As filed with the Securities and Exchange Commission on February 5, 2001.
Registration No. 333-52656
================================================================================

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

PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

eRoomSystem Technologies, Inc.
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(Exact name of registrant as specified in its charter)

Nevada 3570 87-0540713
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(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)

3770 Howard Hughes Parkway, Suite 175, Las Vegas, Nevada 89109, (800) 316-3070
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(Address and telephone number of principal executive offices)

Gregory L. Hrncir, General Counsel
3770 Howard Hughes Parkway, Suite 175, Las Vegas, Nevada 89109, (800) 316-3070
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(Name, address and telephone number of agent for service)

Copies to:
Michael J. Bonner
John C. Jeppsen
Robert C. Kim
Kummer Kaempfer Bonner & Renshaw
3800 Howard Hughes Parkway, 7th Floor
Las Vegas, Nevada 89109
(702) 792-7000

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APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC: As soon as practicable after the
effective date of this Registration Statement.

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If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. / /

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

The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act in 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission acting pursuant
to such Section 8(a) may determine.

The information in this preliminary prospectus is not complete and may be
changed. eRoomSystem Technologies, Inc. may not sell these securities until
the registration statement filed with the Securities and Exchange Commission
is effective. This preliminary prospectus is not an offer to sell these
securities, and it is not seeking an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED FEBRUARY 5, 2001

PROSPECTUS

200,000 SHARES OF COMMON STOCK ON BEHALF OF SELLING STOCKHOLDERS 341,180
SHARES OF COMMON STOCK ON BEHALF OF WARRANT HOLDERS

[GRAPHIC]

This prospectus relates to the registration of an aggregate of 541,180
shares of the common stock of eRoomSystem Technologies, Inc., 200,000 shares of
common stock on behalf of selling stockholders and 341,180 shares of common
stock on behalf of warrants holders. Selling stockholders and warrant holders,
upon exercise of their warrants, may from time to time offer to sell their
respective shares of common stock.

We are not selling any shares of common stock on behalf of selling
stockholders or warrant holders and will not receive any cash or other proceeds
in connection with the sale of shares by selling stockholders or warrant
holders. If all of the warrants held by warrant holders are exercised through
the payment of cash, we will receive proceeds of $910,950 from such exercises.

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eRoomSystem Technologies' common stock is traded on the Nasdaq SmallCap
Market under the symbol "ERMS." On January 29, 2001, the last reported sale
price of eRoomSystem Technologies' common stock was $2.00.

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THESE SECURITIES ARE SPECULATIVE. INVESTING IN OUR COMMON STOCK
INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 4.

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

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED THAT
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

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______________, 2001

[INSIDE FRONT COVER]

[This page will be blank in the final prospectus]

PROSPECTUS SUMMARY

THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN
THIS PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING
"RISK FACTORS" AND OUR FINANCIAL STATEMENTS BEFORE MAKING AN INVESTMENT
DECISION.

OUR BUSINESS

eRoomSystem Technologies is a Nevada corporation incorporated on August
31, 1999. The core business of eRoomSystem Technologies 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, 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, Doubletree Hotels and Bass Hotels. We believe
that our hotel relationships will continue to provide us with the opportunity to
install our eRoomSystem and related products worldwide.

One of the byproducts of our technology is the information we have
collected since our first product installation. To date, we have collected over
twelve 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. Upon 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 will be able 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 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.

OUR OFFICES

We maintain offices at 3770 Howard Hughes Parkway, Suite 175, Las
Vegas, Nevada 89109 and 390 North 3050 East, St. George, Utah 84790. Our
telephone number is (800) 316-3070.

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THE OFFERING

Common stock offered by selling stockholders: 200,000 shares

Common stock offered by warrant holders: 341,180 shares

Common stock to be outstanding after the offering: 7,392,199 shares

Use of proceeds:
eRoomSystem
Technologies will
not receive any of
the proceeds from
the sale of common
stock by either the
selling stockholders
or warrant holders.

Nasdaq SmallCap Market symbol: "ERMS"

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The number of shares of common stock to be outstanding after the
offering is based on the number of shares outstanding as of January 29, 2001 and
includes the 341,180 shares of common stock underlying the warrants held by
warrant holders. The number of shares of common stock to be outstanding after
the offering does not include 2,925,470 shares of common stock issuable upon
exercise of outstanding stock options and warrants as of January 29, 2001, with
a weighted average exercise price of $5.47 per share.

All of the shares are being offered by selling stockholders and warrant
holders, who must deliver a copy of this prospectus to persons who buy such
shares. Selling stockholders and warrant holders will probably sell the shares
at prevailing market prices, through broker-dealers, although they are not
required to do so. Selling stockholders and warrant holders will retain all of
the proceeds of their sales, except for commissions they may pay to
broker-dealers. Although we will not receive any of the proceeds from the sale
of common stock by either selling stockholders or warrant holders, we will
receive the proceeds from the exercise of the warrants to the extent that
warrant holders exercise their respective warrants through the payment of cash
rather than through cashless exercise. We will receive a maximum of $910,950
from such exercises for cash.

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Unless otherwise noted, all information contained in this prospectus
assumes that:

- All of the shares of common stock held by selling stockholders
will be sold in this offering;

- All of the warrants held by warrant holders will be immediately
exercised and all of the resulting shares of common stock will
be sold in this offering;

- All stock certificates for our shares of Series A, Series B and
Series C convertible preferred stock have been surrendered to us
and exchanged for stock certificates for our shares of common
stock; and

- All promissory notes previously issued by us have been paid in
full or funds relating to such repayment have been placed in a
separate account.

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SUMMARY FINANCIAL INFORMATION

(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following tables summarize the financial information for our
business. The summary financial information set forth below should be read in
conjunction with the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
related notes included elsewhere in this prospectus.

NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------------- ---------------------
1995 1996 1997 1998 1999 1999 2000
---------- ----------- ---------- ---------- ----------- ---------- ---------

Revenue........................... $ 356 $ 710 $ 4,666 $ 1,011 $ 541 $ 515 $ 2,278
Cost of revenue................... 301 804 3,339 793 363 265 1,579
Gross margin (deficit)............ 55 (94) 1,327 218 178 250 699
Loss from operations.............. (805) (1,804) (219) (2,128) (2,586) (1,209) (2,060)
Net loss.......................... (877) (2,219) (1,000) (4,145) (3,672) (2,166) (3,650)
Dividends related to convertible
preferred stock................. - - - (19) (607) (154) (5,604)
Loss attributable to common
stockholders.................... (877) (2,219) (1,000) (4,164) (4,279) (2,320) (9,254)
Basic and diluted loss per common
share........................... (1.56) (2.61) (0.76) (1.37) (1.33) (0.65) (2.93)
Basic and diluted weighted
average common shares
outstanding..................... 560 850 1,314 3,029 3,221 3,587 3,159

AS OF SEPTEMBER 30, 2000
------------------------------------

BALANCE SHEET DATA:
Cash................................... $ 5,427
Working capital........................ 4,712
Total assets........................... 9,690
Long-term liabilities.................. 36
Total stockholders' equity............. 7,653

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RISK FACTORS

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK AS WE ARE CONSIDERED TO BE
IN UNSOUND FINANCIAL CONDITION. YOU SHOULD CAREFULLY CONSIDER THE RISKS
DESCRIBED BELOW AND THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
INCLUDING OUR FINANCIAL STATEMENTS AND THE RELATED NOTES, BEFORE YOU PURCHASE
ANY SHARES OF OUR COMMON STOCK. 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,
AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.

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, 1998 and 1999 and the nine months ended September 30, 2000, we have
incurred losses attributable to common stockholders of $4,164,037, $4,279,444
and $9,254,251, respectively, and our operations have used $2,931,871,
$2,304,807 and $2,217,450 of cash, respectively. As of December 31, 1998 and
1999 and September 30, 2000, we had accumulated deficits of $9,404,597,
$13,684,041 and $22,938,292, 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, 1998 and
1999. 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 LEASING CORPORATION 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 Leasing Corporation, or AMRESCO. In addition,
prior to any financing, eRoomSystem must complete a service manual acceptable to
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. We expect to receive our initial
funding from AMRESCO by the end of the second quarter of 2001; however, no
assurance can be given that we will be successful.

Prior to submitting a preliminary application for funding to AMRESCO,
we attempt to 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 after 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

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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 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 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% that, upon
reaching thresholds of funds outstanding, may be subsequently reduced to the
seven-year treasury rate plus 6.5%.

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 Dometic Corporation, Bartech, Inc.,
MiniBar America, Inc. and ElSafe, Inc. Recently, Bartech, who offers an
automated minibar and a software-based network system, was 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.

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

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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 agreed to any of the terms of such arrangements. 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, we will not be
able to deliver and install our products on a timely basis.

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 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 MOST OF 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 generally enter into confidentiality or non-compete agreements
with most of 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. have become the leaders in the minibar industry in Europe through
their established relationships with numerous hotels. 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 THIS OFFERING

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

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common stock price falls below $1.00 per share for more than 30 consecutive
trading days, our common stock may be delisted from the Nasdaq SmallCap Market.

OUR EXECUTIVE OFFICERS AND MEMBERS OF OUR BOARD OF DIRECTORS
BENEFICIALLY OWN APPROXIMATELY 28.0% OF THE OUTSTANDING SHARES OF OUR COMMON
STOCK, 27.0% FOLLOWING THE OFFERING, 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 2,331,329 shares of common stock, or approximately 28.0% of the
outstanding shares of our common stock, 27.0% following the offering. 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 3,738,899 SHARES OF COMMON
STOCK, OR APPROXIMATELY 50.6% OF OUR OUTSTANDING COMMON STOCK, THAT WILL BE
ELIGIBLE FOR SALE SOON AFTER THE COMPLETION OF THIS OFFERING

Sales of a substantial number of shares of common stock in the public
market following this offering could cause the market price for our common stock
to decline. Upon completion of this offering, and based upon assumptions set
forth in this prospectus, there will be 7,392,199 outstanding shares of common
stock, of which 541,180 shares are being registered pursuant to this prospectus
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 1,397,719 shares, or approximately 18.9% 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
this offering, represent approximately 50.6% of our outstanding shares of common
stock. On February 2, 2001, a six-month lock-up will expire and will result in
an additional 770,687 shares of common stock being immediately available for
sale in accordance with to Rule 144(k), and 233,865 shares of common stock will
be eligible for sale in the public market, subject to volume limitations,
pursuant to Rule 144. As result, a total of 4,743,451 shares of common stock
will be eligible for sale in the public market, representing approximately 64.2%
of our outstanding shares of common stock.

Further, upon completion of this offering, we will 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 will be 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.

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 FOLLOWING THE COMPLETION OF THIS OFFERING, INCLUDING
OPTIONS GRANTED TO OUR CURRENT AND FORMER EXECUTIVE OFFICERS TO PURCHASE
1,185,712 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

Upon the completion of this offering, we will 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 1,185,712
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.

-8-

SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

Some of the information in this prospectus contains forward-looking
statements within the meaning of the federal securities laws. These statements
include, among others, the following:

- the implementation of our operating and growth strategy; and

- our projected capital expenditures.

These statements may be found under "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Determination of Offering Price," "Dividend
Policy," "Selling Stockholders and Warrant Holders," "Plan of Distribution,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." Forward-looking statements typically are identified
by use of terms such as "may," "will," "would," "expect," "anticipate,"
"estimate" and similar words, although some forward-looking statements are
expressed differently. You should be aware that our actual results could differ
materially from those contained in forward-looking statements due to a number of
factors, including:

- our ability to finance our products effectively and profitably;

- our ability to maintain and expand our revenue sharing program;

- our ability to compete effectively in the lodging industry;

- our ability to achieve corporate contracts with large hotel chains
and definitive agreements with franchisees;

- our successful management of new product development;

- our ability to continuously modify and update our software;

- our ability to outsource the manufacture and assembly of our
products effectively;

- our ability to successfully diversify into the international,
healthcare and time-share markets;

- our ability to manage expansion effectively; and

- general economic and business conditions in our markets and
industry.

You should also consider carefully the statements under "Risk Factors"
and other sections of this prospectus, which address additional factors that
could cause our actual results to differ from those set forth in the
forward-looking statements.

-9-

USE OF PROCEEDS

We will not receive any of the proceeds from the sale of shares of our
common stock by selling stockholders or by warrant holders. To the extent that
the warrant holders elect to exercise their warrants through the payment of cash
instead of through a cashless exercise procedure, we will receive maximum
proceeds in the amount of $910,950 from such exercises. There is no assurance
that any of the warrants will be exercised or, if exercised, exercised through
the payment of cash. To the extent that a portion of the warrants are exercised
through the payment of cash, the proceeds received will be used for general
working capital purposes.

Although we have agreed to bear the expenses of the registration of the
shares of common stock registered pursuant to this registration statement, we
will not be responsible for any commissions and discounts of agents or
broker-dealers and transfer taxes, if any, incurred by selling stockholders or
warrant holders.

DETERMINATION OF OFFERING PRICE

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.

CALENDAR QUARTER ENDED LOW HIGH
---------------------------- ------------ ------------

September 30, 2000 $4.5000 $6.3750
December 31, 2000 $1.3125 $4.8750
March 31, 2001 (through $1.9062 $2.8750
January 29, 2001)

The last reported sale price of our common stock on the Nasdaq SmallCap
Market on January 29, 2001 was $2.00 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 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. 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 and Series C convertible preferred
stock for conversion into shares of common stock.

-10-

SELLING STOCKHOLDERS AND WARRANT HOLDERS

The following table sets forth the name of each selling stockholder and
warrant holder, the aggregate number of shares of common stock beneficially
owned by each selling stockholder and warrant holder as of December 1, 2000, the
aggregate number of shares of common stock that each selling stockholder and
warrant holder may offer and sell pursuant to this prospectus and the percentage
ownership of the outstanding shares of our common stock for each selling
stockholder and warrant holder, including shares issuable upon the exercise of
warrants.

Because each selling stockholder or warrant holder may offer all or a
portion of the shares of common stock offered by this prospectus at any time,
and from time to time after the date hereof, no estimate can be made of the
number of shares that each selling stockholder or warrant holder may retain upon
completion of this offering. However, assuming all of the shares offered by this
prospectus are sold after completion of this offering, none of the selling
stockholders will own more than one percent of the shares of common stock
outstanding, other than DayStar Partners, L.P.

The beneficial ownership is calculated based on 7,051,019 shares of our
common stock outstanding as of January 29, 2001 and 7,392,199 shares of our
common stock outstanding after the offering. Beneficial ownership is determined
in accordance with the rules of the Commission and generally includes voting or
investment power with respect to securities. Unless otherwise indicated, each
person or entity named in the table has sole voting power and investment power,
or shares voting and investment power with his or her spouse, with respect to
all shares of capital stock listed as owned by such person. Shares issuable upon
the exercise of options that are currently exercisable, or become exercisable
within sixty days of December 1, 2000, are considered outstanding for the
purpose of calculating the percentage of outstanding shares of our common stock
held by the individual, but not for the purpose of calculating the percentage of
outstanding shares of our common stock held by another individual. The
information with respect to beneficial ownership of common stock held by each
person is based upon record ownership data provided by our transfer agent,
information as supplied or confirmed by selling stockholders or warrant holders
or based upon our actual knowledge. Percentage ownership of less than 0.01% is
indicated with an asterisk (*).

Within the past three years, none of the selling stockholders or
warrant holders have held any position or office with us or entered into a
material relationship with us, with the exception of selling stockholders who
provided us with a bridge loan in the principal amount of $1,500,000 on April
13, 2000. We repaid the loan from the proceeds of our initial public offering.

NUMBER OF PERCENTAGE
SHARES NUMBER OF OWNERSHIP OF
BENEFICIALLY SHARES OFFERED OUTSTANDING
NAME OWNED HEREBY SHARES
- -------------------------------------------------------- ---------------- --------------- -------------

SELLING STOCKHOLDERS
566768 Ontario Limited 33,333 shares 33,333 shares *
B.H. Capital Investments, L.P. 33,333 shares 33,333 shares *
Myra Heller 19,335 shares 19,335 shares *
Rachelle Heller 20,000 shares 20,000 shares *
Plazacorp Investments Limited 13,333 shares 13,333 shares *
Queens Centre Corner Limited 66,666 shares 66,666 shares *
Jay Smith 14,000 shares 14,000 shares *
SUB-TOTAL 200,000 SHARES 200,000 SHARES *
WARRANT HOLDERS
Charles Aikins 750 shares 750 shares *
Dennis Arey, Jr. 2,105 shares 1,650 shares 0.01%
Barrington L. Barisic 42,979 shares 3,300 shares 0.54%
Jerry T. Bellon 3,300 shares 3,300 shares *
Leonard Brusseau 1,875 shares 1,875 shares *

-11-

Harold Burton 188 shares 188 shares *
Capitol Bay Securities 25,947 shares 23,627 shares 0.03%
Shu E. Chen, M.D. 21,069 shares 6,600 shares 0.20%
Georgia C. Chou 27,479 shares 6,600 shares 0.28%
Crist, Griffins, Schultz & Biorn Pension Fund 14,048 shares 3,300 shares 0.15%
Benjamin G. Davidian 2,166 shares 1,650 shares 0.01%
DayStar Partners, L.P. 157,216 shares 33,000 shares 1.67%
Rick B. Delamarter 12,656 shares 9,900 shares 0.04%
Shoba Mohinani de Mirani 39,271 shares 16,500 shares 0.31%
DeWitt Land and Investment Co. 4,086 shares 3,300 shares 0.01%
Timothy L. Eide 4,223 shares 3,300 shares 0.01%
David W. and Linda C. Ellis 3,645 shares 3,300 shares *
Richard From 3,938 shares 3,938 shares *
Jeffrey W. Gardiner 16,950 shares 16,950 shares *
Jerry Giles 7,847 shares 7,425 shares 0.01%
Golden Pheasant Ltd. 57,909 shares 18,150 shares 0.54%
Harris & Eide Profit Sharing Plan FBO Donald K. Harris 4,230 shares 3,300 shares 0.01%
Harris & Eide Profit Sharing Plan FBO Gregory M. Eide 4,042 shares 3,300 shares 0.01%
Todd and Wendy Heldt 3,589 shares 3,300 shares *
Mindy Holmquist 375 shares 375 shares *
Hunter Family Trust 7,666 shares 6,600 shares 0.01%
Grant and Jean Hunter 3,536 shares 3,300 shares *
Stephen A. Hunter 7,776 shares 7,050 shares 0.01%
ICB International Commodities Brokers Ltd. 3,751 shares 3,300 shares 0.01%
T. Steven Ichishita IRA 5,192 shares 1,650 shares 0.05%
T. Steven and Virgina Ichishita 10,314 shares 3,300 shares 0.09%
J & L Weststeyn 1996 Family Trust 4,297 shares 3,300 shares 0.01%
Jain Family Trust DTD 12/11/95 3,572 shares 3,300 shares *
Saurabh Jain 4,232 shares 3,300 shares 0.01%
Jet Resources, Inc. 25,275 shares 8,250 shares 0.23%
Brett L. Johnson 1,729 shares 1,650 shares *
Larry R. and Rosaleen L. Kamper 10,516 shares 3,300 shares 0.10%
Kashkooli Family Trust DTD 6/27/91 10,403 shares 3,300 shares 0.10%
Steven Kay IRA 6,559 shares 6,300 shares *
Larry Kelley 3,750 shares 3,750 shares *
Joyce Kircher 188 shares 188 shares *
Stephen C. Kircher 18,750 shares 18,750 shares *
Jerry D. Krug, Jr. 1,768 shares 1,650 shares *
Dan and Marcella Line 5,335 shares 3,300 shares 0.03%
Peter Liu 750 shares 750 shares *
Sean McBratney 4,125 shares 4,125 shares *
Elizabeth McCarger 1,875 shares 1,875 shares *
Marla J. Modine-Solomon Revocable Trust 7,919 shares 6,600 shares 0.02%
Lloyd Moseby 375 shares 375 shares *
Raghunath Mulukutla 4,200 shares 3,300 shares 0.01%

-12-

Nyman Family Trust DTD 6/7/96 8,024 shares 7,425 shares 0.01%
Robert G. Parrish 14,005 shares 3,300 shares 0.14%
Dario M. Passalalpi 1,773 shares 1,650 shares *
Anthony Pescetti 5,315 shares 1,650 shares 0.05%
Robert Pirtlen IRA 8,056 shares 3,300 shares 0.06%
Rossini Family Trust 8,250 shares 8,250 shares *
Rupp Family Trust 1,872 shares 1,650 shares *
Richard Scott 375 shares 375 shares *
Susan Stanberry 750 shares 750 shares *
Dalel Tartak 4,122 shares 1,650 shares 0.03%
Gregory J. Vislocky 7,659 shares 6,788 shares 0.01%
Kathy A. Wickard 2,073 shares 1,650 shares 0.01%
Michael J. Wiechers 3,642 shares 3,300 shares *
William & Carolyn Peterson Family Trust 3,607 shares 3,300 shares *
Arlene Wilson 188 shares 188 shares *
Al Woods 375 shares 375 shares *
Gregory Yankovsky 938 shares 938 shares *
Jim R. Yates II 3,536 shares 3,300 shares *
Takashi Yoshida, M.D. 10,383 shares 3,300 shares 0.10%
Zimbrich Family Trust 10,506 shares 3,300 shares 0.10%
John D. and Cheryl Zimbrich 10,506 shares 3,300 shares 0.10%
SUB-TOTAL 721,691 SHARES 341,180 SHARES 5.15%
TOTAL 921,691 SHARES 541,180 SHARES 5.15%

-13-

PLAN OF DISTRIBUTION

We are registering the shares of common stock offered for sale by this
prospectus on behalf of selling stockholders and warrant holders. As used in
this section, "selling stockholders" and "warrant holders" include donees,
pledgees, distributees, transferees or other successors-in-interest, including,
without limitation, their respective affiliates and limited or general partners,
all of which are referred to as a group below as transferees. Selling
stockholders and warrant holders will act independently of us in making
decisions with respect to the timing, manner and size of each sale.

We will pay all costs, expenses and fees in connection with the
registration of the shares. Selling stockholders and warrant holders will pay
all brokerage commissions, underwriting discounts, commissions, transfer taxes
and other similar selling expenses, if any, associated with the sale of the
shares of common stock by them. Shares of common stock may be sold by selling
stockholders or warrant holders, from time to time, in one or more types of
transactions (which may include block transactions) on the Nasdaq SmallCap
Market or on any other market on which our common stock may, from time to time,
be trading, in the over-the-counter market, in privately-negotiated
transactions, through put or call options transactions relating to the shares,
through short sales of such shares, or a combination of such methods of sale, at
market prices prevailing at the time of sale, fixed prices, varying prices
determined at the time of sale or at negotiated prices.

Selling stockholders and warrant holders will have the sole discretion
not to accept any purchase offer or make any sale of shares if they deem the
purchase price to be unsatisfactory at any particular time. Such transactions
may, or may not, involve brokers or dealers. To the best of our knowledge,
selling stockholders or warrant holders have not entered into any agreements,
understandings or arrangements with any underwriters or broker-dealers regarding
the sale of their securities, nor is there an underwriter or coordinating broker
acting in connection with the proposed sale of shares of common stock offered by
this prospectus; however, selling stockholders or warrant holders may enter into
agreements, understandings or arrangements with an underwriter or broker-dealer
regarding the sale of their shares in the future.

Selling stockholders and warrant holders may effect such transactions
by selling shares of common stock directly to purchasers or to or through
broker-dealers, which may act as agents or principals, or other agents. Such
broker-dealers or other agents may receive compensation in the form of
discounts, concessions, or commissions from selling stockholders and warrant
holders and/or the purchasers of shares of common stock for whom such
broker-dealers or other agents may act as agents or to whom they sell as
principal, or both (which compensation as to a particular broker-dealer or other
agent might be in excess of customary commissions). Market makers and block
purchasers purchasing the shares will do so for their own account and at their
own risk. It is possible that a selling stockholder or a warrant holder will
attempt to sell shares of common stock in block transactions to market makers or
other purchasers at a price per share which may be below the then market price.
There can be no assurance that all or any part of the shares offered hereby will
be sold by selling stockholders and warrant holders.

Selling stockholders and warrant holders may enter into hedging
transactions with broker-dealers or other financial institutions with respect to
the shares. In connection with these transactions, broker-dealers or other
financial institutions may engage in short sales of the shares in the course of
hedging the positions they assume with selling stockholders or warrant holders.
Selling stockholders and warrant holders may also sell the shares short and
redeliver the shares to close out the short positions. Selling stockholders and
warrant holders may also enter into option or other transactions with
broker-dealers or other financial institutions which require delivery of the
shares to the broker-dealer or other financial institutions. Selling
stockholders and warrant holders may also loan or pledge the shares to a
financial institution or a broker-dealer and the financial institution or the
broker-dealer may sell the shares loaned or upon a default the financial
institution or the broker-dealer may effect sales of the pledged shares. Selling
stockholders, warrant holders and any brokers, dealers or agents that
participate in connection with the sale of shares of common stock might be
deemed to be "underwriters" within the meaning of the Securities Act, and any
commissions received by such brokers, dealers or agents and any profit on the
resale of the shares sold by them, while acting as principals, might be deemed
to be underwriting discounts or commissions under the Securities Act.

We have agreed to indemnify selling stockholders against certain
liabilities arising under the Securities Act with respect to any untrue
statement, alleged untrue statement, omission or alleged omission of any
material fact contained in, or required to be contained in, the registration
statement for their shares or this prospectus. Selling stockholders and warrant
holders may agree to indemnify any agent, dealer, broker-dealer or underwriter
that

-14-

participates in transactions involving sales of the shares of common stock
offered pursuant to this prospectus against certain liabilities, including
liabilities arising under the Securities Act. Because selling stockholders or
warrant holders may be deemed to be "underwriters" within the meaning of the
Securities Act, selling stockholders and warrant holders will be subject to the
prospectus delivery requirements of the Securities Act and the rules promulgated
thereunder and they may be subject to certain statutory liabilities under the
Securities Act, including, but not limited to, Sections 11, 12 and 17 of the
Securities Act and Rule 10b-5 under the Securities Exchange Act of 1934, as
amended, or the Exchange Act. In addition, selling stockholders, warrant holders
and any other person participating in the offering will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder,
including Regulation M under the Exchange Act, which may limit the timing of
purchases and sales. These restrictions may affect the marketability of the
common stock and the ability of any person to engage in market-making activities
with respect to the common stock. Any shares of common stock covered by this
prospectus which qualify for sale pursuant to Rule 144 under the Securities Act
may be sold under Rule 144 rather than under the terms of this prospectus. In
addition, subject to applicable state and foreign laws, selling stockholders or
warrant holders may sell their common stock outside the United States pursuant
to Rules 903 and 904 of Regulation S under the Securities Act.

To comply with the securities laws of certain jurisdictions, the shares
of common stock offered by this prospectus may need to be offered or sold only
through registered or licensed brokers or dealers. In addition, in certain
jurisdictions, the shares of common stock may not be offered or sold unless they
have been registered or qualified for sale or an exemption is available and
complied with. If a selling stockholder or a warrant holder notifies us that any
material arrangement has been entered into with a broker-dealer for the sale of
shares of common stock through a block trade, special offering, exchange
distribution or secondary distribution or a purchase by a broker, dealer or
underwriter, we will file a supplement to this prospectus, if required, pursuant
to Rule 424(b) under the Securities Act. In addition, to the extent required, we
will amend or supplement this prospectus to disclose other material arrangements
regarding the plan of distribution.

-15-

SELECTED FINANCIAL DATA

This section presents selected historical financial data of eRoomSystem
Technologies. You should read carefully the financial statements included in
this prospectus, including the notes to the financial statements. The selected
information in this section is not intended to replace the financial statements.

We derived the selected consolidated statement of operations data
presented below for each of our 1998 and 1999 fiscal years and the balance sheet
data at December 31, 1998 and 1999 from our audited consolidated financial
statements appearing elsewhere in this prospectus. We derived the selected
consolidated statement of operations data presented below for each of our 1995,
1996 and 1997 fiscal years and the balance sheet data at December 31, 1995, 1996
and 1997 from our audited financial statements not appearing in this prospectus.
We derived the selected consolidated statement of operations data below for each
of our September 30, 1999 and 2000 nine month periods provided and the balance
sheet data at September 30, 2000 from our unaudited interim consolidated
financial statements.

NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------ -----------------------
1995 1996 1997 1998 1999 1999 2000
----------- ----------- ---------- ---------- ----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF OPERATIONS DATA:
Revenue:
Product sales..................... $ 169 $ 360 $ 4,431 $ 917 $ 144 $ 32 $ 2013
Revenue sharing arrangements...... 129 269 133 46 213 261 155
Maintenance fees.................. 58 81 102 48 183 222 110
----------- ----------- ---------- ---------- ----------- ----------- ----------
Total revenue.................. 356 710 4,666 1,011 540 515 2,278
----------- ----------- ---------- ---------- ----------- ----------- ----------
Cost of revenue:
Product sales..................... 221 625 3,203 711 118 26 1,469
Revenue sharing arrangements...... 50 110 55 21 166 143 36
Maintenance fees.................. 30 69 81 61 78 96 74
----------- ----------- ---------- ---------- ----------- ----------- ----------
Total cost of revenue.......... 301 804 3,339 793 362 265 1,579
----------- ----------- ---------- ---------- ----------- ----------- ----------
Gross margin (deficit).............. 55 (94) 1,327 218 178 250 699
----------- ----------- ---------- ---------- ----------- ----------- ----------
Operating expenses:
Selling and general and
administrative................... 771 1,439 1,330 2,062 2,493 1,252 2,570
Research and development (exclusive
of non cash compensation)........ 89 271 216 284 271 207 188
----------- ----------- ---------- ---------- ----------- ----------- ----------
Total operating expenses....... 860 1,710 1,546 2,346 2,764 1,459 2,758
----------- ----------- ---------- ---------- ----------- ----------- ----------
Loss from operations................ (805) (1,804) (219) (2,128) (2,586) (1,209) (2,059)
----------- ----------- ---------- ---------- ----------- ----------- ----------
Other income (expense):
Interest expense.................. (73) (430) (809) (1,923) (1,445) (1,157) (1,313)
Write-off of note receivable from
stockholder...................... - - - - - - (390)
Equity in income of unconsolidated,
wholly owned subsidiary.......... - - - - 148 - 30
Interest and other income......... 1 15 28 313 211 200 82
----------- ----------- ---------- ---------- ----------- ----------- ----------
Other income (expense), net.... (72) (415) (781) (1,610) (1,086) (957) (1,591)
----------- ----------- ---------- ---------- ----------- ----------- ----------
Loss before extraordinary loss...... (877) (2,219) (1,000) (3,738) (3,672) (2,166) (3,650)
Extraordinary loss, net of income
taxes............................. - - - (407) - - -
----------- ----------- ---------- ---------- ----------- ----------- ----------
Net loss............................ $ (877) $ (2,219) $ (1,000) $ (4,145) $ (3,672) $ (2,166) $ (3,650)
=========== =========== ========== ========== =========== =========== ==========
Dividends related to convertible
preferred stock................... $ - $ - $ - $ (19) $ (607) $ (154) $ (5,604)
=========== =========== ========== ========== =========== =========== ==========
Loss attributable to common
stockholders...................... $ (877) $ (2,219) $ (1,000) $ (4,164) $ (4,279) $ (2,320) $ (9,254)
=========== =========== ========== ========== =========== =========== ==========
Basic and diluted loss per common
share............................. $ (1.56) $ (2.61) $ (0.76) $ (1.37) $ (1.33) $ (0.65) $ (2.93)
=========== =========== ========== ========== =========== =========== ==========

-16-

Basic and diluted weighted average
common shares outstanding......... 560 850 1,314 3,029 3,221 3,588 3,159
=========== =========== ========== ========== =========== =========== ==========

BALANCE SHEET DATA:
Cash................................ 236 188 330 2 113 5,427
Working capital (deficit)........... (666) (2,191) (3,702) (3,358) (2,651) 4,713
Total assets........................ 1,316 2,911 2,429 2,520 4,351 9,691
Long-term liabilities............... 1,270 2,340 83 63 867 37
Total stockholders' equity
(deficit).......................... (986) (2,666) (2,441) (2,428) (24) 7,653

- -----------------
(1) See Note 2 of the notes to our consolidated financial statements for an
explanation of the determination of the number of shares used in computing
per share data.

-17-

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our
financial statements and notes to our financial statements, included elsewhere
in this prospectus. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of various
factors, including those set forth under "Risk Factors," "Special Note Regarding
Forward-Looking Information" and elsewhere in this prospectus.

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.

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, 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
twelve 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 will be able 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

In the past, 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

-18-

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 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 to
require little or no upfront cost to our customers.

Through our revenue sharing plan, we install our products at little or
no cost to our customers and share in the recurring revenues generated from
sales of goods and services related to our products. Ownership of the
eRoomSystems, 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. Over
the term of a revenue sharing agreement, we estimate that the revenues over the
initial years are sufficient for us to recover our costs.

We have installed more than 13,000 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 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.

-19-

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 50% from our maintenance-related revenues. We
base this expectation on our historical cost of maintenance of less than $0.04
per unit per day and, pursuant to our maintenance agreements, our projected
receipt of $0.08 per unit per day.

DESCRIPTION OF EXPENSES

Cost of product sales consists primarily of production, shipping and
installation costs. Cost of revenue sharing arrangements consists primarily of
depreciation of capitalized costs for the products placed in service. We
capitalize the production, shipping, installation and sales commissions related
to the 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.

-20-

RESULTS OF OPERATIONS

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

Nine months
Year ended December 31, ended September 30,
1998 1999 1999 2000
-------------- -------------- -------------- --------------

Statement of Operations Data:
Revenue:
Product sales.......................................... 90.6% 26.7% 6.3% 88.3%
Revenue share arrangements............................. 4.6 39.5 50.6 6.8
Maintenance fees....................................... 4.8 33.8 43.1 4.9
-------------- -------------- -------------- --------------
Total revenue....................................... 100.0 100.0 100.0 100.0
-------------- -------------- -------------- --------------
Cost of revenue:
Product sales.......................................... 70.3 21.8 5.1 64.5
Revenue share arrangements............................. 2.1 30.7 27.8 1.6
Maintenance............................................ 6.0 14.6 18.6 3.2
-------------- -------------- -------------- --------------
Total cost of revenue............................... 78.4 67.1 51.5 69.3
-------------- -------------- -------------- --------------
Gross margin.............................................. 21.6 32.9 48.5 30.7
-------------- -------------- -------------- --------------

Operating expenses:

Selling and general and administrative................. 203.9 461.2 243.1 112.8
Research and development (exclusive of non-cash
compensation) ........................................ 28.1 50.2 40.1 8.3
-------------- -------------- -------------- --------------
Total operating expenses............................ 232.0 511.4 283.2 121.0
-------------- -------------- -------------- --------------
Loss from operations...................................... (210.4) (478.5) (234.7) (90.4)
-------------- -------------- -------------- --------------
Other income (expense):
Interest expense....................................... (190.1) (267.2) (224.8) (57.6)
Write-off of note receivable........................... -- -- -- (17.1)
Equity in income of unconsolidated, wholly owned subsidiary -- 27.3 -- 1.3
Interest and other income.............................. 30.9 39.0 39.0 3.6
-------------- -------------- -------------- --------------
Other expense, net.................................. (159.2) (200.9) (185.8) (69.8)
-------------- -------------- -------------- --------------
Loss before income taxes and extraordinary loss........... (369.6) (679.4) (420.5) (160.2)
Loss before extraordinary loss............................ (369.6) (679.4) (420.5) (160.2)
Extraordinary loss, net of income taxes................... (40.3) -- -- --
-------------- -------------- -------------- --------------
Net loss.................................................. (409.9)% (679.4)% (420.5)% (160.1)%
============== ============== ============= ===============
Dividends related to convertible preferred stock.......... (1.8) (112.3) (29.9) (246.0)
============== ============== ============== ==============
Loss attributable to common stockholders.................. (411.7)% (791.7)% (450.4)% (406.2)%
============== ============== ============== ==============

NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999

REVENUES

Product Sales -- Our revenue from product sales was $32,374 in revenues
from product sales in the nine months ended September 30, 1999 compared to
$2,012,788 in the nine months ended September 30, 2000, representing an increase
of $1,980,414. 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 $260,422 for the nine months ended September 30, 1999 and
$155,156 for the nine months ended September 30, 2000, representing a decrease
of $105,266, or 40%. The decrease in revenue from revenue sharing arrangements
was due primarily to the transfer of Refreshment Centers to RSi BRE, Inc., a
wholly-owned subsidiary. Because RSi BRE is not consolidated, the related
revenues are not included in our financial statements. Rather, we record our
equity in RSi BRE's income for each respective period. The revenue sharing
revenue for these units was recognized as revenue sharing income during the nine
months ended September 30, 1999, and accordingly was not recognized for the nine
months ended September 30, 2000.

-21-

Maintenance Fee Revenue -- Our maintenance fee revenue was $222,303 for
the nine months ended September 30, 1999 and $110,400 for the nine months ended
September 30, 2000, representing a decrease of $111,903, or 50%. 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. Because RSi BRE is not consolidated, the related revenues are not included
in our financial statements. Rather, we record our equity in RSi BRE's income
for each respective period.

COST OF REVENUE

Cost of Product Sales Revenue -- Our cost of product sales revenue was
$26,479 for the nine months ended September 30, 1999 compared to $1,468,891 for
the nine months ended September 30, 2000, an increase of $1,442,412. The
increase in cost of product sales revenue was due to the sale of 1,624
Refreshment Centers and 907 eRoomSafes during the nine months ended September
30, 2000. The gross margin percentage on revenue from product sales revenue was
27% in the nine months ended September 30, 2000 compared to 18% for the nine
months ended September 30, 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 $143,245 for the nine months ended September 30, 1999 and $36,136 for the
nine months ended September 30, 2000, representing a decrease of $107,109, or
75%. 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 45% in the nine months ended September 30, 1999 and 77% in
the nine months ended September 30, 2000. The increase in gross margin
percentage on revenue sharing revenue resulted from the transfer to RSi BRE of
Refreshment Centers that had more extensive service requirements.

Cost of Maintenance Revenue -- Our cost of maintenance revenue was
$95,590 for the nine months ended September 30, 1999 and $74,762 for the nine
months ended September 30, 2000, representing a decrease of $20,808, or 22%. The
gross margin percentage on maintenance revenues was 57% in the nine months ended
September 30, 1999 and 32% in the nine months ended September 30, 2000. The
decrease in our cost of maintenance revenue was primarily due to the expiration
of contracts representing 1,058 units. The decrease in gross margin percentage
was primarily due to the expense associated with the repair of a third party
manufacturing defect that may be recoverable.

OPERATING EXPENSES

Selling, General and Administrative -- Selling, general and
administrative expenses, exclusive of non-cash compensation expense, were
$1,252,404 for the nine months ended September 30, 1999 and $2,066,595 for the
nine months ended September 30, 2000, representing an increase of $814,191, or
65%. Selling, general and administrative expenses represented 243% of our total
revenues in the nine months ended September 30, 1999 and 91% of our total
revenues in the nine months ended September 30, 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 and investor relations expenses in
the nine months ended September 30, 2000.

Research and Development Expenses -- Research and development expenses
were $206,530 for the nine months ended September 30, 1999 and $187,932 for the
nine months ended September 30, 2000, representing a decrease of $18,598, or 9%.
Research and development expenses represented 40% of our total revenue in the
nine months ended September 30, 1999 and 8% of our total revenue in the nine
months ended September 30, 2000. The decrease in research and development
expenses resulted from the reorganization of the research and development
department in an effort to maximize the efficiency of its operation.

Non-Cash Compensation Expense -- Non-cash compensation expense was $0
for the nine months ended September 30, 1999 and $503,676 for the nine months
ended September 30, 2000. The non-cash compensation expense recorded in the nine
months ended September 30, 2000 resulted from options and warrants issued.

Other Income (Expense), Net -- Other expense was $956,893 for the nine
months ended September 30, 1999 and $1,590,673 for the nine months ended
September 30, 2000, representing an increase of $633,780, or 66%.

-22-

The increase in other expense is due primarily to interest expense and the
write-off of a stockholder receivable from $390,000 to $0.

LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS

We incurred losses attributable to common stockholders of $2,320,017
and $9,254,252 during the nine months ended September 30, 1999 and 2000,
respectively. The $6,934,235 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 $390,000 stockholder receivable and a $5,449,956
increase in dividends related to convertible preferred stock. We have continued
to incur losses subsequent to September 30, 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.

YEARS ENDED DECEMBER 31, 1999 AND 1998

REVENUES

Product Sales -- Our product sales revenue was $916,650 in 1998 and
$144,282 in 1999, representing a decrease of $772,368, or 84%, from 1998 to
1999. During 1998, we shifted our focus from selling products to placing
products pursuant to our revenue sharing program. Additionally, during 1998, we
produced and placed approximately 2,000 refreshment centers under revenue share
arrangements which subsequently have been transferred to RSi BRE, an
unconsolidated, wholly-owned subsidiary. Because RSi BRE is not consolidated,
the related revenues are not included in our financial statements. Rather, we
record our equity in RSi BRE's income for each respective period. The decrease
from 1998 to 1999 was due to our transition from product sales to placement of
our products pursuant to our revenue sharing program, a lack of sufficient
working capital and an additional 436 refreshment centers which were produced
and installed in 1999, but which have been transferred to RSi BRE.

Revenue Sharing Arrangements -- Our revenue from revenue sharing
arrangements was $46,524 in 1998 and $213,654 in 1999, representing an increase
of $167,130, or 359%, from 1998 to 1999. During 1998, we began placing products
under revenue sharing arrangements after we shifted our focus from sales of
products. The increase from 1998 to 1999 was due to our continuing transition
from product sales to placement of our products pursuant to our revenue sharing
program.

Maintenance Fee Revenues -- Our maintenance fee revenues were $48,288
in 1998 and $182,581 in 1999, representing an increase of $134,293, or 278%,
from 1998 to 1999. The increase from 1998 to 1999 was due primarily to
maintenance revenues we earn related to the Refreshment Centers owned by RSi
BRE. We perform the maintenance of the RSi BRE units and accordingly receive the
maintenance revenues. The increase was also due to our placement of additional
products pursuant to our revenue sharing program.

COST OF REVENUE

Cost of Product Sales Revenue -- Our cost of product sales revenue was
$711,355 in 1998 and $118,010 in 1999, representing a decrease of $593,345, or
83%, from 1998 to 1999. The gross margin percentage on product sales was 22% in
1998 and 18% in 1999. The decrease in gross margin percentage on product sales
from 1998 to 1999 primarily resulted from further reductions in production and
corresponding increases in the cost per unit and fixed costs from unapplied
overhead costs.

Cost of Revenue Sharing Revenue -- Our cost of revenue sharing revenue
was $21,104 in 1998 and $165,995 in 1999, representing an increase of $144,891,
or 687%, from 1998 to 1999. The gross margin percentage on revenue sharing
revenue was 55% in 1998 and 22% in 1999. The decrease in gross margin percentage
on revenue sharing revenue from 1998 to 1999 resulted from the impact of placing
more expensive Refreshment Centers, which included eRoomSafes, without a
corresponding increase in the related revenues. When we initially began
including eRoomSafes with Refreshment Centers, our intent was that a separate
charge would be paid by the hotel guest for use of the safe. However, separate
charges were not consistently implemented by the hotels. Subsequently, we have
adjusted the percentage of revenues allocated to us when eRoomSafes are
included.

-23-

Cost of Maintenance Revenue -- Our cost of maintenance revenue was
$60,797 in 1998 and $78,518 in 1999 representing an increase of $17,721, or 29%,
from 1998 to 1999. The gross margin percentage on maintenance revenues was (26%)
in 1998 and 57% in 1999. The increase in gross margin percentage from 1998 to
1999 was mainly due to the placement of additional units which enabled us to
cover our fixed overhead costs.

OPERATING EXPENSES

Selling, General and Administrative -- Selling, general and
administrative expenses, exclusive of non-cash compensation expense, were
$2,058,150 in 1998 and $2,387,811 in 1999, representing an increase of $329,661,
or 16%, from 1998 to 1999. Selling, general and administrative expenses
represented 204% of our total revenues in 1998 and 442% of our total revenues in
1999. The increase from 1998 to 1999 was primarily due to the creation of an
allowance for bad debts on notes receivable to purchase shares of preferred
stock.

Research and Development Expenses -- Research and development expenses
were $284,532 in 1998 and $271,230 in 1999, representing a decrease of $13,302,
or 5%, from 1998 to 1999. Research and development expenses represented 28% of
our total revenue in 1998 and 50% of our total revenue in 1999.

Non-Cash Compensation Expense -- Non-cash compensation expense was
$3,955 in 1998 and $105,005 in 1999. The compensation expense recorded in 1998
related to the issuance of 938 options to a consultant for services rendered.
During the year ended December 31, 1999, the non-cash compensation expense was
due to the issuance of options to purchase 63,711 shares of common stock to
non-employees for services rendered and the issuance of 3,134 shares of common
stock for services rendered.

Other Income (Expense), Net -- Interest expense was $1,922,638 in 1998
and $1,444,532 in 1999, representing a decrease of $478,106, or 25%, from 1998
to 1999. The decrease is due primarily to the conversion of $2.3 million of
borrowings to equity during 1998 and the corresponding decrease in related
interest expense and amortization of deferred financing costs.

Income Taxes -- As of December 31, 1999, we had net operating loss
carryforwards for federal and state income tax reporting purposes of
approximately $10.3 million that expire at various dates from 2008 to 2019. We
had net deferred tax assets, including our net operating loss carryforwards and
other temporary differences between book and tax deductions, totaling
approximately $3.7 million as of December 31, 1999. A valuation allowance in the
amount of $3.7 million has been recorded as of December 31, 1999 as a result of
uncertainties regarding the realizability of the net deferred tax assets.

LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS

We incurred losses attributable to common stockholders of $4,164,037 in
1998 and $4,279,444 in 1999. The increase in 1999 was due primarily to the
$607,269 of dividends in 1999 offset by revenue and expenses discussed above and
extraordinary loss on the extinguishment of debt of $407,000 in 1998.

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 September 30, 2000. As for the
remaining dividends, we have placed the funds in a separate account where the
funds for the remaining dividends will be released upon the receipt from
stockholders of their Series A convertible preferred stock certificates for
conversion into common stock.

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 the nine
months ended

-24-

September 30, 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 September 30, 2000. As for the remaining dividends, we have placed the
funds in a separate account where the funds for 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.

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 September 30, 2000, we had cash of $5,427,460 and working capital
of $4,712,819 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 $7,652,722 at September 30, 2000. The improvement in
stockholders' equity primarily resulted from proceeds of our initial public
offering, net of the net loss for the nine months ended September 30, 2000. Our
accumulated deficit increased from $13,684,041 at December 31, 1999 to
$22,938,292 at September 30, 2000. The increase in accumulated deficit resulted
primarily from the triggering of a beneficial conversion feature at the time of
our initial public offering and the net loss from operations. We anticipate that
our accumulated deficit will continue to increase for a period of time.

We believe that our current cash on hand and the anticipated funds from
our long-term equipment financing arrangement will be sufficient to meet our
capital expenditures and working capital requirements, including those from our
planned expansion, for at least the next twelve months. However, we cannot
assure you that we will receive any funds from AMRESCO. 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.

-25-

Our net cash used in operating activities for the nine months ended
September 30, 2000 was $2,217,450. Cash used in operating activities was
primarily attributable to a net loss of $3,650,321, excluding non-cash
compensation expense of $503,676. Our net cash used in operating activities for
the nine months ended September 30, 1999 was $527,271. 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 $1,868,620 and $972,794 in
the nine months ended September 30, 1999 and 2000, respectively. Investing
activities for the nine months ended September 30, 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 nine months
ended September 30, 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 the fourth quarter of 2000 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 $8,504,452 of cash for the nine
months ended September 30, 2000 compared to $2,500,697 for the nine months ended
September 30, 1999. For the nine months ended September 30, 2000, cash provided
from financing activities consisted of $2,164,169 from borrowings, $685,831
received from the sale of preferred stock and warrants and $9,217,231 received
from our initial public offering. For the nine months ended September 30, 1999,
cash provided from financing activities consisted of $504,806 received from the
sale of notes payable to officers and stockholders and $2,391,755 received from
the sale of preferred stock and warrants.

As of September 30, 2000, our debt, secured by our assets, consisted of
$120,000 in notes issued in a 1996 private debt offering, $127,500 in notes
issued in a 1997 private debt/equity offering, a $100,000 note payable to an
individual and $67,795 in notes issued in a 2000 private debt/equity offering.
As of September 30, 2000, our unsecured debt consisted of $7,468 in notes
payable to a bank and secured by vehicles, a $6,062 note due to an individual
and $60,007 of capital lease obligations. As of September 30, 2000, we paid off
a significant portion of our 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
$730,750 and $490,010 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 anticipate taking a one-time restructuring charge of
approximately $400,000 in the fourth quarter of 2000, but estimate that the
restructuring will result in a $1.1 million reduction in annual overhead.

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. Under the terms of this agreement,
we can finance up to 150% of the cost of purchase of our products, through an
open-ended line of credit, over the seven-year term of the agreement. In the
event that funding under this financing arrangement is in excess of $10 million,
AMRESCO may securitize a portion of the outstanding funds under the financing
arrangement. In the event of a securitization, a portion of the outstanding
funds under the

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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 by us only
in full. Prior to any financing, we must complete a service manual acceptable
to AMRESCO.

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, Inc.

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:

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. Upon the assumption that the first financing would have occurred on
January 29, 2001, the applicable interest rate would have been approximately
17.604%, which is equal to the seven-year treasury rate of 5.104% plus 12.5%.

In order for us to qualify for funding under our financing arrangement
with AMRESCO, we first identify properties that possess the performance,
occupancy and liquidity standards sufficient to qualify for funding. Once we
identify a qualified property, we will enter into a lease 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 completion of a 90-day seasoning period, we will submit a final application
for funding to AMRESCO. Within seven days, AMRESCO will notify us as to whether,
in its reasonable discretion, 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. 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.

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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:

AMOUNT TO
MINIMUM GROSS EROOMSYSTEM AMOUNT TO
COLLECTION RATE REVENUES PER DAY TECHNOLOGIES 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. We expect our initial funding with AMRESCO to occur by
the end of the second quarter of 2001.

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, the Bahamas and Brazil, and we
intend to further expand our marketing to the international lodging market and
to other industries domestically and internationally. As a result, our financial
results could be affected by weak economic conditions in foreign markets.
Because all of our revenues will be denominated in U.S. Dollars, a strengthening
of the dollar could make our products less competitive in foreign markets. As we
expand operations internationally, we will continue to evaluate our foreign
currency exposures and risks and develop appropriate hedging or other strategies
to manage those risks.

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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 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 13,000 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
Hilton Hotels Corporation, operator of Doubletree Hotels, Embassy Suites and
Hampton Inn, 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, while our enabling technologies will provide for a
natural expansion of our products and services into the healthcare and
time-share industries.

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, Best Western International, Cendant, Bass Hotels and Hilton
Hotels Corporation.

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 minibars in all of their hotel rooms. Under
Mobil's star-rating, the presence of minibars 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, and the file server located at
our headquarters, or the eRoomSystem master file server. Our software is
remotely upgradable 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 lock 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. We expect
that another extension of the eRoomSystem will be a direct credit card billing
process for the healthcare and time-share industries.

EROOMSERV REFRESHMENT CENTERS

Historically, our primary source of revenue has been from the sale or
revenue sharing of our Refreshment Centers. We currently have orders on-hand for
3,227 Refreshment Centers, 1,304 of which include eRoomSafes. All of our orders
on-hand are to be placed under revenue sharing agreements.

Refreshment Centers are modular in design and consist of our
eRoomSystem, a small compression or thermoelectric refrigeration unit and our
unique multi-vending rack. Our multi-vending rack displays up to 33 different
beverages and/or snacks and maintains a full appearance through a gravity-based
design. Upon removal of

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a product from the Refreshment Center, the gravity-based design uses the
weight of the remaining products to cause such products to roll or slide
forward toward the front of the multi-vending rack. The repair or replacement
of any component of our Refreshment Center is relatively simple and is
provided at no additional charge to the property. 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.

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:

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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
twelve 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 to 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.
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:

EROOMENERGY MANAGEMENT. We are developing a technology by which our
eRoomSystem will detect in-room movement through heat and/or motion sensors. Our
eRoomSystem will control other devices in the room through an infrared
communications portal. This technology is being developed for the lodging
industry as a means of offering an energy management system. 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 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 can 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
can 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.

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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 will 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 can 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. We hold three patents for a credit card point of sale terminal technology
that supplies billing solutions for these services.

SALES AND MARKETING

Historically, we have derived our revenues from the lodging industry.
To date, we have installed more than 13,000 Refreshment Centers and 5,500
eRoomSafes. We have established relationships with Marriott International,
Promus Hotel Corporation and Carlson Worldwide Hospitality and are negotiating
to become the exclusive vendor for Bass Hotels. Due 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 are negotiating
with Hilton on the role of our relationship with Promus as to the entire Hilton
company. In the interim, we are installing units at those franchisee properties
where we had previously entered into contracts and continuing to negotiate with
franchisees that we had previously contacted. Until negotiations with Hilton
have been completed, we have agreed not to enter into any new contracts with
franchisees that we had not previously contacted.

In 2000, we have installed 1,347 Refreshment Centers and 463 eRoomSafes
pursuant to purchase orders and 1,316 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.

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. Our initial strategy is
to hire two additional full-time employees as regional sales managers in the
United States. We currently employ four regional sales managers and retain up to
four 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 our hotel clients by
installing our products at little or no upfront cost to the hotel and sharing
the revenues generated from goods sold from, and usage of, our products. AMRESCO
will finance up to 150% of the cost of our products placed

-33-

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.

CONTINUED IMPLEMENTATION OF THE CORPORATE ACCOUNT STRATEGY. Our
corporate account strategy involves the research, documentation and
implementation of plans associated with hotel chains, brands, management
companies and real estate investment trusts. Through this strategy, we propose
to enter into a corporate agreement that defines the relationship between
eRoomSystem Technologies and the respective corporate entity. 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 anticipate that
by the end of 2001, the majority of all sales and revenue sharing agreements
will be generated indirectly as a result of our corporate account strategy.

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 and the New York Marriott Financial 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 expect to target other
hotel-casinos in Las Vegas, Nevada.

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. We have entered
into an agreement with Hall Communications, Inc. of Las Vegas, Nevada to provide
us with brochures, corporate name and logo development, 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
various trade publications. In addition, we plan to attend trade shows and
pursue promotional activities through a strong public-relations program.

EXPANSION INTO THE HEALTHCARE AND TIME-SHARE INDUSTRIES

We believe that the healthcare industry is a natural extension for our
eRoomSystem, our related products and our patented credit card technology. We
will be able to provide healthcare facilities with a comprehensive room
information and management system that will allow them to provide patients with
a wide array of in-room amenities not available in the past. These amenities
include Refreshment Centers, eRoomSafes, direct dial long distance, on-demand
movies and other products and services commonly found in a hotel room. We have
completed a beta-test at the Miami Heart Institute, a facility managed by
Columbia HCA. We also believe the same opportunities exist in the time-share
industry.

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

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refrigerators from Absocold, Sanyo Corporation, Avanti or Indel-B. 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. There are several companies that provide in-room video
entertainment and information services, such as cable television, pay-per-view
movies, video games and guest services. In addition, we may 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. As for other companies that provide in room services
through an in-room refrigerator, Bartech, Inc., a supplier of minibars based in
France, 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. 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. 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. Although Dometic
possesses a significant share of the honor bar market, Dometic is principally
a refrigerator manufacturer. MiniBar America is principally a manufacturer of
honor bars. Bartech is a French-based company that uses Indel-B refrigerators
in its automated minibar products. Although Bartech has generated most of its
sales from Europe, it has recently established an office in the United States.

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, 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.

These companies may have stronger relationships in the lodging
industry, longer operating histories, larger customer bases, greater brand
recognition and greater financial, research and development, manufacturing,
marketing and technical resources. Although these competitors do not offer
fully-automated minibars, these competitors compete with us for the placement of
units in hotel rooms. Further, we compete with these companies on the basis of
price, service, technology and financing options.

EROOMSAFES. The in-room safe industry is a very competitive market with
competitors throughout the world. ElSafe, Inc. is the market leader with almost
400,000 room 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,

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which allow the 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 Management, eRoomData Management,
eRoomMaintenance and eRoomPersonnel. We have also registered our logo as
presented on the cover of this prospectus 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(R) based program that provides a communication link between
our eRoomSystem, our eRoomSystem hotel file server and the hotel's property
management system. The third module is a Windows(R) based program that collects
data from our eRoomSystem hotel file server and provides a variety of management
and operational reports to eRoomSystem Technologies and our customers.

We do not know if our patent application or any future patent
application 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

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RoomSystems International Corporation to RoomSystems Technologies, Inc.
Subsequently, on March 29, 2000, with the approval of our stockholders, we
changed our name to eRoomSystem Technologies, Inc.

We have 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. 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 our 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 revenues 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.

PROPERTY AND EMPLOYEES

We maintain an office at 3770 Howard Hughes Parkway, Suite 175, Las
Vegas, Nevada. We lease 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 monthly lease rate is
$9,000.

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As a result of the restructuring, we currently employ thirty -two
full-time and three part-time employees in our St. George, Utah facility and one
full-time employee 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.

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 have filed a proof of claim for the demand promissory notes
executed by Mr. Minson, plus accrued interest on such notes. We have
negotiated with the bankruptcy trustee for the reacquisition of the shares.
On November 8, 2000, we submitted to the bankruptcy trustee a final cash
offer of $180,000 relating to the acquisition of the 121,875 shares of common
stock. Our offer has been accepted by the trustee and we are awaiting a
definitive agreement which, upon execution, will be submitted to the
Bankruptcy Court, for formal approval. We anticipate retiring the shares to
treasury and canceling such shares, or selling such shares to a third party
in a private arms-length third party transaction.

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 alleges
breach of contract and seeks payment in the amount of approximately $125,000
from us for materials delivered pursuant to purchase orders. In our answer to
Willow Creek's amended complaint and our Responses to Willow Creek's First Set
of Interrogatories, Requests for Admissions and Request for Production of
Documents, we allege that the materials delivered by Willow Creek were
defective, lacked quality control and were below acceptable standards in the
industry. In addition, we allege that the costs of repairing and replacing the
defective materials, the costs during down time for such repair and replacement
and other related costs are in excess of $120,000, which we believe may be
offset against Willow Creek's claim for damages. Although we believe that our
documentation on this matter is sufficient to support our claims, we are unable
at this time to predict the exact outcome of the matter. We have solicited the
plaintiff in the Willow Creek matter for the purpose of submitting to
alternative dispute resolution. Negotiations are continuing with Willow Creek,
and we are hopeful that this matter will be settled by the end of the first
quarter of 2001.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Our current directors and executive officers are as follows:

NAME AGE TITLE
------ --- -------

David S. Harkness 35 Chief Executive Officer and Vice Chairman of the Board of Directors
Stephen M. Nelson 52 President and Chief Operating Officer
Derek K. Ellis 32 Chief Financial Officer, Treasurer and Secretary
Gregory L. Hrncir 34 General Counsel and Vice President of Business Development
Steven L. Sunyich 46 Chairman of the Board
Lawrence S. Schroeder 53 Director
Dr. Alan C. Ashton 58 Director
S. Leslie Flegel 61 Director
John J. Prehn 40 Director

Each of the executive officers is a full-time employee of eRoomSystem
Technologies and serves at the discretion of our board. Non-employee directors
of eRoomSystem Technologies devote such time to the affairs of eRoomSystem
Technologies as is necessary and appropriate. Set forth below are descriptions
of the backgrounds of the executive officers, directors, director designees and
key employees of eRoomSystem:

DAVID S. HARKNESS has served as our chief executive officer and vice
chairman of the board of directors since December 20, 2000. Since April 1999,
Mr. Harkness has served as co-manager of Providence Management, LLC, or
Providence, which is manager of Ash Capital, LLC, an investment company
controlled by Dr. Alan C. Ashton. From November 1997 to April 1999, Mr.
Harkness served as executive vice president and chief financial officer of
Bookcraft, Inc. From March 1996 to November 1997, Mr. Harkness served as vice
president and director of marketing for Fonix Corporation. Mr. Harkness
received his Bachelor of Science in Business Management and International
Finance from Brigham Young University.

STEPHEN M. NELSON has served as president of eRoomSystem Technologies
and RoomSystems since August 2000 and chief operating officer of eRoomSystem
Technologies and RoomSystems since March 2000. In addition, Mr. Nelson served as
interim chief executive officer from November 2000 to December 2000. Prior to
joining us, Mr. Nelson spent nine years with TELS Corporation where he served as
its president and chief operating officer from 1996 to 1999, its executive vice
president from 1994 to 1996, and its chief financial officer from 1990 to 1994.
Mr. Nelson also served as a member of its board of directors from 1991 to 2000.
Mr. Nelson received his Bachelor of Science in Accounting from the University of
Utah in 1974. Mr. Nelson is a certified public accountant and a member of the
AICPA, UACPA, Institute of Management Accountants and American Management
Association.

DEREK K. ELLIS has served as our chief financial officer and treasurer
since August 1999 and as our secretary since December 2000. Mr. Ellis also
serves as chief financial officer, treasurer and secretary of RoomSystems, as
chief financial officer, treasurer, secretary and as a director of RSi BRE, and
chief financial officer, treasurer and as a director of eRoomSystem SPE. From
1995 to 1997, Mr. Ellis served as the Director of Finance for IVY International
Communications, Inc., Provo, Utah, formerly a division of Novell/Word Perfect.
Mr. Ellis received his Bachelor of Science in Finance from the University of
Utah.

GREGORY L. HRNCIR has served as our general counsel since September
1999. Mr. Hrncir previously served as our secretary from September 1999 to
November 2000, as general counsel and secretary of RoomSystems and RSi BRE from
September 1999 to November 2000 and as secretary of eRoomSystem SPE from May
2000 to November 2000. In 1999, Mr. Hrncir served as general counsel for
PayStation America, Inc. From 1994 to 1998, Mr. Hrncir served in private
practice in Los Angeles, California specializing in corporate and securities
matters, and represented us from 1996 to 1998. Mr. Hrncir received his Bachelor
of Science from Arizona State University and his Juris Doctor from Whittier
College School of Law. Mr. Hrncir is a member of the Arizona and California
State bars.

STEVEN L. SUNYICH has served as our chairman since August 1999. From
August 1999 to November 2000, Mr. Sunyich served as our president and chief
executive officer. Mr. Sunyich also served as our president, chief

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executive officer and chairman of RoomSystems and its predecessors from 1993
to November 2000, as president and chief executive officer of RSi BRE from
its inception in September 1999 to November 2000, and as our president, chief
executive officer and chairman of eRoomSystem SPE from its inception in May
2000 to November 2000. Since 1983, Mr. Sunyich has been involved with the
credit card and lodging industries as a developer, inventor and engineer of
high-tech products. Mr. Sunyich developed and patented our automated credit
card draft capture technology.

LAWRENCE S. SCHROEDER has served as a director of eRoomSystem
Technologies since August 1999. Mr. Schroeder has also been engaged as an
independent sales consultant since January 2001. Mr. Schroeder has also served
as a director of RoomSystems since 1998. Since 1992, Mr. Schroeder has been a
private consultant to the hospitality, sports and other related industries. Mr.
Schroeder is also a Director of River Valley Productions, Kansas City, Missouri,
and a Director of Responsive Marketing & Communications, Chicago, Illinois. Mr.
Schroeder received his Bachelor of Science in Business Administration from Huron
College.

S. LESLIE FLEGEL has served as a director of eRoomSystem Technologies
since August 2000. Mr. Flegel has been the chairman of the board of directors
and chief executive officer of The Source Information Management Company, St.
Louis, Missouri, since its inception in March 1995. For more than 14 years, Mr.
Flegel was the principal owner and chief executive officer of Display
Information Systems Company, a predecessor of The Source. Mr. Flegel received
his Bachelor of Arts from the University of Missouri at Columbia.

DR. ALAN C. ASHTON has served as a director of eRoomSystem Technologies
since August 2000. Dr. Ashton is the co-founder of WordPerfect Corporation,
Orem, Utah. Dr. Ashton received a Bachelor's Degree in Mathematics and a Ph.D.
in Computer Science from the University of Utah. Dr. Ashton is a current
professor of Computer Science at the University of Utah and a former professor
at Brigham Young University. Dr. Ashton has served on the board of directors of
Novell, Inc., Geneva Steel and Utah Valley State College.

JOHN J. PREHN has served as a director of eRoomSystem Technologies
since August 2000. Mr. Prehn is also a member of RSG Investments. From March
1997 to August 2000, Mr. Prehn served as managing director of AMRESCO, Inc.
Prior to March 1997, Mr. Prehn co-founded and managed Commercial Lending
Corporation, the company he sold to AMRESCO, Inc. From 1989 to 1996, Mr.
Prehn co-founded Peteco, Inc., a company that purchased, packaged and sold
securitized assets. Mr. Prehn received his Bachelor of Science in Business
Administration from the University of California at Berkeley.

COMPOSITION OF OUR BOARD

Our board consists of six members, each of whom will serve in that
capacity for a one-year term or until a successor has been elected and
qualified, subject to earlier resignation, removal or death. The number of
directors comprising our board may be increased or decreased by resolution
adopted by the affirmative vote of a majority of the board with our bylaws
authorizing less than two and no more than nine directors. Our board currently
possesses three independent directors.

COMMITTEES OF OUR BOARD

Our audit committee is comprised of Messrs. Ashton, Flegel and Prehn
and our compensation committee is comprised of Messrs. Ashton, Prehn and
Schroeder. The audit committee will have the responsibility of recommending the
firm that will serve as our independent public accountants, reviewing the scope
and results of the audit and services provided by our independent public
accountants and meeting with our financial staff to review accounting procedures
and policies. The compensation committee has the responsibility of reviewing our
financial records to determine overall compensation and benefits for executive
officers and to establish and administer the policies which govern employee
salaries and benefit plans.

DIRECTOR COMPENSATION

Non-employee directors of eRoomSystem Technologies receive an
attendance fee of $500 per meeting attended. In addition, non-employee directors
receive additional stock options to purchase 7,500 shares of common stock at
each annual meeting conducted after 2000. Directors who are employees of
eRoomSystem Technologies or our subsidiaries do not receive compensation for
their services as directors.

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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The compensation of executive officers will be established by the
board pursuant to recommendations from the board's compensation committee.
Prior to the formation of the compensation committee, the compensation of
executive officers was established by Steven L. Sunyich, our chairman. No
member of our compensation committee will serve as a member of a board of
directors or compensation committee of any entity that has one or more
executive officers serving as a member of our board or compensation
committee. However, David S. Harkness, our chief executive officer and vice
chairman, is a co-manager and fifty percent owner of Providence, the manager
of Ash Capital, and Dr. Alan C. Ashton, a director and member of our audit
and compensation committee, is the controlling member of Ash Capital.

2000 STOCK OPTION AND INCENTIVE PLAN

Our stock option plan was adopted by the board on February 3, 2000,
approved by the stockholders on March 29, 2000 and amended and restated by the
board on June 6, 2000. The stock option plan became effective on February 3,
2000. The plan provides us with the vehicle to grant to employees, officers,
directors and consultants stock options and bonuses in the form of stock and
options. Under the plan, we can grant awards for the purchase of up to two
million shares of common stock in the aggregate, including "incentive stock
options" within the meaning of Section 422 of the United States Internal Revenue
Code of 1986 and non-qualified stock options. To date, we have issued options to
purchase 1,982,345 shares of common stock under our stock option plan. The
compensation committee of our board has authority to determine the persons to
whom awards will be granted, the nature of the awards, the number of shares to
be covered by each grant, the terms of the grant and with respect to options,
whether the options granted are intended to be incentive stock options, the
duration and rate of exercise of each option, the option price per share, the
manner of exercise and the time, manner and form of payment upon exercise of an
option.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION INFORMATION

The following table sets forth summary information concerning the total
remuneration paid or accrued by eRoomSystem Technologies, to or on behalf of our
chief executive officers, current and former, and our executive officers whose
total annual salary exceeded $100,000 during the fiscal years ended December 31,
2000, 1999 and 1998. In accordance with the rules of the Securities and Exchange
Commission, or the Commission, the compensation described in this table does not
include perquisites and other personal benefits received by the executive
officers named in the table below which does not exceed the lesser of $50,000 or
10% of the total salary and bonus reported for the executive officers.

ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------------- ------------------------------
SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS
- -------------------------------------------- --------- --------------- -------------- ------------------------------

David S. Harkness, 2000 $ 4,932 $ 0 250,000
Vice chairman and chief executive 1999 $ 0 $ 0 0
officer 1998 $ 0 $ 0 0

Stephen M. Nelson, 2000 $ 89,773 $ 25,000 63,598
President, chief operating officer and 1999 $ 0 $ 0 0
former interim chief executive 1998 $ 0 $ 0 0
officer

Steven L. Sunyich, 2000 $ 167,726 $ 0 353,109
Chairman and former chief executive 1999 $ 158,152 $ 4,326 0
officer 1998 $ 74,308 $ 0 0

Derek K. Ellis, 2000 $ 119,021 $ 0 157,427
Chief financial officer, treasurer and 1999 $ 99,313 $ 2,679 0
secretary 1998 $ 77,000 $ 0 0

Gregory L. Hrncir, 2000 $ 103,959 $ 0 121,578
General counsel and vice president 1999 $ 28,184 $ 2,679 0
of business development 1998 $ 0 $ 0 0

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During 2000, Steven L. Sunyich served as our chief executive officer
until November 2000, Stephen M. Nelson served as our interim chief executive
officer from November 2000 to December 20, 2000 and David S. Harkness has served
as our chief executive officer since December 20, 2000. In addition to the
compensation disclosed above, Mr. Sunyich also received $4,000 in 1998 pursuant
to a consulting agreement and Mr. Hrncir received $23,666 in December 2000
pursuant to a severance agreement and a consulting agreement.

OPTION GRANTS TO EXECUTIVE OFFICERS DURING THE YEAR ENDED DECEMBER 31,
2000

The following table sets forth information regarding grants of
stock options during the fiscal year ended December 31, 2000 made to our
executive officers. The percentages below are based upon the issuance of
options to purchase 1,679,145 shares of common stock rather than 1,692,255
shares of common stock to reflect the termination of options, in 2001, to
purchase 13,110 shares of common stock that failed to vest. We have not
issued any stock appreciation rights.

PERCENT OF TOTAL
NUMBER OF OPTIONS/SARS
SECURITIES GRANTED TO EXERCISE OR
UNDERLYING EMPLOYEES IN BASE PRICE
NAME OPTIONS/ FISCAL YEAR ($/SHARE) EXPIRATION DATE
- -------------------------- -------------------- -------------------- ----------------- ----------------------

David S. Harkness 250,000 $ 1.51 December 20, 2003
250,000 14.89%

Stephen M. Nelson 5,569 $ 4.00 August 2, 2003
696 $ 4.67 August 2, 2002
31,250 $ 6.00 August 2, 2003
22,629 $ 8.80 August 2, 2003
3,454 $ 9.60 August 2, 2003
-------------------
63,598 3.79%

Steven L. Sunyich 169,879 $ 4.00 August 2, 2003
1,392 $ 4.67 August 2, 2002
63,315 $ 8.80 August 2, 2003
118,523 $ 9.60 August 2, 2003
-------------------
353,109 21.02%

Derek K. Ellis 75,569 $ 4.00 August 2, 2003
35,004 $ 8.80 August 2, 2003
46,854 $ 9.60 August 2, 2003
-------------------
157,427 9.38%

Gregory L. Hrncir 58,069 $ 4.00 August 2, 2003
27,504 $ 8.80 August 2, 2003
36,005 $ 9.60 August 2, 2003
-------------------
121,578 7.24%

In addition to the stock options granted in the fiscal year ended
December 31, 2000, we have granted to several of our named executive officers
stock options to purchase 40,000 shares, 100,000 shares and 100,000 shares to
Messrs. Nelson, Ellis and Hrncir, respectively. These stock options were granted
in January 2001, vest semi-annually on June 30, 2001 and December 31, 2001, have
a three-year term and are exercisable at price of $1.91 per underlying share.

AGGREGATED OPTION EXERCISES DURING THE YEAR ENDED DECEMBER 31, 2000
AND OPTION VALUES

In the fiscal year ended December 31, 2000, none of our named executive
officers exercised any stock options. The following table sets forth information
related to the fiscal year-end value of unexercised stock options

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held by our named executive officers. As the closing price of our common
stock on January 29, 2001 was $2.00, none of our named executive officers
hold any stock options that are in-the-money with the exception of David S.
Harkness. We have not issued any stock appreciation rights.

Value of unexercised
NUMBER OF UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
------------------------------------------- -----------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- --------------------- --------------------- ------------------- ---------------

David S. Harkness 250,000 0 $122,500 N/A
Stephen M. Nelson 24,890 38,708 N/A N/A
Steven L. Sunyich 360,459 0 N/A N/A
Derek K. Ellis 156,537 5,374 N/A N/A
Gregory L. Hrncir 119,573 5,374 N/A N/A

REPORT ON REPRICING OF OPTIONS/SARS

During the fiscal year ended December 31, 2000, we did not adjust or
amend the exercise price of any of our outstanding stock options awarded to any
of our named executive officers with the exception of adjustments to all of our
outstanding stock options due to a three-for-four reverse stock split in our
common stock on March 29, 2000. As a result of this reverse stock split, the
exercise prices for all outstanding stock options was appropriately increased
as the number of shares of common stock underlying the stock options were
decreased.

EMPLOYMENT AGREEMENTS

As of December 20, 2000, we entered into an executive employment
agreement with David S. Harkness that will expire on December 31, 2001. As
compensation, Mr. Harkness will be paid an annual base salary of $150,000,
payable in twenty-six equal installments and will be eligible for a
performance bonus to be determined by our compensation committee, together
with other benefits customarily granted to executive officers. Mr. Harkness
also received stock options under the 2000 Plan to purchase 250,000 shares of
common stock at $1.51 per share. The agreement provides that Mr. Harkness
shall hold in strict confidence and shall not disclose any of our non-public
information during and for a period of five years following the termination
of the agreement. In addition, Mr. Harkness has agreed that he will not,
directly or indirectly, be an owner, partner, director, manager, officer or
executive, or otherwise render services to or be associated with any business
or activity that competes with us during the term of employment and for a
three-year period following the termination of such employment.

We may terminate the executive employment agreement with Mr. Harkness
for cause, death or disability. Cause is defined as a breach of the executive
employment agreement or of any other duty or obligation owed to us, a failure to
follow a directive of our board, an act of fraud, misappropriation, dishonesty
or embezzlement, or any willful or negligent misconduct, criminal conviction or
similar conduct or activity. Upon termination for cause, death or disability, we
owe no further obligation to Mr. Harkness with the exception of vested stock
options and the payment of earned but unpaid salary, life insurance or
disability benefits provided to Mr. Harkness. If we terminate the agreement for
any other reason, we are obligated to provide Mr. Harkness with advance written
notice of thirty days and to pay a severance payment equal to three months of
his then existing base salary.

On July 12, 2000, we entered into an executive employment agreement
with Stephen M. Nelson and an amended and restated executive employment
agreement with Derek K. Ellis. The terms of the executive employment
agreements for Messrs. Nelson and Ellis expire on June 30, 2002 and December
31, 2001, respectively, and provide for base salaries of $125,000 and
$132,500, respectively. Subsequently, on January 29, 2001, Messrs. Nelson and
Ellis agreed to rescind their respective agreements in their entirety,
effective retroactively to July 12, 2000, and enter into new executive
employment agreements. The new agreements provide for the same base salary
and benefits, include the extension of the term of their employment to
December 31, 2002 and adopt the termination language contained in the
executive employment agreement with Mr. Harkness. Through the rescission of
their old agreements, we eliminated a provision of their agreements which
obligated us to pay the aggregate exercise price on the stock options
exercised by either Mr. Nelson or Mr. Ellis, and any applicable state and
federal personal income tax incurred as a result of such payment on behalf of
either Mr. Nelson or Mr. Ellis, to the extent that either Mr. Nelson or Mr.
Ellis is employed upon the conclusion of his employment agreement. In

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exchange for the rescission of their old agreements and the revised terms and
conditions of the new agreements, Messrs. Nelson and Ellis each received a
one-time bonus.

On November 30, 2000, we entered into a severance agreement with
Gregory L. Hrncir, our former secretary, that mutually terminated the
employment agreement with Mr. Hrncir and provided a severance payment in the
amount of $67,795 payable to Mr. Hrncir in thirteen equal bi-weekly
installments and other benefits. All of the terms of such employment
agreement became null and void. On the same day, we entered into a consulting
agreement with Mr. Hrncir on a month-to-month basis whereby Mr. Hrncir would
remain as our general counsel and assist in our legal matters. On January 29,
2001, we entered into a new executive employment agreement with Mr. Hrncir
whereby he returned as a full-time employee acting in the capacity of general
counsel and vice president of business development. The new agreement
provides for a base salary of $130,000, has terms and conditions essentially
identical to those contained in the agreement with Mr. Harkness and expires
on December 31, 2002. The consulting agreement with Mr. Hrncir was terminated
effective January 28, 2001. In addition, on January 29, 2001, we entered into
an amended and restated severance agreement with Mr. Hrncir which provided
for the payment of the balance owed on the severance agreement to Mr. Hrncir
and the rescission of his prior executive employment agreement as of July 12,
2000.

On January 26, 2001, we terminated for cause the second amended and
restated executive employment agreement of Steven L. Sunyich and his employment
with us. The employment agreement was entered into on July 12, 2000 and is
essentially identical to the executive employment agreements we had entered into
with Messrs. Nelson, Ellis and Hrncir as of the same date. We have reserved up
to $200,000 in the event we have to make any payments under the terms and
conditions of Mr. Sunyich's executive employment agreement. Mr. Sunyich shall
remain as chairman of our board for the remainder of his term, which expires as
of the 2001 annual meeting of stockholders.

INSURANCE

We maintain directors and officers liability insurance of $5,000,000 on
behalf of our officers and directors insuring them against liability that they
may incur in such capacities or arising out of such status.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

Sections 78.7502 and 78.751 of the Nevada Revised Statutes provide for
the indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities, including reimbursement for expenses incurred, arising under the
Securities Act. Article XII of our articles of incorporation provides for
indemnification of our directors, officers, employees and other agents to the
extent and under the circumstances permitted by Sections 78.7502 and 78.751 of
the Nevada Revised Statutes. In addition, pursuant to the severance agreement
with Mr. Hrncir, we agreed to indemnify Mr. Hrncir for any actions taken by him
on behalf of eRoomSystem Technologies prior to the effective date of the
severance agreement to the extent provided for in our bylaws.

Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons pursuant
to the provisions contained in our articles of incorporation, bylaws, Nevada law
or otherwise, we have been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. If a claim for indemnification against such
liabilities, other than the payment by us of expenses incurred or paid by one of
our directors, officers or controlling persons in the successful defense of any
action, suit, or proceeding, is asserted by such director, officer or
controlling person, we will, unless in the opinion of our counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by us is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of this issue.

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Prehn each possess the right to indemnification if, in civil proceedings,
they acted in good faith and in a manner that they reasonably believed to be
in or not opposed to the best interests of eRoomSystem Technologies, and, in
criminal proceedings, they had no reasonable cause to believe that his
conduct was unlawful. In addition, eRoomSystem Technologies may elect to not
indemnify Messrs. Ashton and Prehn if either a majority of the directors not
involved in the relevant proceeding or independent legal counsel, in a
written opinion, determine that they have not met the relevant standards for
indemnification.

On September 28, 1999, we entered into an indemnification agreement
with Donnelly Prehn which indemnifies Mr. Prehn for actions which may be taken
by him as a director on behalf of RSi BRE. Pursuant to this indemnification
agreement, eRoomSystem Technologies and RSi BRE, jointly and severally, agreed
to hold harmless and indemnify Mr. Prehn against any and all expenses incurred
by him as a result of his position as a director of RSi BRE. In addition, we
agreed to advance expenses incurred by Mr. Prehn upon receipt of a written
request for such advancement containing an unsecured undertaking by Mr. Prehn to
repay such amounts to the extent that Mr. Prehn is held not to be entitled to
indemnification from eRoomSystem Technologies. Mr. Prehn's rights to
indemnification are only available if damages have not already been paid
directly to Mr. Prehn by an insurance carrier maintained by either eRoomSystem
Technologies or RSi BRE. Mr. Prehn is not entitled to indemnification if he is
adjudged by a court of competent jurisdiction to have engaged in intentional
misconduct or a knowing violation of the law, if he received an improper
personal benefit, or if a court of competent jurisdiction renders a final
decision that such indemnification is unlawful.

There is no pending litigation or proceeding involving any of our
directors or officers as to which indemnification is being sought, nor are we
aware of any pending or threatened litigation that may result in claims for
indemnification by any director or officer.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

TRANSACTIONS INVOLVING ASH CAPITAL

On August 17, 1999, eRoomSystem Technologies and Ash Capital entered
into an Agreement of Understanding with respect to the purchase by Ash Capital
of 333,334 shares of Series B convertible preferred stock at a price of $3.00
per share. This agreement provides Ash Capital with representation on our board
and options to purchase 70,313 shares of common stock at $4.80 per share and
56,250 shares of common stock at $8.80 per share. The Agreement of Understanding
was later amended by an agreement which provided additional obligations of
eRoomSystem Technologies with respect to the purchase of an aggregate of 683,336
shares of Series B convertible preferred stock as follows: Ash Capital - 333,334
shares; C&W/RSI Partners - 133,334 shares; SKM Investments, LLC - 133,334
shares; and Thunder Mountain Properties LC - 83,334 shares. Pursuant to this
amendment and until the closing of our initial public offering, eRoomSystem
Technologies agreed to deliver monthly and annual financial statements, make
adjustments for business combinations and capital-related transactions, and
issue additional shares of preferred stock to the extent that eRoomSystem
Technologies sells shares of common stock, or its equivalents, for less than
$3.00 per share. In addition, the shares of Series B convertible preferred stock
purchased by these investors possess the same rights as other shares of Series B
convertible preferred stock. All shares of Series B convertible preferred stock
were converted into shares of our common stock upon the closing of our initial
public offering.

In addition to the Agreement of Understanding, we entered into a
Stockholders' Agreement and Proxy dated August 17, 1999 with Ash Capital in
which rights were granted to Ash Capital. As a result, Ash Capital possesses the
right to vote a nominee onto our board of directors, the right of first refusal
with respect to the proposed sale of shares of our capital stock by our
executive officers and their respective affiliates and the right to participate
in the proposed sale of shares of our capital stock in an amount equal to one
quarter of the number of shares proposed to be sold. In the event that there is
a transfer by our executive officers and their respective affiliates that
violates this agreement, Ash Capital possesses the right to sell to our
executive officers and their respective affiliates the number of shares of
capital stock Ash Capital would have been able to sell pursuant to its
participation rights. In addition, with the exception of transfers for estate
planning purposes, our executive officers and their respective affiliates agreed
to transfer no more than 10,000 shares of our capital stock per year. This
agreement terminates upon the earlier of the tenth anniversary of the agreement
or upon the consummation of a firmly underwritten public offering with gross
proceeds of at least $12 million. Although our initial public offering generated
gross proceeds of only $11.7 million, Ash Capital provided a waiver of the $12
million requirement and the Stockholders' Agreement and Proxy was terminated.

On February 15, 2000, we received a $500,000 loan from Ash Capital. Dr.
Alan C. Ashton is a director of eRoomSystem Technologies and owns 100% of Ash
Capital. This loan was evidenced by a promissory note bearing simple interest at
the rate of 10% per annum, payable on August 15, 2000 and secured by our assets.
Ash Capital was issued a warrant to purchase 18,750 shares of common stock
exercisable at $4.80 per share through August 9, 2002. The primary purpose of
this loan was to fund approximately 900 Refreshment Centers to be installed in
several hotel properties in the United States. In August 2000, the promissory
note was satisfied and paid in full.

In relation to the management of Ash Capital, Providence has served
as the manager of Ash Capital since its inception in April 1999. David S.
Harkness, our chief executive officer, is the co-manager of Providence and
owns fifty percent of Providence. Providence handles all of the business
affairs of Ash Capital in return for a quarterly management fee of up
to $37,500. In addition, once Ash Capital recoups its original principal
investment in a venture, along with a ten percent annual return, Mr. Harkness
is entitled to receive up to 10% of any remaining amount realized by Ash
Capital.

We have entered into two consulting agreements with Providence, one
agreement on September 30, 1999 for marketing and business development
services in exchange for $51,875 and a warrant to purchase 14,961 shares of
common stock, exercisable at $4.80 per share, and another agreement on
October 1, 2000 for strategic tax planning and marketing services in exchange
for $60,000. Although Mr. Harkness will continue to be compensated by
Providence in exchange for a limited amount of assistance on Ash Capital
matters unrelated to us, Mr. Harkness shall no longer receive any of the
warrants or any portion of the payments made by us pursuant to the consulting
agreements with Providence.

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TRANSACTIONS INVOLVING RSG INVESTMENTS

On July 17, 1998, eRoomSystem Technologies entered into an agreement
with RSG Investments through which RSG Investments loaned us $1.5 million. RSG
Investments is a privately-held company in which John J. Prehn, one of our
directors, is a member. Mr. Prehn previously served as the managing director of
AMRESCO. At the time of these agreements, neither RSG Investments nor AMRESCO
were affiliated with us.

The purpose of the $1.5 million loan was to fund the production of
approximately 2,270 Refreshment Centers. As an inducement, we issued the
principals of RSG Investments warrants to purchase 46,875 shares of common stock
and agreed to pay interest at the rate of 15% per annum. Our obligation was
secured by Refreshment Centers, our other assets and shares of common stock held
by the officers, directors and consultants. Under this agreement, we were to
"repurchase" the Refreshment Centers within 75 days, or by September 30, 1998.
If we failed to "repurchase" the Refreshment Centers by such date, warrants to
purchase 9,375 shares of common stock would have accrued every 30 days through
January 30, 1999. We failed to "repurchase" the Refreshment Centers by September
30, 1998 and remained in default through January 30, 1999, although we obtained
several extensions from RSG Investments. As our obligation remained unsatisfied,
we entered into a settlement with RSG Investments in the form of an Equipment
Transfer Agreement dated September 28, 1999.

Pursuant to the Equipment Transfer Agreement, we formed a
bankruptcy-remote entity, RSi BRE, placed a representative of RSG Investments on
the board of directors of RSi BRE, transferred ownership of 2,270 Refreshment
Centers to RSi BRE, and granted RSG Investments the right to receive $0.57 per
Refreshment Center per day of the revenue realized from 2,050 of the Refreshment
Centers. As part of the settlement, the RSi BRE board of directors was to
consist of three individuals, a representative of eRoomSystem Technologies, a
representative of RSG Investments and a third independent director. In addition,
we paid $250,000 to RSG Investments, converted $500,000 of our obligation into
166,667 shares of Series B convertible preferred stock and executed a promissory
note in the principal amount of $750,000 bearing an interest rate of 10% per
annum. Pursuant to this settlement, RSG Investments terminated the security
interest granted under the original obligation and received a security interest
in all of the assets of RSi BRE. In addition, RSG Investments surrendered all
warrants to purchase shares of common stock eRoomSystem Technologies previously
issued to it.

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

OTHER TRANSACTIONS WITH RELATED PARTIES

In October 1996, in consideration for the sale of patents to
eRoomSystem Technologies, we agreed to pay $125,000 and issue 65,625 shares of
common stock to Steven L. Sunyich, our chairman. In fiscal year 1999, Mr.
Sunyich converted the remaining principal balance of $70,750 into 23,583 shares
of Series B convertible preferred stock.

In 1997, Kelley Family Trust and Toleman Family Trust, both of which
are controlled by Mr. Sunyich, purchased 84,375 and 118,125 shares of common
stock, respectively, at a price of $4.67 per share, evidenced by demand
promissory notes bearing simple interest at the rate of 7% per annum. On October
1, 1999, the board called the demand promissory notes of Kelley Family Trust and
Toleman Family Trust. The demand promissory notes were defaulted upon and the
shares of common stock were returned to us and retired.

In 1997, Derek K. Ellis, our chief financial officer, treasurer and
secretary, purchased 120,375 shares of common stock at a price of $4.67 per
share, evidenced by a demand promissory note bearing simple interest at the rate
of 7% per annum. On October 1, 1999, the board called the demand promissory note
of Mr. Ellis. The demand promissory note was defaulted upon and the shares of
common stock were returned to us and retired.

In 1998, Mr. Ellis loaned $10,545 to us evidenced by a promissory note.
On September 1, 1999, we entered into an agreement with Mr. Ellis whereby we
agreed to convert the outstanding indebtedness due on this promissory note into
shares of Series B convertible preferred stock. As a result, we issued 3,742
shares of Series B

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convertible preferred stock and 2,989 shares of our common stock to Mr.
Ellis. These shares of Series B convertible preferred stock were converted
into shares of our common stock upon the closing of our initial public
offering.

Mr. Sunyich loaned the sum of $205,209 to us, as evidenced by a
promissory note dated January 1, 1999. In addition, William R. Shupe, a former
executive officer and former consultant, loaned the sum of $83,411 to us, as
evidenced by a promissory note dated January 1, 1999. On September 1, 1999, we
entered into agreements whereby we agreed to convert the outstanding
indebtedness due on these promissory notes. As a result, we issued 72,434 shares
of Series B convertible preferred stock and 51,983 shares of our common stock to
Mr. Sunyich and 29,808 shares of Series B convertible preferred stock and 25,377
shares of our common stock to Mr. Shupe. These shares of Series B convertible
preferred stock were converted into shares of our common stock upon the closing
of our initial public offering.

The funds loaned by Mr. Sunyich and Mr. Shupe were originally loaned to
them by Riggs Family Partnership, an entity owned and controlled by Mr. Shupe.
Upon inquiry, we were advised that the loans by Riggs Family Partnership had
been obtained from the proceeds of what may have been an unregistered offering
of our common stock by Riggs Family Partnership and Mr. Shupe. Through its
offering, Riggs Family Partnership sold shares of our common stock held by two
of our stockholders. We have been advised that, from April 1998 through March
1999, Riggs Family Partnership sold approximately 112,500 shares of our common
stock to approximately 36 investors in exchange for approximately $1.3 million.

Further, in December 1999, Riggs Family Partnership notified us of its
intention to transfer to these investors approximately 60,000 additional shares
of our common stock held by Riggs Family Partnership to offset the effect of our
one-for-two reverse stock split. We have not been able to determine whether this
unregistered offering was conducted by Riggs Family Partnership with the benefit
of a state or federal exemption from registration. As a result, Riggs Family
Partnership and Mr. Shupe may be subject to an examination by administrative
agencies with respect to its offers and sales of our common stock or may be
subject to demand for rescission by the purchasers of our common stock. Despite
the possible exposure of Riggs Family Partnership and Mr. Shupe to liability, we
did not have any control over Riggs Family Partnership or Mr. Shupe and did not
participate in the actual offer and sale of our common stock to these
purchasers.

On May 30, 1999, the SBD Limited Partnership, an entity controlled by
Mr. Sunyich, executed a promissory note in favor of eRoomSystem Technologies in
the original principal amount of $1,590,000 in consideration for the issuance of
198,750 shares of our common stock. The purpose of the issuance was to assist
eRoomSystem Technologies in complying with the stock pledge requirements
mandated by the terms of the $1,500,000 loan from RSG Investments. On September
28, 1999, as a result of a settlement agreement with RSG Investments, the
198,750 shares of common stock were returned to the SBD Limited Partnership.
Immediately thereafter, the SBD Limited Partnership surrendered the 198,750
shares of common stock to eRoomSystem Technologies in exchange for the
cancellation of the promissory note. The shares of common stock were booked as
treasury stock and have been retired.

On December 7, 1999 and February 14, 2000, Mr. Sunyich formally
assigned to eRoomSystem Technologies Patent No. 4,939,352 and Patent Nos.
4,857,714 and 4,883,948, respectively. These patents relate to credit card point
of sale technology. Each of the patent assignments have been filed with the
United States Patent and Trademark Office. The assignments finalized the sale of
such patents by Mr. Sunyich to us in 1996. In exchange, we issued 65,625 shares
and a promissory note in the principal amount of $125,000 to Mr. Sunyich. After
paying down the promissory note to approximately $70,750, we converted the
remaining outstanding principal and interest into 23,583 shares of Series B
convertible preferred stock. These shares were converted into shares of our
common stock upon the closing of our initial public offering.

The terms of each of the affiliate transactions were as favorable to
the issuer or its affiliates as those generally available from unaffiliated
third parties. We lacked sufficient disinterested independent directors to
ratify the affiliate transactions at the time the transactions were initiated.
All future material affiliated transactions and loans will be made, or entered
into, on terms that are no less favorable to us than those that can be obtained
from unaffiliated third parties. All future material affiliated transactions and
loans, and any forgiveness of loans, must be approved by a majority of our
independent directors who do not have an interest in the transactions and who
had access, at our expense, to our legal counsel or independent legal counsel.

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PRINCIPAL STOCKHOLDERS

The following table sets forth the beneficial ownership of our common
stock by our executive officers and our directors, individually, and all of our
executive officers and directors, as a group, as of January 29, 2001 and, as
adjusted, to reflect the sale of the shares of common stock in this offering.
The beneficial ownership is calculated based on 7,051,019 shares of our common
stock outstanding as of January 29, 2001 and 7,392,199 shares of our common
stock outstanding upon completion of this offering. Beneficial ownership is
determined in accordance with the rules of the Commission and generally includes
voting or investment power with respect to securities.

Unless otherwise indicated, each person or entity named in the table
has sole voting power and investment power, or shares voting and investment
power with his or her spouse, with respect to all shares of capital stock listed
as owned by such person. Shares issuable upon the exercise of options that are
currently exercisable or become exercisable within sixty days of January 29,
2001 are considered outstanding for the purpose of calculating the percentage of
outstanding shares of our common stock held by the individual, but not for the
purpose of calculating the percentage of outstanding shares of our common stock
held by another individual. Unless otherwise indicated, the address of the
following stockholders is c/o eRoomSystem Technologies, Inc., 3770 Howard Hughes
Parkway, Suite 175, Las Vegas, Nevada 89109.

PERCENTAGE OF SHARES
NUMBER OF BENEFICIALLY OWNED
SHARES ------------------
BENEFICIALLY PRIOR TO THE AFTER THE
NAME OF EXECUTIVE OFFICERS AND DIRECTORS OWNED OFFERING OFFERING
- ------------------------------------------ ------- -------- --------
David S. Harkness(1) 961,333 12.9% 12.3%
Stephen M. Nelson(2) 27,577 0.4% 0.4%
Derek K. Ellis(3) 170,220 2.4% 2.3%
Gregory L. Hrncir(4) 124,135 1.7% 1.7%
Steven L. Sunyich(5) 41,662 11.4% 10.9%
Lawrence S. Schroeder(6) 55,911 0.8% 0.8%
Dr. Alan C. Ashton(7) 711,333 9.9% 9.4%
S. Leslie Flegel(8) 130,490 1.8% 1.7%
John J. Prehn(9) 20,000 0.3% 0.3%
Executive officers and directors as a group (9 2,331,329 28.0% 27.0%
persons)

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

(1) Reflects beneficial ownership of options to purchase an aggregate of
250,000 shares of common stock. The options held by Mr. Harkness are immediately
exercisable. Of the 961,333 shares, 711,333 shares are attributable to Mr.
Harkness as a result of his position of co-manager of Providence, which has a
20% profits interest in, and is the manager of Ash Capital, an investment entity
controlled by Dr. Ashton. Mr. Harkness disclaims any beneficial ownership of the
shares of common stock beneficially owned by Ash Capital.

(2) Reflects beneficial ownership of options to purchase an aggregate of
103,598 shares of common stock, of which only 27,577 will be exercisable by
March 30, 2001.

(3) Reflects beneficial ownership of 10,996 shares of common stock and
options to purchase an aggregate of 261,911 shares of common stock, of which
only 159,224 will be exercisable by March 30, 2001.

(4) Reflects beneficial ownership of 1,875 shares of common stock and
options to purchase an aggregate of 224,947 shares of common stock, of which
only 122,260 will be immediately exercisable by March 30, 2001.

(5) Reflects beneficial ownership of 210,639 shares of common stock,
270,564 shares of common stock held by trusts for which Mr. Sunyich acts as
trustee and his family members are beneficiaries and options to purchase an
aggregate of 360,459 shares of common stock, all which are immediately
exercisable.

(6) Reflects beneficial ownership of options to purchase 58,598 shares
of common stock, of which 55,911 are immediately exercisable.

(7) Ash Capital, controlled by Dr. Ashton, owns 566,020 shares of
common stock and options to purchase 145,313 shares of common stock. The options
held by Ash Capital are immediately exercisable.

(8) Reflects beneficial ownership of 15,490 shares of common stock,
options to purchase 112,500 shares of common stock and a warrant to purchase
2,500 shares of common stock. The options and warrants held by Mr. Flegel are
immediately exercisable.

(9) Reflects beneficial ownership of 5,000 shares of common stock and
options to purchase 15,000 shares of common stock. The options held by Mr. Prehn
are immediately exercisable. RSG Investments, an entity in which Mr. Prehn is a
member, owns 178,569 shares of common stock. Since Mr. Prehn's ownership of RSG
Investments is 24%, the shares of common stock beneficially owned by RSG
Investments have not been attributed to Mr. Prehn.

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DESCRIPTION OF CAPITAL STOCK

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.

On September 28, 1999, our stockholders approved a reverse split of our
common stock, including all common stock underlying our outstanding options and
warrants, at the rate of one share for every two shares outstanding. Due to
contractual anti-dilution rights which have since been terminated, 1,471,000
shares of our common stock were excluded from the one-for-two reverse stock
split. This reverse stock split did not affect our Series A or Series B
convertible preferred stock and has been retroactively reflected in this
prospectus.

On March 29, 2000, our stockholders approved a reverse split of our
common stock, including all common stock underlying our outstanding options and
warrants, at a rate of three shares for each four shares outstanding. Our
three-for-four reverse stock split did not affect our Series A, Series B or
Series C convertible preferred stock and has been retroactively reflected in
this prospectus.

As of January 29, 2001, and after giving effect to the one-for-two
reverse stock split and the three-for-four reverse stock split of our common
stock, there were 7,051,019 shares of common stock outstanding and no shares of
preferred stock outstanding. As set forth below, there are outstanding options
and warrants to purchase 3,266,650 shares of common stock as of January 29,
2001. We have reserved 2,000,000 shares of common stock for issuance pursuant to
our stock option plan.

COMMON STOCK

As of January 29, 2001, our outstanding shares of common stock were
held by approximately 680 stockholders. Holders of common stock are entitled to
one vote per share on all matters submitted to a vote of the shareholders. We do
not allow cumulative voting of any kind, and are not required to do so under
Nevada law. Subject to preferences that may be applicable to any then
outstanding preferred stock, the holders of common stock will be entitled to
receive dividends, if any, as may be declared from time to time by the board out
of legally available funds. Upon liquidation, dissolution, or winding up of
eRoomSystem Technologies, the holders of common stock will be entitled to a pro
rata share of our assets that are legally available for distribution after
payment of all debts and other liabilities and subject to the prior rights of
any preferred stock then outstanding. Holders of our common stock have no
preemptive, subscription, redemption, or conversion rights.

Our common stock is traded on the Nasdaq SmallCap Market under the
symbol "ERMS." On January 29, 2001, the last reported sale price of eRoomSystem
Technologies' common stock was $2.00. As we have a history of operating losses
and as there has only been a limited public market for our common stock, we may
not be able to meet the requirements for continued listing on the Nasdaq
SmallCap Market. In the event that our common stock no longer meets the listing
requirements of the Nasdaq SmallCap Market, our common stock will most likely be
traded on the OTC Bulletin Board or the National Quotation Bureau Pink Sheets.
If our common stock is no longer traded on the Nasdaq SmallCap Market, the
visibility of our common stock to the market and its liquidity will most likely
be reduced.

PREFERRED STOCK

We are authorized to issue 5,000,000 shares of undesignated preferred
stock. None of the undesignated preferred stock is issued or outstanding, and we
have no present plans to issue shares of undesignated preferred stock. Although
our board is empowered to issue one or more series of undesignated preferred
stock with such rights, preferences, restrictions and privileges as may be fixed
by our board, without further action by our stockholders, we will not offer any
preferred stock to any officer, director or 5% stockholder except on the same
terms it is offered to all other existing or new stockholders, or unless the
issuance of any preferred stock is approved by a majority of our independent
directors who did not have an interest in the transactions and who have access,
at our expense, to our legal counsel or independent legal counsel. The issuance
of the undesignated preferred stock

-50-

could adversely affect the rights, including voting rights, of the holders of
our common stock and could impede an attempted takeover of us.

In addition to our undesignated preferred stock, we have authorized
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.
Prior to the consummation of our initial public offering, we had issued and
outstanding 360,000 shares of Series A convertible preferred stock, 2,081,680
shares of Series B convertible preferred stock and 161,535 shares of Series C
convertible preferred stock. Upon the consummation of our initial public
offering, the outstanding shares of Series A convertible preferred stock, Series
B convertible preferred stock and Series C convertible preferred stock were
converted into 553,846 shares, 2,135,056 shares and 178,318 shares of our common
stock, respectively. In addition, all accrued outstanding 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 stock certificates for Series A
convertible preferred stock and Series C convertible preferred stock for
conversion into shares of common stock.

OPTIONS AND WARRANTS

As of January 29, 2001, there were options and warrants outstanding to
purchase 3,266,650 shares of common stock at exercise prices ranging from $1.00
to $16.00 per share with a weighted average exercise price per share of $5.18.
Upon the assumption that warrant holders exercise all of their warrants, there
will be options and warrants outstanding to purchase 2,925,470 shares of common
stock. These options and warrants are exercisable at various times through the
third anniversary date of this offering. We will not grant any options or
warrants to purchase common stock at an exercise price of less than 85% of the
fair market value of our common stock on the date of grant.

REGISTRATION RIGHTS

In conjunction with our July 1996 through March 1997 notes offering, we
distributed offering documents that contained a statement that made reference to
demand and piggy-back registration rights for the shares of common stock
underlying the warrants granted in the offering. These purported registration
rights apply to 341,180 shares of common stock. Although we believe that there
are sufficient grounds to deny such registration rights, we have agreed to
register the shares of common stock underlying these warrants pursuant to this
registration statement on behalf of warrant holders.

Pursuant to our April 1997 through December 1997 units offering, we
granted registration rights to the purchasers of units where such purchasers
possessed the right to demand registration and piggy-back registration for the
shares of common stock purchased. These registration rights apply to 372,375
shares of common stock. We have not solicited or obtained waivers from the
holders of these registration rights with respect to our initial public offering
or this offering since the shares were purchased over two years ago and are
freely tradable pursuant to Rule 144(k) of the Securities Act.

Pursuant to our January 1998 through March 1998 common stock offering,
we granted purchasers of common stock the right to piggy-back the registration
of their shares onto a future registration statement of eRoomSystem Technologies
for a public offering. The determination of whether the shares of common stock
purchased by these investors will be included in a future registration statement
will be dependent upon the underwriter or underwriters for the public offering,
as the underwriter or underwriters would have final discretion as to which
shares of common stock will be registered. We have not solicited or obtained
waivers from the holders of these registration rights with respect to our
initial public offering since the shares were purchased over two years ago and
are freely tradable pursuant to Rule 144(k) of the Securities Act.

Pursuant to an offshore subscription agreement dated as of April 13,
2000, we granted registration rights for the 200,000 shares of common stock
issued to the selling stockholders in connection with the bridge loan. In
accordance with these registration rights, these shares of common stock have
been registered pursuant to this registration statement. In addition, we have
agreed to have a registration statement for these shares declared effective
within 180 days of the closing of our initial public offering. The selling
stockholders are prohibited from selling their shares of common stock until 180
days after the closing of our initial public offering, or for a longer

-51-

period as required by the National Association of Securities Dealers, Inc. or
the Nasdaq Stock Market not to exceed one year.

On March 24, 2000, we entered into an agreement with an agency to
provide us with advertising, marketing and promotional services and materials.
As part of our fee, we granted to the agency warrants to purchase 125,000 shares
of our common stock at an exercise price of $4.50 per share and the one-time
right, beginning on August 2, 2001, to have the shares of common stock
underlying the warrant registered pursuant to the Securities Act.

On August 2, 2000, in connection with our initial public offering,
we issued to our underwriters, for nominal consideration, warrants to
purchase up to an aggregate of 180,000 shares of common stock at an exercise
price of $7.80 per share. The warrants are exercisable for a period of four
years beginning on August 2, 2001. In addition, we granted to our
underwriters the right, beginning on August 2, 2001, to have the shares of
common stock underlying the warrants registered pursuant to the Securities
Act either through a one-time demand registration right or piggy-back
registration rights. These rights include the right to require us to register
these shares for a four year period and the right to include these shares for
a six year period in a registration statement filed by us.

2000 REVERSE STOCK SPLIT

On March 29, 2000, our board and a majority of our stockholders
approved by written consent our three-for-four reverse stock split. This reverse
stock split affected all shares of common stock outstanding and underlying our
options and warrants, but did not affect the previously outstanding shares of
Series A, Series B and Series C convertible preferred stock.

NEVADA LAW, OUR ARTICLES OF INCORPORATION AND BYLAWS

Some of the provisions of our articles of incorporation and bylaws may
have the effect of discouraging some types of transactions that involve an
actual or threatened change of control of eRoomSystem Technologies, which in
turn could limit your ability to sell your shares at a premium. Some of these
provisions are summarized below.

SIZE OF BOARD AND ELECTION OF DIRECTORS. Our articles of incorporation
and bylaws, when read together, provide for a minimum of two and a maximum of
nine persons to serve on the board. However, the number of directors may be
increased or decreased by a resolution adopted by the affirmative vote of a
majority of the board. Removal of a director requires two-thirds vote of the
outstanding shares of our common stock.

STOCKHOLDER NOMINATIONS AND PROPOSALS. Our bylaws provide for advance
notice requirements for stockholder nominations and proposals at annual meetings
of our stockholders. Stockholders may nominate directors or submit other
proposals only upon written notice to eRoomSystem Technologies not less than 120
days nor more than 150 days prior to the anniversary of the date of the notice
to stockholders of the previous year's annual meeting. A stockholder's notice
also must contain additional information, as specified in the bylaws. The board
may reject proposals that are not made in accordance with the procedures
contained in the bylaws or that are not properly the subject of stockholder
action.

CALLING SPECIAL STOCKHOLDER MEETINGS; STOCKHOLDER ACTION WITHOUT A
MEETING. Matters to be acted upon by the stockholders at special meetings are
limited to those specified in the notice of the meeting. A special meeting of
stockholders may be called by the board, the Chairman or the president of
eRoomSystem Technologies by resolution of the board or at the request in writing
of stockholders holding at least 10% of the outstanding shares entitled to vote
at the special meeting. As allowed by Nevada law, the bylaws provide that any
action by written consent of stockholders in lieu of a meeting must be signed by
the holders of at least a majority of the voting power.

PREFERRED STOCK. We are authorized to issue 5,000,000 shares of
undesignated preferred stock, commonly referred to as "blank check" preferred
stock. None of the undesignated preferred stock is issued or outstanding, and we
have no present plans to issue shares of undesignated preferred stock. Our board
is empowered to issue one or more series of undesignated preferred stock with
such rights, preferences, restrictions and privileges as may be fixed by our
board, without further action by our stockholders. The issuance of the
undesignated preferred stock could

-52-

adversely affect the rights, including voting rights, of the holders of our
common stock and could impede an attempted takeover of us.

NEVADA ANTI-TAKEOVER STATUTES. Nevada law provides that an acquiring
person who acquires a controlling interest in a Nevada corporation may only
exercise voting rights on any control shares if those voting rights are
conferred by a majority vote of the corporation's disinterested stockholders at
a special meeting held upon the request of the acquiring person. If the
acquiring person is accorded full voting rights and acquires control shares with
at least a majority of all the voting power, any of our stockholders who did not
vote in favor of authorizing voting rights for the control shares, are entitled
to payment for the fair value of his shares. A "controlling interest" is an
interest that is sufficient to enable the acquiring person to exercise at least
one-fifth of the voting power of the corporation in the election of directors.
"Control shares" are outstanding voting shares that an acquiring person or
associated persons acquire or offer to acquire in an acquisition and those
shares acquired during the 90-day period before the person involved became an
acquiring person.

In addition, Nevada law restricts the ability of a corporation to
engage in any combination with an interested stockholder for three years from
when the interested stockholder acquires shares that cause the stockholder to
become an interested stockholder, unless the combination or the purchase of
shares by the interested stockholder is approved by the board before the
stockholder became an interested stockholder. If the combination was not
previously approved, the interested stockholder may only effect a combination
after the three-year period, if the stockholder receives approval from a
majority of the disinterested shares or the offer meets the fair price criteria.

An "interested stockholder" is a person who is:

- the beneficial owner, directly or indirectly, of 10% or more
of the voting power of the outstanding voting shares of a
corporation; or

- an affiliate or associate of a corporation and, at any time
within three years immediately before the date in question,
was the beneficial owner, directly or indirectly, of 10% or
more of the voting power of the then outstanding shares of a
corporation.

These provisions are intended to enhance the likelihood of continuity
and stability in the composition of the board and in the policies formulated by
the board and to discourage some types of transactions that may involve actual
or threatened change of control of our company. These provisions are designed to
reduce our vulnerability to an unsolicited proposal for a takeover that does not
contemplate the acquisition of all of our outstanding shares or an unsolicited
proposal for the potential restructuring or sale of all or a part of our
company. However, these provisions could discourage potential acquisition
proposals and could delay or prevent a change in control of our company. These
provisions may also have the effect of preventing changes in our management.

As a result of the potential adverse effects of these provisions on our
stockholders, on July 11, 2000, our board approved the second amendment and
restatement of our articles of incorporation whereby eRoomSystem Technologies
elected not to be governed by the Nevada laws relating to an acquisition of a
controlling interest in a Nevada corporation and a business combination with an
interested stockholder. On July 12, 2000, our stockholders approved this second
amendment and restatement of our articles of incorporation. Under Nevada law,
the amendment to our articles of incorporation is not effective until 18 months
after July 12, 2000 and will not apply to any combination of eRoomSystem
Technologies with an interested stockholder whose date of acquiring our shares
is on or before July 12, 2000.

TRANSFER AGENT

Our transfer agent is American Stock Transfer and Trust Company. Its
address is 40 Wall Street, New York, New York 10005, and its telephone number is
(718) 921-8360.

-53-

SHARES ELIGIBLE FOR FUTURE SALE

Prior to our initial public offering, there had been no market for our
common stock. As of January 29, 2001, there were 7,051,019 shares of common
stock outstanding. Pursuant to this offering and upon the assumption that all
shares of common stock registered are sold, there will be 7,392,199 shares of
common stock outstanding. Of this amount, 541,180 shares are freely tradeable
pursuant to this offering and another 1,800,000 shares are freely tradeable
pursuant to our initial public offering, unless purchased by our "affiliates" as
that term is defined in Rule 144 under the Securities Act. In general,
affiliates include officers, directors and/or 10% stockholders.

The balance of 5,051,019 shares outstanding are "restricted securities"
within the meaning of Rule 144. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144 or 144(k) promulgated under the Securities Act, which are
summarized below. Sales of the restricted securities in the public market, or
the availability of such shares for sale, could adversely affect the market
price of the common stock.

Our directors, officers and selected stockholders entered into lock-up
agreements in connection with our initial public offering generally providing
that, without first obtaining the written consent of the underwriter
representative:

- they will not offer or sell any of our common stock owned by them
during the first 18 months following the closing of our initial
public offering;

- they will not offer or sell more than 10% of our common stock
owned by them in any of the next two consecutive calendar quarters
after the initial 18-month period; and

- they will not offer or sell more than the lesser of 25% of our
outstanding common stock owned by them or the number of shares
which may be sold pursuant to the volume limitation of Rule 144(e)
under the Securities Act, in any of the next four calendar
quarters thereafter.

These stockholders also agreed that, during the four-year period from the
closing of our initial public offering, they will not sell shares of our common
stock in excess of the volume limitations of Rule 144(e) even though Rule 144(k)
may be available. The underwriter representative may elect to release such
stockholders from their respective lock-up agreements if, in the sole discretion
of the underwriter representative, the sales of common stock will not disrupt an
orderly market for our common stock. In addition, our officers and directors
entered into an additional lock-up agreement where they will not sell any of our
common stock owned by them during the two-year period after the close of our
initial public offering and offer or sell more than 2.5% of our common stock
owned by them in any of the next eight consecutive calendar quarters after the
initial two-year period.

Taking into account the lock-up agreements, and assuming the
underwriter representative does not release stockholders from these agreements,
the following shares will be eligible for sale in the public market at the
following times:

- Beginning on the date of this prospectus, all 541,180 shares
registered in this offering, all 1,800,000 shares sold in our
initial public offering and up to 1,397,719 shares pursuant to
Rule 144(k) will be immediately available for sale in the public
market.

- On February 2, 2001, a six-month lock-up will expire and will
result in 770,687 shares of common stock being immediately
available for sale in the public market pursuant to Rule 144(k),
and 233,865 shares of common stock will be eligible for sale in
the public market, subject to volume limitations, as explained
below, pursuant to Rule 144.

- On May 2, 2001, a nine-month lock-up will expire with respect to
1,389,792 shares of common stock, all shares of which will be
eligible for sale in the public market, subject to volume
limitations, pursuant to Rule 144.

-54-

- On August 2, 2001, a twelve-month lock-up will expire with respect
to 178,318 shares of common stock, all shares of which will be
eligible for sale in the public market, subject to volume
limitations, pursuant to Rule 144.

In general, under Rule 144 as currently in effect, after the expiration
of the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:

- one percent of the number of shares of common stock then
outstanding which will equal approximately 73,921 shares
immediately after this offering; or

- the average weekly trading volume of the common stock during the
four calendar weeks preceding the sale.

Sales under Rule 144 are also subject to requirements with respect to
manner of sale, notice, and the availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have been our affiliate
during the three months preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, is entitled to sell these
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.

Rule 701, as currently in effect, permits our employees, officers,
directors or consultants who purchased shares pursuant to a written compensatory
plan or contract to resell these shares in reliance upon Rule 144 but without
compliance with specific restrictions. Rule 701 provides that affiliates may
sell their Rule 701 shares under Rule 144 without complying with the holding
period requirement and that non-affiliates may sell these shares in reliance on
Rule 144 without complying with the holding period, public information, volume
limitation or notice provisions of Rule 144.

In addition, we intend to file a registration statement on Form S-8
under the Securities Act to register shares to be issued pursuant to our
employee benefit plans. As a result, any options or rights exercised under our
stock option plan will also be freely tradable in the public market. However,
shares held by affiliates will be subject to lock-up agreements and the volume
limitation, manner of sale, notice and public information requirements of Rule
144 unless otherwise resaleable under Rule 701. As of January 29, 2001, assuming
the exercise of all of the warrants to purchase 341,180 shares of common stock
registered pursuant to this offering, there were outstanding options and
warrants for the purchase of 2,925,470 shares of common stock, of which
2,385,858 shares were vested and exercisable.

-55-

LEGAL MATTERS

Kummer Kaempfer Bonner & Renshaw, Las Vegas, Nevada, will pass upon the
validity of the shares of common stock being registered under this prospectus
for us.

EXPERTS

The consolidated balance sheets as of December 31, 1998 and 1999, and
the consolidated statements of operations, stockholders' equity (deficit), and
cash flows for the years then ended have been included in this prospectus in
reliance on the report of Hansen, Barnett & Maxwell, Salt Lake City, Utah,
independent certified public accountants, given on the authority of that firm as
experts in accounting and auditing.

CHANGE IN ACCOUNTANTS

In September 1999, we engaged the firm of Arthur Andersen LLP to audit
our financial statements for the fiscal years ended December 31, 1998 and 1999.
On March 31, 2000, we received a letter in which Arthur Andersen resigned as our
independent auditors due to its determination that its independence had been
impaired. Arthur Andersen did not issue a report for our financial statements
for the last two fiscal years. The resignation of Arthur Andersen was not based
upon a disagreement on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure while Arthur
Andersen was engaged by us. On April 4, 2000, our board approved the retention
of Hansen, Barnett & Maxwell as our independent auditors.

AVAILABLE INFORMATION

We have filed with the Commission a registration statement on Form SB-2
under the Securities Act with respect to the shares of common stock registered
on behalf of selling stockholders and warrant holders. This prospectus, filed as
part of the registration statement, does not contain all of the information set
forth in the registration statement and its exhibits, portions of which have
been omitted as permitted by the rules and regulations of the Commission. For
further information about us and the common stock, we refer you to the
registration statement and to its exhibits. Statements in this prospectus about
the contents of any contract, agreement or other document are not necessarily
complete and, in each instance, we refer you to the copy of such contract,
agreement or document filed as an exhibit to the registration statement, and
each such statement being qualified in all respects by reference to the document
to which it refers. Anyone may inspect the registration statement and its
exhibits without charge at the public reference facilities the Commission
maintains at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at 7 World Trade Center, Suite 1300, New York,
New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois,
60661. You may obtain copies of all or any part of these materials from the
Commission upon the payment of the fees prescribed by the Commission. You may
also inspect these reports and other information without charge at a website
maintained by the Commission. The address of this site is http://www.sec.gov.
You may also obtain information on the operation of the public reference
facilities of the Commission at 1-800-732-0330.

We are subject to the informational requirements of the Exchange Act
and are required to file reports, proxy statements and other information with
the Commission. You will be able to inspect and copy these reports, proxy
statements and other information at the public reference facilities maintained
by the Commission and at the Commission's regional offices at the addresses
noted above. You also will be able to obtain copies of this material from the
Public Reference Section of the Commission as described above, or inspect them
without charge at the Commission's website. Since we have received approval for
quotation on the Nasdaq SmallCap Market, then you will be able to inspect
reports, proxy and information statements and other information concerning us at
the National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington, D.C. 20006.

-56-

EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Certified Public Accountants.......................F-2

Consolidated Balance Sheets..............................................F-3

Consolidated Statements of Operations....................................F-5

Consolidated Statements of Stockholders' Equity (Deficit)................F-6

Consolidated Statements of Cash Flows...................................F-11

Notes to Consolidated Financial Statements..............................F-13

F-1

HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS

Member of AICPA Division of Firms (801) 532-2200
Member of SECPS Fax (801) 532-7944
Member of Summit International Associates, Inc. 345 East Broadway, Suite 200
Salt Lake City, Utah 84111-2693
www.hbmcpas.com

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, 1998
and 1999, 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 generally accepted auditing
standards. 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, 1998 and 1999, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.

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
(excluding non-cash compensation expense (income)) and as of December 31, 1999
had a working capital deficit of $2,650,616, a stockholders' deficit of $23,852,
and was in default under certain debt agreements. During the years ended
December 31, 1998 and 1999, the Company's operations used $2,931,871 and
$2,304,807 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
April 13, 2000, except for the third paragraph
of Note 1, as to which the date is June 2, 2000

F-2

EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

ASSETS

December 31,
-------------------------------- September 30,
1998 1999 2000
-------------- ------------- ---------------
(Unaudited)

CURRENT ASSETS:
Cash..................................................... $ 1,850 $ 113,252 $ 5,427,460
Accounts receivable, net of allowance for doubtful
accounts of $3,900, $15,000 and $15,000 (unaudited),
respectively........................................... 35,655 40,213 233,016
Inventories.............................................. 1,488,354 697,033 864,942
Prepaid expenses and other............................... 1,250 6,250 188,915
-------------- ------------- --------------

Total Current Assets........................ 1,527,109 856,748 6,714,333
-------------- ------------- --------------
-------------- ------------- --------------
Refreshment Centers in Service, net of accumulated
depreciation of $3,895, $3,858 and $75,966 (unaudited),
respectively............................................. 362,266 169,791 1,559,306
-------------- ------------- --------------

PROPERTY AND EQUIPMENT:
Production equipment..................................... 138,908 138,908 201,165
Computer equipment....................................... 130,951 171,666 198,648
Vehicles and other....................................... 76,857 76,857 60,777
-------------- ------------- --------------
346,716 387,431 460,590
Less accumulated depreciation and amortization........... (203,381) (264,946) (302,368)
-------------- ------------- --------------

Net Property and Equipment.................. 143,335 122,485 158,222
-------------- ------------- --------------

INVESTMENT IN WHOLLY OWNED, UNCONSOLIDATED SUBSIDIARY....... -- 2,535,976 894,858
-------------- ------------- --------------

OTHER ASSETS:
Patents and license rights, net of accumulated
amortization of $155,211, $222,710 and $273,334
(unaudited), respectively............................ 317,279 249,780 199,156
Deferred offering and financing costs, net of
accumulated amortization of $749,457, $0 and $0
(unaudited), respectively............................ 884 88,000 --
Deposits and other..................................... 169,416 327,851 164,888
-------------- ------------- --------------

Total Other Assets.......................... 487,579 665,631 364,044
-------------- ------------- --------------

Total Assets................................................ $ 2,520,289 $ 4,350,631 $ 9,690,763
============== ============= ==============

See accompanying notes to consolidated financial statements.

F-3

EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (CONTINUED)

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

December 31,
-------------------------------------- September 30,
1998 1999 2000
------------------ ------------------ ------------------
(Unaudited)

CURRENT LIABILITIES
Notes payable and current portion of long-term debt, net
of discount of $0, $0 and $13,581, respectively.......... $ 2,872,570 $ 1,560,458 $ 425,464
Notes payable to stockholder............................... 145,750 -- --
Current portion of capital lease obligations............... 13,212 22,061 26,841
Accounts payable........................................... 1,186,995 987,013 752,555
Accrued liabilities........................................ 240,475 332,835 406,852
Accrued interest........................................... 293,024 290,117 109,469
Customer deposits.......................................... 51,010 93,470 94,258
Deferred maintenance revenue............................... 63,875 58,868 73,467
Preferred stock dividends payable.......................... 18,541 162,542 112,608
------------------ ------------------ ------------------
Total Current Liabilities.............................. 4,885,452 3,507,364 2,001,514
------------------ ------------------ ------------------
------------------ ------------------
LONG-TERM LIABILITIES
Long-Term Debt, net of current portion..................... 11,719 812,022 3,361
------------------ ------------------ ------------------
Capital Lease Obligations, net of current portion.......... 51,223 55,097 33,166
------------------ ------------------ ------------------
Total Long-Term Liabilities............................ 62,942 867,119 36,527
------------------ ------------------ ------------------
------------------ ------------------ ------------------
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, 1998 and 1999 and no shares outstanding at
September 30, 2000 (unaudited)........................... 1,332,953 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 September 30, 2000 (unaudited)............ -- 6,171,196 --
Series C convertible preferred stock, $0.001 par value;
2,000,000 shares authorized, no shares outstanding at
September 30, 2000 (unaudited)...........................
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; 3,531,311 shares, 2,217,291 shares and
7,051,019 shares (unaudited) outstanding at December 31, 1998
and 1999 and September 30, 2000, respectively............ 3,532 2,218 7,051
Additional paid-in capital................................. 8,670,586 6,265,284 28,554,445
Warrants and options outstanding........................... 1,043,362 728,538 2,029,518
Notes receivable from stockholders......................... (4,073,941) (840,000) --
Accumulated deficit........................................ (9,404,597) (13,684,041) (22,938,292)
------------------ ------------------ ------------------
Total Stockholders' Deficit............................ (2,428,105) (23,852) 7,652,722
------------------ ------------------ ------------------
================== ================== ==================
Total Liabilities and Stockholders' Equity (Deficit).......... $ 2,520,289 $ 4,350,631 $ 9,690,763
================== ================== ==================

See accompanying notes to consolidated financial statements.

F-4

EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, Nine Months Ended September 30,
---------------------------------- ----------------------------------
1998 1999 1999 2000
--------------- ---------------- --------------- ---------------
(Unaudited)

REVENUE:
Product sales.................................. $ 916,650 $ 144,282 $ 32,374 $ 2,012,788
Revenue sharing arrangements................... 46,524 213,654 260,422 155,156
Maintenance fees............................... 48,288 182,581 222,303 110,400
--------------- ---------------- ---------------- ---------------
Total Revenue.............................. 1,011,462 540,517 515,099 2,278,344
--------------- ---------------- ---------------- ---------------
COST OF REVENUE:
Product sales.................................. 711,355 118,010 26,479 1,468,891
Revenue sharing arrangements................... 21,104 165,995 143,245 36,136
Maintenance.................................... 60,797 78,518 95,590 74,762
--------------- ---------------- ---------------- ---------------
Total Cost of Revenue...................... 793,256 362,523 265,314 1,579,789
--------------- ---------------- ---------------- ---------------
Gross Margin...................................... 218,206 177,994 249,785 698,555
--------------- ---------------- ---------------- ---------------
OPERATING EXPENSES:
Selling, general and administrative (including
non-cash compensation expense of $3,955,
$105,005, $0 and $552,351, respectively)..... 2,062,105 2,492,816 1,252,404 2,570,271
Research and development....................... 284,532 271,230 206,530 187,932
--------------- ---------------- ---------------- ---------------
Total Operating Expenses................... 2,346,637 2,764,046 1,458,934 2,758,203
--------------- ---------------- ---------------- ---------------
Loss From Operations.............................. (2,128,431) (2,586,052) (1,209,149) (2,059,648)
--------------- ---------------- ---------------- ---------------
OTHER INCOME (EXPENSE):
Interest expense............................... (1,922,638) (1,444,532) (1,157,823) (1,313,011)
Write-off of note receivable from stockholder.. -- -- -- (390,000)
Equity in income of unconsolidated, wholly
owned subsidiary............................. -- 147,615 -- 29,998
Interest and other income...................... 312,573 210,794 200,930 82,340
--------------- ---------------- ---------------- ---------------
Other Expense, Net......................... (1,610,065) (1,086,123) (956,893) (1,590,673)
--------------- ---------------- ---------------- ---------------
Loss Before Extraordinary Loss on Extinguishment
of Debt........................................ (3,738,496) (3,672,175) (2,166,042) (3,650,321)
Extraordinary Loss on Extinguishment of Debt, net
of income tax benefit of $0.................... (407,000) -- -- --
--------------- ---------------- ---------------- ---------------
Net Loss.......................................... (4,145,496) (3,672,175) (2,166,042) (3,650,321)
Dividends Related to Convertible Preferred Stock.. (18,541) (607,269) (153,975) (5,603,930)
--------------- ---------------- ---------------- ---------------
Loss Attributable to Common Stockholders.......... $ (4,164,037) $ (4,279,444) $ (2,320,017) $ (9,254,251)
=============== ================ ================ ===============

Basic and Diluted Extraordinary Loss Per Common
Share.......................................... $ (0.13) $ -- $ -- $ --
=============== ================ ================ ===============
Basic and Diluted Loss Per Common Share........... $ (1.37) $ (1.33) $ (0.65) $ (2.93)
=============== ================ ================ ===============
Basic and Diluted Weighted Average Common Shares
Outstanding.................................... 3,028,982 3,220,709 3,587,563 3,159,200
=============== ================ ================ ===============

See accompanying notes to consolidated financial statements.
F-5

EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)

Series A Convertible
Preferred Stock Common Stock Additional Warrants And
------------------------ ------------------------- Paid-in Options
Shares Amount Shares Amount Capital Outstanding
------------------------------------------------------------------------------------

Balance, December 31, 1997.............. -- $ -- 3,285,733 $ 3,286 $ 6,910,699 $ 225,904

Issuance of Series A convertible
preferred stock upon conversion of
1996 Notes at $5.00 per share, net
and issuance of common stock and
warrants to placement agent........... 360,000 1,332,953 13,125 13 139,987 17,479

Issuance of common stock in connection
with conversion of 1996 Notes into
Series A convertible preferred stock.. -- -- 38,156 38 406,962 --

Issuance of common stock for cash at
$10.67 per share, net and issuance of
warrants to placement agent........... -- -- 40,688 41 371,644 18,358

Issuance of common stock in connection
with conversion of 60-day convertible
notes and1996 notes................... -- -- 84,661 85 841,179 --

Stock dividend issued to placement
agent in connection with
anti-dilution rights.................. -- -- 68,948 69 115 --

Issuance of warrants in connection with
financing transactions................ -- -- -- -- -- 777,666

Issuance of stock options to a
consultant for services............... -- -- -- -- -- 3,955

Accrual of interest on notes receivable
from stockholders..................... -- -- -- -- -- --

Series A convertible preferred stock
dividend accrual...................... -- -- -- -- -- --

Net loss................................ -- -- -- -- -- --
-----------------------------------------------------------------------------------

Balance, December 31, 1998.............. 360,000 $1,332,953 3,531,311 $ 3,532 $ 8,670,586 $ 1,043,362
===================================================================================

Notes
Receivable From Accumulated
Shareholders Deficit Total
-------------------------------------------------

Balance, December 31, 1997.............. $ (3,799,250) $(5,240,376) $(1,899,737)

Issuance of Series A convertible
preferred stock upon conversion of
1996 Notes at $5.00 per share, net
and issuance of common stock and
warrants to placement agent........... -- -- 1,490,432

Issuance of common stock in connection
with conversion of 1996 Notes into
Series A convertible preferred stock.. -- -- 407,000

Issuance of common stock for cash at
$10.67 per share, net and issuance of
warrants to placement agent........... -- -- 390,043

Issuance of common stock in connection
with conversion of 60-day convertible
notes and1996 notes................... -- -- 841,264

Stock dividend issued to placement
agent in connection with
anti-dilution rights.................. -- (184) --

Issuance of warrants in connection with
financing transactions................ -- -- 777,666

Issuance of stock options to a
consultant for services............... -- -- 3,955

Accrual of interest on notes receivable
from stockholders..................... (274,691) -- (274,691)

Series A convertible preferred stock
dividend accrual...................... -- (18,541) (18,541)

Net loss................................ -- (4,145,496) (4,145,496)
-------------------------------------------------

Balance, December 31, 1998.............. $ (4,073,941) $(9,404,597) $(2,428,105)
==================================================

See accompanying notes to consolidated financial statements.
F-6

EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED) (CONTINUED)

Series A Convertible Series B Convertible
Preferred Stock Preferred Stock Common Stock Additional
------------------------ ------------------------ ------------------------- Paid-in
Shares Amount Shares Amount Shares Amount Capital
----------------------------------------------------------------------------------------

Balance, December 31, 1998............. 360,000 $1,332,953 -- $ -- 3,531,311 $ 3,532 $8,670,586

Issuance of Series B convertible
preferred stock for cash and
conversion of notes at $3.00 per
share, net........................... -- -- 2,081,680 5,849,826 -- -- --

Issuance of common stock to entity
controlled by the Company's
president in exchange for note
receivable........................... -- -- -- -- 198,750 199 1,589,801

Return of common stock from entity
controlled by the Company's president.... -- -- -- -- (198,750) (199) (1,589,801)

Issuance of common stock for interest
in connection with conversion of
notes payable to stockholders at
$3.20 per share...................... -- -- -- -- 83,500 84 264,398

Issuance of common stock for interest
in connection with 90-day
convertible notes at $3.20 per share.... -- -- -- -- 41,410 41 121,566

Issuance of common stock for services
at $3.20 per share and issuance of
stock options........................ -- -- -- -- 3,134 3 5,962

Issuance of warrants in connection
with financing transactions.......... -- -- -- -- -- -- --

Return of warrants in connection with
troubled debt restructuring.......... -- -- -- -- -- -- --

Accrual of interest on notes
receivable from stockholders......... -- -- -- -- -- -- --

Series A convertible preferred stock
dividend accrual..................... -- -- -- -- -- -- --

Series B convertible preferred stock
dividend accrual payable in the form
of common stock...................... -- -- -- -- 28,936 29 141,870

Series B convertible preferred stock
beneficial conversion dividend....... -- -- -- 321,370 -- -- --

Warrants Notes
And Receivable
Options From Accumulated
Outstanding Shareholders Deficit Total
---------------------------------------------------

Balance, December 31, 1998............. $1,043,362 $(4,073,941) $(9,404,597) $(2,428,105)

Issuance of Series B convertible
preferred stock for cash and
conversion of notes at $3.00 per
share, net........................... -- -- -- 5,849,826

Issuance of common stock to entity
controlled by the Company's
president in exchange for note
receivable........................... -- (1,590,000) -- --

Return of common stock from entity
controlled by the Company's president... -- 1,590,000 -- --

Issuance of common stock for interest
in connection with conversion of
notes payable to stockholders at
$3.20 per share...................... -- -- -- 264,482

Issuance of common stock for interest
in connection with 90-day
convertible notes at $3.20 per share.... -- -- -- 121,607

Issuance of common stock for services
at $3.20 per share and issuance of
stock options........................ 99,040 -- -- 105,005

Issuance of warrants in connection
with financing transactions.......... 92,830 -- -- 92,830

Return of warrants in connection with
troubled debt restructuring.......... (506,694) -- -- (506,694)

Accrual of interest on notes
receivable from stockholders......... -- (235,951) -- (235,951)

Series A convertible preferred stock
dividend accrual..................... -- -- (144,000) (144,000)

Series B convertible preferred stock
dividend accrual payable in the form
of common stock...................... -- -- (141,899) --

Series B convertible preferred stock
beneficial conversion dividend....... -- -- (321,370) --

See accompanying notes to consolidated financial statements.

F-7

EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)

Return of common stock as payment of
shareholder notes receivable ........ -- -- -- -- (1,471,000) (1,471) (2,939,098)

Reserve for shareholder notes
receivable........................... -- -- -- -- -- -- --

Net loss............................... -- -- -- -- -- -- --
----------- ------------ ------------ ----------- ------------ ------------ ------------

Balance, December 31, 1999............. 360,000 $1,332,953 2,081,680 $6,171,196 2,217,291 $ 2,218 $6,265,284
=======================================================================================

Warrants Notes
And Receivable
Options From Accumulated
Outstanding Shareholders Deficit Total
----------- ------------ ------------- -----------

Return of common stock as payment of
shareholder notes receivable ........ -- 2,940,569 -- --

Reserve for shareholder notes
receivable........................... -- 529,323 -- 529,323

Net loss............................... -- -- (3,672,175) (3,672,175)
---------------------------------------------------

Balance, December 31, 1999............. $ 728,538 $ (840,000) $(13,684,041) $ (23,852)
==================================================

See accompanying notes to consolidated financial statements.

F-8

EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED) (CONTINUED)

Series A Convertible Series B Convertible
Preferred Stock Preferred Stock
------------------------------- ------------------------------
Shares Amount Shares Amount
------------- ------------- ------------- -------------

Balance, December 31, 1999.............. 360,000 $ 1,332,953 2,081,680 $ 6,171,196
Issuance of common stock in connection
with 90-day convertible notes, the
2000 Bridge loan and shareholders
notes payable at $3.20 per share
(unaudited).......................... -- -- -- --
Issuance of common stock for services
at $3.20 per share (unaudited)....... -- -- -- --
Series B convertible preferred stock
dividend accrual payable in the form
of common stock, net (unaudited)..... -- -- -- --
Series A convertible preferred stock
beneficial conversion dividend
(unaudited) ......................... -- 1,800,000 -- --
Series B convertible preferred stock
beneficial conversion dividend
(unaudited).......................... -- -- -- 3,425,654
Return of common stock as a result of a
default on a note receivable from
shareholder (unaudited).............. -- -- -- --
Write-down of note receivable from
shareholder (unaudited) ............. -- -- -- --
Issuance of Series C convertible
preferred stock and 42,500 warrants
for cash at $2.83 per share
(unaudited).......................... -- -- -- --
Issuance of common stock and 180,000
warrants for cash (unaudited) ....... -- -- -- --
Conversion of Series A preferred stock
into common stock (unaudited) ....... (360,000) (3,132,953) -- --
Conversion of Series B preferred stock
into common stock (unaudited) ....... -- -- (2,081,680) (9,596,850)
Conversion of Series C preferred stock
into common stock (unaudited) ....... -- -- -- --
Issuance of warrants related to
advertising agreement, financing
activities, and consulting services
(unaudited).......................... -- -- -- --
Shares issued under anti-dilution
agreement (unaudited) ............... -- -- -- --
Series A convertible preferred stock
dividend accrual (unaudited)......... -- -- -- --
Series C convertible preferred stock
dividend accrual (unaudited) ........ -- -- -- --
Net loss (unaudited).................... -- -- -- --
------------- ------------- ------------- -------------

Balance, September 30, 2000 (Unaudited). -- $ -- -- $ --
============= ============= ============= =============

Series C Convertible
Preferred Stock Common Stock
------------------------------ ------------------------------
Shares Amount Shares Amount
------------- ------------- ------------- -------------

Balance, December 31, 1999.............. -- $ -- 2,217,291 $ 2,218
Issuance of common stock in connection
with 90-day convertible notes, the
2000 Bridge loan and shareholders
notes payable at $3.20 per share
(unaudited).......................... -- -- 225,957 226
Issuance of common stock for services
at $3.20 per share (unaudited)....... -- -- 777 1
Series B convertible preferred stock
dividend accrual payable in the form
of common stock, net (unaudited)..... -- -- 68,169 68
Series A convertible preferred stock
beneficial conversion dividend
(unaudited) ......................... -- -- -- --
Series B convertible preferred stock
beneficial conversion dividend
(unaudited).......................... -- -- -- --
Return of common stock as a result of a
default on a note receivable from
shareholder (unaudited).............. -- -- (140,625) (141)
Write-down of note receivable from
shareholder (unaudited) ............. -- -- -- --
Issuance of Series C convertible
preferred stock and 42,500 warrants
for cash at $2.83 per share
(unaudited).......................... 196,150 535,986 -- --
Issuance of common stock and 180,000
warrants for cash (unaudited) ....... -- -- 1,800,000 1,800
Conversion of Series A preferred stock
into common stock (unaudited) ....... -- -- 553,846 554
Conversion of Series B preferred stock
into common stock (unaudited) ....... -- -- 2,135,056 2,135
Conversion of Series C preferred stock
into common stock (unaudited) ....... (196,150) (535,986) 178,318 178
Issuance of warrants related to
advertising agreement, financing
activities, and consulting services
(unaudited).......................... -- -- -- --
Shares issued under anti-dilution
agreement (unaudited) ............... -- -- 12,230 12
Series A convertible preferred stock
dividend accrual (unaudited)......... -- -- -- --
Series C convertible preferred stock
dividend accrual (unaudited) ........ -- -- -- --
Net loss (unaudited).................... -- -- -- --
------------- ------------- ------------- -------------

Balance, September 30, 2000 (Unaudited). -- $ -- 7,051,019 $ 7,051
============= ============= ============= =============

See accompanying notes to consolidated financial statements.

F-9

EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999 AND
FOR THE NINE MONTHS ENDED SEPTEMBER, 2000 (UNAUDITED) (CONTINUED)

Notes
Additional Warrants and Receivable
Paid- In Options From
Capital Outstanding Shareholders
------------ ------------- ------------

Balance, December 31, 1999................................................ $ 6,265,284 $ 728,538 $ (840,000)

Issuance of common stock in connection with 90-day convertible notes the
2000 Bridge loan and shareholder notes payable at $3.20 per share
(unaudited)............................................................ 527,427 -- --

Issuance of common stock for services (unaudited)......................... 2,484 -- --

Series B convertible preferred stock dividend accrual payable in the form
of common stock, net (unaudited)....................................... 275,609 -- --

Series A Convertible preferred stock beneficial conversion dividend
(unaudited)............................................................ -- -- --

Series B convertible preferred stock beneficial conversion dividend
(unaudited)............................................................ -- -- --

Return of common stock as a result of a default on a note receivable from
shareholder (unaudited)................................................ (449,859) -- 450,000

Write-down of note receivable from shareholder (unaudited)................ -- -- 390,000

Issuance of Series C convertible preferred stock and 42,500 warrants for
cash at $2.83 per share (unaudited).................................... 31,875 59,988 --

Issuance of common stock and 180,000 warrants for cash (unaudited) ....... 8,638,715 470,572 --

Conversion of Series A preferred stock into common stock (unaudited) ..... 3,132,399 -- --

Conversion of Series B preferred stock into common stock (unaudited) ..... 9,594,715 -- --

Conversion of Series C preferred stock into common stock (unaudited) ..... 535,808 -- --

Issuance of warrants related to advertising agreement, financing
activities, and consulting services (unaudited)....................... -- 770,420 --

Shares issued under anti-dilution agreement (unaudited) .................. (12) -- --

Series A convertible preferred stock dividend accrual (unaudited)......... -- -- --

Series C convertible preferred stock dividend accrual (unaudited) ........ -- -- --

Net loss (unaudited)...................................................... -- -- --
------------ ------------- ----
Balance, September 30, 2000 (Unaudited)................................... $ 28,554,445 $ 2,029,518 --
============ ============= ====

Accumulated
Deficit Total
------------- ------------

Balance, December 31, 1999................................................ $ (13,684,041) $ (23,852)

Issuance of common stock for services (unaudited)......................... -- 2,485

Series B convertible preferred stock dividend accrual payable in the form
of common stock, net (unaudited)....................................... (275,677) --

Series A Convertible preferred stock beneficial conversion dividend
(unaudited)............................................................ (1,800,000) --

Series B convertible preferred stock beneficial conversion dividend
(unaudited)............................................................ (3,425,654) --

Return of common stock as a result of a default on a note receivable from
shareholder (unaudited)................................................ -- --

Write-down of note receivable from shareholder (unaudited)................ -- 390,000

Issuance of Series C convertible preferred stock and 42,500 warrants for
cash at $2.83 per share (unaudited).................................... -- 627,849

Issuance of common stock and 180,000 warrants for cash (unaudited) ....... -- 9,111,087

Conversion of Series A preferred stock into common stock (unaudited) ..... -- --

Conversion of Series B preferred stock into common stock (unaudited) ..... -- --

Conversion of Series C preferred stock into common stock (unaudited) ..... -- --

Issuance of warrants related to advertising agreement, financing
activities, and consulting services (unaudited)....................... -- 770,420

Shares issued under anti-dilution agreement (unaudited) .................. -- --

Series A convertible preferred stock dividend accrual (unaudited)......... (87,583) (87,583)

Series C convertible preferred stock dividend accrual (unaudited) ........ (15,016) (15,016)

Net loss (unaudited)...................................................... (3,650,321) (3,650,321)
----------- ------------
Balance, September 30, 2000 (Unaudited)................................... (22,938,292) $ 7,652,722
=========== ============

See accompanying notes to consolidated financial statements.

F-10

EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, Nine Months Ended September 30,
----------------------------------- ---------------------------------
1998 1999 1999 2000
--------------- --------------- --------------- --------------
(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................... $ (4,145,496) $ (3,672,175) $ (2,166,042) $ (3,650,321)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization................ 134,617 292,877 241,279 140,748
Amortization of deferred offering and
financing costs and accretion of debt
discount................................... 560,921 35,997 12,534 500,530
Interest accrued on notes receivable from
stockholders............................... (274,691) (235,951) (198,186) --
Write-off of note receivable from stockholder -- 390,000
Non-cash compensation expense................ 3,955 105,005 5,954 503,676
Extraordinary loss related to debt
extinguishment............................. 407,000 -- -- --
Interest expense paid by issuance of common
stock, warrants, and stock options......... 813,409 478,919 403,484 221,186
Distributions in excess of (undistributed)
equity in income from unconsolidated
subsidiary................................. -- (46,242) -- 169,507
Reserve against stockholders notes receivable. -- 529,323 -- --
Amortization of deferred compensation........ 41,019 -- -- --
Changes in operating assets and liabilities, net of
transfers to unconsolidated subsidiary:
Accounts receivable.......................... 182,643 (4,558) (151,773) (192,803)
Inventories.................................. (808,192) 613,898 1,167,475 (160,345)
Prepaid expenses, deposits and other......... (108,099) (163,435) (112,011) 14,086
Accounts payable............................. 241,016 (97,689) (203,150) (165,460)
Accrued liabilities.......................... 114,984 (178,228) 429,039 (3,641)
Other liabilities............................ (94,957) 37,452 44,126 15,387
---------------- ----------------- ---------------- --------------
Net Cash Provided By (Used In) Operating
Activities............................... (2,931,871) (2,304,807) (527,271) (2,217,450)
---------------- ----------------- ---------------- --------------

CASH FLOWS FROM INVESTING ACTIVITIES
Additions to refreshment centers in service.... (246,161) (1,711,105) (1,866,238) (722,144)
Purchase of property and equipment............. (50,599) (12,239) (2,382) (84,029)
Cash investment in wholly owned,
unconsolidated subsidiary.................... -- (572,544) -- (166,621)
---------------- ----------------- ---------------- --------------
Net Cash Used In Investing Activities...... (296,760) (2,295,888) (1,868,620) (972,794)
---------------- ----------------- ---------------- --------------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings....................... 2,265,058 477,669 -- 2,164,169
Principal payments on notes payable............ (127,971) (400,789) -- (3,393,095)
Proceeds from issuance of notes payable to
officers and stockholders.................... -- 299,195 504,806 --
Principal payments on notes payable to
stockholder and officer...................... (12,500) -- (371,730) --
Principal payments on capital lease obligations
Other offering and financing costs paid........ (9,190) (15,753) (24,134) (17,151)
Proceeds from issuance of common stock......... (204,843) (88,000) -- --
Proceeds from issuance of preferred stock and 390,043 -- -- 9,217,231
warrants..................................... 600,275 4,439,775 2,391,755 685,831
Payment of dividends........................... -- -- -- (152,533)
---------------- ----------------- ---------------- --------------
Net Cash Provided By Financing Activities.. 2,900,872 4,712,097 2,500,697 8,504,452
---------------- ----------------- ---------------- --------------
Net Increase (Decrease) In Cash.................... (327,759) 111,402 104,806 5,314,208
Cash At Beginning of Year.......................... 329,609 1,850 1,850 113,252
---------------- ----------------- ---------------- --------------

Cash At End Of Year................................ $ 1,850 $ 113,252 $ 106,656 $ 5,427,460
================ ================= ================ ==============

See accompanying notes to consolidated financial statements.

F-11

EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Years Ended December 31, Nine Months Ended September 30,
----------------------------------- ---------------------------------
1998 1999 1999 2000
--------------- --------------- ---------------- --------------
(Unaudited)

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest......................... $ 296,935 $ 126,857 $ 200,928 $ 314,806
Non-cash investing and financing activities
Issuance of common stock in payment of debt
offering costs............................. 84,000 -- -- --
Accrual of preferred stock dividends......... 18,542 607,269 153,975 102,597
Issuance of common stock as payment of debt
obligations................................ 1,261,521 386,088 1,500,250 --
Issuance of preferred stock as payment of
debt obligations........................... 1,040,000 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 shares of common
stock...................................... -- 2,940,569 -- --

Property and equipment acquired by capital
lease...................................... -- 28,476 -- --
Retirement of common stock................... -- -- -- 450,000
Issuance of warrants for advertising
agreement.................................. -- -- -- 135,512
Accrued interest, accounts payable and
payable to stockholder converted to notes
payable.................................... -- 401,162 573,588 56,063
Beneficial conversion feature on bridge loan. -- -- -- 448,398
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......................... -- -- -- 737,337
Transfer of notes payable and accrued
interest to unconsolidated subsidiary...... -- -- -- 900,895

See accompanying notes to consolidated financial statements.

F-12

eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)

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).

The accompanying consolidated financial statements include the accounts
of eRoomSystem Technologies, and its wholly owned subsidiary RSI, 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.

The Company has suffered recurring net losses and as of December 31,
1999, had a working capital deficit of $2,650,616, a stockholders'
deficit of $23,852, and was in default under certain debt agreements.
During the years ended December 31, 1998 and 1999, the Company's
operations used $2,931,871 and $2,304,807 of cash, respectively.
Additionally, at December 31, 1999, the Company was past due on
accounts payable with several vendors which could affect the Company's
ability to procure inventory and services for its operations. These
matters raised a doubt about the Company's ability to continue as a
going concern. 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 have
resulted if the Company had been unable to continue as a going concern.
The Company needed to obtain additional financing to fund payment of
past due and current debt obligations and to provide working capital
for operations. Management has raised additional equity capital through
its initial public offering that closed on August 9, 2000 (the "IPO")
and is arranging additional debt financing for the placement of
products pursuant to its revenue sharing program.

F-13

The Company is subject to certain risk factors frequently encountered
by companies lacking adequate capital and which 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.

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.

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:

December 31,
--------------------------------- September
1998 1999 30, 2000
--------------- --------------- --------------

Finished goods.................................. $ 997,248 $284,382 $524,771
Work-in process................................. 115,561 160,764 41,842
Parts and raw materials......................... 375,545 251,887 298,329
--------------- --------------- --------------
$1,488,354 $697,033 $864,942
=============== =============== ==============

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:

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

F-14

Depreciation and amortization expense related to Refreshment Centers in
service and property and equipment was $84,028 and $277,030 for the
years ended December 31, 1998 and 1999, respectively, and $190,655 and
$140,748 for the nine months ended September 30, 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.

FAIR VALUE OF FINANCIAL INSTRUMENTS

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.

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, 1998 and 1999 or the nine months ended
September 30, 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

F-15

December 31, 1999 and September 30, 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
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.

F-16

The Company has applied this interpretation to all issuances to
non-employee directors during 1999 and thereafter.

NET LOSS PER COMMON SHARE

The Company computes net loss per share in accordance with SFAS No.
128, "Earnings Per Share" ("SFAS 128"), and SEC Staff Accounting
Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS 128 and SAB
98, 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, 1998 and 1999, there were 360,000 shares of Series A
convertible preferred stock outstanding, as of December 31, 1999 there
were 2,081,680 shares of Series B convertible preferred stock
outstanding, and as of December 31, 1998 and 1999 and September 30,
2000, there were options and warrants outstanding to purchase 598,030
shares, 866,508 shares and 2,699,184 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.

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 in the
accompanying December 31, 1998 consolidated balance sheet.

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, 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.

F-17

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

F-18

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 paid and the $500,000 of
Series B convertible preferred stock that was issued to RSG. The
remaining liability is being amortized by the Company 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 $900,895, including $95,353 of
accrued interest, 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
September 30, 2000, the assets and liabilities of RSi BRE consisted of
the following:

December 31, September 30,
1999 2000
---------------- -----------------

Cash.................................... $ 189,659 $ 142,563
Accounts receivable..................... 66,507 107,728
Inventory............................... 414,860 --
Refreshment centers in service.......... 2,097,363 2,090,118
Accumulated depreciation................ (217,797) (422,909)
Accrued interest........................ (95,353)
Accrued liabilities..................... (4,616) (121,747)
Customer deposits....................... (10,000) --
Notes payable........................... -- (805,542)
---------------- -----------------

Net Assets.............................. $ 2,535,976 $ 894,858
================ =================

For the period from its inception (September 29, 1999) to December 31,
1999 and for the nine months ended September 30, 2000, the revenues and
expenses of RSi BRE consisted of the following:

December 31, September 30,
1999 2000
---------------- -----------------

Revenue sharing agreement revenues........... $212,919 $ 474,846
Depreciation................................. (53,947) (246,984)
Other operating expenses..................... (16,654) (83,803)
Interest expense............................. -- (118,010)
Interest income.............................. 5,297 3,949
---------------- -----------------

Net Income................................... $147,615 $ 29,998
================ =================

F-19

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.

The investors in the 1996 Notes were also 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). The warrants issued in connection with the debt were valued by
the Company, at the time of issuance, at $148,764 using the
Black-Scholes option pricing model with the following assumptions: risk
free interest rate of 5.4 percent, expected dividend yield of 0
percent, volatility of 22.2 percent, and expected life of 3.3 years.
The value of the warrants was recorded as warrants outstanding and the
related debt was recorded net of the value of the warrants. The
difference between the face amount of the debt and the recorded value
was accreted to interest expense over the extended term of the debt. 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). The value of these warrants of $52,900 was determined
using the Black-Scholes option pricing model with the assumptions
disclosed above. The commissions paid of $157,200 were recorded as
deferred debt offering costs and were amortized to interest expense
over the extended term of the debt.

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,
1998 and 1999 and for the nine months ended September
30, 2000, the Company issued warrants to purchase
38,089 shares, 28,608 shares and 21,025 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, 1998 and 1999 and for
the nine months ended September 30, 2000,
respectively: risk free interest rates at 5.4, 5.7
and 6.7 percent, expected dividend yield of 0
percent, volatility at 49.0, 96.5 and 92.2 percent,
and expected lives at 2.8, 3.0 and 2.3 years,
respectively) at amounts ranging from $8.32 to $8.69,
$1.63 to $4.99 and $1.98 to $5.62 per warrant,
respectively. These amounts were recorded as
additional interest expense on the debt.

F-20

- 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 September 30, 2000, $120,000 remained outstanding
under the 1996 Notes with funds for the repayment of the remaining 1996
Notes placed into a separate account. These funds will be released upon
the Company's receipt of the relevant security interest termination
statements.

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.

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

F-21

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 September 30, 2000, $127,500 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.

1998 CONVERTIBLE 60 DAY NOTES OFFERING

In May 1998, the Company issued $561,520 of 10 percent convertible
promissory notes, with a term of sixty days. These notes were
convertible at maturity into common stock at a price of $10.67 per
share. These convertible promissory notes were secured by the assets of
the Company. In connection with this issuance, the Company agreed to
issue 7,875 shares of common stock as a finders fee. These shares were
valued at $10.67 per share and recorded as deferred offering costs and
amortized to interest expense over the term of the notes. In October
1998, note holders converted $561,520 of outstanding principal and
$17,632 of accrued interest into 54,296 shares of common stock. The
Company incurred $45,462 of offering costs associated with this
conversion which was recorded as an offset to additional paid-in
capital.

1998 PROMISSORY NOTE

During 1998, the Company issued a $100,000 short-term promissory note
to an investor which was subsequently converted into 9,375 shares of
common stock at a price of $10.67 per share. In addition, this investor
was granted an additional 1,500 shares of common stock as an inducement
to convert the promissory note, which was valued at $10.67 per share
and recorded as additional interest expense in 1998.

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. Through the proceeds of the
IPO, these notes were paid in full in August 2000.

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

F-22

years subsequent to the closing of the IPO (through August 9, 2002).
The warrants issued were valued at $37,135 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 percent, 70.45 percent volatility and 2.30 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 $67,795, net of $13,581 unamortized discount,
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 $340,000 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 September 30, 2000, no
Refreshment Centers have been funded nor has any financing been
provided under the program agreement.

F-23

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

December 31,
----------------------------- September 30,
1998 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)..................................................... $ 429,725 $ 130,000 $ 120,000
1997 Notes secured by assets of the Company, in default, interest of 15%
per annum (see description above)...................................... 870,500 431,750 127,500
1999 Notes secured by assets of the Company, (see description above), paid
August 2000............................................................ -- 35,115 --
Note payable to RSG net of discount of $35,136 and $0 as of December 31,
1998 and 1999, respectively, secured by assets of the Company, imputed
interest at 41 % per annum, transferred to RSi BRE (see Note 3)........ 1,464,864 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.......................... 100,000 100,000 100,000
Note payable to a bank, interest at 10 % per annum, due in monthly
installments through June 2002, secured by vehicle..................... 19,200 11,719 7,468
Note payable to an individual, interest at 15% per annum, unsecured....... -- 6,062 6,062
2000 Convertible promissory notes, secured by assets of the Company,
bearing interest at 7% per annum, net of $13,581 of unamortized discount
based on imputed interest at 20.5% as of September 30, 2000 (see
description above)..................................................... -- -- 67,795
-------------- -------------- --------------

Total notes payable and long-term debt.......................... 2,884,289 2,372,480 428,825

Less: Current portion........................................... (2,872,570) (1,560,458) (425,464)
-------------- -------------- --------------

$ 11,719 $ 812,022 $ 3,361
============== ============== ==============

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 interest termination statements from the holders
of the notes. To this end, the Company has placed $579,553 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:

Year Ending December 31, December 31, 1999 September 30, 2000
------------------------ ------------------------ ---------------------------

2000..................... $ 1,560,458 $ 354,979
2001..................... 4,210 73,463
2002..................... 32,043 383
2003..................... 109,871 --
2004..................... 163,711 --
Thereafter...................... 502,187 --
------------------------ ---------------------------

Total.................... $ 2,372,480 $ 428,825
======================== ===========================

F-24

5. NOTES PAYABLE TO STOCKHOLDERS

In March 1996, the Company's former chief executive officer, who is
also a principal stockholder, agreed to purchase 187,500 shares of the
Company's common stock from a stockholder for $500,000. As payment for
the shares, the former chief executive officer signed a $250,000 note
payable obligation to the selling stockholder, which bore interest at 7
percent and was due on March 14, 1998, and signed another $250,000
promissory note payable to the selling stockholder, which bore interest
at 7 percent and was due on demand. In October 1996, the Company agreed
to assume the former chief executive officer's rights and obligations
under the agreements and repurchased the shares as treasury shares as
per the terms of the original agreement with no additional compensation
or consideration paid to the chief executive officer. In March 1998,
the Company and the stockholder agreed to rescind and to return the
187,500 shares of stock to the original stockholder. Accordingly, no
loss was recognized on this transaction.

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, 1998 and 1999, the
Company paid $41,750, $12,500 and $0, respectively, in cash 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. In connection with these agreements, the Company
accrued and issued 83,500 shares of common stock which 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.

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:

December 31,
--------------------------------- September 30,
1998 1999 2000
--------------- --------------- ----------------

Property and equipment.............. $ 75,126 $ 103,602 $ 28,476
Less: Accumulated amortization...... (29,320) (62,701) (7,571)
--------------- --------------- ----------------

$ 45,806 $ 40,901 $ 20,905
=============== =============== ================

F-25

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:

Year Ending December 31, December 31, 1999 September 30, 2000
------------------------ ----------------------- ----------------------

2000......................................... $ 35,728 $ 8,932
2001......................................... 35,728 35,728
2002......................................... 27,776 27,776
----------------------- ----------------------
Total net minimum lease payments 99,232 72,436
Less: Amount representing interest (22,074) (12,429)
----------------------- ----------------------
Present value of net minimum lease payments... 77,158 60,007
Less: Current portion........................ (22,061) 26,841
----------------------- ----------------------

Long-term portion............................ $ 55,097 $ 33,966
======================= ======================

OPERATING LEASES AS LESSOR

The Company accounts for its revenue sharing agreements as operating
leases. As of December 31, 1999 and September 30, 2000, the Company had
only one revenue sharing agreement for which the customer was
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, 1999:

Year Ending December 31,
------------------------

2000................................... $ 132,457
2001................................... 132,457
2002................................... 132,457
2003................................... 132,457
2004................................... 132,457
Thereafter................................. 264,914
---------------

Total.................................. $ 927,199
===============

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, 1998 and 1999 and the nine months ended September 30, 2000
was $100,098, $115,245 and $99,665, respectively. Minimum rental
payments under non-cancelable operating leases were as follows:

Year Ending December 31, December 31, 1999 September 30, 2000
------------------------ ----------------------- ----------------------

2000............................ $ 132,886 $ 33,221
2001............................ 119,836 119,836
2002............................ 104,030 104,030
----------------------- ----------------------

Total........................... $ 356,752 $ 257,087
======================= ======================

F-26

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, 1998 and 1999 are as follows:

1998 1999
---------------- -----------------

Deferred Income Tax Assets:
Net operating loss carryforwards............... $ 2,533,815 $ 3,640,709
Reserves and accrued liabilities............... 121,422 82,602
---------------- -----------------
Total deferred income tax assets......... 2,655,237 3,723,311
Valuation allowance............................ (2,611,073) (3,687,977)
---------------- -----------------
Net deferred tax asset................... 44,164 35,334
---------------- -----------------
Deferred Income Tax Liability:
Tax depreciation in excess of book............. (44,164) (35,334)
---------------- -----------------
Total deferred income tax liabilities.... (44,164) (35,334)
---------------- -----------------

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.

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:

December 31,
-------------------------------------
1998 1999
---------------- -----------------

Benefit at statutory rate (34%).................. $ (1,409,469) $ (1,248,540)
Non-deductible expenses.......................... 414,216 220,108
Change in valuation allowance.................... 1,049,973 1,076,904
State tax benefit, net of federal tax benefit.... (54,720) (48,472)
---------------- -----------------
Net Benefit From Income Taxes............... $ -- $ --
================ =================

The following summarizes the tax net operating loss carryforwards and
their respective expiration dates as of December 31, 1999:

2008...................................... $ 44,043
2010...................................... 930,194
2011...................................... 2,188,074
2017...................................... 820,111
2018...................................... 3,191,461
2019...................................... 3,133,899
---------------

Total net operating loss carryforwards.... $ 10,307,782
===============

F-27

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

On November 30, 2000, the Company entered into a severance agreement
with an officer that terminated the officer's employment agreement.
The severance agreement provided that $67,795 of severance payments
be provided to the officer of which $23,666 was paid during 2000. On
January 29, 2001, the Company entered into a new employment
agreement with the officer and agreed to pay the balance owed under
the severance agreement. On January 26, 2001, the Company terminated
the employment agreement with another officer. Under the terms of
his employment agreement, as modified in July 2000, the termination
may require the Company to pay approximately $200,000 to the former
officer through December 31, 2001. The costs of these terminations
will be recognized during the fourth quarter of 2000.

F-28

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. 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 $135,148 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 646,180
shares of common stock, as well as 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). 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.

9. STOCKHOLDERS' EQUITY

AMENDMENTS 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 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

F-29

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. During the years
ended December 31, 1998 and 1999, the Company accrued $274,691 and
$235,951, respectively, 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 is 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

F-30

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.

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 would
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 STOCK TRANSACTIONS

In January 1998, the Company sold 35,532 shares of common stock in a
private placement at $10.67 per share. The Company received cash
proceeds of $335,042, net of $43,958 in offering costs. The placement
agent of the offering received a cash commission of 12.5 percent and
warrants to purchase 4,264 shares of common stock, exercisable at
$12.80 per share which are exercisable for a period of three years. The
Company has valued these warrants at $4.31 per share using the
Black-Scholes option pricing model with the following assumptions: risk
free rate of 5.4 percent, expected dividend yield of 0 percent,
volatility of 58.2 percent and an expected life of 3.3 years.

During the year ended December 31, 1998, the Company sold an additional
5,156 shares of common stock to an investor at $10.67 per share.

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, 1998 and 1999, holders of Series A
convertible preferred stock were owed dividends of $18,541 and
$162,541, respectively. Upon closing the IPO, $250,124 of Series A
convertible preferred stock dividends were due and payable, of which
$146,410 were paid through September 30, 2000. The Company is paying
the Series

F-31

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 $2,265,599
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.

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 the nine months ended September 30, 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.

F-32

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 the nine months ended
September 30, 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 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.

F-33

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 $6,124 was paid through September 30, 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
proceeds from the IPO, after offering costs and commissions, totaled
$9,111,087 and were allocated to the common stock issued and the
warrants based upon their relative fair value. Accordingly, $8,640,515
was allocated to the 1,800,000 shares of common stock, and $470,572 was
allocated to the 180,000 warrants.

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 an allocation of $1,051,769 to the promissory note
before offering costs of $19,810 and $440,541 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 nine months ended September 30, 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 1996 Notes who are entitled to receive shares

F-34

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
12,230 shares of common stock to stockholders who had been protected
from the effects of the reverse stock splits but who had not been
previously identified.

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, 1998 and 1999 and the nine months
ended September 30, 2000, the Company issued options to purchase 938
shares, 63,711 shares and 314,626 shares of common stock, respectively.
The exercise price was $12.80, $4.80 to $9.60, and $4.00 to $9.60 for
the years ended December 31, 1998 and 1999 and for the nine months
ended September 30, 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 1998 and 1999 and the nine months ended September 30, 2000,
respectively: risk free interest rate of 5.6, 6.2 and 6.7 percent,
expected dividend yield of 0 percent, volatility of 58.2, 100.6 and
86.3 percent, expected lives of 3.2, 2.6 and 3.3 years, respectively)
at amounts ranging from $1.51, $1.37 to $1.63 and $1.15 to $3.12 per
share, respectively.

EMPLOYEE GRANTS

During 1998 and 1999, the Company granted options to purchase 9,375 and
269,909 shares of common stock, respectively. The exercise price ranged
from $11.33 and $4.80 to $8.80 per share, respectively. There was no
intrinsic value relating to these options. 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 both the direct award or 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 nine months ended September 30, 2000, the Company issued
options for the purchase of 1,130,775 shares of common stock to certain
officers and employees of the Company pursuant to the 2000

F-35

Plan. These options vested immediately. The exercise prices range from
$3.60 to $9.60 per share. The options are exercisable through August 9,
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 1998 and 1999 and the nine months ended September 30,
2000, respectively: risk-free interest rate of 5.5, 6.3 and 6.7
percent, a dividend yield of 0 percent, volatility of 58.2, 100.6 and
85.4 percent, and a expected lives of 3.8, 2.7 and 3.3 years,
respectively.

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

Years Ended December 31,
----------------------------------- Nine months ended
1998 1999 September 30, 2000
---------------- --------------- ----------------------

Loss attributable to common
stockholders as reported........... $ (4,164,037) $ (4,279,444) $ (9,254,251)
Loss attributable to common
stockholders pro forma............. (4,209,596) (4,725,793) (10,909,859)
Basic and diluted loss per common
share as reported.................. (1.37) (1.33) (2.93)
Basic and diluted loss per common
share pro forma.................... (1.39) (1.47) (3.45)

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, 1998 and 1999 and the nine months ended
September 30, 2000 is as follows:

Options and Weighted Average
Warrants Price Range Exercise Price
--------------------- ------------------- -------------------

Balance, December 31, 1997.......... 454,575 $ 2.67 - 6.00 $ 3.19
Granted........................ 143,455 2.67 - 16.00 10.33
---------------------
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........................ 1,832,676 1.00 - 9.60 6.63
---------------------

Balance, September 30, 2000......... 2,699,184 $1.00 - 16.00 $ 5.91
=====================
Exercisable, December 31, 1999...... 866,508 $2.67 - 16.00 $ 4.39
=====================
Exercisable, September 30, 2000..... 2,449,663 $1.00 - 16.00 $ 5.71
=====================

F-36

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, 1998 and 1999 and the nine
months ended September 30, 2000 is as follows:

Weighted Average
Options and Weighted Fair Value of
Warrants Average Options and
Granted Exercise Price Warrants
-------------- --------------- -------------------

Year Ended December 31, 1998:
Grants with exercise price less than
estimated market value................. 105,416 $ 2.67 $ 8.46
Grants with exercise price greater than
estimated market value................. 38,039 13.78 4.88
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
Nine Months Ended - September 30, 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................. 1,818,026 6.67 1.69

A summary of the options and warrants outstanding and exercisable as of
December 31, 1999 and September 30, 2000 follows:

DECEMBER 31, 1999
-----------------

Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise 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
================== ===================

SEPTEMBER 30, 2000
-------------------

$ 1.00 - 2.67 410,583 2.25 years $ 2.62 410,583 $ 2.62
2.68 - 5.33 1,207,057 2.78 years 4.45 1,207,057 4.45
5.34 -16.00 1,081,544 3.05 years 8.80 832,023 9.07
------------------ -------------------
2,699,184 2,449,663
================== ===================

F-37

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, 1998 and 1999.
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, 1998 and 1999 and for the
nine months ended September 30, 2000 is as follows:

December 31,
-------------------------------- September 30,
1998 1999 2000
-------------- -------------- ------------------

Revenue:
United States................. $ 769,062 $ 540,517 $ 2,278,344
Other Countries............... 242,400 -- --
-------------- -------------- ------------------

Total Revenue................. $ 1,011,462 $ 540,517 $ 2,278,344
============== ============== ==================

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, 1998, revenues from three customers
accounted for 40.8, 25.1 and 24 percent of total revenues.

During the year ended December 31, 1999, revenues from two customers
accounted for 26.7 and 16.0 percent of total revenues.

During the nine months ended September 30, 2000, no single customer
accounted for a material amount of the Company's revenue. No other
customer accounted for more than 10 percent of total revenues in any
period presented.

13. 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.

ISSUANCE OF OPTIONS AND WARRANTS

During December 2000, the Company issued 12,375 warrants to two former
note holders with respect to a 1996 private placement of notes by the
Company. The warrants have an exercise price of $2.67 per

F-38

underlying share. The warrants have a fair value of $2,095 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 8 months. The
above fair value will be charged to interest expense during the fourth
quarter of 2000.

On October 2, 2000, the Company issued options to purchase 15,000
shares to a director at $5.36 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. The
options had a fair value of $1.71 per share based on the Black-Scholes
option pricing model with the following assumptions: risk free interest
rate of 6.1 percent, volatility of 62.5 percent, expected dividend
yield of 0 percent, and an expected life of two years.

On January 23, 2001, the Company issued options, pursuant to the 2000
Plan, to purchase a total of 303,200 shares of common stock. Fifty
percent of these options 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 no 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.

EMPLOYMENT AGREEMENT

On December 20, 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 three years from the date of issuance. 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.
The options had a fair value of $125,450 ($0.50 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
two years.

As more fully explained in Note 8, on November 30, 2000 and on January
26, 2001, the employment of two officers were terminated, one of
which was the result of a voluntary resignation. On January 29, 2001,
the Company entered into new employment agreements with one of the
terminated officers and replaced employment agreements with two
additional officers.

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.

PAYMENTS ON NOTES PAYABLE

From October 1, 2000 through December 31, 2000, the Company paid
$369,846 in principal against notes payable which were outstanding at
September 30, 2000. as a result of those payments, the principal
balance of notes payable and long-term debt at December 31, 2000 is
$58,979.

F-39

[INSIDE BACK COVER]

This page will be blank in the final prospectus.

==============================================================================

No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is an offer to sell only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.

==============================================================================

200,000 Shares of Common Stock on Behalf of
Selling Stockholders

341,180 Shares of Common Stock on Behalf of
Warrant Holders

eROOMSYSTEM TECHNOLOGIES, INC.

[GRAPHIC OMITTED]

TABLE OF CONTENTS

Page
----

Prospectus Summary................................. 1
Risk Factors....................................... 4
Special Note Regarding Forward-Looking
Information..................................... 9
Use of Proceeds.................................... 10
Determination of Offering Price.................... 10
Dividend Policy.................................... 10
Selling Stockholders and Warrant Holders........... 11
Plan of Distribution............................... 14
Selected Financial Data............................ 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations...................................... 18
Business........................................... 29
Management......................................... 39
Certain Relationships and Related
Transactions.................................... 46
Principal Stockholders............................. 49
Description of Capital Stock....................... 50
Shares Eligible for Future Sale.................... 54
Legal Matters...................................... 56
Experts............................................ 56
Change in Accountants.............................. 56
Available Information.............................. 56
Index to Consolidated Financial Statements......... F-1

_______________

Through and including ___________, 2001, all dealers effecting transactions
in these securities, whether or not participating in this offering, may be
required to deliver a prospectus. This is in addition to a dealer's
obligation to deliver a prospectus when acting as an underwriter and with
respect to an unsold allotment or subscription.
==============================================================================

[INSERT DATE]

===================

PART II - INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Sections 78.7502 and 78.751 of the Nevada Revised Statutes provides for
the indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act. Article XII of our amended and restated articles of
incorporation (Exhibit 3.01 hereto) provides for indemnification of our
directors, officers, employees and other agents to the extent and under the
circumstances permitted by Sections 78.7502 and 78.751 of the Nevada Revised
Statutes. In addition, pursuant to the severance agreement with Mr. Hrncir, we
agreed to indemnify Mr. Hrncir for any actions taken by him on behalf of
eRoomSystem Technologies prior to the effective date of the severance agreement
to the extent provided for in our bylaws.

In addition to the indemnification of officers and directors under the
Nevada Revised Statutes, we entered into indemnification agreements with Dr.
Alan C. Ashton on August 17, 1999 and with John J. Prehn on May 31, 2000.
Pursuant to these indemnification agreements, we agreed to hold harmless and
indemnify each of them against any and all expenses incurred by them as a result
of their positions as directors of eRoomSystem Technologies. In addition, we
agreed to advance expenses incurred by each of them upon receipt of a written
request for such advancement containing an unsecured undertaking by each of them
to repay such amounts to the extent that they are held to not be entitled to
indemnification from eRoomSystem Technologies. The advancement of expenses
specifically excludes amounts for judgments, penalties, fines and settlements.
Messrs. Ashton and Prehn each possess the right to indemnification if, in civil
proceedings, they acted in good faith and in a manner that they reasonably
believed to be in or not opposed to the best interests of eRoomSystem
Technologies, and, in criminal proceedings, they had no reasonable cause to
believe that his conduct was unlawful. In addition, eRoomSystem Technologies may
elect to not indemnify Messrs. Ashton and Prehn if either a majority of the
directors not involved in the relevant proceeding or independent legal counsel,
in a written opinion, determine that they have not met the relevant standards
for indemnification.

On September 28, 1999, we entered into an indemnification agreement
with Donnelly Prehn which indemnifies Mr. Prehn for actions to be taken by him
as a director on behalf of RSi BRE. Pursuant to this indemnification agreement,
eRoomSystem Technologies and RSi BRE, jointly and severally, agreed to hold
harmless and indemnify Mr. Prehn against any and all expenses incurred by him as
a result of his position as a director of eRoomSystem Technologies. In addition,
we agreed to advance expenses incurred by Mr. Prehn upon receipt of a written
request for such advancement containing an unsecured undertaking by Mr. Prehn to
repay such amounts to the extent that Mr. Prehn held to not be entitled to
indemnification from eRoomSystem Technologies. Mr. Prehn's rights to
indemnification are only available if damages have not already been paid
directly to Mr. Prehn by an insurance carrier maintained by either eRoomSystem
Technologies or RSi BRE. Mr. Prehn is not entitled to indemnification if he is
adjudged by a court of competent jurisdiction to have engaged in intentional
misconduct or a knowing violation of the law, if he received an improper
personal benefit, or if a court of competent jurisdiction renders a final
decisions that such indemnification is unlawful.

Even though indemnification for liabilities arising under the
Securities Act may be provided to certain directors and officers pursuant to the
foregoing provisions, we have been informed that in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Act and is therefore unenforceable.

II-1

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Registrant in connection with
the sale of common stock being registered. All amounts are estimates except the
SEC registration fee.

SEC registration fee $ 251
Printing and engraving costs 15,000
Legal fees and expenses 50,000
Accounting fees and expenses 20,000
Blue Sky fees and expenses 10,000
Transfer Agent and Registrar fees 5,000
Miscellaneous expenses 5,000
------------------------------------------ -----------------
TOTAL $ 105,251

We will pay substantially all costs and expenses associated with the
registration of the shares of common stock covered by this registration
statement. Selling stockholders and warrant holders are responsible for all
underwriting discounts, commissions, transfer taxes and other expenses
associated with the sale of common stock by them.

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.

From January 1998 through December 2000, we have granted or issued and
sold the following unregistered securities:

(1) On January 9, 1998, we commenced a private placement, or Series A
convertible preferred stock offering, of up to 1,200,000 shares of Series A
convertible preferred stock at a price of $5.00 per share, underwritten on a
best-efforts basis by Capital Bay Securities, or CBS. We received cash
subscriptions of $760,000, and issued 152,000 shares of Series A convertible
preferred stock. CBS received 13% in the form of a commission, due diligence and
non-accountable expense allowances, and warrants to purchase 6,840 shares of
common stock exercisable at $16.00 per share for serving as placement agent. On
the six-month anniversary of the close of the Series A convertible preferred
stock offering, or November 14, 1998, holders of Series A convertible preferred
stock started to accrue an 8% annual dividend, payable in the form of cash. The
reverse stock split did not affect the number of shares of Series A convertible
preferred stock outstanding. This offering was exempt from registration in
reliance on Rule 506 of Regulation D of the Securities Act. The securities were
issued to independent third parties and to existing stockholders, each of whom
were accredited investors. Each of the investors received a private placement
memorandum disclosing information about the securities and our corporate,
business and financial matters. Upon the closing of our initial public offering,
the shares of Series A convertible preferred stock were converted into shares of
our common stock. As of the date of the closing of our initial public offering,
holders of Series A convertible preferred stock were owed dividends of $250,126.
We paid $146,410 of the accrued dividends through September 30, 2000 with the
funds for the remaining dividends placed in a separate account to be released
upon the receipt of the remaining stock certificates for our Series A
convertible preferred stock.

(2) On January 16, 1998, we commenced a private placement, or the 1998
Common Stock Offering, of up to 60,938 shares of common stock, at a price of
$10.67 per share. The 1998 Common Stock Offering was underwritten on a
best-efforts basis by Spectrum Securities, Inc., or Spectrum. We received cash
subscriptions of $379,000, and issued 35,531 shares of common stock. Spectrum
received a cash commission of 12.5% and warrants to purchase 4,264 shares of
common stock, exercisable at $12.80 per share, for serving as placement agent.
This offering was exempt from registration in reliance on Rule 506 of Regulation
D of the Securities Act. The securities were issued to independent third parties
and to existing stockholders, each of who were accredited investors. Each of the
investors received a private placement memorandum disclosing information about
the securities and our corporate, business and financial matters.

(3) On January 23, 1998, we offered to convert our 1996 12% secured
promissory notes, or the 1996 Notes, into shares of Series A convertible
preferred stock. Pursuant to this offer, $1,040,000 of the $1,470,000 1996 Notes
were converted into 208,000 shares of Series A convertible preferred stock. This
offering was exempt in reliance on Rule 506 of Regulation D of the Securities
Act. The investors were either accredited or sophisticated non-accredited
investors, either alone or with a purchaser representative. Each of the
investors received a private

II-2

placement memorandum disclosing information about the securities and our
corporate, business and financial matters.

(4) In January 1998, we issued 13,781 shares of common stock to holders
of the 1996 Notes, at a rate of 188 shares of common stock per $20,000 in
outstanding principal, to prevent the foreclosure of our assets by holders of
the 1996 Notes. This offering was exempt from registration in reliance upon
Section 4(2) of the Securities Act. The investors were either accredited or
sophisticated non-accredited investors.

(5) In April 1998, we issued a $100,000 short-term promissory note to
an existing stockholder which was subsequently converted into 9,375 shares of
common stock at a price of $10.67 per share. In addition, this investor was
granted an additional 1,500 shares of common stock as an inducement to convert
the promissory note, which was valued at $10.67 per share and recorded as
additional interest expense in 1998. This offering was exempt from registration
in reliance upon Section 3(a)(9) and Section 4(2) of the Securities Act. The
investor was an accredited investor.

(6) In May 1998, we offered 10% unsecured promissory notes, or the 1998
Notes, with a term of sixty days and automatically convertible at maturity into
common stock at the rate of $10.67 per share. We received cash subscriptions
totaling $561,520 and issued 54,296 shares of common stock to the holders of the
1998 Notes, which amount included $17,632 of accrued interest. This offering was
exempt from registration in reliance upon Section 4(2) of the Securities Act.
The securities were issued to independent third parties and to existing
stockholders, each of whom were either accredited or sophisticated
non-accredited investors.

(7) In October 1998, we offered to convert previously issued notes into
shares of common stock at a rate of $10.67 per share of common stock. As a
result of the conversion, we converted $115,000 in outstanding principal and
$24,568 in accrued interest into 26,169 shares of common stock. This offering
was exempt in reliance upon Section 3(a)(9) and Section 4(2) of the Securities
Act. The investors were accredited investors and sophisticated non-accredited
investors.

(8) From February 1999 through May 1999, we offered 15% unsecured
promissory notes, or the 1999 Notes, with a term of ninety days and interest
accruing at the rate of 37.5 shares of common stock every thirty days for every
$1,000 of outstanding principal. We received $350,000 from the sale of 1999
Notes. $134,885 of the 1999 Notes have been paid off, and $180,000 of the 1999
Notes have been converted into 81,909 shares of Series B convertible preferred
stock, which amount includes accrued interest and shares of common stock. All of
the outstanding 1999 Notes are in default. As of March 31, 2000, we have issued
50,137 shares of common stock as interest and have outstanding $35,115 in
principal and $7,947 of accrued interest on the 1999 Notes. This offering was
exempt in reliance upon Section 4(2) of the Securities Act. The securities were
issued to independent third parties who were either accredited or sophisticated
non-accredited investors. We repaid the 1999 Notes from the proceeds of our
initial public offering.

(9) From March 1999 through October 1999, we conducted a private
placement, or the 1999 Preferred Stock Offering, of up to $4,000,000 of Series B
convertible preferred stock at $3.00 per share. The 1999 Preferred Stock
Offering was co-underwritten on a best-efforts basis by Donald & Co. Securities
Inc. and CBS. Donald & Co. and CBS received a commission of 9% and a
non-refundable expense allowance of 2.5%. Upon completion of the 1999 Preferred
Stock Offering, we issued 1,355,047 shares of Series B convertible preferred
stock in exchange for cash subscriptions of $4,065,133 and 726,633 shares of
Series B convertible preferred stock in exchange for certain outstanding
promissory notes and unpaid salaries to certain officers and as part of the
settlement with RSG Investments. The reverse stock split did not affect the
number of shares of Series B convertible preferred stock outstanding. This
offering was exempt in reliance on Rule 506 of Regulation D of the Securities
Act. The securities were issued to independent third parties and to existing
stockholders who were either accredited investors or sophisticated
non-accredited investors. Each of the investors received a private placement
memorandum disclosing information about the securities and our corporate,
business and financial matters. 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 our initial public offering.

(10) In May 1999, holders of previously issued notes were offered the
right to convert their notes and accrued interest into Series B convertible
preferred stock at the rate of $3.00 per share. Holders of these notes
consisting of $425,051 in outstanding principal, plus accrued interest,
converted into 175,562 shares of Series B convertible preferred stock. This
offering was exempt from registration in reliance on Section 3(a)(9) and Section

II-3

4(2) of the Securities Act. The investors were either accredited or
sophisticated non-accredited investors. Each of the investors received a
private placement memorandum disclosing information about the conversion and
our corporate, business and financial matters. 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 our initial public
offering.

(11) On May 30, 1999, we issued 198,750 shares of our common stock to
the SBD Limited Partnership, an entity controlled by Steven L. Sunyich, our
chairman, in exchange for a promissory note in favor eRoomSystem Technologies in
the original principal amount of $1,590,000. The purpose of the issuance was to
assist eRoomSystem Technologies in complying with the stock pledge requirements
mandated by the terms of the $1,500,000 loan from RSG Investments. On September
30, 1999, we entered into an Equipment Transfer Agreement with RSG, and the
198,750 shares of common stock were returned to the SBD Limited Partnership. In
turn, the SBD Limited Partnership surrendered the 198,750 shares of common stock
to eRoomSystem Technologies in exchange for the cancellation of the promissory
note. The shares of common stock were booked as treasury stock and have been
retired. This offering was exempt in reliance on Section 4(2) of the Securities
Act. Mr. Sunyich was an accredited investor.

(12) On September 1, 1999, we entered into promissory note purchase
agreements with Steven L. Sunyich, our chairman, Derek Ellis, our chief
financial officer, treasurer and secretary, and a former executive officer of
and consultant to eRoomSystem Technologies, in which we agreed to convert the
outstanding indebtedness due on their respective demand promissory notes into
shares of Series B convertible preferred stock. As a result of these agreements,
we issued 72,434 shares of Series B convertible preferred stock and 51,981
shares of our common stock to Mr. Sunyich, 3,742 shares of Series B convertible
preferred stock and 2,990 shares of our common stock to Mr. Ellis, and 29,808
shares of Series B convertible preferred stock and 25,376 shares of our common
stock to the former executive officer and consultant. The shares of Series B
convertible preferred stock were converted into shares of common stock upon the
closing of our initial public offering. This offering was exempt in reliance on
Section 4(2) of the Securities Act. Messrs. Sunyich and Ellis were both
accredited investors.

(13) On December 7, 1999 and February 14, 2000, Mr. Sunyich formally
assigned to us all of his rights in Patent No. 4,939,352 and Patent Nos.
4,857,714 and 4,883,948, which relate to credit card point of sale technology.
In exchange, we issued 65,625 shares of common stock and a promissory note in
the principal amount of $125,000 to Mr. Sunyich. After paying down the
promissory note to approximately $70,000, we converted the remaining outstanding
principal and interest into 23,524 shares of Series B convertible preferred
stock. This offering was exempt in reliance on Section 4(2) of the Securities
Act. Mr. Sunyich was an accredited investor.

(14) On December 30, 1999, we entered into conversion agreements with
Steven L. Sunyich, our chairman, and Derek Ellis, our chief financial officer,
treasurer and secretary, in which we agreed to convert unpaid salaries in
exchange for shares of Series B convertible preferred stock. As a result of
these agreements, we issued 73,052 shares of Series B convertible preferred
stock to Mr. Sunyich and 3,776 shares of Series B convertible preferred stock to
Mr. Ellis. This offering was exempt in reliance on Section 4(2) of the
Securities Act. Messrs. Sunyich and Ellis were both accredited investors. The
shares of Series B convertible preferred stock were converted into shares of
common stock upon the closing of our initial public offering.

(15) On February 15, 2000, we received a loan in the original principal
amount of $500,000 from Ash Capital, LLC, an entity controlled by Dr. Alan C.
Ashton, a then director designee of the Company. To evidence this transaction,
we issued a promissory note bearing an interest rate of 10% and warrants to
purchase 18,750 shares of common stock to Ash Capital. We repaid the remaining
principal and accrued interest from the net proceeds of our initial public
offering. This issuance of securities was exempt from registration in reliance
on Section 4(2) of the Securities Act. Dr. Ashton is an accredited investor.

(16) In March and April 2000, we conducted a private placement, or the
2000 Units Offering, of up to $3,000,000 of units where each $100,000 unit
consisted of a 7% convertible promissory note in the original principal amount
of $25,000, 23,077 shares of Series C convertible preferred stock and a warrant
to purchase 5,000 shares of common stock at an exercise price of $6.60 per
share. The 2000 Units Offering was underwritten on a best-efforts basis by
Donald & Co. Securities Inc., who received a commission of 8% and a
non-accountable expense allowance of 0.5% As a result of the 2000 Units
Offering, we received cash of $850,000 which resulted in the issuance of 196,150
shares of Series C convertible preferred stock, notes in the original principal
amount of $212,500 and warrants to purchase 42,500 shares of common stock. This
offering was exempt from registration in

II-4

reliance on Rule 506 of Regulation D of the Securities Act. The securities
were issued to independent third parties and to existing stockholders, each
of who were an accredited investor. Each of the investors received a private
placement memorandum disclosing information about the securities and our
corporate, business and financial matters. Pursuant to the terms of the
Series C convertible preferred stock, the shares were automatically converted
into common stock upon the closing of our initial public offering.

(17) On March 30, 2000, we issued a warrant to purchase 125,000 shares
of common stock, exercisable at $4.80 per share through December 31, 2001, to
Hall Communications, Inc. for advertising, marketing and promotional services.
This offering was exempt from registration in reliance on Section 4(2) of the
Securities Act. The investor was an accredited investor.

(18) On April 13, 2000, we issued 200,000 shares of common stock in
conjunction with the receipt of a $1,500,000 loan evidenced by a promissory note
of the same date. This offering was exempt in reliance on Regulation S of the
Securities Act. The securities were offered and sold outside of the United
States to the following seven independent third party investors: (i) 566768
Ontario Limited, (ii) B.H. Capital Investments, L.P., (iii) Myra Heller, (iv)
Rachelle Heller, (v) Plazacorp Investments Limited, (vi) Queens Centre Corner
Limited and (vii) Jay Smith.

(19) In June 2000, we issued 777 shares of common stock to an employee
for services rendered. The shares were to have been issued to the employee in
October 1999, but for an oversight by us. The shares were valued at $2,485 or
$3.20 per share. This issuance of securities was exempt from registration in
reliance on Section 4(2) of the Securities Act.

(20) 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
until September 2000. This issuance of securities was exempt from registration
in reliance on Section 4(2) of the Securities Act.

(21) 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.

(22) 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.

(23) As of January 29, 2001, we have issued options pursuant to our
2000 Stock Option Plan to purchase an aggregate of 1,982,345 shares of our
common stock. The issuances of options and warrants to employees and consultants
of eRoomSystem Technologies under the 2000 Stock Option Plan were exempt under
Section 4(2) and Rule 701 of the Securities Act as transactions pursuant to a
compensatory benefit plan or written compensation contract. Of the Rule 701
issuances, none of the securities were issued to consultants. Of the Section
4(2) issuances, the securities were issued to existing stockholders, officers,
director, consultants or former consultants who were either accredited or
sophisticated non-accredited investors. Each of the sophisticated non-accredited
investors had access to our corporate, business and financial information.

(24) As of January 29, 2001, with the exception of the options and
warrants discussed in this Item 26, we have issued and outstanding options
and warrants to purchase 1,160,586 shares of common stock. Of this amount, we
issued warrants to purchase 390,429 shares of common stock in conjunction
with a private placement conducted from September 1996 through March 1997 in
reliance on Section 4(2) of the Securities Act. The remaining options and
warrants to purchase 770,157 shares of common stock were issued to employees,
consultants, investors and other service providers of eRoomSystem
Technologies in reliance upon Section 4(2) of the Securities Act.

II-5

ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits

See exhibits listed on the Exhibit Index following the signature page
of the Form SB-2 which is incorporated herein by reference.

(b) Financial Statement Schedules

None.

ITEM 28. UNDERTAKINGS.

The undersigned Registrant hereby undertakes to file, during any period
in which selling stockholders or warrant holders offer or sell securities, a
post-effective amendment to this registration statement to:

(1) Include any prospectus required by Section 10(a)(3)
of the Securities Act;

(2) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement; and

(3) Include any additional or changed material
information on the plan of distribution.

The undersigned Registrant further undertakes, for determining
liability under the Securities Act, to treat each post-effective amendment as a
new registration statement of the securities offered, and the offering of the
securities at the time to be the initial bona fide offering and to file a
post-effective amendment to remove from registration any of the securities that
remain unsold at the end of the offering.

Insofar as indemnification by the Registrant for liabilities arising
under the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 24 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act, and is therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered hereunder, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of Prospectus
filed as part of this Registration Statement in reliance upon Rule 430A
and contained in a form of Prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this Registration Statement as of the time it was
declared effective.

(2) For the purpose of determining any liability under
the Securities Act, each post-effective amendment that contains a form
of Prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.

II-6

SIGNATURES

In accordance with the requirements of the Securities Act of 1933,
the registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements of filing Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, in the
City of Las Vegas, State of Nevada, on the 2nd day of February 2001.

eROOMSYSTEM TECHNOLOGIES, INC.

By: /s/ Stephen M. Nelson
-----------------------------------------------
Stephen M. Nelson
Its: President and Chief Operating Officer

In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:

SIGNATURE TITLE DATE

*
- ------------------------------------ Chief Executive Officer and February 2, 2001
David S. Harkness Vice Chairman (Principal Executive Officer)

*
- ------------------------------------ Chairman of the Board of Directors February 2, 2001
Steven L. Sunyich

/s/ Stephen M. Nelson
- ------------------------------------ President and Chief Operating Officer February 2, 2001
Stephen M. Nelson

/s/ Gregory L. Hrncir
- ------------------------------------ General Counsel and Vice President February 2, 2001
Gregory L. Hrncir of Business Development

*
- ------------------------------------ Chief Financial Officer, Treasurer and Secretary February 2, 2001
Derek K. Ellis (Principal Financial and Accounting Officer)

*
- ------------------------------------ Director February 2, 2001
Lawrence S. Schroeder

*
- ------------------------------------ Director February 2, 2001
Dr. Alan C. Ashton

*
- ------------------------------------ Director February 2, 2001
S. Leslie Flegel

*
- ------------------------------------ Director February 2, 2001
John J. Prehn

*By: /s/ STEPHEN M. NELSON
-------------------------------- Attorney-in-Fact February 2, 2001
Stephen M. Nelson

II-7

EXHIBIT INDEX

EXHIBIT
NUMBER DOCUMENT NAME PAGE
------- ------------- ----

1.01 Form of Underwriting Agreement relating to the registrant's initial public offering that closed on ***
August 9, 2000

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

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

3.01 Amendment and Restatement of Articles of Incorporation *

3.02 Certificate of Correction dated May 30, 2000 **

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

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

3.05 Certificate of Designation, Preferences, Rights and Limitation of Series C convertible preferred *
stock

3.06 Amended and Restated Bylaws **

3.07 Second Amendment and Restatement of Articles of Incorporation ***

3.08 Second Amended and Restated Bylaws ***

4.01 Form of Common Stock Certificate *

4.02 Form of Certificate for Series A convertible preferred stock *

4.03 Form of Certificate for Series B convertible preferred stock *

4.04 Form of Certificate for Series C convertible preferred stock *

5.01 Opinion of Kummer Kaempfer Bonner & Renshaw ++

10.01 Amended and Restated 2000 Stock Option and Incentive Plan **

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

10.02A Exhibits to Lease Agreement by and between RoomSystems Finance Corporation and 3770 Howard Hughes **
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 **

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

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

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

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

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

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

10.08 Promissory Note Repurchase Agreement by and between Steven L. Sunyich and RoomSystems, Inc. dated *
September 1, 1999

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

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

II-8

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

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

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

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

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

10.15 Form of Hotel Revenue Sharing Lease Agreement **

10.16 Form of Noncompetition and Nondisclosure Agreement (Sales) *

10.17 Form of Consulting Agreement *

10.18 Form of Sales Representation Agreement *

10.19 Form of Executive Employment Agreement *

10.20 Form of Offshore Loan Subscription Agreement dated as of April 13, 2000 *

10.21 Form of Secured Subordinated Promissory Note dated as of April 13, 2000 *

10.22 Form of Installation, Co-Maintenance and Software Licensing and Upgrade Agreement **

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

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

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

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

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

10.28 Executive Employment Agreement of Stephen M. Nelson dated July 12, 2000 ++

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

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

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

16.01 Letter regarding Change in Certifying Accountant *

21.01 List of Subsidiaries ++

23.01 Consent of Hansen, Barnett & Maxwell

23.02 Consent of Kummer Kaempfer Bonner & Renshaw (included in Exhibit 5.01) ---

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

* Previously filed as an exhibit to the registrant's Registration
Statement on Form SB-2, as filed with the Commission on April 14,
2000.
** 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.
*** 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.
++ 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.
+ 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.
++ Previously filed as an exhibit to the registrant's Registration
Statement on Form SB-2, as filed with the Commission on December
22, 2000.

II-9