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-K, as filed with the Securities and Exchange Commission on March 12, 2009.

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. In 2009, we purchased Kooltech refreshment centers that were installed in various hotels from CPC. We may make additional investments in promising emerging growth companies, and potentially acquire an operating company if the opportunity arises.

On July 24, 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 matured on June 30, 2009 and the interest rate increased to 18% annually as of January 1, 2009, with interest payable quarterly on the last business day of each quarter. An extension to the note was provided through December 31, 2009 at an interest rate of 18%.

On June 17, 2009, the Company purchased the assets of Kooltech SPE which had been acquired by Cardinal Pointe Capital ("CPC"). CPC sold the minibars, baskets and stock owned by Kooltech SPE to the Company. The Company has formed a subsidiary, eFridge, LLC ("eFridge") for the purposes of this purchase. The purchase price is an amount equal to thirty percent (30%) of eFridge's EBITDA and an amount equal to thirty percent (30%) of New Equipment Cash Flow. Payment of the Purchase Price shall be made by eFridge to CPC on a monthly basis within twenty days after the end of each month, based on the eFridge's EBITDA for the month then ended.

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

Although historically, we have received most of our revenues from the sale or placement under a revenue-sharing program of our products in hotels, presently a significant portion of our revenues is derived from agreements with Hotels in which we provide the equipment as well as product and labor for restocking. A portion of revenue earned is paid to the Hotel. 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.

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 either provide product and labor for restocking and pay the Hotel a small percentage in the recurring revenues generated from sales of goods and services related to our products or we receive a share in the recurring revenues generated from sales of goods and services related to our products and the hotel takes care of the product and labor. We retain the ownership of the refreshment centers and safes 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.

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. Recently however, we have taken over the operation of Kooltech minibars located in various Hotels. Additionally, in 2005 we commenced our diversification strategy to invest in emerging growth companies. 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 third party companies, if applicable. The timing and return on such investments, however, cannot be assured.

We anticipate that we will receive more than 95% of the recurring revenues from the sale of goods and services generated by our currently installed refreshment centers, safes and baskets solutions under revenue-sharing agreements.

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 refreshment centers and safes 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.

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 cost of goods and labor as well as remaining basis on sale of old refreshment centers. 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. Research and development expenses in the nine months ended September 30, 2009 were $7,116.

In accordance with generally accepted accounting principles 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, 2009 and 2008

Revenues

Revenue Sharing Arrangements - Our revenue from revenue sharing arrangements was $45,559 for the three months ended September 30, 2009, compared to $114,294 for the three months ended September 30, 2008, representing a decrease of $68,735, or 60.1%. The decrease in revenue sharing revenue was due to the completion of a number of revenue sharing contracts in 2008 and 2009.

Maintenance Fee Revenues - Maintenance fee revenues were $45,158 for the three months ended September 30, 2009, compared to $58,590 for the three months ended September 30, 2008, representing a decrease of $13,432, or 22.9%. The decrease in maintenance fee revenue was due to the completion of a number of revenue sharing and maintenance contracts in 2008 and 2009.

Product Sales - Revenue from product sales was $115,277 for the three months ended September 30, 2009, compared to $0 for the three months ended September 30, 2008, representing an increase of $115,277, or 100%. The increase in product sales revenues was primarily due to the sale of product in our new Hotels in agreements structured in the three months ended September 30, 2009 utilizing the Kooltech refreshment centers as well as the sale of refreshment centers at the termination of a revenue sharing agreement in the three months ended September 30, 2009.

Cost of Revenue

Cost of Revenue Sharing Revenue - Cost of revenue sharing revenue was $8,691 for the three months ended September 30, 2009, compared to $46,330 for the three months ended September 30, 2008 representing a decrease of $37,639 or 81.2%. The gross margin percentage on revenue sharing revenue was 80.9% for the three months ended September 30, 2009, compared to 59.5% for the three months ended September 30, 2008. The increase in gross margin relating to revenue sharing revenue is due to the completion of some revenue sharing contracts in 2008.

Cost of Maintenance Fee Revenue - Our cost of maintenance fee revenue was $23,533 for the three months ended September 30, 2009, compared to $16,638 for the three months ended September 30, 2008, representing an increase of $6,895, or 41.4%. The gross margin percentage on maintenance fee revenues was 47.9% for the three months ended September 30, 2009, compared to 71.6% for the three months ended September 30, 2008. The increase in our cost of maintenance fee revenue was due to the Kooltech equipment being serviced.

Cost of Product Sales Revenue - Our cost of product sales revenue for the three months ended September 30, 2009 was $96,008, compared to $0 for the three months ended September 30, 2008, an increase of $96,008, or 100%. The gross margin percentage on revenue from product sales revenue was 16.7% for the three months ended September 30, 2009, compared to 0% for the three months ended September 30, 2008. The increase in cost of product sales revenue relates to the remaining basis of the refreshment centers sold as well as the cost of the minibar product sold and labor provided in the three months ended September 30, 2009 versus the three months ended September 30, 2008. We are presently providing a complete turnkey solution to the Hotels, which includes providing equipment labor and product for the Kooltech equipment that we purchased in June.

The changes and percent changes with respect to our revenues and our cost of revenue for the three months ended September 30, 2009 and 2008 are summarized as follows:

                                  For the Three Months
                                   Ended September 30,                      Percent
                                   2009           2008         Change        Change
REVENUE
Revenue-sharing arrangements    $    45,559     $ 114,294     $ (68,735 )      -60.1 %
Maintenance fees                     45,158        58,590       (13,432 )      -22.9 %
Product sales                       115,277             -       115,277        100.0 %
Total Revenue                       205,994       172,884        33,110         19.2 %

COST OF REVENUE
Revenue-sharing arrangements          8,691        46,330       (37,639 )      -81.2 %
Maintenance                          23,533        16,638         6,895         41.4 %
Product sales                        96,008             -        96,008        100.0 %
Total Cost of Revenue           $   128,232     $  62,968     $  65,264        103.6 %

GROSS MARGIN PERCENTAGE
Revenue-sharing arrangements           80.9 %        59.5 %
Maintenance                            47.9 %        71.6 %
Product sales                          16.7 %         0.0 %
Total Gross Margin Percentage          37.7 %        63.6 %

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, 2009 and 2008, 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 $237,309 for the three months ended September 30, 2009, compared to $79,158 for the three months ended September 30, 2008, representing an increase of $158,151, or 199.8%. The increase in our selling, general and administrative expenses was due to the start-up costs for the Kooltech equipment as well as the write-off of an uncollectible account.

Research and Development-Research and development expenses were $2,031 for the three months ended September 30, 2009, compared to $48,320 for the three months ended September 30, 2008 representing a decrease of $46,289. The decrease in our research and development expenses for the three months ended September 30, 2009 reflects a decrease in new product development in 2009.

Interest and other income was $20,101 for the three months ended September 30, 2009 as compared to $28,977 for the three months ended September 30, 2008 representing a decrease of $8,876, or 30.6%. The decrease was due to the decrease in interest rates on our cash and cash equivalents.

Net Income/(Loss) Attributable to Common Stockholders

We realized a net loss of $141,477 for the three months ended September 30, 2009, compared to a net income of $11,415 during the three months ended September 30, 2008. The $152,892 decrease in net income was primarily due to decreasing revenue sharing agreements and the many costs involved in the equipment purchase from CPC. We may incur losses in the future as existing revenue sharing agreements with our hotel clients continue expire and as we continue to bring our recently purchased equipment up to par. There is no assurance that we will be successful in bringing the equipment up to par.

Comparison of Nine months ended September 30, 2009 and 2008

Revenues

Revenue Sharing Arrangements - Our revenue from revenue sharing arrangements was $194,374 for the nine months ended September 30, 2009, compared to $450,099 for the nine months ended September 30, 2008, representing a decrease of $255,725, or 56.8%. The decrease in revenue sharing revenue was due to the completion of a number of revenue sharing contracts in 2008 and 2009.

Maintenance Fee Revenues - Maintenance fee revenues were $120,986 for the nine months ended September 30, 2009, compared to $170,088 for the nine months ended September 30, 2008, representing a decrease of $49,102, or 28.9%. The decrease in maintenance fee revenue was due to the completion of a number of revenue sharing and maintenance contracts in 2008 and 2009.

Product Sales - Revenue from product sales was $155,383 for the nine months ended September 30, 2009, compared to $96,368 for the nine months ended September 30, 2008, representing an increase of $59,015, or 61.2%. The increase in product sales revenues was primarily due to the sale of product in the Kooltech minibars as well as sales of refreshment centers to hotels and sales of parts during the nine months ended September 30, 2009.

Cost of Revenue

Cost of Revenue Sharing Revenue - Cost of revenue sharing revenue was $55,642 for the nine months ended September 30, 2009, compared to $197,093 for the nine months ended September 30, 2008 representing a decrease of $141,451 or 71.8%. The gross margin percentage on revenue sharing revenue was 71.4% for the nine months ended September 30, 2009, compared to 56.2% for the nine months ended September 30, 2008. The increase in gross margin relating to revenue sharing revenue is due to the completion of some revenue sharing contracts in 2008 and 2009.

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 $31,156 for the nine months ended September 30, 2009, compared to $62,147 for the nine months ended September 30, 2008, representing an decrease of $30,991, or 49.9%. The gross margin percentage on maintenance fee revenues was 74.2% for the nine months ended September 30, 2009, compared to 63.5% for the nine months ended September 30, 2008. The decrease in our cost of maintenance fee revenue was due to the decreased amount of equipment being serviced.

Cost of Product Sales Revenue - Our cost of product sales revenue for the nine months ended September 30, 2009 was $128,763, compared to $26,098 for the nine months ended September 30, 2008, an increase of $102,665, or 393.4%. The gross margin percentage on revenue from product sales revenue was 17.1% for the nine months ended September 30, 2009, compared to 72.9% for the nine months ended September 30, 2008. The increase in cost of product sales revenue relates to the cost of product and labor for the recently purchased Kooltech minibar as well as to the increase in parts sold and the remaining basis of the refreshment centers sold in the nine months ended September 30, 2009 versus the nine months ended September 30, 2008. We are presently providing a complete turnkey solution to the Hotels, which includes providing equipment labor and product for the Kooltech equipment that we purchased in June.

The changes and percent changes with respect to our revenues and our cost of revenue for the nine months ended September 30, 2009 and 2008 are summarized as follows:

                                       For the Nine Months
                                       Ended September 30,                            Percent
                                       2009            2008           Change           Change
REVENUE
Revenue-sharing arrangements       $    194,374     $   450,099     $  (255,725 )          -56.8 %
Maintenance fees                        120,986         170,088         (49,102 )          -28.9 %
Product sales                           155,383          96,368          59,015             61.2 %
Total Revenue                           470,743         716,555        (245,812 )          -34.3 %

COST OF REVENUE
Revenue-sharing arrangements             55,642         197,093        (141,451 )          -71.8 %
Loss on impairment of
refreshment centers in serivice               -          64,835         (64,835 )          100.0 %
Maintenance                              31,156          62,147         (30,991 )          -49.9 %
Product sales                           128,763          26,098         102,665            393.4 %
Total Cost of Revenue              $    215,561     $   350,173     $  (134,612 )          -38.4 %

GROSS MARGIN PERCENTAGE
Revenue-sharing arrangements               71.4 %          56.2 %
Maintenance                                74.2 %          63.5 %
Product sales                              17.1 %          72.9 %
Total Gross Margin Percentage              54.2 %          51.1 %

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, 2009 and 2008, 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 $480,526 for the nine months ended September 30, 2009, compared to $333,125 for the nine months ended September 30, 2008, representing a increase of $147,401, or 44.2%. The increase in our selling, general and administrative expenses reflects primarily the expenses involved in the purchase of the Kooltech equipment from CPC.

Research and Development-Research and development expenses were $7,116 for the nine months ended September 30, 2009, compared to $85,648 for the nine months ended September 30, 2008 representing a decrease of $78,532. The decrease in our research and development expenses for the nine months ended September 30, 2009 reflects the decrease in new product development in 2009.

Interest and other income was $93,836 for the nine months ended September 30, 2009 as compared to $89,022 for the nine months ended September 30, 2008 representing an increase of $4,814, or 5.4%. The increase was due to the increase in interest earned on our loan receivable.

Net Income/(Loss) Attributable to Common Stockholders

We realized net loss of $138,624 for the nine months ended September 30, 2009, compared to a net income of $36,631 during the nine months ended September 30, 2008. The $175,255 decrease in net income was primarily due to decreasing revenue sharing agreements and the many costs involved in the equipment purchase from CPC. We may incur losses in the future as existing revenue sharing agreements with our hotel clients continue expire and as we continue to bring our recently purchased equipment up to par. In addition, there is no assurance that we will be successful in bringing the equipment up to par.

Liquidity and Capital Resources

At September 30, 2009, our principal sources of liquidity consisted of $2,322,514 of cash and working capital of $2,927,408, as compared to $2,135,814 of cash and working capital of $2,774,255 at December 31, 2008. In addition, our stockholders' equity was $2,963,270 at September 30, 2009, compared to stockholders' equity of $3,081,719 at December 31, 2008, a decrease of $118,449. The increase in cash reflects the payment of a note receivable.

Our accumulated deficit increased from $31,010,396 at December 31, 2008 to $31,149,020 at September 30, 2009. The $138,624 increase in accumulated deficit resulted directly from the net loss realized for the nine months ended September 30, 2009. Our accumulated deficit may increase in the future as existing revenue sharing and maintenance agreements with our hotel clients expire and if we don't succeed in bringing our new Kooltech equipment up to par.

Our operations used net cash of $57,078 for the nine months ended September 30, 2009, compared to providing $272,883 during the nine months ended September 30, 2008.

Investing activities for the nine months ended September 30, 2009 provided net cash of $243,778, compared to $1,071,689 of net cash provided during the nine months ended September 30, 2008. The change consisted primarily of the proceeds from the sale of investment securities in 2008.

There were no financing activities in the nine months ended September 30, 2009 and 2008.

Contractual Cash Obligations and Commercial Commitments

. . .