FORMER     
EXECUTIVE OFFICERS TO PURCHASE 1,520,566 SHARES OF COMMON STOCK, THE SALES OF   
THE SHARES RECEIVED UPON THE EXERCISE OF SUCH OPTIONS AND WARRANTS, OR THE      
PROSPECT OF SUCH SALES, COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON   
STOCK                                                                           

       We have outstanding options and warrants to purchase 2,925,470 shares
of common stock at exercise prices ranging from $1.00 to $16.00 per share. Of   
this amount, in 2000 and 2001, we issued to current and former executive        
officers options to purchase 1,520,566 shares of common stock at exercise prices
ranging from $1.51 to $9.60. To the extent that all or a portion of those       
options and warrants are exercised, the sales of such shares in the public      
market, or the prospect of such sales, could adversely affect the market price  
of our common stock.                                                            

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ITEM 7. FINANCIAL STATEMENTS.                                                   

 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                [Download Table]
                                                                               
Report of Independent Certified Public Accountants...........................29

Consolidated Balance Sheets..................................................30

Consolidated Statements of Operations........................................32

Consolidated Statements of Stockholders' Equity (Deficit)....................33

Consolidated Statements of Cash Flows........................................35

Notes to Consolidated Financial Statements...................................37

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[HANSEN, BARNETT & MAXWELL LETTERHEAD]

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and the Stockholders                                  
eRoomSystem Technologies, Inc.                                                  

We have audited the accompanying consolidated balance sheets of eRoomSystem     
Technologies, Inc. (a Nevada corporation) and subsidiary as of December 31, 1999
and 2000, and the related consolidated statements of operations, stockholders'  
equity (deficit) and cash flows for the years then ended. These financial       
statements are the responsibility of the Company's management. Our              
responsibility is to express an opinion on these financial statements based on  
our audits.                                                                     

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

In our opinion, the consolidated financial statements referred to above present 
fairly, in all material respects, the financial position of eRoomSystem         
Technologies, Inc. and subsidiary as of December 31, 1999 and 2000, and the     
results of their operations and their cash flows for the years then ended in    
conformity with accounting principles generally accepted in the United States.  

The accompanying consolidated financial statements have been prepared           
assuming that the Company will continue as a going concern. As discussed in     
Note 1 to the financial statements, the Company has suffered recurring losses   
from operations. During the years ended December 31, 1999 and 2000, the         
Company had net losses of $3,672,175 and 5,702,365, respectively. During the    
years ended December 31, 1999 and 2000, the Company's operations used           
$2,304,807 and $4,285,183 of cash, respectively. These matters raise            
substantial doubt about the Company's ability to continue as a going concern.   
Management's plans in regard to these matters are also described in Note 1.     
The financial statements do not include any adjustments relating to the         
recoverability and classification of asset carrying amounts or the amount and   
classification of liabilities that might result should the Company be unable    
to continue as a going concern.                                                 

                   HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah                                                            
January 19, 2001                                                                

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 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
 CONSOLIDATED BALANCE SHEETS

ASSETS

                                                        [Enlarge/Download Table]

                                                                                        DECEMBER 31,          
                                                                               ------------------------------ 
                                                                                   1999              2000     
                                                                               ------------      ------------ 
                                                                                                              
CURRENT ASSETS                                                                                                
   Cash .....................................................................  $    113,252      $  2,811,023 
   Accounts receivable, net of allowance for doubtful accounts of $15,000 and                                 
     $24,000, respectively ..................................................        40,213           773,715 
   Inventories ..............................................................       697,033           946,318 
   Prepaid expenses and other ...............................................         6,250            45,056 
                                                                               ------------      ------------ 
        TOTAL CURRENT ASSETS ................................................       856,748         4,576,112 
                                                                               ------------      ------------ 

REFRESHMENT CENTERS IN SERVICE, net of accumulated depreciation of $3,858 and                                 
   $120,343, respectively ...................................................       169,791         1,762,245 
                                                                               ------------      ------------ 

PROPERTY AND EQUIPMENT                                                                                        
   Production equipment .....................................................       138,908           225,110 
   Computer equipment .......................................................       171,666           216,482 
   Vehicles and other .......................................................        76,857            67,316 
                                                                               ------------      ------------ 
                                                                                    387,431           508,908 
   Less accumulated depreciation and amortization ...........................      (264,946)         (323,044)
                                                                               ------------      ------------ 
        NET PROPERTY AND EQUIPMENT ..........................................       122,485           185,864 
                                                                               ------------      ------------ 

INVESTMENT IN WHOLLY OWNED, UNCONSOLIDATED SUBSIDIARY .......................     2,535,976           936,182 
                                                                               ------------      ------------ 

OTHER ASSETS                                                                                                  
   Patents and license rights, net of accumulated amortization of $222,710                                    
     and $290,208, respectively .............................................       249,780           182,282 
   Deferred offering and financing costs, net of accumulated amortization of                                  
     $0 and $0, respectively ................................................        88,000                -- 
   Deposits and other .......................................................       327,851           172,464 
                                                                               ------------      ------------ 
        TOTAL OTHER ASSETS ..................................................       665,631           354,746 
                                                                               ------------      ------------ 

TOTAL ASSETS ................................................................  $  4,350,631      $  7,815,149 
                                                                               ============      ============ 

See accompanying notes to consolidated financial statements.

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 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
 CONSOLIDATED BALANCE SHEETS (CONTINUED)

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

                                                        [Enlarge/Download Table]

                                                                                         DECEMBER 31,         
                                                                               ------------------------------ 
                                                                                   1999              2000     
                                                                               ------------      ------------ 
                                                                                                              
CURRENT LIABILITIES                                                                                           
   Notes payable and current portion of long-term debt ......................  $  1,560,458      $     56,710 
   Current portion of capital lease obligations .............................        22,061            28,091 
   Accounts payable .........................................................       987,013         1,071,333 
   Accrued liabilities ......................................................       332,835           406,191 
   Accrued interest .........................................................       290,117            12,906 
   Accrued restructuring costs ..............................................            --           418,606 
   Customer deposits ........................................................        93,470            89,258 
   Deferred maintenance revenue .............................................        58,868            72,764 
   Preferred stock dividends payable ........................................       162,542            31,894 
                                                                               ------------      ------------ 
        TOTAL CURRENT LIABILITIES ...........................................     3,507,364         2,187,753 
                                                                               ------------      ------------ 

LONG-TERM LIABILITIES                                                                                         
   Long-term debt, net of current portion ...................................       812,022             2,269 
   Capital lease obligations, net of current portion ........................        55,097            25,656 
                                                                               ------------      ------------ 
        TOTAL LONG-TERM LIABILITIES .........................................       867,119            27,925 
                                                                               ------------      ------------ 

COMMITMENTS AND CONTINGENCIES                                                                                 

STOCKHOLDERS' EQUITY (DEFICIT)                                                                                
   Series A convertible preferred stock, $0.001 par value; 500,000 shares                                     
     authorized; 360,000 shares outstanding at December 31,1999 and no shares                                 
     outstanding at December 31, 2000 .......................................     1,332,953                -- 
   Series B convertible preferred stock, $0.001 par value; 2,500,000 shares                                   
     authorized, 2,081,680 shares outstanding at December 31,1999 and no                                      
     shares outstanding at December 31, 2000 ................................     6,171,196                -- 
   Series C convertible preferred stock, $0.001 par value; 2,000,000 shares                                   
     authorized, no shares outstanding ......................................            --                -- 
   Undesignated preferred stock, $0.001 par value; 5,000,000 shares                                           
     authorized; no shares outstanding ......................................            --                -- 
   Common stock, $0.001 par value; 50,000,000 shares authorized; 2,217,291                                    
     shares and 7,051,019 shares outstanding at December 31, 1999 and 2000,                                   
     respectively ...........................................................         2,218             7,051 
   Additional paid-in capital ...............................................     6,265,284        28,546,432 
   Warrants and options outstanding .........................................       728,538         2,036,324 
   Notes receivable from stockholders .......................................      (840,000)               -- 
   Accumulated deficit ......................................................   (13,684,041)      (24,990,336)
                                                                               ------------      ------------ 
        TOTAL STOCKHOLDER'S EQUITY (DEFICIT) ................................       (23,852)        5,599,471 
                                                                               ------------      ------------ 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ........................  $  4,350,631      $  7,815,149 
                                                                               ============      ============ 

See accompanying notes to consolidated financial statements.

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 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF OPERATIONS

                                                        [Enlarge/Download Table]

                                                                             FOR THE YEARS ENDED        
                                                                                  DECEMBER 31,          
                                                                         ------------------------------ 
                                                                             1999              2000     
                                                                         ------------      ------------ 
                                                                                                        
REVENUE                                                                                                 
   Product sales ......................................................  $    144,282      $  2,552,578 
   Revenue sharing arrangements .......................................       213,654           266,730 
   Maintenance fees ...................................................       182,581           164,332 
                                                                         ------------      ------------ 
        TOTAL REVENUE .................................................       540,517         2,983,640 
                                                                         ------------      ------------ 

COST OF REVENUE                                                                                         
   Product sales ......................................................       118,010         1,926,333 
   Revenue sharing arrangements .......................................       165,995            91,558 
   Maintenance ........................................................        78,518           137,770 
                                                                         ------------      ------------ 
        TOTAL COST OF REVENUE .........................................       362,523         2,155,661 
                                                                         ------------      ------------ 

GROSS MARGIN ..........................................................       177,994           827,979 
                                                                         ------------      ------------ 

OPERATING EXPENSES                                                                                      
   Selling general and administrative (including non-cash compensation                                  
     expense of $105,005 and $564,674, respectively) ..................     2,492,816         4,105,423 
   Restructuring costs ................................................            --           418,606 
   Research and development ...........................................       271,230           364,960 
                                                                         ------------      ------------ 
        TOTAL OPERATING EXPENSES ......................................     2,764,046         4,888,989 
                                                                         ------------      ------------ 
LOSS FROM OPERATIONS ..................................................    (2,586,052)       (4,061,010)
                                                                         ------------      ------------ 

OTHER INCOME (EXPENSE)                                                                                  
   Interest expense ...................................................    (1,444,532)       (1,371,899)
   Write-off of note receivable from stockholder ......................            --          (399,000)
   Equity in income (loss) from unconsolidated, wholly owned subsidiary       147,615           (16,229)
   Interest and other income ..........................................       210,794           145,773 
                                                                         ------------      ------------ 
        OTHER EXPENSE, NET ............................................    (1,086,123)       (1,641,355)
                                                                         ------------      ------------ 
NET LOSS ..............................................................    (3,672,175)       (5,702,365)
DIVIDENDS RELATED TO CONVERTIBLE PREFERRED STOCK ......................      (607,269)       (5,603,930)
                                                                         ------------      ------------ 
LOSS ATTRIBUTED TO COMMON STOCKHOLDERS ................................  $ (4,279,444)     $(11,306,295)
                                                                         ------------      ------------ 

BASIC AND DILUTED LOSS PER COMMON SHARE ...............................  $         --      $         -- 
                                                                         ============      ============ 
BASIC AND DILUTED LOSS PER COMMON SHARE ...............................  $      (1.33)     $      (2.73)
                                                                         ============      ============ 
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARE OUTSTANDING ...........  $  3,220,709      $  4,137,458 
                                                                         ============      ============ 

See accompanying notes to consolidated financial statements.

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  eEROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 2000

                                                        [Enlarge/Download Table]

                                                                1999                          2000              
                                                    ----------------------------   ---------------------------- 
                                                       SHARES           AMOUNT       SHARES           AMOUNT    
                                                    -----------      -----------   -----------      ----------- 
                                                                                                                
SERIES A CONVERTIBLE PREFERRED STOCK                                                                            
Balance at Beginning of Year .....................      360,000      $ 1,332,953       360,000      $ 1,332,953 
Series A convertible preferred stock beneficial                                                                 
   conversion dividend ...........................           --               --            --        1,800,000 
Conversion of Series A preferred stock into                                                                     
   common stock ..................................           --               --      (360,000)      (3,132,953)
                                                    -----------      -----------   -----------      ----------- 
        Balance at End of Year ...................      360,000      $ 1,332,953            --      $        -- 
                                                    ===========      ===========   ===========      =========== 
SERIES B CONVERTIBLE PREFERRED STOCK                                                                            
Balance, at Beginning of Year ....................           --      $        --     2,081,680      $ 6,171,196 
Issuance of Series B convertible preferred stock                                                                
   for cash and conversion of notes payable at                                                                  
   $3.00 per shares, net .........................    2,081,680        5,849,826            --               -- 
Series B convertible preferred stock beneficial                                                                 
   conversion dividend ...........................           --          321,370            --        3,425,654 
Conversion of Series B preferred stock into                                                                     
   common stock ..................................           --               --    (2,081,680)      (9,596,850)
                                                    -----------      -----------   -----------      ----------- 
        Balance at End of Year ...................    2,081,680      $ 6,171,196            --      $        -- 
                                                    ===========      ===========   ===========      =========== 
SERIES C CONVERTIBLE PREFERRED STOCK                                                                            
Issuance of Series C convertible preferred stock                                                                
   and 42,500 warrants for cash at $2.83 per share           --      $        --       196,150      $   535,986 
Conversion of Series C preferred stock into                                                                     
   common stock ..................................           --               --      (196,150)        (535,986)
                                                    -----------      -----------   -----------      ----------- 
        Balance at End of Year ...................           --      $        --            --      $        -- 
                                                    ===========      ===========   ===========      =========== 
COMMON STOCK                                                                                                    
Balance, Beginning of Year .......................    3,531,311      $     3,532     2,217,291      $     2,218 
Issuance of common stock to entity controlled by                                                                
   the Company's former CEO in exchange for a                                                                   
   note receivable ...............................      198,750              199            --               -- 
Return of common stock from entity controlled by                                                                
   the Company's former CEO ......................     (198,750)            (199)           --               -- 
Issuance of common stock and 180,000 warrants for                                                               
   cash ..........................................           --               --     1,800,000            1,800 
Issuance of common stock for interest in                                                                        
   connection with conversion of notes payable to                                                               
   stockholders ..................................       83,500               84            --               -- 
Issuance of common stock in connection with 2000                                                                
   Bridge loan ...................................           --               --       200,000              200 
Issuance of common stock for interest in                                                                        
   connection with 90-day convertible notes, the                                                                
   2000 Bridge loan and notes payable to                                                                        
   shareholders ..................................       41,410               41        25,957               26 
Issuance of common stock for services ............        3,134                3           777                1 
Series B convertible preferred stock dividend in                                                                
   the form of common stock ......................       28,936               29        68,169               68 
Conversion of Series A preferred stock into                                                                     
   common stock ..................................           --               --       553,846              554 
Conversion of Series B preferred stock into                                                                     
   common stock ..................................           --               --     2,135,056            2,135 
Conversion of Series C preferred stock into                                                                     
   common stock ..................................           --               --       178,318              178 
Shares issued under anti-dilution agreement ......           --               --        12,230               12 
Return of common stock as payment of shareholder                                                                
   notes receivable ..............................   (1,471,000)          (1,471)           --               -- 
Return of common stock as a result of a default                                                                 
   on a note receivable from a shareholder .......           --               --      (140,625)            (141)
                                                    -----------      -----------   -----------      ----------- 
        Balance at End of Year ...................    2,217,291      $     2,218     7,051,019      $     7,051 
                                                    ===========      ===========   ===========      =========== 

See accompanying notes to consolidated financial statements.

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 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 2000

                                                        [Enlarge/Download Table]

                                                                                   1999           2000     
                                                                               ------------   ------------ 
                                                                                                           
ADDITIONAL PAID-IN CAPITAL                                                                                 
Balance at  Beginning of Year ...............................................  $  8,670,586   $  6,265,284 
Issuance of common stock to entity controlled by the Company's former CEO in                               
   exchange for a note receivable ...........................................     1,589,801             -- 
Return of common stock from entity controlled by the Company's former CEO ...    (1,589,801)            -- 
Issuance of common stock and 180,000 warrants for cash ......................            --      8,630,702 
Issuance of common stock for interest in connection with conversion of notes                               
   payable to stockholders ..................................................       264,398             -- 
Issuance of common stock in connection with 2000 Bridge loan ................            --        440,341 
Issuance of common stock for interest in connection with 90-day convertible                                
   Notes and shareholders notes payable .....................................       121,566         87,086 
Issuance of common stock for services .......................................         5,962          2,484 
Issuance of Series C convertible preferred stock and 42,500 warrants for cash                              
   at $2.83 per share .......................................................            --         31,875 
Series B convertible preferred stock dividend in the form of common stock ...       141,870        275,609 
Conversion of Series A preferred stock into common stock ....................            --      3,132,399 
Series B convertible preferred stock dividend in the form of  common stock ..            --      9,594,715 
Conversion of Series C preferred stock into common stock ....................            --        535,808 
Shares issued under anti-dilution agreement receivable ......................            --            (12)
Return of common stock as payment of shareholder notes receivable ...........    (2,939,098)            -- 
Return of common stock as a result of a default on a note receivable from a                                
   shareholder ..............................................................            --       (449,859)
                                                                               ------------   ------------ 
        Balance at End of Year ..............................................  $  6,265,284   $ 28,546,432 
                                                                               ============   ============ 
WARRANTS AND OPTIONS OUTSTANDING                                                                           
Balance at Beginning of Year ................................................  $  1,043,362   $    728,538 
Issuance of Series C convertible preferred stock and 42,500 warrants for cash                              
   at $2.83 per share .......................................................            --         59,988 
Issuance of common stock and 180,000 warrants for cash ......................            --        470,572 
Issuance of warrants related to advertising agreement, financing activities                                
   and consulting ...........................................................       191,870        777,226 
Return of warrants in connection with troubled debt restructuring ...........      (506,694)            -- 
                                                                               ------------   ------------ 
        Balance at End of Year ..............................................  $    728,538   $  2,036,324 
                                                                               ============   ============ 
NOTE RECEIVABLE FROM SHAREHOLDERS                                                                          
Balance at Beginning of Year ................................................  $ (4,073,941)  $   (840,000)
Issuance of common stock to entity controlled by the Company's former CEO in                               
   exchange for a note receivable ...........................................    (1,590,000)            -- 
Return of common stock from entity controlled by the Company's former CEO ...     1,590,000             -- 
Accrual of interest on notes receivable from stockholders ...................      (235,951)            -- 
Reserve for shareholder notes receivable ....................................       529,323        390,000 
Return of common stock as payment of shareholder notes receivable ...........     2,940,569             -- 
Return of common stock as a result of a default on a note receivable from a                                
   shareholder ..............................................................            --        450,000 
                                                                               ------------   ------------ 
        Balance at End of Year ..............................................  $   (840,000)  $         -- 
                                                                               ============   ============ 
ACCUMULATED DEFICIT                                                                                        
Balance at Beginning of Year ................................................  $ (9,404,597)  $(13,684,041)
Series A convertible preferred stock dividend accrual .......................      (144,000)       (87,583)
Series B convertible preferred stock dividend in the form of  common stock ..      (141,899)      (275,677)
Series C convertible preferred stock dividend accrual .......................            --        (15,016)
Series A convertible preferred stock beneficial conversion dividend .........            --     (1,800,000)
Series B convertible preferred stock beneficial conversion dividend .........      (321,370)    (3,425,654)
Net loss ....................................................................    (3,672,175)    (5,702,365)
                                                                               ------------   ------------ 
        Balance at End of Year ..............................................  $(13,684,041)  $(24,990,336)
                                                                               ============   ============ 
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) AT END OF YEAR .........................  $    (23,852)  $  5,599,471 
                                                                               ============   ============ 

See accompanying notes to consolidated financial statements.

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 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                        [Enlarge/Download Table]

                                                                                     FOR THE YEARS ENDED       
                                                                                         DECEMBER 31,          
                                                                                ------------------------------ 
                                                                                    1999              2000     
                                                                                ------------      ------------ 
                                                                                                               
CASH FLOWS FROM OPERATING ACTIVITIES                                                                           
   Net loss ..................................................................  $ (3,672,175)     $ (5,702,365)
   Adjustments to reconcile net loss to net cash used in operating activities:                                 
     Depreciation and amortization ...........................................       292,877           222,675 
     Interest expense paid by issuance of common stock, warrants, and stock                                    
        options ..............................................................       478,919           167,005 
     Amortization of deferred offering, financing costs and accretion of debt                                  
        discount .............................................................        35,997           496,728 
     Interest accrued on notes receivable from stockholders ..................      (235,951)               -- 
     Write-off of note receivable from stockholder ...........................            --           390,000 
     Reserve against stockholders notes receivable ...........................       529,323                -- 
     Non-cash compensation expense ...........................................       105,005           564,674 
     Distributions in excess of (undistributed) equity in income from                                          
        unconsolidated subsidiary ............................................       (46,242)          (81,499)
     Changes in operating assets and liabilities, net of transfers to                                          
        unconsolidated subsidiary                                                                              
     Accounts receivable .....................................................        (4,558)         (733,502)
     Inventories .............................................................       613,898          (249,285)
     Prepaid expenses, deposits and other ....................................      (163,435)          116,581 
     Accounts payable ........................................................       (97,689)          153,318 
     Accrued liabilities .....................................................      (178,228)          353,165 
     Other liabilities .......................................................        37,452            17,322 
                                                                                ------------      ------------ 
        NET CASH USED IN OPERATING ACTIVITIES ................................    (2,304,807)       (4,285,183)
                                                                                ------------      ------------ 
CASH FLOWS FROM FINANCING ACTIVITIES                                                                           
   Additions to refreshment centers in service ...............................    (1,711,105)         (933,422)
   Purchase of property and equipment ........................................       (12,239)         (160,823)
   Cash investment in wholly owned, unconsolidated subsidiary ................      (572,544)               -- 
                                                                                ------------      ------------ 
        NET CASH USED IN INVESTING ACTIVITIES ................................    (2,295,888)       (1,094,245)
                                                                                ------------      ------------ 
CASH FLOWS FROM FINANCING ACTIVITIES                                                                           
   Proceeds from borrowings ..................................................       477,669         1,767,021 
   Principal payments on notes payable .......................................      (400,789)       (3,827,771)
   Proceeds from issuance of notes payable to officers and stockholders ......       299,195                -- 
   Principal payments on capital lease obligations ...........................       (15,753)          (23,411)
   Other offering and financing costs paid ...................................       (88,000)               -- 
   Proceeds from issuance of common stock and warrants .......................            --         9,766,759 
   Proceeds from issuance of preferred stock and warrants ....................     4,439,775           627,849 
   Payment of dividends ......................................................            --          (233,248)
                                                                                ------------      ------------ 
        NET CASH PROVIDED BY FINANCING ACTIVITIES ............................     4,712,097         8,077,199 
                                                                                ------------      ------------ 

NET INCREASE IN CASH .........................................................       111,402         2,697,771 

CASH AT BEGINNING OF YEAR ....................................................         1,850           113,252 
                                                                                ------------      ------------ 

CASH AT END OF YEAR ..........................................................  $    113,252      $  2,811,023 
                                                                                ============      ============ 

See accompanying notes to consolidated financial statements.

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 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                                                        [Enlarge/Download Table]

                                                                                     FOR THE YEARS ENDED     
                                                                                         DECEMBER 31,        
                                                                                -----------------------------
                                                                                    1999             2000    
                                                                                ------------     ------------
                                                                                                             
SUPPLEMENTAL CASH FLOWS INFORMATION                                                                          
   Cash paid for interest ....................................................  $    126,857     $         --
                                                                                ============     ============
NON-CASH INVESTING AND FINANCING ACTIVITIES                                                                  
   Accrual of preferred stock dividends ......................................       607,269          378,276
   Issuance of common stock as payment of debt obligations ...................       386,088               --
   Issuance of preferred stock as payment of debt obligations ................     1,410,051               --
   Value of warrants converted to debt .......................................       506,694               --
   Cancellation of stockholder notes receivable and related accrued interest                                 
     in exchange for return of 1,471,000 and 140,625 shares of common stock ..     2,940,569          450,000
   Property and equipment acquired by capital lease ..........................        28,476               --
   Issuance of warrants for advertising agreement ............................            --          135,144
   Accrued interest, accounts payable and payable to stockholder converted to                                
     notes payable ...........................................................       401,162           56,063
   Beneficial conversion feature on Series A and B Preferred Stock ...........            --        5,225,654
   Value of shares issued as a dividend on Series B Preferred Stock ..........            --          275,679
   Conversion of Series A, B and C Preferred Stock into common stock .........            --       13,265,789
   Transfer of assets from investment in unconsolidated subsidiary to                                        
     refreshment centers in service ..........................................            --          775,518
   Transfer of notes payable and accrued interest to unconsolidated subsidiary            --          943,956

See accompanying notes to consolidated financial statements.

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NOTE 1 -- ORGANIZATION AND NATURE OF OPERATIONS                                 

ORGANIZATION AND PRINCIPLES OF CONSOLIDATION                                    

eRoomSystem Technologies, Inc., a Nevada corporation ("eRoomSystem              
Technologies"), is the successor to RoomSystems, Inc., a Nevada corporation     
("RSI"). RSI was originally incorporated as InnSyst! Corporation, a North       
Carolina corporation, on March 17, 1993 and on April 17, 1996, was              
reincorporated as a Nevada corporation.                                         

On August 31, 1999, RoomSystems International Corporation ("RSIC") was          
incorporated in Nevada as a wholly owned subsidiary of RSI. As of December 31,  
1999, RSI, RSIC and their shareholders entered into an Agreement and Plan of    
Reorganization wherein RSI became a wholly owned subsidiary of RSIC. On March   
29, 2000 and corrected on May 30, 2000, RSIC changed its name to eRoomSystem    
Technologies, Inc.                                                              

This reorganization has been accounted for as a reorganization of entities under
common control with the assets and liabilities reflected at carry-over basis in 
a manner similar to pooling-of-interests accounting. The accompanying           
consolidated financial statements have been restated to reflect the equivalent  
eRoomSystem Technologies shares for all periods presented.                      

On September 29, 1999, eRoomSystem Technologies formed a new bankruptcy-remote  
entity, RSi BRE, Inc. ("RSi BRE"), as a wholly owned subsidiary (see Note 3).   

On May 10, 2000, eRoomSystem Technologies formed a new bankruptcy-remote entity,
eRoomSystem SPE, Inc. ("SPE"), as a wholly owned subsidiary. SPE was formed for 
the purposes of purchasing certain business leases and certain related          
refreshment centers, obtaining the rights, through licensing, to certain        
intellectual property relating to the use of the refreshment centers, and       
obtaining financing secured by pledging the business leases.                    

The accompanying consolidated financial statements include the accounts of      
eRoomSystem Technologies, and its wholly owned subsidiaries RSI and SPE, after  
elimination of intercompany accounts and transactions. RSi BRE has not been     
consolidated in the accompanying financial statements since the Company does not
have the ability to control RSi BRE's operations. RSi BRE has been accounted for
under the equity method of accounting. eRoomSystem Technologies and RSI are     
sometimes collectively referred to as "eRoomSystem Technologies" or the         
"Company."                                                                      

NATURE OF OPERATIONS AND RELATED RISKS                                          

The Company designs, assembles and markets a complete line of fully-automated   
Refreshment Centers and eRoomSafes traditionally installed in hotels. The       
Refreshment Centers and eRoomSafes use proprietary software, and patented credit
card technology, that integrate with the data collection computer in each hotel.

Since inception, the Company has suffered recurring net losses. During the years
ended December 31, 1999 and 2000, the Company had net losses of $3,672,175 and  
5,702,365, respectively. During the years ended December 31, 1999 and 2000, the 
Company's operations used $2,304,807 and $4,285,183 of cash, respectively. In   
the future, the Company may need to obtain additional financing to provide      
working capital for operations. Management is attempting to arrange debt        
financing for product sales. The financial statements do not include any        
adjustments relating to the recoverability and classification of asset carrying 
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.                           

The Company is subject to certain risk factors frequently encountered by        
companies that are in the early stages of developing a business line that may   
impact its ability to become a profitable enterprise. These risk factors        
include, among others:                                                          

a.        The Company's business model is capital intensive and will require    
    significant additional equity or debt financing. This additional
       funding may not be available in sufficient amounts or on acceptable
terms to the Company, or at all.                            

b.        The Company faces competition from companies that have substantially  
          greater capital resources, research and development, manufacturing and
marketing resources than the Company.                       

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c.        The Company's ability to implement its strategy is dependent upon its 
  ability to retain key employees, ability to attract and retain
      additional qualified personnel and its ability to manage expansion
effectively.                                                

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES                                       

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS                     

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

INVENTORIES                                                                     

Inventories include direct materials, direct labor and manufacturing overhead   
costs and are stated at the lower of cost (using the first-in, first-out method)
or market value. Inventories consist of the following:                          

                                                                [Download Table]

                                December 31,     
                            ---------------------
                              1999         2000  
                            --------     --------
                                                 
Finished goods ........     $284,382     $ 90,943
Work-in process .......      160,764      100,759
Parts and raw materials      251,887      754,616
                            --------     --------
                            $697,033     $946,318
                            ========     ========

Provisions, when required, are made to reduce excess and obsolete inventories to
their estimated net realizable values. Due to competitive pressures and         
technical innovation, it is possible that estimates of the net realizable value 
could change in the near term.                                                  

REFRESHMENT CENTERS IN SERVICE AND PROPERTY AND EQUIPMENT                       

Refreshment Centers (including eRoomSafes, if applicable) and property and      
equipment are stated at cost, less accumulated depreciation and amortization.   
Major additions and improvements are capitalized, while minor repairs and       
maintenance costs are expensed when incurred. Depreciation and amortization are 
computed using the straight-line method over the estimated useful lives of the  
related assets, after taking into consideration residual values for Refreshment 
Centers, which are as follows:                                                  

                                                                [Download Table]
                                                                   
Refreshment Centers in service...................         7 years  
Production equipment.............................       3 - 5 years
Computer and office equipment....................       3 - 7 years
Vehicles.........................................         7 years  

Depreciation and amortization expense related to Refreshment Centers in service 
and property and equipment was $277,030 and $191,399 for the years ended        
December 31, 1999 and 2000, respectively.                                       

On retirement or disposition of property and equipment, the cost and related    
accumulated depreciation and amortization are removed from the accounts and any 
resulting gain or loss is recognized in the statement of operations.            

CASH EQUIVALENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS                        

Cash equivalents include highly liquid investments with original maturities of  
three months or less, readily convertible to known amounts of cash. At December 
31, 2000 and 1999, the Company had cash in excess of federally insured limits of
$2,711,023 and $6,324, respectively.                                            

The carrying amounts reported in the accompanying consolidated financial        
statements for cash, accounts receivable and accounts payable approximate fair  
values because of the immediate or short-term maturities of these financial     
instruments. The carrying amounts of the Company's debt obligations approximate 
fair value based on current interest rates available to the Company.            

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CAPITALIZED SOFTWARE COSTS                                                      

In accordance with Financial Accounting Standards Board ("FASB") Statement of   
Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of    
Computer Software to be Sold, Leased or Otherwise Marketed" development costs   
incurred in the research and development of new software products to be sold,   
leased or otherwise marketed are expensed as incurred until technological       
feasibility in the form of a working model has been established. Internally     
generated capitalizable software development costs have not been material for   
the years ended December 31, 1999 and 2000. The Company has charged its software
development costs to research and development expense in the accompanying       
consolidated statements of operations.                                          

PATENTS AND LICENSE RIGHTS                                                      

Patents and license rights consist of patents and licenses purchased from a     
related party (see Note 5). These costs are being amortized on a straight-line  
basis over the estimated life of the related patents or licenses of 7 years.    
Management evaluates the recoverability of these costs on a periodic basis,     
based on revenues from the products related to the technology, existing or      
expected revenue trends and projected cash flows.                               

DEFERRED OFFERING AND FINANCING COSTS                                           

The Company capitalizes direct costs associated with the acquisition of debt    
financing. These costs are amortized over the life of the related debt as       
additional interest expense. If the underlying debt is repaid or extinguished   
prior to the scheduled maturity, the costs are removed from the accounts and    
considered in the determination of the gain or loss from extinguishment. Certain
debt has been converted to equity and the related unamortized debt financing    
costs have been recorded as equity offering costs. The Company also capitalizes 
direct costs associated with the acquisition of equity financing which are      
netted against the actual equity proceeds.                                      

IMPAIRMENT OF LONG-LIVED ASSETS                                                 

The Company reviews its long-lived assets, including intangibles, for impairment
when events or changes in circumstances indicate that the carrying value of an  
asset may not be recoverable. The Company evaluates, at each balance sheet date,
whether events and circumstances have occurred which indicate possible          
impairment. The Company uses an estimate of future undiscounted net cash flows  
from the related asset or group of assets over their remaining life in measuring
whether the assets are recoverable. As of December 31, 2000, the Company does   
not consider any of its long-lived assets to be impaired.                       

REVENUE RECOGNITION                                                             

The Company generates revenues from either the sale of Refreshment Centers and  
eRoomSafes or from leases of Refreshment Centers and eRoomSafes under revenue   
sharing agreements. Under the revenue sharing agreements, the Company receives a
portion of the sales generated by the units and under certain agreements is     
guaranteed a minimum daily revenue amount. The Company also generates revenues  
from maintenance services.                                                      

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

INCOME TAXES                                                                    

The Company recognizes an asset or liability for the deferred tax consequences  
of all temporary differences between the tax bases of assets or liabilities and 
their reported amounts in the financial statements that will result in taxable  
or deductible amounts in future years when the reported amounts of the assets or
liabilities are recovered or settled. These deferred tax assets or liabilities  
are measured using the enacted tax rates that will be in effect when the        

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differences are expected to reverse. Deferred tax assets are reviewed           
periodically for recoverability and valuation allowances are provided, as       
necessary.                                                                      

RECENT ACCOUNTING PRONOUNCEMENTS                                                

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative          
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes new      
accounting and reporting standards for companies to report information about    
derivative instruments, including certain derivative instruments embedded in    
other contracts (collectively referred to as derivatives), and for hedging      
activities. This statement, as extended by SFAS No. 137, is effective for       
financial statements issued for all fiscal quarters of fiscal years beginning   
after June 15, 2000. The Company does not expect this statement to have a       
material impact on the Company's results of operations, financial position or   
liquidity.                                                                      

On December 3, 1999, the Securities and Exchange Commission issued Staff        
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." This
bulletin requires the application of specific criteria in determination of the  
timing of revenue recognition in financial statements and is effective for all  
fiscal years beginning after December 16, 1999. The Company's accounting        
policies conform to the requirements of this bulletin and the adoption of this  
bulletin had no material effect upon the Company's results of operations,       
financial position or liquidity.                                                

In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain   
Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 
25." Interpretation No. 44 provides definitive guidance regarding accounting for
stock-based compensation to non-employee directors. Interpretation 44 allows    
non-employee directors to be treated as "employees" for purposes of applying APB
Opinion No. 25. The Company has applied this interpretation to all issuances to 
non-employee directors during 1999 and thereafter.                              

NET LOSS PER COMMON SHARE                                                       

Basic loss per common share is computed by dividing net loss attributable to    
common stockholders by the weighted average number of common shares outstanding.
Dilutive loss per common share is computed by dividing net loss attributable to 
common stockholders by the weighted average number of common shares and the     
dilutive potential common share equivalents then outstanding. Potential common  
share equivalents consist of shares issuable upon the exercise of stock options,
warrants and shares issuable upon the conversion of Series A, Series B, and     
Series C convertible preferred stock.                                           

As of December 31, 1999, there were 360,000 and 2,081,680 shares of Series A and
Series B convertible preferred stock outstanding, respectively. As of December  
31, 1999 and 2000, there were options and warrants outstanding to purchase      
866,508 shares and 2,976,560 shares of common stock, respectively, that were not
included in the computation of diluted loss per common share as their effect    
would have been anti-dilutive, thereby decreasing the loss per common share.    

NOTE 3 -- RSG INVESTMENT TRANSACTIONS AND SETTLEMENT                            

On July 17, 1998, the Company entered into an Equipment Purchase and Sale       
Agreement (the "Equipment Agreement") with RSG Investments, LLC ("RSG"), an     
unrelated lender. Under the terms of the Equipment Agreement, RSG paid $1.5     
million for the production of approximately 2,270 Refreshment Centers (the "RSG 
Units") to be installed in six hotel properties in the United States under      
revenue sharing agreements. Pursuant to the Equipment Agreement, title to the   
RSG Units was transferred to RSG and the Company was to repurchase the RSG Units
within 75 days, or by September 30, 1998. The repurchase price was based upon   
the $1.5 million bearing interest at 15 percent per annum and was secured by the
Company's common stock pledged by certain officers, directors and consultants to
the Company and the Company's assets. Due to the Company's obligation to        
repurchase the RSG Units, this transaction was treated as a collateralized      
borrowing.                                                                      

As an inducement for RSG to enter into the Equipment Agreement, the Company     
issued to the principals of RSG warrants to purchase 46,875 shares of common    
stock at $12.80 per share. These warrants were valued by the Company at the time
of issuance at $253,347 using the Black-Scholes option pricing model with the   
following assumptions: risk-free interest rate of 5.5 percent, expected dividend
yield of 0 percent, volatility of 58.2 percent, and expected life of 4.9 years. 
In the event that the Company did not meet the obligation to repurchase the     
units,                                                                          

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additional warrants to purchase 9,375 shares of the Company's common stock at   
$12.80 per share accrued to RSG every thirty days through January 28, 1999,     
whereupon the Equipment Agreement would be in default.                          

During the years ended December 31, 1998 and 1999, the Company issued additional
warrants to purchase 37,500 and 9,375 shares of common stock, respectively, in  
connection with the Equipment Agreement. These additional warrants were valued  
by the Company at the time of issuance at $202,597 and $50,750, respectively,   
using the Black-Scholes option pricing model with the following assumptions:    
risk-free interest rate of 5.5 percent, expected dividend yield of 0 percent,   
volatility of 58.2 percent, and expected life of 4.9 years. All of the warrants 
issued to RSG were to be exercisable for a period of three years subsequent to  
the Company's initial public offering.                                          

On January 28, 1999, the Company was unable to meet the terms of the repurchase 
obligation and the Equipment Agreement was in default. RSG granted the Company  
several extensions to meet the terms under the Equipment Agreement, the last of 
which was signed on May 19, 1999. RSG placed certain conditions on the Company, 
the failure to meet any of the conditions would result in RSG's foreclosure on  
the pledged common stock and the assets of the Company.                         

On September 28, 1999, the Company and RSG entered into a settlement agreement  
in the form of the Equipment Transfer Agreement (the "Transfer Agreement"),     
which provided for the following:                                               

-    eRoomSystem Technologies formed a new bankruptcy-remote entity, RSi BRE, as
   a wholly owned subsidiary. The ownership of the RSG Units and the related
   revenue sharing agreements were transferred to RSi BRE. RSG is to receive
 $0.57 per unit per day of the revenue realized from the revenue sharing
     agreements covering 2,050 of the RSG Units over the remaining life of their
    seven year revenue sharing agreements. However, the $0.57 per unit per day
   is paid only after $0.11 per unit per day has been paid to the Company to
     cover taxes and maintenance. To the extent that at least $0.68 per unit per
day in revenue is not realized from the RSG Units, the Company has no 
     obligation to pay the difference to RSG. Rather, RSG is subject to the risk
    that revenues generated from the RSG Units are not at least $0.68 per unit
     per day. To the extent that the revenue per unit per day exceeds $0.68, the
incremental amount is paid to the Company.                            

-    RSG converted one-third of the principal amount of the loan, or $500,000,  
  into 166,667 shares of Series B convertible preferred stock at $3.00 per
share.                                                                

-    The Company paid $250,000 to RSG upon the execution of the Transfer        
    Agreement and executed a promissory note in the amount of $750,000 bearing
    10 percent interest. This note was paid in full on August 9, 2000 with the
proceeds from the IPO.                                                

-    The Company transferred $750,000 of cash and other assets into RSi BRE to  
pay for the manufacture and installation of at least an additional 750
    Refreshment Centers. If the Company had failed to pay the $750,000 note to
    RSG prior to December 31, 2000, the $750,000 note would have been forgiven
and in exchange RSG would have received $0.57 per unit per day from an
   additional 750 units held as collateral under the obligations to RSG over
 the remaining term of their seven year revenue sharing agreements. This
    obligation was under the same terms as the $0.57 per unit per day payments
discussed above.                                                      

-    RSG terminated the pledge of the common stock of the stockholders and the  
assets of the Company.                                                

-    RSG remitted to the Company all payments received under the revenue sharing
agreements for the RSG Units.                                         

-    RSG forgave the interest due on the repurchase obligation up to August 1,  
1999.                                                                 

-    RSG returned to the Company the warrants to purchase 93,750 shares of the  
  Company's common stock, and the warrants which accrued during the period
commencing September 30, 1998 through January 28, 1999.               

In accordance with SFAS No. 15, "Accounting by Debtors and Creditors for        
Troubled Debt Restructurings," the Company accounted for this transaction as a  
troubled debt restructuring. Accordingly, no gain or loss was recognized from   
this transaction. Rather, the Company combined all liabilities to RSG at the    
time of the Transfer Agreement including the principal amount of the repurchase 
obligation of $1,500,000, accrued interest of $298,849 and the value of the     
warrants of $506,694. The total liability of $2,305,543 was reduced by the      
$250,000 of cash                                                                

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paid and the $500,000 of Series B convertible preferred stock that was issued to
RSG. The Company is amortizing the remaining liability over the remaining life  
of the underlying revenue sharing agreements using an estimated effective       
interest rate of approximately 41 percent. This estimated effective interest    
rate could fluctuate in future periods depending upon the level and timing of   
revenues generated from the RSG units.                                          

Under the terms of the Transfer Agreement, the Company paid RSG $750,000 on     
August 15, 2000. Upon making the required payment, 750 additional units valued  
at $737,337 held by RSi BRE as collateral under the obligation to RSG were      
transferred to the Company. The remaining balance of the obligation to RSG of   
$914,615 was transferred to and assumed by RSi BRE.                             

The board of directors of RSi BRE is comprised of one appointee from the        
Company, one appointee from RSG and one independent appointee. All operating    
decisions, including disbursements, of RSi BRE require unanimous consent of RSi 
BRE's board of directors. As a result, the Company does not control RSi BRE. In 
accordance with EITF 96-16, "Investor's Accounting for an Investee When the     
Investor has a Majority of the Voting Interest But the Minority Shareholder or  
Shareholders Have Certain Approval or Veto Rights," the Company has determined  
that RSi BRE does not qualify for consolidation in the Company's financial      
statements. Rather, the Company's investment in RSi BRE is reflected as an      
"Investment in Wholly Owned, Unconsolidated Subsidiary" in the accompanying     
consolidated balance sheet and is being accounted for under the equity method of
accounting. At December 31, 1999 and 2000, the assets and liabilities of RSi BRE
consisted of the following:                                                     

                                                        [Enlarge/Download Table]

                                                                               December 31,           
                                                                       ------------------------------ 
                                                                           1999              2000     
                                                                       ------------      ------------ 
                                                                                                      
Cash ................................................................. $    189,659      $    170,288 
Accounts receivable, net of allowance for doubtful accounts ..........       66,507           137,406 
Inventory ............................................................      414,860                -- 
Refreshment centers in service .......................................    2,097,363         2,090,118 
Accumulated depreciation .............................................     (217,797)         (492,510)
Accrued liabilities ..................................................       (4,616)          (54,505)
Customer deposits ....................................................      (10,000)               -- 
Notes payable ........................................................           --          (914,615)
                                                                       ------------      ------------ 

Net Assets ........................................................... $  2,535,976      $    936,182 
                                                                       ============      ============ 

For the period from its inception (September 29, 1999) to December 31, 1999 and 
for the year ended December 31, 2000, the revenues and expenses of RSi BRE      
consisted of the following:                                                     

                                                        [Enlarge/Download Table]

                                                                                December 31,          
                                                                       ------------------------------ 
                                                                           1999              2000     
                                                                       ------------      ------------ 
                                                                                                      
Revenue sharing agreement revenues ................................... $    212,919      $    593,803 
Depreciation .........................................................      (53,947)         (316,586)
Other operating expenses .............................................      (16,654)         (205,958)
Interest expense .....................................................           --           (94,249)
Interest income ......................................................        5,297             6,761 
                                                                       ------------      ------------ 

Net Income/(Loss) .................................................... $    147,615      $    (16,229)
                                                                       ============      ============ 

NOTE 4 -- NOTES PAYABLE AND LONG-TERM DEBT                                      

1996 PRIVATE DEBT OFFERING                                                      

During the period from September through December 31, 1996, the Company raised  
$1,310,000 of debt funding through a best efforts private placement of          
promissory notes (the "1996 Notes"). An additional $160,000 was raised through  
March 1997. The 1996 Notes bore interest at 12 percent per annum paid quarterly 
and matured one year from the date of issuance. In the event the Company did not
repay all principal and accrued interest at the end of the one-year term, the   
1996 Notes were extended for an additional year and the interest rate increased 
to 15 percent per annum. If the 1996 Notes were extended for the additional     
year, all outstanding principal was to be amortized on a monthly basis over the 
second year. The 1996 Notes are secured by the assets of the Company.           

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The investors in the 1996 Notes were also originally issued 242,550 warrants to 
purchase shares of common stock of eRoomSystem Technologies at $2.67 per share  
which are exercisable for a period of the earlier of five years from the date of
issuance or three years subsequent to the closing of the Company's initial      
public offering (through August 9, 2003). In addition, the Company agreed to pay
the placement agent a 12 percent selling commission and issued the agent and    
brokers 86,250 warrants to purchase common stock at $2.67 per share which are   
exercisable for a period of the earlier of five years from the date of issuance 
or three years subsequent to the Company's initial public offering (through     
August 9, 2003).                                                                

During late 1997 and early 1998, the Company defaulted on all of the 1996 Notes.
To avoid foreclosure on the assets of the Company by the holders of 1996 Notes, 
the Company agreed to issue each of the holders of the 1996 Notes the following:

-    On a monthly basis commencing on the maturity date of each note and        
    continuing until the date of pay off or conversion into equity securities,
     through September 28, 1999, a warrant to purchase 99 shares of common stock
at $2.67 per share, from September 29, 1999 through March 29, 2000, a 
warrant to purchase 198 shares of common stock at $1.33 per share, and
   thereafter, a warrant to purchase 264 shares of common stock at $1.00 per
share, for every $20,000 of outstanding principal, which warrants are 
exercisable for a period of two years subsequent to the closing of the
Company's initial public offering (through August 9, 2002). During the
years ended December 31, 1999 and 2000, the Company issued warrants to
 purchase 28,608 shares and 33,400 shares of common stock, respectively,
  which were valued (utilizing the Black-Scholes option pricing model with
     the following weighted average assumptions for the years ended December 31,
1999 and 2000, respectively: risk free interest rates at 5.7 and 6.3  
    percent, expected dividend yield of 0 percent, volatility at 96.5 and 81.1
     percent, and expected lives at 3.0 and 1.71 years, respectively) at amounts
   ranging from $1.63 to $4.99 and $0.17 to $5.62 per warrant, respectively.
    The Company recognized $92,830 and $48,346 in interest expense relating to
  the grant of these warrants during the years ended December 31, 1999 and
2000, respectively.                                                   

-    188 shares of common stock for every $20,000 of outstanding principal, or a
total of 13,781 shares of common stock which were valued at $10.67 per
share on the date of issuance in 1998.                                

-    An additional 469 shares of common stock for every $20,000 of outstanding  
     principal converted into Series A convertible preferred stock. During 1998,
 holders of $1,040,000 of outstanding principal elected to convert their
   1996 Notes into 208,000 shares of Series A convertible preferred stock at
an agreed upon value of $5.00 per share. In connection with this      
 conversion, the Company issued 24,375 shares of common stock which were
valued at $10.67 per share.                                           

The total value of $407,000 related to the issuance of the 13,781 common shares 
issued to avoid foreclosure and the 24,375 common shares issued to induce the   
conversion to Series A convertible preferred stock has been recognized as an    
extraordinary loss from debt extinguishment in the accompanying December 31,    
1998 statement of operations.                                                   

In connection with the above-mentioned conversion of the 1996 Notes into Series 
A convertible preferred stock, the Company issued 13,125 shares of common stock 
to the original placement agent for assisting in the conversion. These shares   
were valued at $10.67 per share and were recorded as an offset to additional    
paid-in capital.                                                                

In May 1999, the remaining holders of the 1996 Notes were offered the right to  
convert their notes into Series B convertible preferred stock at the rate of    
$3.00 per share. Notes consisting of $300,000 of outstanding principal and      
$58,124 of accrued interest were converted into 119,374 shares of Series B      
convertible preferred stock.                                                    

As of December 31, 1999, the remaining 1996 Notes in the amount of $130,000 were
in default and were continuing to accrue warrants on a monthly basis. As of     
December 31, 2000, all 1996 notes were settled in full.                         

1997 PRIVATE DEBT AND EQUITY OFFERING                                           

In April 1997, the Company began a private placement offering of promissory     
notes (the "1997 Notes") and shares of common stock. The offering (as amended)  
consisted of 198.6 units at $10,000 per unit, totaling gross proceeds of        
1,986,000, each unit consisting of 938 shares of common stock and a $5,000      
promissory note. The 1997 Notes bore interest at 15 percent, payable quarterly, 
were due in one year and were secured by the assets of the Company.             

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In connection with the private placement offering, the Company agreed to issue  
common stock to a placement agent (the "Merchant Banker"), such that the        
Merchant Banker would own 5.9 percent of the issued and outstanding capital     
stock of the Company immediately preceding the filing of a registration         
statement relating to an initial public offering of the Company's securities.   

In May 1998, the Company entered into an agreement with the Merchant Banker     
which eliminated its anti-dilution rights in exchange for the issuance of 68,948
shares of common stock and the forgiveness of $50,014 in receivables from the   
Merchant Banker. The additional shares issued have been reflected as a stock    
dividend inasmuch as no additional services were provided by the Merchant       
Banker.                                                                         

In September 1998, holders of the 1997 Notes were offered the right to convert  
the 1997 notes and accrued interest into common stock at a rate of $10.67 per   
share. Note holders consisting of $115,000 in outstanding principal and $9,428  
of accrued interest elected to convert their 1997 Notes into 11,665 shares of   
common stock at that time. The Company incurred $11,082 of offering costs       
associated with this conversion which was recorded as an offset to additional   
paid-in capital.                                                                

In May 1999, remaining holders of the 1997 Notes were offered the right to      
convert the notes and accrued interest into Series B convertible preferred stock
at the rate of $3.00 per share. Notes consisting of $425,051 in outstanding     
principal and $96,882 of accrued interest were converted into 173,976 shares of 
Series B convertible preferred stock at that time. In addition, the Company paid
$5,000 in cash to one investor.                                                 

As of December 31, 1999, the remaining 1997 Notes in the amount of $431,750 were
in default. As of December 31, 2000, $27,500 remained outstanding under the 1997
Notes with the funds for the repayment of the remaining 1997 Notes placed into a
separate account. These funds will be released upon the Company's receipt of the
relevant security interest termination statements.                              

1999 PRIVATE DEBT OFFERING                                                      

From February through May 1999, the Company offered 15 percent promissory notes 
with a term of ninety days (the "1999 Notes"). Interest was payable at maturity.
Additionally, the 1999 Notes provided for the holders to receive 100 shares of  
common stock (75 shares before the March 29, 2000 reverse stock split and 37.5  
shares before the September 28, 1999 reverse stock split) every thirty days for 
each $1,000 of principal outstanding. The Company received $350,000 from the    
issuance of the 1999 Notes. The 1999 Notes are secured by the assets of the     
Company. During 1999, the Company paid off $134,885 of the 1999 Notes with cash 
and converted $180,000 of the 1999 Notes and 7,479 shares of accrued but        
unissued common stock (which were valued at $4.00 per share) into 81,909 shares 
of Series B convertible preferred stock. In addition, during 1999, the Company  
accrued and issued 41,410 shares of common stock that were not converted into   
Series B convertible preferred stock. As of December 31, 1999, $35,115 of these 
notes remained outstanding and were in default. As of December 31, 2000, these  
notes were paid in full.                                                        

2000 PRIVATE PLACEMENT OFFERING                                                 

On April 13, 2000, the Company issued subordinated $1,500,000 in promissory     
notes and issued 200,000 shares of common stock from a private placement        
offering. The Company received $1,472,500, net of offering costs of $27,500,    
from the private placement offering. The proceeds of the offering were allocated
to the financial instruments issued based upon their relative fair values which 
resulted in $1,051,769 to the promissory note before the offering costs of      
$19,810 and $440,541 being allocated to the common stock. The Company also      
recorded a discount on the notes payable of $448,398, which was amortized as    
interest expense through August 9, 2000, the date the promissory notes were paid
in full.                                                                        

2000 NOTE PAYABLE TO STOCKHOLDER                                                

On February 15, 2000, the Company received a $500,000 loan from a company,      
wholly owned by a stockholder and nominee to the board of directors. The loan   
was evidenced by a promissory note, bore interest at the rate of 10 percent per 
annum, matured on May 31, 2000 (subsequently extended to August 15, 2000) and   
was secured by the assets of the Company. In addition, the Company issued a     
warrant for the purchase of 18,750 shares of common stock, which is exercisable 
at $4.80 per share for two years subsequent to the closing of the IPO (through  
August 9, 2002). The warrants issued were valued at $31,547 based upon their    
fair value measured using the Black-Scholes option pricing model with the       
following assumptions: 6.7 risk-free interest rate, expected dividend yield of 0

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percent, 102.7 percent volatility and 2.4 years estimated life. The discount to 
the notes resulting from allocating a portion of the proceeds to the warrants   
was immediately amortized to interest expense. The Company repaid the note on   
August 9, 2000.                                                                 

2000 CONVERTIBLE PROMISSORY NOTES                                               

During March and April 2000, $212,500 of convertible promissory notes were      
issued in connection with the Series C convertible preferred stock offering.    
These notes bore interest at 7% per annum, payable semi-annually and mature on  
December 31, 2001. These notes were convertible at the option of the holders    
into common stock at $5.52, commencing September 9, 2000. These notes were      
repaid on August 9, 2000 with the exception of $25,000, which remains           
outstanding.                                                                    

FINANCING AGREEMENT                                                             

During 1999, the Company entered into a program agreement with a finance company
to provide funding for Refreshment Centers which the Company places with hotel  
customers under revenue sharing agreements. Under the terms of the program      
agreement, the finance company will fund the Company's product costs for each   
Refreshment Center that has been in service for 90 days, subject to the hotel   
customer meeting certain requirements and other conditions. Financing of up to  
$340 million is available to the Company under the program agreement. The       
Company is obligated to repay the financing over seven years, with a            
formula-based variable interest rate. As part of the financing, eRoomSystem     
Technologies, Inc. has formed a new entity, eRoomSystem SPE, Inc., a Nevada     
corporation. eRoomSystem SPE, Inc. will own all of the Refreshment Centers      
funded by the finance company as well as the revenue sharing agreements. The    
finance company will take a senior security interest in the Refreshment Centers 
financed under the program agreement. As of December 31, 1999 and 2000, no      
Refreshment Centers have been funded nor has any financing been provided under  
the program agreement.                                                          

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

                                                        [Enlarge/Download Table]

                                                                                       December 31,          
                                                                              ------------------------------ 
                                                                                  1999              2000     
                                                                              ------------      ------------ 
                                                                                                             
1996 Notes secured by assets of the Company, interest at 15% per annum and                                   
   accruing warrants to purchase common stock on a monthly basis (see                                        
   description above), paid December 2000 .................................   $    130,000      $         -- 
1997 Notes secured by assets of the Company, in default, interest of 15% per                                 
   annum (see description above) ...........................................       431,750            27,500 
1999 Notes secured by assets of the Company, (see description above), paid                                   
   August 2000 .............................................................        35,115                -- 
Note payable to RSG net of discount, secured by assets of the Company,                                       
   imputed interest at 41% per annum, transferred to RSi BRE (see Note 3)        1,555,544                -- 
Note payable to a corporation for services performed, paid August 2000 .....       102,290                -- 
Note payable to an individual, secured by assets of the Company, in default,                                 
   interest at 15% per annum, unsecured, paid December 2000 .................      100,000                -- 
Note payable to a bank, interest at 10% per annum, due in monthly                                            
   installments through June 2002, secured by vehicle ......................        11,719             6,479 
Note payable to an individual, interest at 15% per annum, unsecured, paid                                    
   in full .................................................................         6,062                -- 
2000 Convertible promissory notes, secured by assets of the Company, bearing                                 
   interest at 7% per annum, (see description above) ........................           --            25,000 
                                                                              ------------      ------------ 

Total notes payable and long-term debt .....................................     2,372,480            58,979 

Less: Current portion ......................................................    (1,560,458)          (56,710)
                                                                              ------------      ------------ 

                                                                              $    812,022      $      2,269 
                                                                              ============      ============ 

Although none of the notes in default have been extended, holders of the notes  
in default have not taken any action to foreclose on the notes. The Company     
intends to pay the notes in default upon receipt of the relevant security       

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interest termination statements from the holders of the notes. To this end, the 
Company has placed $73,990 of cash into a separate account for payment of these 
notes and related accrued interest.                                             

Future maturities of notes payable and long-term debt are as follows:           

                                                                [Download Table]
                                                                
YEAR ENDING DECEMBER 31,                                        
          2001 .....................................  $   56,710
          2002 .....................................       2,269
                                                      ----------

  Total ............................................  $   58,979
                                                      ----------

NOTE 5 -- NOTES PAYABLE TO STOCKHOLDERS                                         

In October 1996, in connection with the Company's acquisition of certain patents
and license rights from the Company's former chief executive officer, the       
Company agreed to pay the chief executive officer $125,000 as well as issue the 
former chief executive officer 65,625 shares of common stock. The $125,000      
obligation was originally due March 1, 1997 without interest. During 1997 and   
1998, the Company paid $54,250 towards the principal on this obligation. In     
December, 1999, the Company's former chief executive officer agreed to convert  
the remaining principal balance of $70,750 into 23,583 shares of Series B       
preferred stock at $3.00 per share.                                             

During the years ended December 31, 1998 and 1999, the Company's former chief   
executive officer loaned the Company $75,000 and $130,209, respectively.        
Additionally, during the year ended December 31, 1999, the Company's chief      
financial officer, who is a stockholder, and another stockholder loaned the     
Company $10,545 and $83,441, respectively. These loans were evidenced by        
promissory notes which bore interest at 10 percent. In addition, the note       
holders were also to receive 100 shares of common stock per month for every     
$1,000 of principal outstanding. During 1999, the Company accrued and issued    
83,500 shares of common stock in connection with these agreements. The shares   
were valued at $3.20 per share. During September 1999, all amounts outstanding  
on these notes were converted into 105,984 shares of Series B convertible       
preferred stock at a rate of $3.00 per share.                                   

NOTE 6 -- LEASES                                                                

CAPITALIZED LEASE OBLIGATIONS                                                   

Certain equipment is leased under capital lease agreements. The following is a  
summary of assets held under capital lease agreements:                          

                                                                [Download Table]

                                                   December 31,         
                                             -------------------------- 
                                                1999            2000    
                                             ----------      ---------- 
                                                                        
Property and equipment .................     $  103,602      $  103,602 
Less: Accumulated amortization .........        (62,701)        (77,114)
                                             ----------      ---------- 

                                             $   40,901      $   26,488 
                                             ==========      ========== 

The following is a schedule of future minimum lease payments under capital lease
agreement together with the present value of the net minimum lease payments:    

                                                                [Download Table]
                                                                        
YEAR ENDING DECEMBER 31,                                                
    2001 .............................................     $     35,728 
    2002 .............................................           28,401 
                                                           ------------ 
    Total net minimum lease payments .................           64,129 
    Less:  Amount representing interest ..............          (10,382)
                                                           ------------ 
    Present value of net minimum lease payments ......           53,747 
    Less:  Current portion ...........................          (28,091)
                                                           ------------ 

     Long-term portion ...............................     $     25,656 
                                                           ============ 

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OPERATING LEASES AS LESSOR                                                      

The Company accounts for its revenue sharing agreements as operating leases. As 
of December 31, 2000, the Company had two revenue sharing agreements for which  
the customers were contractually obligated to pay minimum monthly payments.     
Agreements with all other customers provide for an allocation of revenues to the
Company with no minimum monthly payment. Accordingly, the Company is unable to  
estimate future amounts to be received under these agreements.                  

Future minimum payments to be received under the contract that provides for     
minimum monthly amounts were as follows, as of December 31, 2000:               

                                                                [Download Table]
                                                                      
YEAR ENDING DECEMBER 31,                                              
      2001 ............................................     $  136,667
      2002 ............................................        138,775
      2003 ............................................        138,775
      2004 ............................................        138,775
      2005 ............................................        138,775
  Thereafter...........................................        140,883
                                                            ----------

      Total............................................     $  832,650
                                                            ==========

OPERATING LEASES AS LESSEE                                                      

The Company leases its operating facilities and certain equipment under         
non-cancelable operating leases. Rent expense for the years ended December 31,  
1999 and 2000 was $115,245 and $128,494, respectively. Minimum rental payments  
under non-cancelable operating leases were as follows:                          

                                                                [Download Table]
                                                        
YEAR ENDING DECEMBER 31,                                
     2001 ...............................     $  115,000
     2002 ...............................        100,000
                                              ----------
     Total ..............................     $  215,000
                                              ==========

NOTE 7 -- INCOME TAXES                                                          

The Company has paid no federal or state income taxes. The significant          
components of the Company's deferred income tax assets as of December 31, 1999  
and 2000 are as follows:                                                        

                                                                [Download Table]

                                                  1999              2000     
                                              ------------      ------------ 
                                                                             
Deferred Income Tax Assets:                                                  
   Net operating loss carryforwards .....     $  3,640,709      $  5,520,926 
   Reserves and accrued liabilities .....           82,602            73,029 
                                              ------------      ------------ 
         Total Deferred Income Tax Assets        3,723,311         5,593,955 
   Valuation allowance ..................       (3,687,977)       (5,556,869)
                                              ------------      ------------ 
         Net Deferred Tax Asset .........           35,334            37,086 
                                              ------------      ------------ 

Deferred Income Liability - Depreciation           (35,334)          (37,086)
                                              ------------      ------------ 

         Net Deferred Income Taxes ......     $         --      $         -- 
                                              ============      ============ 

The amount of, and ultimate realization of, the deferred income tax assets are  
dependent, in part, upon the tax laws in effect, the Company's future earnings, 
and other future events, the effects of which cannot be determined. The Company 
has established a valuation allowance against its deferred income tax assets.   
Management believes that, based on a number of factors, the available objective 
evidence creates sufficient uncertainty regarding the realizability of these    
deferred income tax assets to warrant the valuation allowance.                  

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

                                                                [Download Table]

                                                            December 31,          
                                                   ------------------------------ 
                                                       1999              2000     
                                                   ------------      ------------ 
                                                                                  
Benefit at statutory rate (34%) .................. $ (1,248,540)     $ (1,938,804)
Non-deductible expenses ..........................      220,108           145,183 
Change in valuation allowance ....................    1,076,904         1,868,892 
State tax benefit, net of federal tax benefit.....      (48,472)          (75,271)
                                                   ------------      ------------ 
     Net Benefit From Income Taxes ............... $         --      $         -- 
                                                   ============      ============ 

The following summarizes the tax net operating loss carryforwards and their     
respective expiration dates as of December 31, 2000:                            

                                                                [Download Table]
                                                       
2008 .................................     $     44,057
2010 .................................          930,194
2011 .................................        2,188,074
2017 .................................        1,082,373
2018 .................................        3,635,513
2019 .................................        3,397,087
2020 .................................        4,353,864
                                           ------------
Total net operating loss carryforwards     $ 15,631,162
                                           ============

NOTE 8 -- COMMITMENTS AND CONTINGENCIES                                         

LEGAL MATTERS                                                                   

In March 1999, a vendor of the Company filed a lawsuit that alleges breach of   
contract and seeks payment in the amount of approximately $125,000 from the     
Company related to purchases of materials from the vendor. The Company has      
responded to the lawsuit, and management believes that the materials delivered  
by the vendor were defective. In addition, the Company's costs resulting from   
the defective materials are in excess of $120,000. Although the Company, after  
consultation with legal counsel, believes that their defenses have merit, they  
are unable to predict the outcome of this matter.                               

The Company is also the subject of certain legal matters, which it considers    
incidental to its business activities. It is the opinion of management, after   
discussion with legal counsel, that the ultimate disposition of these legal     
matters will not have a material impact on the consolidated financial condition 
or results of operations of the Company.                                        

In January 1999, the Company received $288,620 as a loan from an officer and a  
consultant. The proceeds were loaned to the officer and the consultant by the   
Riggs Family Partnership, a third party which had received the proceeds from an 
unregistered offering of the Company's common stock. Collectively, the loans    
from the officer and the consultant were subsequently converted into 102,242    
shares of Series B convertible preferred stock and 77,353 shares of common      
stock. This unregistered offering was performed outside the Company and without 
its knowledge. The Company has not been able to determine whether the           
unregistered offering was conducted with the benefit of a state or federal      
exemption from registration. The Company was not privy to any offering materials
that may have been used or distributed with respect to the offering, and it has 
no independent knowledge regarding the status of the investors. The Company also
maintains that it did not have any control over, or contractual relationship    
with, the Riggs Family Partnership. In the event a successful claim is asserted 
against the Riggs Family Partnership, as a result of the unregistered offering, 
the Company may be subject to a potential disgorgement of the proceeds received 
plus interest. No amount has been reclassified from stockholders' deficit to a  
liability in the accompanying financial statements for any possible payments,   
which may result from the outcome of this unasserted claim.                     

EMPLOYMENT AGREEMENTS                                                           

In January 2001, the company entered into and amended employment agreements with
certain of its executive officers. The revised agreements are for periods       
through December 31, 2002 with an option to extend the terms for up to an       
additional 12 months upon mutual agreement of the Company and each executive    
officer. In the event of                                                        

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termination of employment without cause, each executive officer is entitled to  
cash compensation equal to three months of the then existing base salary under  
his respective employment agreement.                                            

On November 30, 2000, the Company entered into a severance agreement with an    
executive officer that terminated the officer's employment agreement. The       
severance agreement provided that $67,795 of severance payments be provided to  
the executive officer. On January 29, 2001, the Company entered into a new      
employment agreement with the individual and agreed to pay the balance owed     
under the severance agreement.                                                  

On December 19, 2000, the Company reached a verbal one-year employment agreement
with its new chief executive officer. As part of this agreement, the Company    
agreed to pay the new officer a base salary of $150,000 and issued options to   
purchase 250,000 shares of common stock at $1.51 per share. These options vested
on the date granted and are exercisable for two years. The granting of the      
options will have no financial effect due to the exercise price being above the 
market value of the common stock on the date granted.                           

ADVERTISING AGREEMENT                                                           

On March 24, 2000, the Company entered into a letter of agreement with an       
advertising agency. Under the terms of the agreement, the advertising agency is 
to assist the Company in the development and implementation of the Company's    
creative design related primarily to the IPO and secondarily to its advertising,
marketing and promotion. The agreement lasts for a term of one year and provides
for the agency to be compensated as follows: months one through four - on March 
29, 2000, the Company issued the agency a warrant to purchase 125,000 shares of 
common stock at $4.80 per share, and months five through twelve - the Company is
to pay the agency $43,687 per month in cash. These options have demand          
registration rights after August 9, 2001. In addition, the Company also agreed  
to pay all outside expenses incurred by the agency, on behalf of the Company,   
which is estimated to be $450,000. The warrants issued were valued at $135,144  
based upon their fair value measured using the Black-Scholes option pricing     
model with the following assumptions: 6.7 percent risk-free interest rate, 0    
percent expected dividend yield, 83.41percent volatility, and a 1.76 year       
estimated life. The Company charged the fair value of these warrants against the
proceeds received as part of the IPO.                                           

REGISTRATION RIGHTS                                                             

In connection with certain of its debt and equity offerings and the conversion  
of certain debt to equity, the Company has granted the holders 572,375 shares of
common stock and warrants to purchase 341,180 shares of common stock the right, 
subject to applicable terms and conditions, to require the Company to register  
their common stock on a best efforts basis (or equivalent common shares upon the
exercise of the warrants) under the Securities Act for offer to sell to the     
public. Additionally, the Company has also granted certain stock and warrant    
holders the right to join in any registration of securities of the Company      
(subject to certain exceptions). After August 9, 2001, in connection with       
certain agreements and its IPO, the Company has granted holders of 305,000      
warrants to purchase common shares the rights, subject to applicable terms and  
conditions, to require the Company to register their common shares upon the     
exercise of the warrants under the Securities Act for offer to sell to the      
public. The Company is obligated to pay all offering expenses related to        
offerings requested by the stock and warrant holders under these agreements. The
stockholders are obligated to pay all selling expenses.                         

NOTE 9 -- STOCKHOLDERS' EQUITY                                                  

AMENDMENT TO ARTICLES OF INCORPORATION                                          

On February 2, 2000, with stockholder approval, the Company filed articles of   
amendment to its articles of incorporation. The amended articles of             
incorporation authorize the Company to issue 500,000 shares of $0.001 par value 
Series A preferred stock, 2,500,000 shares of $0.001 par Series B preferred     
stock and 2,000,000 shares of $0.001 par value Series C preferred stock and     
20,000,000 shares of $0.001 par value common stock. The Company's board of      
directors is authorized, without stockholder approval, to designate and         
determine the preferences, limitations and relative rights granted to, or       
imposed upon, each share of preferred stock which are not fixed by the amended  
articles of incorporation.                                                      

On March 29, 2000, and corrected on May 30, 2000, the Company filed an amendment
and restatement of the Company's articles of incorporation, as amended and      
restated on February 2, 2000. The amended and restated articles of              
incorporation: (i) changed the Company's name to "eRoomSystem Technologies,     
Inc."; (ii) increased the                                                       

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Company's authorized capital stock to 60,000,000 shares; (iii) increased the    
authorized number of shares of the Company's common stock from 20,000,000 shares
to 50,000,000 shares; and (iv) authorized 5,000,000 shares of undesignated      
preferred stock at $0.001 par value.                                            

REVERSE STOCK SPLITS                                                            

On September 28, 1999, the Company's board of directors approved a one-for-two  
reverse stock split related to its outstanding common stock and common stock    
options and warrants. However, in connection with their employment agreements,  
officers which held 996,000 shares of common stock and a former consultant which
held 475,000 shares of common stock were excluded from the effect of this       
reverse stock split. On March 29, 2000, the Company's board of directors        
approved a three-for-four shares reverse stock split related to its common stock
and common stock options and warrants. Additionally, in connection with the sale
of the Series A and B convertible preferred stock, the holders of Series A and B
convertible preferred stock were excluded from the effect of these reverse stock
splits. The 1999 and 2000 stock splits have been retroactively reflected in the 
accompanying consolidated financial statements for all periods presented.       

STOCK ISSUANCES FOR SERVICES                                                    

During the year ended December 31, 1999, the Company issued shares of common    
stock to officers, key employees and outside parties for services provided and  
as bonuses. The shares issued have been valued by the Company's Board of        
Directors at estimated fair values based on other issuances of shares for cash  
and on the terms of related transactions. During 1999, the Company issued 1,864 
shares of its common stock to certain officers and key employees and recorded   
$5,965 of related compensation expense, respectively. The shares issued in 1999 
were valued at $3.20 per share.                                                 

1997 STOCK OPTION EXERCISE                                                      

During the year ended December 31, 1997, certain option and warrant holders     
exercised options and warrants to purchase 1,733,500 shares of common stock in  
exchange for partial recourse notes receivable of $3,799,250. The notes were due
on demand, bore interest at 7 percent per annum and the principal and accrued   
interest could be paid by surrendering shares of common stock to the Company.   
Through December 31, 1999, the Company accrued $510,642 of interest related to  
these notes receivable. On the dates the options and warrants were granted to   
employees during 1997, the exercise price of $1.75 per share was greater than   
the fair value of the Company's common stock. Accordingly, no compensation was  
recognized. Warrants granted to third-party consultants were valued at their    
fair value based upon the Black-Scholes option pricing model and resulted in the
recognition of approximately $93,000 of compensation expense during 1997.       

EITF 95-16, "Accounting for Stock Compensation Arrangements with Employer Loan  
Features Under APB No. 25," requires employee notes received upon exercise of   
stock options to be accounted for as the issuance of new stock options with a   
new measurement date if the notes are nonrecourse to the employee. The notes    
received in connection with the exercise of these options were partial recourse 
to the stockholders. Accordingly, they were not nonrecourse notes and were      
therefore not considered to be the issuance of new stock options.               

In connection with their employment/consulting agreements, certain stockholders 
had been exempted from the effects of the reverse stock split discussed above.  
During the year ended December 31, 1999, the Company demanded payment on notes  
receivable with principal balances totaling $3,143,000. Holders of 1,471,000    
shares of common stock, with a principal obligation totaling $2,574,250, and    
accrued interest of $366,319 surrendered their shares to the Company as         
satisfaction of the obligation. Since these officers and former consultant      
immediately returned all of these shares to the Company, no compensation was    
recognized in connection with the exclusion of these shares from the reverse    
stock split. However, as of December 31, 1999, a holder of 121,875 shares of    
common stock with a principal balance of $568,750 and accrued interest of       
$50,938 had filed for bankruptcy protection. As a result, the Company is        
currently negotiating with the bankruptcy trustee for the return of the shares. 
However, the fair value of the shares was less than the principal and accrued   
interest on the note receivable. Accordingly, as of December 31, 1999, the      
Company recorded a reserve of $229,688 against the note receivable to reflect it
at the fair value of the underlying collateral. Negotiations with the bankruptcy
trustee during 2000 have resulted in the understanding that the Company would   
have to pay the trustee for the shares of common stock in order for the Company 
to reacquire the same. Accordingly, the note receivable was written down to zero
during the three months ended September 30, 2000. The Company has been          
authorized by its board of directors to acquire the 121,875 shares of common    
stock from the bankruptcy trustee for $180,000, however this transaction has yet
to occur.                                                                       

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As of December 31, 1999, a note receivable from the exercise of 140,625 stock   
options, with a principal balance of $656,250, and accrued interest of $93,385  
remained outstanding for which the Company had not yet demanded repayment. As a 
result of the decline in the value of the underlying collateral and because the 
Company did not believe it will receive payment beyond the return of the        
underlying common stock, the Company recorded a reserve of $299,635 to reflect  
the note receivable at the fair value of the underlying collateral. At March 31,
2000, the Company canceled a note receivable from the stockholder which was used
to purchase shares of common stock. As consideration for the cancellation of the
note receivable, 140,625 shares of common stock were returned to the Company by 
the stockholder and retired.                                                    

1998 SERIES A CONVERTIBLE PREFERRED STOCK OFFERING                              

In January 1998, the Company issued 360,000 shares of Series A convertible      
preferred stock at a price of $5.00 per share. The Company received $600,275 in 
net cash proceeds (net of offering costs of $159,725) and issued 152,000 shares 
of Series A convertible preferred stock. In addition, the Company issued 208,000
shares of Series A convertible preferred stock relating to the conversion of    
$1,040,000 of 1996 Notes. The placement agent received a cash commission of 13  
percent, due diligence and non-accountable expense allowances (for a total of   
$149,843), 13,125 shares of common stock (valued at $10.67 per share) and       
warrants to purchase 6,840 shares of common stock exercisable at $16.00 per     
share which are exercisable for a period of two years subsequent to the         
Company's initial public offering (through August 9, 2002). The Company valued  
these warrants at $2.56 per share using a Black-Scholes option pricing model    
with the following assumptions: risk free rate of 5.6 percent, expected dividend
yield of 0 percent, volatility of 58.2 and an expected life of 2.1 years.       

The Series A convertible preferred stock was automatically converted into shares
of common stock upon the consummation of the IPO at the conversion rate of      
$10.00 divided by $6.50. The outstanding shares of the Series A convertible     
preferred stock were converted into 553,846 shares of common stock on August 9, 
2000.                                                                           

On November 14, 1998, holders of Series A convertible preferred stock commenced 
cumulating an 8% annual dividend. The annual dividend requirement applicable to 
Series A preferred shares outstanding at December 31, 1999 was $144,000, or     
$0.40 per share. Due to certain provisions of the Series A convertible preferred
stock, the Company's one-for-two reverse stock split declared on September 28,  
1999 did not affect the number of shares of Series A convertible preferred stock
outstanding. As of December 31, 1999, holders of Series A convertible preferred 
stock were owed dividends of $162,541. Upon closing the IPO, $250,124 of Series 
A convertible preferred stock dividends were due and payable, of which $219,555 
were paid through December 31, 2000. The Company is paying the Series A         
convertible preferred dividends upon the receipt from stockholders of their     
Series A convertible preferred stock certificates for conversion into common    
stock.                                                                          

The conversion of the Series A preferred shares was contingent upon an initial  
public offering that was outside the control of the stockholders. In accordance 
with EITF 98-5, "Accounting for Convertible Securities with Beneficial          
Conversion Features or Contingently Adjustable Conversion Ratios," a contingent 
beneficial conversion feature was measured at the commitment date, but not      
recognized until the contingency was resolved. Accordingly, the Company deferred
recording the beneficial conversion feature until the time of the IPO. In       
connection with the IPO, the Company recorded the contingent beneficial         
conversion feature of $5.00 per Series A share, or $1,800,000, as a dividend to 
the Series A convertible preferred stockholders.                                

Upon the liquidation, dissolution or winding up of the Company, holders of the  
Series A preferred stock, while outstanding, were entitled to receive, out of   
legally available assets, a liquidation preference of $10.00 per share, plus an 
amount equal to any unpaid dividends through the payment date, before any       
payment or distribution was made to holders of common stock or any series or    
class of stock thereafter issued that rank junior as to the liquidation rights  
of the Series A preferred stock. The holders of the Series A shares were not    
entitled to vote on any matter, excluding matters affecting the rights of such  
stockholders or as required by law. In connection with such vote, each share of 
Series A preferred stock, while outstanding, was entitled to one vote.          

1999 SERIES B CONVERTIBLE PREFERRED STOCK OFFERING                              

From May through September 1999, the Company issued 2,081,680 shares of Series B
convertible preferred stock at a price of $3.00 per share. The Company received 
$3,584,256 in net cash proceeds (net of cash offering costs of $480,885) and    
issued 1,355,047 shares of Series B convertible preferred stock. In addition,   
the Company issued 726,633 shares of Series B convertible preferred stock upon  
the conversion of $2,265,570 of promissory notes and unpaid salaries of certain 
officers and as part of the settlement with RSG Investments. The placement agent
received a cash commission of 9 percent on shares which they placed and a       
non-refundable expense allowance of 2.5 percent.                                

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Effective January 1, 2000 and in connection with the Series B convertible       
preferred stock offering, the Company agreed to pay an individual a finder's fee
of $51,250 plus interest at 10 percent, which was payable from proceeds of the  
Company's initial public offering and agreed to issue an option to purchase     
1,125 shares of common stock at an exercise price of $4.80 per share.           

Pursuant to the terms of the Series B convertible preferred stock, the shares   
were automatically converted into shares of common stock upon the consummation  
of the IPO. Before the modification as explained below, the conversion was at   
the lower of (i) $3.00 per share or (ii) 50 percent of the initial public       
offering price per share. On April 12, 2000, the certificate of designation for 
the Series B preferred stock was amended to modify the conversion rate to be    
determined by dividing $3.00 by 45 percent of the initial public offering price 
per share. As a result of the IPO price being $6.50 per share of common stock,  
the Series B convertible preferred stock was converted into 2,135,056 shares of 
common stock on August 9, 2000.                                                 

The holders of the Series B preferred stock were entitled to an annual          
cumulative dividend of six percent, payable in common stock. The annual dividend
requirement applicable to Series B convertible preferred stock outstanding was  
$374,702, or $0.18 per share. For the year ended December 31, 1999 and 2000, the
Company accrued common stock dividends of 28,936 and 68,169 shares with a value 
of $141,899 and $275,677, respectively, related to the Series B convertible     
preferred stock.                                                                

In accordance with EITF 98-5, "Accounting for Convertible Securities with       
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,"   
the Company determined that the holders of the Series B convertible preferred   
stock had received a beneficial conversion feature at the date of issuance. This
beneficial conversion feature was valued at $1,249,008 and was accrued as a     
dividend between the date of issuance of the Series B convertible preferred     
stock and September 28, 2000, the date which the Series B convertible preferred 
stockholders have the right to convert their shares. By modifying the terms of  
the beneficial conversion feature, when the value of the common stock was $3.20 
per share, the beneficial conversion feature was increased by $2,498,016. The   
increase to the beneficial conversion feature was accrued as a dividend from    
April 12, 2000 through August 9, 2000. During the year ended December 31, 1999  
and 2000, the Company recorded dividends of $321,370 and $3,425,654 to the      
Series B convertible preferred stockholders related to the beneficial conversion
feature.                                                                        

Upon the liquidation, dissolution or winding up of the Company, holders of      
Series B convertible preferred stock, while outstanding, were entitled to       
receive, out of legally available assets, a liquidation preference of $10.00 per
share, plus an amount equal to any unpaid dividends through the payment date,   
before any payment or distribution was made to holders of common stock or any   
series or class thereafter issued that ranks junior to the liquidation rights of
the Series B convertible preferred stock. The holders of Series B convertible   
preferred stock were not entitled to vote on any matter, excluding matters      
affecting the rights of such Series B stockholders or as required by law. In    
connection with any such vote, each outstanding share of Series B convertible   
preferred stock, while outstanding, was entitled to one vote. In addition, if   
the Company had not completed an initial public offering by September 28, 2000, 
holders of Series B convertible preferred stock would have been accorded voting 
rights. If such event had occurred, each share of Series B convertible preferred
stock would have been entitled to one vote.                                     

1999 COMMON STOCK ISSUANCE                                                      

On May 30, 1999, the Company sold 198,750 shares of common stock to an entity   
controlled by the Company's former president in exchange for a promissory note  
in the amount of $1,590,000. The purpose of the stock sale was to assist the    
Company in complying with certain stock pledge requirements set forth in the    
Equipment Agreement with RSG. On September 28, 1999, as a result of the Transfer
Agreement with RSG, the 198,750 shares of common stock were returned to the     
Company in exchange for the cancellation of the promissory note. The shares have
been reflected as issued and retired in the accompanying statement of           
stockholders' equity (deficit) for the year ended 1999.                         

2000 SERIES C CONVERTIBLE PREFERRED STOCK OFFERING                              

The Company issued $212,500 of 7% secured, subordinated, convertible promissory 
notes, 196,150 shares of 7% Series C convertible preferred stock and warrants to
purchase 42,500 shares of common stock at $6.60 per share, in a private         
placement offering during March and April 2000. The Company received $774,636 in
proceeds (net of offering costs of $75,364).                                    

The proceeds from the offering were allocated to the financial instruments      
issued, based upon their relative fair values, and resulted in an allocation of 
$164,169 to the promissory notes before offering costs of $17,382, $31,875      

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to the beneficial debt conversion feature, $535,986 to the Series C convertible 
preferred stock and $59,988 to the warrants. While the allocated value of the   
warrants was less than their fair value of $71,350, the fair value was measured 
using the Black-Scholes option pricing model with the following weighted average
assumptions: risk free interest rate of 5%, expected dividend yield of 0%,      
volatility of 100%, and expected lives of 3.25 years. The debt issuance costs   
were amortized through August 9, 2000 and the discount on the promissory notes  
of $48,331 was amortized as interest expense through August 9, 2000.            

The Series C convertible preferred stock was issued at a stated value of $3.25  
per share. The outstanding shares of Series C convertible preferred stock were  
automatically converted into common stock upon the close of the IPO at the rate 
determined by $3.25 divided by 55% of the IPO price of $6.50 per share which    
resulted in the issuance of 178,318 shares of common stock.                     

Dividends on the Series C convertible preferred stock accrued at 7% annually    
through August 9, 2000 and were payable in cash. Upon closing of the IPO,       
$15,016 of Series C convertible preferred stock dividends was payable of which  
$13,693 was paid through December 31, 2000. The Company is paying the preferred 
dividends upon the receipt from stockholders of their Series C convertible      
preferred stock certificates for conversion into common stock.                  

Upon the liquidation, holders of the Series C convertible preferred stock, while
outstanding, were entitled to receive, out of legally available assets, a       
liquidation preference of $10.00 per share plus an amount equal to any unpaid   
dividends through the payment date before any payment or distribution was made  
to the holders of common stock or any series or class of the Company's capital  
stock that ranks junior to the liquidation rights of the Series C convertible   
preferred stock. The holders of the Series C convertible preferred stock could  
not vote on any matter, excluding matters affecting the rights of such          
stockholders or as required by law. In connection with any such vote, each share
of Series C convertible preferred stock, while outstanding, was entitled to one 
vote.                                                                           

2000 COMMON STOCK INITIAL PUBLIC OFFERING                                       

On August 2, 2000, a registration statement for 1,800,000 shares of common stock
became effective and, on August 9, 2000, the Company issued 1,800,000 shares of 
common stock to the public in connection with the IPO. The shares were issued at
$6.50 per share before offering costs and commissions. In addition, the Company 
issued 180,000 warrants to the underwriter in connection with the IPO. The      
warrants are exercisable from August 2, 2001 through August 2, 2005 at $7.80 per
share, with the exercise price subject to reduction if the Company issues common
stock to others at less than the exercise price. The net value from the IPO,    
after offering costs and commissions, totaled $9,103,074 and were allocated to  
the common stock issued and the warrants based upon their relative fair value.  
Accordingly, $8,632,502 was allocated to the 1,800,000 shares of common stock,  
and $470,572 was allocated to the 180,000 warrants. After adding back $88,000 in
costs relating to the IPO during 1999 and $135,144 in non-cash offering costs,  
the Company received $9,326,218 in cash proceeds relating to the IPO.           

Although the amount allocated to the warrants was less than their fair value,   
the fair value of the warrants was $636,895 determined using the Black-Scholes  
option pricing model with the following assumptions: risk free interest rate of 
6.0%, expected dividend yield of 0%, volatility of 62.49%, and expected lives of
4.0 years.                                                                      

OTHER 2000 EQUITY TRANSACTIONS                                                  

On April 13, 2000, the Company issued 200,000 shares of common stock in         
connection with the issuance of a nine percent secured, subordinated promissory 
note in the principal amount of $1,500,000. The Company received $1,472,500, net
of offering costs of $27,500, from the private placement offering. The proceeds 
from the offering were allocated to the financial instruments issued based upon 
their relative fair values and resulted in $440,541 being allocated to the      
common stock. The Company also recorded a discount on the notes payable of      
$448,398, which was amortized as interest expense through August 9, 2000.       

During the year ended December 31, 2000, the Company issued 4,116 shares of     
common stock to an employee who previously loaned money to the Company. The     
shares were issued as a payment of interest and the value of the shares issued  
was $14,250 or $3.46 per share. Additionally, the Company issued 21,841 shares  
of common stock to the holders of the 1999 Private Debt Offering who are        
entitled to receive shares for the payment of interest. The value of the shares 
issued as an interest payment was $72,862 or $3.33 per share.                   

In June 2000, the Company issued 777 shares of common stock to an employee for  
services previously rendered. The shares were valued at $2,485 or $3.20 per     
share. During September 2000, the Company issued 12,176 shares of common stock  
to stockholders who had been protected from the effects of the reverse stock    
splits but who had not                                                          

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been previously identified. In October 2000, the Company issued 5,670 shares of 
common stock as an interest payment to an employee who loaned funds to the      
Company.                                                                        

NOTE 10 -- STOCK OPTIONS AND WARRANTS                                           

STOCK-BASED COMPENSATION                                                        

The Company accounts for its stock options issued to directors, officers and    
employees under Accounting Principles Board Opinion No. 25 and related          
interpretations ("APB 25"). Under APB 25, compensation expense is recognized if 
an option's exercise price on the measurement date is below the fair value of   
the Company's common stock. The Company accounts for options and warrants issued
to non-employees in accordance with SFAS No. 123, "Accounting for Stock-Based   
Compensation" (SFAS 123) which requires these options and warrants be accounted 
for at their fair value.                                                        

NON-EMPLOYEE GRANTS                                                             

During the years ended December 31, 1999 and 2000, the Company issued options to
purchase 63,711 shares and 314,626 shares of common stock, respectively, to     
non-employees for various consulting services. The exercise price was $4.80 to  
$9.60 and $4.00 to $9.60 for the years ended December 31, 1999 and 2000,        
respectively. These options were valued in accordance with SFAS 123 (utilizing  
the Black-Scholes option pricing model with the following weighted average      
assumptions for the years ended 1999 and 2000, respectively: risk free interest 
rate of 6.2 and 6.7 percent, expected dividend yield of 0 percent, volatility of
100.6 and 85.3 percent, expected lives of 2.6 and 3.4 years, respectively) at   
amounts ranging from $1.37 to $1.63 and $1.15 to $3.12 per share, respectively. 
The Company recognized $99,040 and $562,189 in compensation expense relating to 
the grant of these options during the years ended December 31, 1999 and 2000,   
respectively.                                                                   

EMPLOYEE GRANTS                                                                 

During 1999, the Company granted options to purchase 269,909 shares of common   
stock, respectively. The exercise price ranged from $11.33 and $4.80 to $8.80   
per share, respectively. The options were vested upon grant.                    

On February 3, 2000, the Board of Directors adopted, and on March 29, 2000, a   
majority of the shareholders' approved the creation of the 2000 Stock Option    
Plan ("2000 Plan") with 2,000,000 shares of common stock reserved for issuance  
thereunder. The 2000 Plan was amended and restated by the Board of Directors on 
June 6, 2000. The 2000 Plan provides for both the direct award and sale of      
shares and for the grant of options to purchase shares. The Company's           
compensation committee administers the plan and has the discretion to determine 
the employees, directors, independent contractors and advisors who will receive 
awards, the type of awards (stock, incentive stock options or non-qualified     
stock options) to be granted, the term, vesting and exercise prices. The        
exercise price for the options may be paid in cash, in shares of the Company's  
common stock valued at fair market value on the exercise date or through a      
same-day sale program without any cash outlay by the optionee. In the event of a
change in control (as defined), all restrictions on all awards or sales of      
shares issued under the plan will lapse and vesting on all unexercised options  
will accelerate to the date of the change in control.                           

During the year ended December 31, 2000, the Company granted options to purchase
of 1,395,776 shares of common stock to certain officers and employees of the    
Company pursuant to the 2000 Plan. These options vested immediately. The        
exercise prices range from $1.58 to $9.60 per share. The options are exercisable
through August 2, 2003.                                                         

SFAS 123 requires pro forma information regarding operating results as if the   
Company had accounted for its stock options granted to employees under the      
minimum fair value method of the statement. The minimum fair value of the stock 
options was estimated at the grant date by the Company using the Black-Scholes  
option pricing model. The following weighted average assumptions were used in   
the Black-Scholes model for the years ended 1999 and 2000, respectively:        
risk-free interest rate of 6.3 and 6.5 percent, a dividend yield of 0 percent,  
volatility of 100.6 and 81.1 percent, and expected lives of 2.7 and 3.1 years.  

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Following are the pro forma disclosures and the related impact on the net       
losses:                                                                         

                                                        [Enlarge/Download Table]

                                                                   Years Ended December 31,     
                                                             ---------------------------------- 
                                                                  1999                2000      
                                                             --------------      -------------- 
                                                                                                
Loss attributable to common stockholders as reported ....... $   (4,279,444)     $  (11,306,295)
Loss attributable to common stockholders pro forma .........     (4,725,793)        (13,135,257)
Basic and diluted loss per common share as reported ........          (1.33)              (2.73)
Basic and diluted loss per common share pro forma ..........          (1.47)              (3.17)

Due to the nature and timing of option grants, the resulting pro forma          
compensation cost may not be indicative of future years.                        

OUTSTANDING STOCK OPTIONS AND WARRANTS                                          

The Company has, from time to time, granted stock options and warrants to       
employees, directors, consultants and in connection with financing transactions.
A summary of stock option and warrant activity for the years ended December 31, 
1999 and 2000 is as follows:                                                    

                                                        [Enlarge/Download Table]

                                       Options and                            Weighted Average  
                                         Warrants          Price Range         Exercise Price   
                                     -----------------   -----------------  --------------------
                                                                                                
Balance, December 31, 1998..........           598,030       $2.67-16.00           $  5.00      
     Granted........................           362,228         1.33-9.60              5.56      
     Forfeited......................           (93,750)            12.80             12.80      
                                     -----------------                                          
Balance, December 31, 1999..........           866,508        2.67-16.00              4.39      
     Granted........................         2,110,052         1.00-9.60              5.98      
                                     -----------------                                          
Balance, December 31, 2000..........         2,976,560       $1.00-16.00              5.53      
                                     =================                                          
Exercisable, December 31, 1999......           866,508       $2.67-16.00              4.39      
                                     =================                                          
Exercisable, December 31, 2000......         2,727,038       $1.00-16.00              5.31      
                                     =================                                          

Weighted-average fair value of                                                                  
   options granted during year                                                                  
   ended December 31, 1999                      $ 1.66                                          
                                     =================                                          

Weighted-average fair value of                                                                  
   options granted during year                                                                  
   ended December 31, 2000                      $ 1.54                                          
                                     =================                                          

A summary of stock option and warrant grants with exercise prices less than,    
equal to or greater than the estimated market value on the date of grant during 
the years ended December 31, 1999 and 2000 is as follows:                       

                                                        [Enlarge/Download Table]

                                            Options and        Weighted      Weighted Average Fair 
                                              Warrants          Average       Value of Options and 
                                              Granted       Exercise Price          Warrants       
                                           ---------------  ---------------  ----------------------
                                                                                                   
Year Ended December 31, 1999:                                                                      
   Grants with exercise price less than                                                            
     estimated market value...............       19,233          $2.40               $2.20         
   Grants with exercise price greater                                                              
     than estimated market value..........      342,995           5.66                1.82         
Year Ended - December 31, 2000:                                                                    
   Grants with exercise price less than                                                            
     estimated market value...............       14,650           1.84                2.70         
   Grants with exercise price greater                                                              
     than estimated market value..........    2,095,402           6.03                1.54         

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A summary of the options and warrants outstanding and exercisable as of December
31, 1999 and 2000 follows:                                                      

                                                        [Enlarge/Download Table]

        DECEMBER 31, 1999                                                                                 
                                       Weighted Average       Weighted                        Weighted    
 Range of Exercise        Number           Remaining          Average          Number         Average     
       Price           Outstanding     Contractual Life    Exercise Price   Exercisable    Exercise Price 
--------------------- --------------- -------------------- --------------- --------------- ---------------
                                                                                                          
    $1.33 - 2.67            398,304        2.5 years           $2.65             398,304       $2.65      
     2.68 - 5.33            366,914        2.6 years            4.76             366,914        4.76      
     5.34 -16.00            101,290        2.6 years            9.72             101,290        9.72      
                      ---------------                                      ---------------                
                            866,508                                              866,508                  
                      ===============                                      ===============                


        DECEMBER 31, 2000                                                                                 
                                       Weighted Average       Weighted                        Weighted    
 Range of Exercise        Number          Remaining           Average          Number         Average     
       Price           Outstanding     Contractual Life    Exercise Price   Exercisable    Exercise Price 
--------------------- --------------- -------------------- --------------- --------------- ---------------
                                                                                                          
    $1.00 - 2.67            671,958       1.53 years           $2.23             671,958       $2.23      
     2.68 - 5.33          1,208,057       2.14 years            4.45           1,208,057        4.45      
     5.34 -16.00          1,096,545       2.80 years            8.74             847,023        8.99      
                      ---------------                                      ---------------                
                          2,976,560                                            2,727,038                  
                      ===============                                      ===============                

NOTE 11 -- SEGMENT INFORMATION                                                  

In June 1998, the FASB issued SFAS No. 131, "Disclosures about Segments of an   
Enterprise and Related Information." SFAS 131 establishes disclosures related to
components of a company for which separate financial information is available   
and evaluated regularly by a company's chief operating decision makers in       
deciding how to allocate resources and in assessing performance. It also        
requires segment disclosures about products and services as well as geographic  
areas. The Company has determined that it did not have any separately reportable
operating segments as of December 31, 1999 and 2000. However, the Company does  
sell Refreshment Centers in geographic locations outside of the United States.  

Revenues attributed to individual countries based on the location of sales to   
unaffiliated customers for the years ended December 31, 1999 and 2000 is as     
follows:                                                                        

                                                                [Download Table]

                                            December 31,        
                                   -----------------------------
                                       1999             2000    
                                   ------------     ------------
                                                                
Revenue:                                                        
   United States .............     $    540,517     $  2,905,643
   Other Countries ...........               --           77,997
                                   ------------     ------------

   Total Revenue .............     $    540,517     $  2,983,640
                                   ============     ============

NOTE 12 -- CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS               

The Company's historical revenues and receivables have been derived solely from 
the lodging industry. The Company offers credit terms on the sale of its        
Refreshment Centers and in connection with its revenue sharing contracts. The   
Company performs ongoing credit evaluations of its customers' financial         
condition and does not require collateral from its customers. The Company       
maintains an allowance for uncollectible accounts receivable based upon the     
expected collectibility of all accounts receivable.                             

During the year ended December 31, 1999, revenues from two customers accounted  
for 26.7 and 16.0 percent of total revenues. During the year ended December 31, 
2000, revenues from four customers accounted for 20.1, 19.6, 15.7, and 13.6     
percent of total revenues.                                                      

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NOTE 13 - RESTRUCTURING COSTS                                                   

Management and the Board of Directors determined in December 2000 to restructure
the Company's operations in an effort to reduce operating costs. In connection  
with the restructuring, the Company modified certain executive employment       
agreements and terminated 15 employees. As a result of the modification of the  
executive employment agreements and the obligation to pay termination benefits, 
which include related payroll taxes, the Company recognized a restructuring     
charge of $418,606 during the fourth quarter of 2000.                           

NOTE 14 -- SUBSEQUENT EVENTS                                                    

REGISTRATION OF WARRANTS                                                        

Under the terms of a 1996 private placement, the Company distributed offering   
documents that contained a statement that referred to the right of holders of   
341,180 warrants to join in any registration of the Company's securities. In    
August 2000, the Company completed the IPO at $6.50 per share. Subsequently, the
warrant holders have made an informal demand for the registration of the        
underlying shares of common stock. Through negotiations with the warrant        
holders, the Company has agreed to register the underlying shares in this       
offering. The Company has estimated the cost of the additional registration     
statement to be $60,000 with such estimate charged against operations.          

TERMINATION OF AN EXECUTIVE OFFICER                                             

On January 26, 2001, the Company terminated with cause the employment agreement 
with an executive officer. Under the terms of his agreement, as modified in July
2000, the termination may require the Company to pay approximately $185,000 to  
the former officer through December 31, 2001.                                   

ISSUANCE OF OPTIONS                                                             

On January 23, 2001, the Company issued options, pursuant to the 2000 Plan, to  
purchase a total of 303,200 shares on common stock. Fifty percent of these      
option vest on June 30, 2001 and the remaining fifty percent on December 31,    
2001. These options are exercisable at $1.91 per share and expire three years   
from the date of issuance (January 23, 2004). The granting of the options will  
have not financial effect due to the exercise price being equal to the market   
value of the common stock on the date granted. The options will have a value of 
$.088 per share based on the Black-Scholes option pricing model with the        
following assumptions: risk free interest rate of 5.7 percent, volatility of    
62.5 percent, expected dividend yield of 0 percent, and an expected life of     
three years.                                                                    

FINANCING AGREEMENT (UNAUDITED)                                                 

During March 2001, the Company received its first funding related to the        
agreement with a financing company to provide funding for Refreshment Centers   
which the Company places with hotel customers under revenue sharing agreements. 
This funding was in the amount of $294,220 and accrues interest at the rate of  
17.5% per annum, which is equal to the seven-year treasury rate of 5.07% plus   
12.5%.                                                                          

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

Not applicable.                                               

PART III

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

        This information is incorporated by reference from our proxy statement
to be filed with the Commission in connection with our Annual Meeting of        
Stockholders to be held on May 7, 2001.                                         

ITEM 10.      EXECUTIVE COMPENSATION.                                           

        This information is incorporated by reference from our proxy statement
to be filed with the Commission in connection with our Annual Meeting of        
Stockholders to be held on May 7, 2001.                                         

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

        This information is incorporated by reference from our proxy statement
to be filed with the Commission in connection with our Annual Meeting of        
Stockholders to be held on May 7, 2001.                                         

ITEM 12.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.                   

        This information is incorporated by reference from our proxy statement
to be filed with the Commission in connection with our Annual Meeting of        
Stockholders to be held on May 7, 2001.                                         

 PART IV

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

(a)      Exhibits                                             

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

(b)      Reports on Form 8-K                                  

None.                                                         

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SIGNATURES

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

                    eROOMSYSTEM TECHNOLOGIES, INC.

                    By:      /s/ David S. Harkness
                                            ------------------------------------
                         David S. Harkness
                                   Its:     Chief Executive Officer and Chairman

             Date:    March 30, 2001

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

                                                        [Enlarge/Download Table]

SIGNATURE                             TITLE                                              DATE     
                                                                                                  

/s/ David S. Harkness                 Chief Executive Officer and Chairman          March 30, 2001
------------------------------------  (Principal Executive Officer)                               
David S. Harkness                                                                                 

/s/ Stephen M. Nelson                 President and Chief Operating Officer         March 30, 2001
------------------------------------                                                              
Stephen M. Nelson                                                                                 

/s/ Derek K. Ellis                    Chief Financial Officer and Treasurer         March 30, 2001
------------------------------------  (Principal Financial and Accounting Officer)                
Derek K. Ellis                                                                                    

/s/ Gregory L. Hrncir                 General Counsel, Vice President               March 30, 2001
------------------------------------  of Business Development and Secretary                       
Gregory L. Hrncir                                                                                 

/s/ Lawrence S. Schroeder             Director                                      March 30, 2001
------------------------------------                                                              
Lawrence S. Schroeder                                                                             

/s/ Dr. Alan C. Ashton                Director                                      March 30, 2001
------------------------------------                                                              
Dr. Alan C. Ashton                                                                                

/s/ S. Leslie Flegel                  Director                                      March 30, 2001
------------------------------------                                                              
S. Leslie Flegel                                                                                  

/s/ John J. Prehn                     Director                                      March 30, 2001
------------------------------------                                                              
John J. Prehn                                                                                     

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 EXHIBIT INDEX

                                                        [Enlarge/Download Table]

EXHIBIT                                                                                                             
NUMBER                                               DOCUMENT NAME                                              PAGE
------                                               -------------                                              ----
                                                                                                                    
 1.01    Form of Underwriting Agreement relating to the registrant's initial public offering that closed on      (3)
         August 9, 2000                                                                                             

 2.01    Agreement and Plan of Reorganization by and between RoomSystems International Corporation and           (1)
         RoomSystems, Inc. dated December 31, 1999                                                                  

 2.02    Transfer Pricing Agreement by and between RoomSystems International Corporation and RoomSystems, Inc.   (1)
         dated December 31, 1999                                                                                    

 3.01    Amendment and Restatement of Articles of Incorporation                                                  (1)

 3.02    Certificate of Correction dated May 30, 2000                                                            (2)

 3.03    Amended and Restated Certificate of Designation, Preferences, Rights and Limitation of Series A         (1)
         convertible preferred stock                                                                                

 3.04    Amended and Restated Certificate of Designation, Preferences, Rights and Limitation of Series B         (1)
         convertible preferred stock                                                                                

 3.05    Certificate of Designation, Preferences, Rights and Limitation of Series C convertible preferred        (1)
         stock                                                                                                      

 3.06    Amended and Restated Bylaws                                                                             (2)

 3.07    Second Amendment and Restatement of Articles of Incorporation                                           (3)

 3.08    Second Amended and Restated Bylaws                                                                      (3)

 4.01    Form of Common Stock Certificate                                                                        (1)

 4.02    Form of Certificate for Series A convertible preferred stock                                            (1)

 4.03    Form of Certificate for Series B convertible preferred stock                                            (1)

 4.04    Form of Certificate for Series C convertible preferred stock                                            (1)

10.01    Amended and Restated 2000 Stock Option and Incentive Plan                                               (2)

10.02    Lease Agreement by and between RoomSystems Finance Corporation and 3770 Howard Hughes Parkway           (1)
         Associates Limited Partnership dated October 8, 1997                                                       

10.02A   Exhibits to Lease Agreement by and between RoomSystems Finance Corporation and 3770 Howard Hughes       (2)
         Parkway Associates Limited Partnership dated October 8, 1997                                               

10.03    Lease Agreement by and between RoomSystems, Inc. and Pam Joy Realty, Inc. dated October 10, 1997        (2)

10.04    Master Corporate Agreement by and between Innco Corporation and RoomSystems, Inc. dated April 6, 1998   (1)

10.04A   Exhibits to Master Corporate Agreement by and between Innco Corporation and RoomSystems, Inc. dated     (2)
         April 6, 1998                                                                                              

10.05    Indemnification Agreement by and between RoomSystems, Inc. and Alan C. Ashton dated August 17, 1999     (1)

10.06    Agreement of Understanding by and between RoomSystems, Inc. and Ash Capital, LLC, C&W/RSI Partners,     (1)
         LLC, SKM Investment, LLC and Thunder Mountain Investments, LC dated August 17, 1999                        

10.06A   Exhibits to Agreement of Understanding by and between RoomSystems, Inc. and Ash Capital, LLC,           (2)
         C&W/RSI Partners, LLC, SKM Investment, LLC and Thunder Mountain Investments, LC dated                      
         August 17, 1999                                                                                            

10.07    First Amendment to Agreement of Understanding by and between RoomSystems, Inc. and Ash Capital, LLC,    (1)
         C&W/RSI Partners, LLC, SKM Investment, LLC and Thunder Mountain                                            
         Investments, LC dated September 30, 1999                                                                   

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EXHIBIT                                                                                                             
NUMBER                                               DOCUMENT NAME                                              PAGE
------                                               -------------                                              ----
                                                                                                                    
10.08    Promissory Note Repurchase Agreement by and between Steven L. Sunyich and RoomSystems, Inc. dated       (1)
         September 1, 1999                                                                                          

10.09    Indemnification Agreement by and between RSi BRE, Inc. and Donnelly Prehn dated September 27, 1999      (1)

10.10    Equipment Transfer Agreement by and between RoomSystems, Inc., RoomSystems International Corporation,   (1)
         RSi BRE, Inc. and RSG Investments, LLC dated September 28, 1999                                            

10.10A   Exhibits to Equipment Transfer Agreement by and between RoomSystems, Inc., RoomSystems International    (2)
         Corporation, RSi BRE, Inc. and RSG Investments, LLC dated September 28, 1999                               

10.11    Amendment to Equipment Transfer Agreement by and between RoomSystems, Inc., RoomSystems International   (1)
         Corporation, RSi BRE, Inc. and RSG Investments, LLC dated November 23, 1999                                

10.12    Conversion Agreement by and between Steven L. Sunyich and RoomSystems, Inc. dated December 30, 1999     (1)

10.13    Loan and Security Agreement by and between RoomSystem Technologies, Inc. and Ash Capital, LLC dated     (1)
         February 15, 2000                                                                                          

10.13A   Exhibits to Loan and Security Agreement by and between RoomSystem Technologies, Inc. and Ash Capital,   (2)
         LLC dated February 15, 2000                                                                                

10.14    Letter Agreement by and between eRoomSystem Technologies, Inc. and Hall Communications, Inc. dated      (1)
         March 30, 2000                                                                                             

10.15    Form of Hotel Revenue Sharing Lease Agreement                                                           (2)

10.16    Form of Noncompetition and Nondisclosure Agreement (Sales)                                              (1)

10.17    Form of Consulting Agreement                                                                            (1)

10.18    Form of Sales Representation Agreement                                                                  (1)

10.19    Form of Executive Employment Agreement                                                                  (1)

10.20    Form of Offshore Loan Subscription Agreement dated as of April 13, 2000                                 (1)

10.21    Form of Secured Subordinated Promissory Note dated as of April 13, 2000                                 (1)

10.22    Form of Installation, Co-Maintenance and Software Licensing and Upgrade Agreement                       (2)

10.23    + Master Business Lease Financing Agreement by and among AMRESCO Leasing Corporation, eRoomSystem       (4)
         SPE, Inc., RoomSystems, Inc. and eRoomSystem Technologies, Inc. dated May 11, 2000                         

10.24    Indemnification Agreement by and between eRoomSystem Technologies, Inc. and John J. Prehn dated May     (2)
         31, 2000                                                                                                   

10.25    Amended and Restated Executive Employment Agreement of Steven L. Sunyich dated June 6, 2000             (2)

10.26    Second Amended and Restated Executive Employment Agreement of Steven L. Sunyich dated July 12, 2000     (3)

10.27    Amended and Restated Executive Employment Agreement of Derek K. Ellis dated July 12, 2000               (3)

10.28    Executive Employment Agreement of Stephen M. Nelson dated July 12, 2000                                 (4)

10.29    Amended and Restated Executive Employment Agreement of Gregory L. Hrncir dated July 12, 2000            (3)

10.30    Shareholders' Agreement and Proxy by and among Ash Capital, LLC, RoomSystems, Inc. and certain          (1)
         stockholders of RoomSystems, Inc. dated August 17, 1999                                                    

10.31    Employment Agreement of David S. Harkness dated as of December 20, 2000                                 (6)

10.32    Employment Agreement of Stephen M. Nelson dated as of January 29, 2001                                  63 

61

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EXHIBIT                                                                                                      
NUMBER                                               DOCUMENT NAME                                       PAGE
------                                               -------------                                       ----
                                                                                                             
10.33    Employment Agreement of Derek K. Ellis dated as of January 29, 2001                              72 

10.34    Employment Agreement of Gregory L. Hrncir dated as of January 29, 2001                           82 

10.35    ++Amended and Restated Master Business Lease Financing Agreement by and among AMRESCO Leasing    92 
         Corporation, eRoomSystem SPE, Inc., RoomSystems, Inc. and eRoomSystem Technologies, Inc. dated      
         February 23, 2001                                                                                   

16.01    Letter regarding Change in Certifying Accountant                                                 (1)

21.01    List of Subsidiaries                                                                             (6)

------------------------------------------------------------------------------- 

       (1)   Previously filed as an exhibit to the registrant's Registration
               Statement on Form SB-2, as filed with the Commission on April 14,
2000.                                             

        (2)   Previously filed as an exhibit to the registrant's Pre-Effective
            Amendment No. 1 to its Registration Statement on Form SB-2, as
filed with the Commission on June 9, 2000.        

        (3)   Previously filed as an exhibit to the registrant's Pre-Effective
            Amendment No. 2 to its Registration Statement on Form SB-2, as
filed with the Commission on July 14, 2000.       

        (4)   Previously filed as an exhibit to the registrant's Pre-Effective
            Amendment No. 3 to its Registration Statement on Form SB-2, as
filed with the Commission on July 19, 2000.       

       (5)   Previously filed as an exhibit to the registrant's Registration
              Statement on Form SB-2, as filed with the Commission on December
22, 2000.                                         

        (6)   Previously filed as an exhibit to the registrant's Pre-Effective
            Amendment No. 1 to its Registration Statement on Form SB-2, as
filed with the Commission on February 5, 2000.    

       +     Confidential treatment has been granted with respect to certain
            portions of this agreement, including the exhibits thereto, of
           which certain portions have been omitted and filed separately
with the Commission.                              

         ++    Confidential treatment has been requested with respect to certain
            portions of this agreement, including the exhibits thereto, of
           which certain portions have been omitted and filed separately
with the Commission.                              

62

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘10KSB40’ Filing		Date		First		Last			Other Filings
		7/2/07		9
		11/27/06		9
		8/14/06		9
		8/2/05		53
		1/23/04		57
		8/9/03		43
		8/2/03		54
		4/6/03		6
		12/31/02		21		48			10KSB,  5
		10/31/02		11
		8/9/02		43		51
		12/31/01		21		57			10KSB
		8/9/01		49
		8/2/01		27		53
		6/30/01		57					10QSB
		5/7/01		58					DEF 14A
		5/2/01		27
		4/30/01		11
Filed on:		4/2/01							DEF 14A
		3/31/01		12					10-Q
		3/30/01		59
		3/29/01		1		12
		3/28/01		11
		3/22/01		7		23
		3/12/01		11
		2/23/01		18		62
		2/2/01		27
		1/30/01		7
		1/29/01		49
		1/26/01		10		57
		1/23/01		57
		1/19/01		29
For Period End:		12/31/00		1		56
		12/22/00		62					SB-2
		12/20/00		61
		12/19/00		49
		11/30/00		49
		11/8/00		11
		10/31/00		11
		9/30/00		12		50			10QSB,  NT 10-Q
		9/28/00		52
		9/9/00		45
		9/1/00		20
		8/15/00		42		44
		8/9/00		12		60
		8/3/00		12		26			424B4
		8/2/00		13		53			SC 13D
		7/19/00		62					SB-2/A
		7/14/00		62					8-A12G,  SB-2/A
		7/12/00		61
		6/15/00		22		40
		6/9/00		62					SB-2/A
		6/6/00		54		61
		5/31/00		44
		5/30/00		37		60
		5/11/00		18		61
		5/10/00		37
		4/14/00		62					SB-2
		4/13/00		44		61
		4/12/00		52
		3/31/00		51
		3/30/00		61
		3/29/00		9		54
		3/24/00		49
		2/15/00		44		61
		2/5/00		62
		2/3/00		54
		2/2/00		49
		2/1/00		9
		1/5/00		11
		1/1/00		52
		12/31/99		9		60
		12/30/99		61
		12/16/99		40
		12/3/99		40
		11/23/99		61
		9/30/99		60
		9/29/99		37		43
		9/28/99		41		61
		9/27/99		11		61
		9/1/99		61
		8/31/99		14		37
		8/17/99		60		61
		8/1/99		41
		5/30/99		52
		5/19/99		41
		3/2/99		11
		1/28/99		41
		12/31/98		41		55
		11/14/98		51
		9/30/98		40		41
		7/17/98		40
		4/6/98		60
		12/31/97		50
		11/1/97		11
		10/10/97		60
		10/8/97		60
		3/1/97		46
		12/31/96		42
		4/29/96		9
		4/17/96		37
		9/28/93		9
		8/12/93		9
		3/17/93		9		37
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