As used in this Form 10-Q, references to the "Company," "we," "our" or "us" refer to eRoomSystem Technologies, Inc., unless the context otherwise indicates.

This Management's Discussion and Analysis or Plan of Operations ("MD&A") section of our Quarterly Report on Form 10-Q discusses our results of operations, liquidity and financial condition, and certain factors that may affect our future results. You should read this MD&A in conjunction with our consolidated financial statements and accompanying notes included in this Quarterly Report.

Forward-Looking Statements

This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors discussed elsewhere in this report.

Certain information included herein contains statements that may be considered forward-looking statements, such as statements relating to our anticipated revenues, gross margin and operating results, future performance and operations, plans for future expansion, capital spending, sources of liquidity and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, such results may differ from those expressed in any forward-looking statements made herein. These risks and uncertainties include, but are not limited to, those relating to our liquidity requirements, the continued growth of the lodging industry, the success of our product-development, marketing and sales activities, vigorous competition in the lodging industry, dependence on existing management, leverage and debt service (including sensitivity to fluctuations in interest rates), domestic or global economic conditions, the inherent uncertainty and costs of prolonged arbitration or litigation, and changes in federal or state tax laws or the administration of such laws. A complete discussion of these risks and uncertainties are contained in our Annual Report on Form 10-KSB/A, as filed with the Securities and Exchange Commission on April 30, 2008.

Overview

Our core business is the development and installation of an intelligent, in-room computer platform and communications network, or the eRoomSystem, for the lodging industry. The eRoomSystem is a computerized platform and processor-based system designed to collect and control data. The eRoomSystem supports our fully automated and interactive eRoomServ refreshment centers, eRoomSafes, eRoomEnergy products, and the eRoomTray. In 2005, we commenced our diversification strategy of investing in third party emerging growth companies. To this end, we have an investment totaling $10,000 in Identica Holdings Corporation ("Identica"). In addition, we have loaned Identica $150,000 in cash. The loan is secured by a security interest in all the assets of Identica and is evidenced by a promissory note. Although the loan was to be paid back in June 2008, we extended the due date to December 20, 2008. In consideration for making the loan, Identica issued a warrant to us to purchase one million (1,000,000) shares of common stock of Identica, exercisable at $0.15 per share at any time through May 20, 2010. In third quarter of 2008 we extended an additional $20,000 to Identica with the same terms. We may make additional investments in promising emerging growth companies, and potentially acquire an operating company if the opportunity arises.

On July 25, 2008, we provided a secured loan to BlackBird Corporation, a Florida corporation ("BlackBird"), an unrelated entity. The funding of the loan took place on completion of a transaction by BlackBird to acquire an unrelated company, USA Datanet Corporation. The acquisition took place on July 24, 2008. The loan is evidenced by a 10% senior secured convertible promissory note, made by BlackBird (the "Secured Note"). The Secured Note matures on June 30, 2009 and bears interest at an annual rate of 10%, with interest payable quarterly on the last business day of each quarter.

Our existing products interface with the hotel's property management system through our eRoomSystem communications network. The hotel's property management system posts usage of our products directly to the hotel guest's room account. The solutions offered by our eRoomSystem and related products have allowed us to install our products and services in several premier hotel chains, including Marriott International, Hilton Hotels and Carlson Hospitality Worldwide, in the United States and internationally.

One of the byproducts of our technology is the information we have collected since our first product installation. To date, we have collected several million room-nights of data. Through our eRoomSystem, we are able to collect information regarding the usage of our products on a real-time basis. We use this information to help our customers increase their operating efficiencies.

Description of Revenues

Historically, we have received most of our revenues from the sale or placement under a revenue-sharing program of our products in hotels. We expect that these revenues will account for a substantial majority of our revenues for the foreseeable future. In addition, we may receive revenues in the future upon the sale of securities received in consideration for our investment made in a third party company in 2005; however, the return on such investment is not assured.

We also generate revenues from maintenance and support services relating to our existing installed products. Our dependence on the lodging industry, including its guests, makes us extremely vulnerable to downturns in the lodging industry caused by the general economic environment. Such a downturn could result in fewer purchases by hotel guests of goods and services from our products installed in hotels, and accordingly lower revenues where our products are placed pursuant to a revenue sharing agreement. Time spent by individuals on travel and leisure is often discretionary for consumers and may be particularly affected by adverse trends in the general economy. The success of our operations depends, in part, upon discretionary consumer spending and economic conditions affecting disposable consumer income such as employment, wages and salaries, business conditions, interest rates, availability of credit and taxation.

Our revenue-sharing program provides us with a seven-year revenue stream under each revenue-sharing agreement. Because many of our customers in the lodging industry traditionally have limited capacity to finance the purchase of our products, we designed our revenue-sharing program accordingly. Through our revenue-sharing plan, we have installed our products at little or no upfront cost to our customers and share in the recurring revenues generated from sales of goods and services related to our products. We retain the ownership of the eRoomServ refreshment centers and eRoomSafes throughout the term of the revenue-sharing agreements and the right to re-deploy any systems returned to us upon the expiration or earlier termination of the revenue-sharing agreements. We have failed to place any products, either on a revenue sharing or sale basis in the prior four fiscal years, and we have no present intention of placing new products in the future. We do, however, intend to continue to service and maintain our existing installed product base for the remaining life of the contracts relating thereto.

Our revenues over the past years have been declining as we have focused on service and maintenance of our existing installed products and have not installed new products at hotels and as existing revenue sharing agreements conclude. Given the foregoing, in 2005 we commenced our diversification strategy to invest in emerging growth companies. To this end, we invested in Identica Holdings Corporation, a privately held distributor and integrator of next-generation biometric security solutions, including the TechSphere hand vascular pattern biometric technology. We continue to explore opportunities and perform due diligence on third parties with respect to additional potential investments. At this time, we have not reached a definitive agreement to make further investments. In addition, we may acquire an operating company in the future if the opportunity arises. Over time, we may realize revenues from the sale of securities purchased from Identica, and other third party companies, if applicable. The timing and return on such investments, however, cannot be assured.

We anticipate that we will receive more than 50% of the recurring revenues from the sale of goods and services generated by our currently installed eRoomServ refreshment centers, eRoomSafes and eRoomTray solutions under revenue-sharing agreements. Our customers receive the remainder of the recurring revenues.

Revenue Recognition

Sales revenue from our products is recognized upon completion of installation and acceptance by the customer. We do not, however, expect to generate meaningful sales revenue as such revenues are limited to the sales of used equipment as well as replacement equipment and parts to hotel clients who previously purchased our products. Sales revenue from the placement of our eRoomServ refreshment centers and eRoomSafes under our revenue-sharing program are accounted for similar to an operating lease, with the revenues recognized as earned over the term of the agreement. In some instances, our revenue-sharing agreements provide for a guaranteed minimum daily payment by the hotel. We negotiated 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 have entered into installation, maintenance and license agreements with most of our existing hotel customers. Installation, maintenance and license revenues are recognized as the services are performed, or pro rata over the service period. We defer all revenue paid in advance relating to future services and products not yet installed and accepted by our customers.

Our installation, maintenance and license agreements stipulate that we collect a maintenance fee per eRoomServ refreshment center per day, payable on a monthly basis. Our objective is to generate gross profit margins of approximately 40% from our maintenance-related revenues. We base this expectation on our historical cost of maintenance of approximately $0.04 per unit per day and, pursuant to our maintenance agreements, our projected receipt of generally not less than $0.08 per unit per day.

Description of Expenses

Cost of product sales consists primarily of production, shipping and installation costs. Cost of revenue-sharing arrangements consists primarily of depreciation of capitalized costs for the products placed in service. We capitalize the production, shipping, installation and sales commissions related to the eRoomServ refreshment centers, eRoomSafes, eRoomTrays and eRoomEnergy management products placed under revenue-sharing agreements. Cost of maintenance fee revenues primarily consists of expenses related to customer support and maintenance.

Selling, general and administrative expenses primarily consist of general and administrative expenses including 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 our consultants in the maintenance of our existing installed products as well as research and development for new products. Our research and development expenses in the nine and three months ended September 30, 2008 were $85,648 and $48,320, respectively.

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

Results of Operations

Comparison of Three Months Ended September 30, 2008 and 2007

Revenues

Revenue Sharing Arrangements - Our revenue from revenue sharing arrangements was $114,294 for the three months ended September 30, 2008, compared to $189,530 for the three months ended September 30, 2007, representing a decrease of $75,236, or 39.7%. The decrease in revenue sharing revenue was due to the completion of a number of revenue sharing contracts in 2007 and 2008.

Maintenance Fee Revenues - Maintenance fee revenues were $58,590 for the three months ended September 30, 2008, compared to $63,643 for the three months ended September 30, 2007, representing a decrease of $5,053 or 7.9%. The decrease in maintenance fee revenue was due to the completion of a number of revenue sharing and maintenance contracts in 2007 and 2008.

Product Sales - Revenue from product sales was $0 for the three months ended September 30, 2008, compared to $65,194 for the three months ended September 30, 2007, representing a decrease of $65,194 or 100%. The decrease in product sales revenues was primarily due to the fact that there were no product sales in the three months ended September 30, 2008.

Cost of Revenue

Cost of Revenue Sharing Revenue - Cost of revenue sharing revenue was $46,330 for the three months ended September 30, 2008, compared to $87,254 for the three months ended September 30, 2007 representing a decrease of $40,924 or 46.9%. The gross margin percentage on revenue sharing revenue was 59.5% for the three months ended September 30, 2008, compared to 54.0% for the three months ended September 30, 2007. The increase in gross margin percentage relating to revenue sharing revenue is due to the completion of some revenue sharing contracts in 2007 and 2008.

Cost of Maintenance Fee Revenue - Our cost of maintenance fee revenue was $16,638 for the three months ended September 30, 2008, compared to $14,716 for the three months ended September 30, 2007, representing an increase of $1,922, or 13.1%. The gross margin percentage on maintenance fee revenues was 71.6% for the three months ended September 30, 2008, compared to 76.9% for the three months ended September 30, 2007. The increase in our cost of maintenance fee revenue was due to the aging of the equipment being serviced.

Cost of Product Sales Revenue - Our cost of product sales revenue for the three months ended September 30, 2008 was $0, compared to $10,175 for the three months ended September 30, 2007, a decrease of $10,175, or 100%. The gross margin percentage on revenue from product sales revenue was 0% for the three months ended September 30, 2008, compared to 84.4% for the three months ended September 30, 2007. The decrease in cost of product sales revenue relates to the fact that there were no product sales in the three months ended September 30, 2008 versus the three months ended September 30, 2007.

The changes and percent changes with respect to our revenues and our cost of revenue for the three months ended September 30, 2008 and 2007 are summarized as follows:

                                    For the Three Months
                                    Ended September 30,
                                                                          Percent
                                      2008         2007        Change      Change
REVENUE
Revenue-sharing arrangements      $    114,294   $ 189,530   $  (75,236 )    -39.7 %
Maintenance fees                        58,590      63,643       (5,053 )     -7.9 %
Product sales                                -      65,194      (65,194 )   -100.0 %
Total Revenue                          172,884     318,367     (145,483 )    -45.7 %

COST OF REVENUE
Revenue-sharing arrangements            46,330      87,254      (40,924 )    -46.9 %
Maintenance                             16,638      14,716        1,922       13.1 %
Product sales                                -      10,175      (10,175 )   -100.0 %
Total Cost of Revenue             $     62,968   $ 112,145   $  (49,177 )    -43.9 %

GROSS MARGIN PERCENTAGE
Revenue-sharing arrangements              59.5 %      54.0 %
Maintenance                               71.6 %      76.9 %
Product sales                                -        84.4 %
Total Gross Margin Percentage             63.6 %      64.8 %

Although the preceding table summarizes the net changes and percent changes with respect to our revenues and our cost of revenue for the three months ended September 30, 2008 and 2007, the trends contained therein are limited and should not be viewed as a definitive indication of our future results.

Operating Expenses

Selling, General and Administrative - Selling, general and administrative expenses, including non-cash compensation expense, were $79,158 for the three months ended September 30, 2008, compared to $84,347 for the three months ended September 30, 2007, representing a decrease of $5,189, or 6.2%. The decrease in our selling, general and administrative expenses was immaterial.

Research and Development-Research and development expenses were $48,320 for the three months ended September 30, 2008, compared to $0 for the three months ended September 30, 2007 representing an increase of $48,320. The increase in our research and development expenses for the three months ended September 30, 2008 reflects new product development in 2008.

Interest and other income was $28,977 for the three months ended September 30, 2008 as compared to $31,443 for the three months ended September 30, 2007 representing a decrease of $2,466 or 7.8%. The decrease was due to the interest earned on our increasing balance of cash and investments in marketable securities.

Net Income Attributable to Common Stockholders

We realized net income of $11,415 for the three months ended September 30, 2008, compared to $153,318 during the three months ended September 30, 2007. The $141,903 decrease in net income was primarily due to decreasing revenue sharing agreements, as well as research and development costs. We may incur losses in the future as existing revenue sharing agreements with our hotel clients expire.

Comparison of Nine Months Ended September 30, 2008 and 2007

Revenues

Revenue Sharing Arrangements - Our revenue from revenue sharing arrangements was $450,099 for the nine months ended September 30, 2008, compared to $625,197 for the nine months ended September 30, 2007, representing a decrease of $175,098, or 28.0%. The decrease in revenue sharing revenue was due to the completion of a number of revenue sharing contracts in 2007 and 2008.

Maintenance Fee Revenues - Maintenance fee revenues were $170,088 for the nine months ended September 30, 2008, compared to $196,892 for the nine months ended September 30, 2007, representing a decrease of $26,804, or 13.6%. The decrease in maintenance fee revenue was due to the completion of a number of revenue sharing and maintenance contracts in 2007 and 2008.

Product Sales - Revenue from product sales was $96,368 for the nine months ended September 30, 2008, compared to $125,891 for the nine months ended September 30, 2007, representing a decrease of $29,523, or 23.5%. The decrease in product sales revenues was primarily due to the difference in sales of refreshment centers to hotels at the completion of their revenue share contracts in the nine months ended September 30, 2008.

Cost of Revenue

Cost of Revenue Sharing Revenue - Cost of revenue sharing revenue was $197,093 for the nine months ended September 30, 2008, compared to $297,219 for the nine months ended September 30, 2007 representing a decrease of $100,126 or 33.7%. The gross margin percentage on revenue sharing revenue was 56.2% for the nine months ended September 30, 2008, compared to 52.5% for the nine months ended September 30, 2007. The increase in gross margin percentage relating to revenue sharing revenue is due to the completion of some revenue sharing contracts in 2007 and 2008.

Loss on Impairment of Refreshment Centers - During 2008, the Company assessed the carrying value of certain refreshment centers that had been used by a Hotel and taken out of service and recorded a loss due to impairment of $64,835.

Cost of Maintenance Fee Revenue - Our cost of maintenance fee revenue was $62,147 for the nine months ended September 30, 2008, compared to $44,558 for the nine months ended September 30, 2007, representing an increase of $17,589, or 39.5%. The gross margin percentage on maintenance fee revenues was 63.5% for the nine months ended September 30, 2008, compared to 77.4% for the nine months ended September 30, 2007. The increase in our cost of maintenance fee revenue was due to the aging of the equipment being serviced.

Cost of Product Sales Revenue - Our cost of product sales revenue for the nine months ended September 30, 2008 was $26,098, compared to $27,085 for the nine months ended September 30, 2007, a decrease of $987, or 3.6%. The gross margin percentage on revenue from product sales revenue was 72.9% for the nine months ended September 30, 2008, compared to 78.5% for the nine months ended September 30, 2007. The difference in cost of product sales revenue relates to the remaining basis of the refreshment centers sold in the nine months ended September 30, 2008 versus the nine months ended September 30, 2007.

The changes and percent changes with respect to our revenues and our cost of revenue for the nine months ended September 30, 2008 and 2007 are summarized as follows:

                                       For the Nine Months
                                       Ended September 30,
                                                                               Percent
                                        2008          2007        Change       Change
REVENUE
Revenue-sharing arrangements         $   450,099   $  625,197   $ (175,098 )       -28.0 %
Maintenance fees                         170,088      196,892      (26,804 )       -13.6 %
Product sales                             96,368      125,891      (29,523 )       -23.5 %
Total Revenue                            716,555      947,980     (231,425 )       -24.4 %

COST OF REVENUE
Revenue-sharing arrangements             197,093      297,219     (100,126 )       -33.7 %
Loss on impairment of refreshment
centers in serivice                       64,835            -       64,835         100.0 %
Maintenance                               62,147       44,558       17,589          39.5 %
Product sales                             26,098       27,085         (987 )        -3.6 %
Total Cost of Revenue                $   350,173   $  368,862   $  (18,689 )        -5.1 %

GROSS MARGIN PERCENTAGE
Revenue-sharing arrangements                56.2 %       52.5 %
Maintenance                                 63.5 %       77.4 %
Product sales                               72.9 %       78.5 %
Total Gross Margin Percentage               51.1 %       61.1 %

Although the preceding table summarizes the net changes and percent changes with respect to our revenues and our cost of revenue for the nine months ended September 30, 2008 and 2007, the trends contained therein are limited and should not be viewed as a definitive indication of our future results.

Operating Expenses

Selling, General and Administrative - Selling, general and administrative expenses, including non-cash compensation expense, were $333,125 for the nine months ended September 30, 2008, compared to $298,305 for the nine months ended September 30, 2007, representing an increase of $34,820, or 11.7%. The increase in our selling, general and administrative expenses reflects the write-off of an uncollectible account.

Research and Development-Research and development expenses were $85,648 for the nine months ended September 30, 2008, compared to $0 for the nine months ended September 30, 2007 representing an increase of $85,648. The increase in our research and development expenses for the nine months ended September 30, 2008 reflects new product development in 2008.

Interest and other income was $89,022 for the nine months ended September 30, 2008 as compared to $76,862 for the nine months ended September 30, 2007 representing an increase of $12,160, or 15.8%. The increase was due to the interest earned on our loans receivable and increasing balance of cash and investments in marketable securities.

Net Income Attributable to Common Stockholders

We realized net income of $36,631 for the nine months ended September 30, 2008, compared to $366,175 during the nine months ended September 30, 2007. The $329,544 decrease in net income was primarily due to decreasing revenue sharing agreements, the loss on impairment of refreshment centers recognized, the write-off of an uncollectible account as well as research and development costs. We may incur losses in the future as existing revenue sharing agreements with our hotel clients expire.

Liquidity and Capital Resources

At September 30, 2008, our principal sources of liquidity consisted of $1,700,542 of cash and working capital of $2,725,082, as compared to $355,970 of cash and working capital of $2,416,398 at December 31, 2007. In addition, our stockholders' equity was $3,084,572 at September 30, 2008, compared to stockholders' equity of $3,029,941 at December 31, 2007, an increase of $54,631. The increase in cash reflects the increase in working capital, decrease in investments and increase in stockholders' equity.

At September 30, 2008, the Company had $500,000 invested in outstanding auction rate preferred securities ("ARPS"). ARPS are perpetual securities with dividend rates that are reset periodically-often weekly or monthly-when buyers and sellers come together at an auction. There is currently an imbalance between the number of buyers and sellers in the ARPS market that has resulted in a number of "failed auctions." This has created a lack of liquidity for ARPS investors. However, as we have already liquidated over $2,000,000 of these securities after the auctions failed and are continuing to liquidate our securities, we do not believe this will have a negative affect on our cash flows.

Our accumulated deficit decreased from $31,082,627 at December 31, 2007 to $31,045,996 at September 30, 2008. The $36,631 decrease in accumulated deficit resulted directly from the net income realized for the nine months ended September 30, 2008. Our accumulated deficit may increase in the future as existing revenue sharing agreements with our hotel clients expire.

Our operations provided net cash of $272,883 for the nine months ended September 30, 2008, compared to $565,245 during the nine months ended September 30, 2007. The $292,362 decrease in net cash provided by our operating activities resulted primarily from the decrease in net income during the nine months ended September 30, 2008.

Investing activities for the nine months ended September 30, 2008 provided net . . .