<PAGE>

                       U.S. SECURITIES AND EXCHANGE COMMISSION
                                Washington, D.C. 20549
                                  __________________
                                     FORM 10-KSB

                   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                         THE SECURITIES EXCHANGE ACT OF 1934

            [X]      Annual report pursuant to Section 13 or 15(d) of the
                           Securities Exchange Act of 1934

                     For the fiscal year ended December 31, 1998

            [ ]  Transition report pursuant to Section 13 or 15(d) of the
                           Securities Exchange Act of 1934

                For the transition period from _________ to __________

                             Commission File No. 0-27646

                                 RACOM SYSTEMS, INC.
                                 --------------------
                (Exact name of registrant as specified in its charter)

                    DELAWARE                                84-1182875
                    --------                                ----------
(State or other jurisdiction of incorporation or         (I.R.S. Employer
                  organization                         Identification Number)


                     P.O. Box 3224, Boulder, Colorado  80307-3224
                     --------------------------------------------
                       (Address of principal executive offices)

                                    (303) 771-2077
                                    --------------
                 (Registrant's telephone number, including area code)

      Securities registered pursuant to Section 12(b) of the Exchange Act:  None

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

                             $.01 Par Value Common Stock
                            Common Stock Purchase Warrants
                            ------------------------------
                                   (Title of Class)

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

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

The registrant's revenues for its year ended December 31, 1998 were 
$1,747,203.

The aggregate market value of voting stock held by nonaffiliates of the 
registrant's common stock, as of March 30, 1999 was approximately $727,863 
(based on the last sale price of such stock as reported by Nasdaq SmallCap 
Stock Market).

The number of shares outstanding of the registrant's common stock as of March 
30, 1999 was 2,987,230.

DOCUMENTS INCORPORATED BY REFERENCE          None


<PAGE>

                                 RACOM SYSTEMS, INC.

                                     FORM 10-KSB
                         FOR THE YEAR ENDED DECEMBER 31, 1998

                                        INDEX

PART I                                                                    PAGE
                                                                          ----

Item 1.   Business                                                          3 
Item 2.   Properties                                                       13 
Item 3.   Legal Proceedings                                                14 
Item 4.   Submission of Matters to a Vote of Security Holders              14 

PART II

Item 5.   Market for Common Equity and Related Stockholder Matters         14 
Item 6.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations                                        15 
Item 7.   Financial Statements and Supplementary Data                      20 
Item 8.   Changes in and Disagreements with Accountants on
          Accounting and Financial Disclosure                              20 

PART III

Item 9.   Directors, Executive Officers, Promoters and Control Persons;
          Compliance with Section 16(a) of the Exchange Act                20 
Item 10.  Executive Compensation                                           22 
Item 11.  Security Ownership of Certain Beneficial Owners and Management   24 
Item 12.  Certain Relationships and Related Transactions                   25 
Item 13.  Exhibits and Reports on Form 8-K                                 26 

SIGNATURES

Signatures                                                                 28 


                                          2
<PAGE>

                                        PART I


FORWARD-LOOKING STATEMENTS

Statements contained in this Report which are not historical in nature are 
forward-looking statements within the meaning of the Private Securities 
Litigation Reform Act of 1995.  These forward-looking statements include 
statements in "Item 1. Business," "Item 5. Market for Common Equity and 
Related Stockholder Matters," and "Item 6. Management's Discussion and 
Analysis of Financial Condition and Results of Operations," which can be 
identified by the use of forward-looking terminology such as "believes," 
"expects," "may," "should," or "anticipates" or the negative thereof or other 
variations thereon or comparable terminology, or by discussions of strategy.

Such forward-looking statements involve certain risks and uncertainties that 
could cause actual results to differ materially from anticipated results.  
These risks and uncertainties include regulatory constraints, changes in laws 
or regulations governing the Company's products and international trade, the 
ability of the Company to market successfully its products in an increasingly 
competitive worldwide market, changes in the Company's operating strategy, 
failure to consummate or successfully integrate product developments, the 
general economy of the United States and the specific global markets in which 
the Company competes, the availability of financing from internal and 
external sources and other factors as may be identified from time to time in 
the Company's filings with the Securities and Exchange Commission or in the 
Company's press releases.

No assurance can be given that the future results covered by the 
forward-looking statements will be achieved. The matters identified in "Item 
1. Business--Risk Factors" contain cautionary statements identifying 
important factors with respect to such forward-looking statements, including 
certain risks and uncertainties, that could cause actual results to vary 
materially from the future results covered in such forward-looking 
statements.  Other factors could also cause actual results to vary materially 
from the future results covered in such forward-looking statements.

ITEM 1.  BUSINESS 

GOING CONCERN

The Company has generated substantial operating losses since inception and 
has yet to generate sufficient revenues to fund its operations.  To date, the 
Company has completed a series of pilot projects; however, the Company has 
not yet completed a significant number of substantial sales transactions to 
third parties at prices and volumes sufficient to fund its operations.  
During 1998, the Company experienced significant cash flow deficits and 
liquidity shortages and funded its operations through the sale of a 
non-exclusive sublicense of its technology and a capital contribution from a 
related party, which was received in consideration of the Company reconveying 
to the related party its rights to sublicense the ferroelectric technology to 
two additional licensees.  In the fourth quarter of 1998, the Company reduced 
its administrative, sales and engineering costs through personnel reductions; 
however, the Company was not able to generate sufficient margins to fund its 
operations.  In March 1999, the Company announced that it was unable to 
continue to fund operations and, as of March 31, 1999, most of its employees 
have been furloughed for an indefinite period of time.  The Company will 
enter a period whereby its primary function will be to collect future 
royalties if and when receivable pursuant to the Company's existing Radio 
Frequency Identification ("RFID") technology licenses to three multinational 
semiconductor companies (See Note 5 to the Financial Statements). There can 
be no assurance that royalties will become due in the future.

The Company is in the process of identifying sources of debt or equity 
financing to fund its operations until royalty revenue is received or until a 
strategic merger partner is located.  To date, no financing has been made 
available under terms acceptable to the Company.  There can be no assurance 
that the Company will be successful in obtaining acceptable financing.

                                       3
<PAGE>

These factors, among others, raise substantial doubt about the ability of the 
Company to continue as a going concern.

OVERVIEW

The Company was incorporated in June 1991 and is a developer and marketer of 
contactless smart card systems ("Smart Card(s)" or "Smart Card System(s)"). 
Generally the size of a credit card, Smart Cards add the ability and 
intelligence to store and process information with a computer chip embedded 
inside the card.  Smart Cards are used in a number of consumer applications 
including (i) access to restricted areas (replacing keys and identification 
cards), (ii) public transportation fare collection (replacing bus tokens, 
taxi cab charge cards, airline or railway tickets), (iii) point of sale 
purchases (replacing cash or supplementing credit cards at cafeterias, 
newsstands and related point of sale locations where speed of purchase is 
important), and (iv) miscellaneous small monetary transactions (replacing 
coins and cash at parking lots, in vending machines and public telephones and 
the like). Smart Card technology is also used in industrial applications such 
as attaching a "Smart Tag" containing the Smart Card technology to a 
manufactured product in order to track the product from the assembly line 
through quality control, warehousing, inventory control, distribution and 
warranty.

The Company's Smart Cards are both "contactless" and "batteryless" and 
therefore do not require the use of a magnetic stripe or insertion into a 
terminal as is required by contacted cards ("Contacted Card(s)"), such as 
credit cards and ATM cards. Contacted Cards in use today are typically 
limited to storing information as opposed to "intelligent" Smart Cards, which 
have processing capabilities similar to that of a personal computer.   The 
Company's Smart Card System involves direct wireless radio frequency 
communications and magnetic induction between a chip in the Smart Card and a 
terminal.  Moreover, the Company's contactless Smart Card Systems do not 
require insertion in a terminal or the use of a keypad and therefore may be 
used by all members of the population regardless of age or physical ability 
and in both indoor and outdoor locations.

For consumers and providers of goods and services, the Company's Smart Cards 
offer the convenience and accuracy of high speed transaction processing 
without the requirement of carrying cash, checks or credit cards, thereby 
reducing the threat of theft, inventory shrinkage, and payment fraud 
resulting from the handling of cash or the counterfeiting of cash or credit 
cards. Goods and services providers do not risk loss from (i) accepting cash 
or checks which may be subsequently stolen from them after payment by 
consumers or (ii) accepting credit cards which may have been stolen prior to 
such payment. Consumer loss is limited because the Smart Card is programmed 
to be used to purchase only specific goods or services.  Thus, the Smart Card 
is not as attractive to a thief when compared to stolen cash, checks or 
credit cards.

The Smart Card is designed to complement credit cards rather than replace 
them in that Smart Card applications involve the storage and handling of 
substantially more data than credit cards and can therefore be used for other 
applications (rather than just purchase and sale transactions) such as 
identification of the user, loyalty programs and other portable data 
functions.

The Company sells its Smart Card Systems through Original Equipment 
Manufacturers ("OEM's"), a combination of joint ventures and strategic 
alliances and selective licensing and distributorship arrangements and 
agreements with independent sales representatives in foreign countries. 

Since 1993, the Company has supplied Smart Card Systems to over 100 customers 
in cities throughout the world including Singapore, Macau, Hong Kong, Tokyo, 
Manchester, Paris, Milan, Los Angeles, Chicago and Denver. To date, the 
Company has completed a series of projects, many of which are small scale 
"pilot" projects, but may have the potential for implementation on a larger 
scale.  In some cases, these demonstration projects are "rolled out" for full 
scale implementation, however the demonstration 

                                       4
<PAGE>

phase often takes 6-12 months or longer.  Examples of the Company's Smart 
Card projects include the following:

<TABLE>
<CAPTION>

USER (LOCATION)                                        DESCRIPTION OF INSTALLATION
_______________________________________________        _________________________________________
<S>                                                    <C>
Chep Lap Kok International Airport--(Hong Kong)        access control, point of sale and payroll

City of Lompoc and Ventura County, California--
(United States)                                        automatic fare collection

Lubbock International Airport--(United States)         parking facility fee collection
 
Honeywell, Inc.--(United States)                       factory automation
 
Login BV --(Holland)                                   access control, e-commerce &
                                                       facility management

Chicago Transit Authority--(United States)             automatic fare collection
 
Yamatake Honeywell Limited--(Japan)                    factory automation

City of Winston-Salem Transit Authority--
  (United States)                                      automatic fare collection
 
LWD, Inc.--(United States)                             hazardous waste tracking
 
Microlise Engineering Limited--(United Kingdom)        access control
 
Boreal Ridge Corp.--(United States)                    maintenance tracking
 
Nittetsu Shoji Co., Ltd.--(Japan)                      point of sale/cafeteria and access
                                                       control 
 
ST Electronic & Engineering Limited-- (Singapore)      access control
 
UVM s.r.l. Ufficio Vendita Macchine--(Italy)           point of sale
 
Transmac Transportes Urbanos DeMacau, S.A.R.L.
("Transmac")--(Macau)                                  automatic fare collection

Tyco Printed Circuit Group--(United States)            factory automation

</TABLE>

In 1997, the Company announced a third generation series of its advanced 
Smart Card products, the RX Series. The new RX Series of Smart Card Systems 
offers a level of security and flexibility in contactless operation that 
previously could only be achieved in contacted operation.  The RX Series is 
designed to meet the needs of multi-application environments and is based on 
the ISO 14443 type B communications standard promoted by leading 
semiconductor OEM's.  For example, they can support a healthcare database, 
electronic commerce, travel, loyalty and access control in one Smart Card, 
thereby reducing the quantity of plastic cards carried in a wallet. 

                                       5
<PAGE>

In 1998, the Company began building a new generation of radio frequency 
("RF") products, tools and services called Contactless Distributed Control 
("CDC") which would allow users to store and retrieve information in a 
multitude of ways.  The Company also began developing modular, internet-based 
solutions using its core ferroelectric memory ("FRAM") and RF technologies.  
The Company's CDC internet solutions would enable businesses to distribute, 
store and process data through web-enabled, object-oriented software tools 
and services.

Smart Card products, including the Company's Smart Card (collectively 
referred to as "generic smart cards"), are typically the size of a plastic 
credit/debit card containing an integrated circuit chip ("chip") which can 
process and store information. Today's generic smart cards typically have the 
processing power of an early 1980's vintage personal computer, minus a 
keyboard, display and power supply. Because generic smart cards are really 
portable computers, they can be programmed to perform virtually any function 
which can be implemented by software in the available memory space. Generic 
smart cards benefit directly from ongoing advances in semiconductor 
technology making available continuously increasing performance and features 
at declining cost.

There are two basic types of generic smart cards, memory cards and 
microprocessor cards, each of which can interface between the generic smart 
card and a terminal on a contacted or contactless basis. Memory cards are 
typically used to store and retrieve information only and do not have the 
capability of performing complex processing of information. Microprocessor 
cards are true "smart" cards in that they contain a central processing unit 
within a chip which can perform a number of functions, including complex 
arithmetic operations required for security. Most of the generic smart cards 
sold are memory cards with contacted interfaces requiring alignment and 
insertion of the generic smart card into a terminal to complete an electrical 
circuit with the metal contacts on the surface of the card. While contacted 
generic smart cards have found broad use in high volume, cost sensitive 
applications, such as pay phone systems which use contacted generic smart 
cards, they are expensive to maintain, less reliable and may be considered 
too slow for applications such as transportation. To address the perceived 
shortcomings of the contacted generic smart card, a contactless generic smart 
card was first developed and introduced in the early 1990's. 

Generic smart card products and markets have only recently begun to develop, 
are rapidly evolving and are characterized by an increasing number of market 
entrants who have developed or are developing a wide variety of products.  As 
is typical in a new and rapidly evolving industry, demand and market 
acceptance for new products are subject to a high level of uncertainty.  
There is no assurance that the Company's products will become widely 
accepted.  If the market fails to develop, develops more slowly than expected 
or becomes saturated with competitors, or if the Company's products, tools 
and services do not achieve market acceptance, the Company's business, 
operating results and financial condition may be materially adversely 
affected.

PRODUCT DEVELOPMENT

The Company believes its technology provides distinct advantages over known 
competing Smart Card Systems including: (i) higher speed making possible 
real-time processing; (ii) lower power consumption with no battery 
requirements; and (iii) reliability with a virtually unlimited card life. The 
Company continues to demonstrate its abilities in the fields of radio 
frequency ("RF") analog and digital circuit design.  The RX Series of Smart 
Cards developed by the Company offers a level of security and flexibility in 
contactless operation that could only previously be achieved in contacted 
operation.  

The Company believes it was the first to successfully develop and introduce 
contactless Smart Cards using ferroelectric random access memory ("FRAM") 
technology and batteryless, RF communications.  In previous years, the 
Company has primarily relied on its proprietary FRAM technology for the 
memory component of the Smart Cards.  Although the FRAM memory demonstrates 
quantifiable benefits by improving processing speeds and reliability over 
competing memory technologies, it is not currently being produced in 
sufficient volumes by a significant number of manufacturers to achieve 
competitive 

                                       6
<PAGE>

costs.  Complementary to its FRAM technology, the Company now also utilizes 
Electronically Erasable Programmable Read-Only Memory ("EEPROM") technology 
in its Smart Card Systems, allowing the Company to offer higher volume Smart 
Cards at a more competitive price.  Utilizing both the FRAM and EEPROM memory 
technologies involves the coordination of a variety of Integrated Circuit 
vendors and the management of semiconductor foundry development.  

The Company incurred R&D expenses of approximately $1,025,000 in 1998 and 
$1,234,000 in 1997. Generally, the costs of R&D activities are borne by the 
Company.  

MARKETING

In late 1997, the Company recognized that a strategy of acting as the prime 
contractor for Smart Card projects was not feasible due to the cost and risk 
associated with these projects.  Other direct sales efforts targeted at 
smaller industrial installations, while successful, have also proven to be 
costly in terms of the technical support required to sustain the 
installation.  The Company therefore re-focused its efforts on developing an 
OEM sales channel for the North American market.  The Company believed that 
by developing relationships with properly selected and trained OEMs, it could 
maximize revenue and improve margins. 

Two customers (Transmac and WHC Electronic Vertrieb) each accounted for 10% 
or more of the Company's non-related party net product sales for the year 
ended December 31, 1998, and four customers (Echelon Industries, Inc., 
Honeywell, Inc., Login BV, and Tyco Printed Circuit Group, Inc.) each 
accounted for 10% or more of the Company's non-related party net product 
sales for the year ended December 31, 1997.  Net product sales to related 
parties for both 1998 and 1997 consisted primarily of sales to Racom Japan.

MANUFACTURING AND ASSEMBLY

Since inception, the Company has subcontracted substantially all of its 
manufacturing operations. The Company will continue to contract with third 
parties to manufacture the Company's Smart Card products in order to avoid 
capital intensive investments and to focus the Company's limited resources on 
new product applications and software development. 

The Company's manufacturing and assembly operations consist primarily of 
final assembly, test, burn-in and quality control of Smart Card terminals as 
well as programming, testing and quality control of the Smart Cards 
themselves (and Smart Tags in the case of industrial applications). The 
Company subcontracts assembly of Smart Cards, terminals and card lamination 
to multiple United States, Japanese, and Asian based companies who specialize 
in this kind of contract work.  The Company also operates its own prototype 
Smart Card manufacturing facility to support new product introductions and 
lower volume customer requirements.

The Company purchases a wide variety of electrical and mechanical components 
as well as sub-assemblies for integration into the Company's Smart Card 
Systems. With two notable exceptions, most materials are available from 
several supply sources. The FRAM chips used in the Company's Smart Cards and 
Tags are supplied by two sources, Ramtron International Corporation 
("Ramtron") located in Colorado Springs, Colorado, and Rohm located in Kyoto, 
Japan. Ramtron and Rohm own 36.3% and 3.8%, respectively, of the Company's 
Common Stock. The Company is dependent on maintaining at least one reliable 
source of supply for its FRAM chips and its business would be materially 
adversely affected if no such source were available. Currently, all of the 
Company's terminals include a component manufactured by only one United 
States company, Microchip Technology.  If necessary, the Company could 
redesign its terminals to use a similar component available from other 
semiconductor manufacturers, although such a redesign would be time-consuming 
and expensive and may adversely affect the Company's operations.

                                       7
<PAGE>

COMPETITION

The market for Smart Card products is new, intensely competitive, quickly 
evolving and subject to rapid technological change. Competitors may develop 
superior products or products of similar quality for sale at lower prices. 
Moreover, there can be no assurance that the Company's Smart Card will not be 
rendered obsolete by changing technology or new industry standards. The 
Company expects competition to persist and increase in the future. The 
Company's current and potential competitors are primarily subsidiaries of 
multinational companies with established Contacted and Contactless Smart Card 
products that have longer operating histories, greater name recognition, 
larger customer bases and significantly greater financial, technical and 
marketing resources than the Company. This intense level of competition could 
materially adversely affect the Company's future business, operating results 
and financial condition.

Competitive factors in the industry include transaction speed, the extent and 
flexibility of Smart Card memory, reliability, transaction accuracy and cost, 
all of which are discussed below. There can be no assurance that the Company 
will be able to compete successfully against current or future competitors or 
that competitive pressures faced by the Company will not materially adversely 
affect its business, operating results and financial condition. Many of the 
Company's competitors have the financial resources necessary to enable them 
to withstand substantial price and product competition, which are expected to 
increase, and to implement extensive advertising and promotional programs, 
both generally and in response to efforts by other competitors to enter into 
existing markets or introduce new products. The industry is also 
characterized by frequent introductions of new products. The Company's 
ability to compete successfully will be largely dependent on its ability to 
anticipate and respond to various competitive factors affecting the Smart 
Card industry, including new products which may be introduced, changes in 
customer preferences, demographic trends, pricing strategies by competitors 
and consolidation in the industry where smaller companies with leading edge 
technologies may be acquired by larger multinational companies. 

Contacted Cards represent the Company's primary competition in electronic 
commerce applications. Contacted Card competitors include such multinational 
firms as Gemplus, Schlumberger and Group Bull.  The Company believes that it 
is able to compete favorably against Contacted Cards because the Company's 
contactless Smart Cards (i) operate at higher speeds, (ii) do not require the 
time and effort involved in inserting the Smart Card in a terminal or 
removing the Smart Card from a wallet or purse, (iii) use reliable solid 
state electronics with no moving parts, exposed contact points or magnetic 
stripes which can be erased by a magnetic field, and (iv) are lower in cost 
over the product life.

The Company also competes against contactless Smart Cards designed by Philips 
GmbH, Sony Corporation, Gemplus, Motorola and Micron Communications, Inc., 
which use contactless technologies similar to the Company's technology. The 
Company believes that its Smart Cards compete favorably against these other 
contactless technologies because the Company's contactless Smart Cards 
operate at higher speeds, have higher endurance and do not require batteries 
for power.  The Company's Smart Cards are priced at parity with competitors' 
contactless Smart Card products but sell at a premium to Contacted Cards. 

REGULATION

The Company's Smart Card products use radio frequency communications and 
other technologies which make them subject to regulation by the Federal 
Communications Commission ("FCC") in the United States and to export 
licensing by the United States Government when sold internationally. Smart 
Card products are subject to similar regulation by some foreign governments 
for use within their countries. All of the Company's products currently 
comply with FCC regulations, similar regulations of the foreign countries in 
which the Company sells its products and United States export license 
requirements. Future compliance with FCC regulations, similar regulations in 
foreign countries and United States export 

                                       8
<PAGE>

license requirements may be costly and time-consuming and may limit the 
Company's ability to sell its Smart Card products in certain jurisdictions. 

Market needs and competitive pressures will require that the Company's 
products contain certain regulated cryptographic algorithms in order to 
protect information and cash substitutes stored in the Smart Cards. Export, 
import and usage of such cryptographic algorithms are covered by a large and 
changing body of regulations in the United States.

Federal, state and local regulations impose various environmental controls on 
the discharge of chemicals and gases which may be used in the Company's 
present or future assembly processes. Moreover, changes in such environmental 
rules and regulations may require the Company to invest in capital equipment 
and implement compliance programs in the future. Any failure by the Company 
to comply with environmental rules and regulations, including the discharge 
of hazardous substances, could subject it to serious liabilities and could 
materially adversely affect its operations.

PATENTS AND TRADE SECRETS

The Company relies on its own patents, trade secrets and copyrights as well 
as the patents, trade secrets and copyrights of its licensors to protect its 
Smart Card technology. Due to rapid changes in the generic smart card 
industry, the Company believes that development of trade secrets and 
unpatented proprietary knowledge in connection with new products and 
technologies are generally as important as patent and copyright protection in 
establishing and maintaining a competitive advantage. Nevertheless, the 
Company has obtained patents and copyrights on certain of its Smart Card 
technologies and will continue to aggressively pursue patents and copyrights 
when available. To date, the Company has been awarded six United States 
patents and is pursuing additional patents, both in the U.S. and in certain 
foreign countries. The Company has a license, including the right to grant a 
limited number of sublicenses, to use Ramtron's FRAM chip technology, patents 
and improvements specifically for the development, manufacture and sale of 
radio frequency identification devices, including the Company's contactless 
Smart Cards.  

There can be no assurance that any of the Company's future patent 
applications will be granted, that any current or future patent or patent 
application will provide significant protection for the Company's products or 
technology, be of commercial benefit to the Company, or that the validity of 
such patents or patent applications will not be challenged. Furthermore, 
there can be no assurance that any patent underlying licensed technology will 
not be challenged. Moreover, there can be no assurance that foreign patent, 
trade secret or copyright laws will protect the Company's technologies or 
that the Company will not be vulnerable to competitors who attempt to copy or 
use the Company's Smart Card products or processes.

                            RISK FACTORS

INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND THE OTHER 
INFORMATION CONTAINED IN THIS REPORT BEFORE MAKING AN INVESTMENT DECISION 
WITH REGARD TO THE COMPANY'S COMMON STOCK. INFORMATION CONTAINED IN THIS 
REPORT CONTAINS "FORWARD-LOOKING STATEMENTS" WHICH CAN BE IDENTIFIED BY THE 
USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS," "MAY," 
"SHOULD" OR "ANTICIPATES" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON 
OR COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY. SEE, E.G., "ITEM 6. 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 
OPERATIONS" AND "ITEM 1. BUSINESS." NO ASSURANCE CAN BE GIVEN THAT THE FUTURE 
RESULTS COVERED BY THE FORWARD-LOOKING STATEMENTS WILL BE ACHIEVED. THE 
FOLLOWING MATTERS CONSTITUTE CAUTIONARY 

                                       9
<PAGE>

STATEMENTS IDENTIFYING IMPORTANT FACTORS WITH RESPECT TO SUCH FORWARD-LOOKING 
STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT COULD CAUSE 
ACTUAL RESULTS TO VARY MATERIALLY FROM THE FUTURE RESULTS COVERED IN SUCH 
FORWARD-LOOKING STATEMENTS. OTHER FACTORS COULD ALSO CAUSE ACTUAL RESULTS TO 
VARY MATERIALLY FROM THE FUTURE RESULTS COVERED IN SUCH FORWARD-LOOKING 
STATEMENTS.

TERMINATION OF OPERATIONS, NO ASSURANCE OF CONTINUING AS A GOING CONCERN.  In 
March 1999, the Company announced that it is unable to continue to fund its 
operations and, as of March 31, 1999, most of its employees have been 
furloughed for an indefinite period of time.  The Company will enter a period 
whereby its primary function will be to collect future royalties if and when 
receivable pursuant to the Company's existing Radio Frequency Identification 
("RFID") technology licenses to three multinational semiconductor companies.  
There can be no assurance that royalties will become due in the future.  The 
Company is in the process of identifying sources of financing to fund its 
operations until royalty revenue is received or until a strategic merger 
partner is located.  To date, no financing has been made available under 
terms acceptable to the Company.  There can be no assurance that the Company 
will be successful in obtaining acceptable financing.  These factors, among 
others, raise substantial doubt about the ability of the Company to continue 
as a going concern.

LIMITED OPERATING HISTORY AND LIMITED REVENUES; LOSSES AND INDEPENDENT PUBLIC 
ACCOUNTANTS GOING CONCERN OPINION.  The Company began operations in June 1991 
and has a limited operating history upon which potential investors may base 
an evaluation of its performance. Since inception, the Company has focused 
its efforts and resources on developing its technology and on identifying 
products and applications for introduction into the market.  The Company has 
only recently begun generating revenues from its operations and therefore the 
Company has historically incurred significant operating losses and cash flow 
deficits. For the years ended December 31, 1998 and 1997, the Company had 
revenues of $1,747,203 and $902,280, respectively, and net losses of 
$3,212,384 and $3,702,581, respectively. Moreover, at December 31, 1998, the 
Company had working capital of $131,018 and had an accumulated deficit of 
$17,068,617.  The Report of Independent Public Accountants covering the 
Company's December 31, 1998 financial statements, included elsewhere in this 
Report, contains an explanatory paragraph about the Company's ability to 
continue as a going concern. See "Item 7.  Financial Statements."

POSSIBLE DELISTING FROM THE NASDAQ SMALLCAP STOCK MARKET.  The Company must 
maintain certain requirements to remain listed on the Nasdaq SmallCap Stock 
Market ("Nasdaq").   These requirements include maintaining a specified level 
of net tangible assets, as defined, market capitalization or net income. 
Additionally, the Company must maintain a specified level of publicly traded 
shares, market value of the publicly traded shares, minimum bid price, number 
of market makers and shareholders.  In October 1998, the Company received 
notification from Nasdaq regarding the continued listing of its stock because 
the Company's common stock failed to maintain a closing bid price greater 
than or equal to $1.00.  The Company attended a hearing with Nasdaq officials 
on March 5, 1999.  The Company demonstrated compliance with the minimum bid 
price since the Company effected a reverse stock split on March 1, 1999 until 
April 1, 1999 when the stock price once again fell below $1.00 per share.  
The Company has not yet received a response from Nasdaq concerning its 
listing.

On March 8, 1999, the Company received another notification from Nasdaq 
regarding its continued listing because the Company has failed to maintain 
the minimum required market value of the public float of $1,000,000.  The 
Company has until June 8, 1999 to demonstrate compliance with this 
requirement.

There can be no assurance that the Company's efforts to maintain its Nasdaq 
listing will be successful or that a delisting will not adversely effect its 
efforts to obtain financing.

DEVELOPING MARKET; UNPROVEN MARKET FOR THE COMPANY'S SMART CARD PRODUCTS.  
Smart Card products and markets have only recently begun to develop, are 
rapidly evolving and are characterized by an 

                                       10
<PAGE>

increasing number of market entrants who have developed or are developing a 
wide variety of products. As is typical in a new and rapidly evolving 
industry, demand and market acceptance for new products are subject to a high 
level of uncertainty. There can be no assurance that the Smart Cards designed 
by the Company will become widely accepted. Because the market for the 
Company's Smart Cards is new and evolving, it is also difficult to predict 
with any assurance the future growth rate, if any, and size of the market. If 
a market fails to develop, develops more slowly than expected or becomes 
saturated with competitors, or if the Company's Smart Cards or other 
products, tool and services do not achieve market acceptance, the Company's 
business, operating results and financial condition may be materially 
adversely affected. See "Item 1. Business."
 
COMPETITION; FREQUENT PRODUCT INTRODUCTIONS.  The market for Smart Card 
products is new, intensely competitive, quickly evolving and subject to rapid 
technological change. Competitors may develop superior Smart Card products or 
products of similar quality for sale at lower prices. Moreover, there can be 
no assurance that the Company's Smart Cards will not be rendered obsolete by 
changing technology or new industry standards. The Company expects 
competition to persist and increase in the future. The Company's current and 
potential competitors are primarily subsidiaries of multinational companies 
with established Contacted Card and contactless Smart Card businesses which 
have longer operating histories, greater name recognition, larger customer 
bases and significantly greater financial, technical and marketing resources 
than the Company. This intense level of competition could materially 
adversely affect the Company's future business, operating results and 
financial condition.
 
Competitive factors in the industry include transaction speed, the extent and 
flexibility of Smart Card memory, reliability, transaction accuracy and cost. 
Current competitors include such multinational firms as Gemplus, Schlumberger 
and Group Bull, which primarily offer Contacted Cards, and Philips GmbH, 
Motorola, Sony Corporation and Micron Communications, Inc., which offer 
primarily contactless Smart Cards. 

There can be no assurance that the Company will be able to compete 
successfully against current or future competitors or that competitive 
pressures faced by the Company will not materially adversely affect its 
business, operating results and financial condition. Many of the Company's 
competitors have the financial resources necessary to enable them to 
withstand substantial price and product competition, which are expected to 
increase, and to implement extensive advertising and promotional programs, 
both generally and in response to efforts by other competitors to enter into 
existing markets or introduce new products. The industry is also 
characterized by frequent introductions of new products. The Company's 
ability to compete successfully will be largely dependent on its ability to 
anticipate and respond to various competitive factors affecting the industry, 
including new products which may be introduced, changes in customer 
preferences, demographic trends and pricing strategies by competitors, which 
could adversely affect the Company's operating margins. 

RISKS OF NEW PRODUCT DEVELOPMENT.  The Company may experience difficulties 
that could delay or prevent the development, introduction and marketing of 
new Smart Card products. The Company will be substantially dependent in the 
near future upon Smart Card products that are currently being developed. 
There can be no assurance that, despite testing by the Company, errors will 
not be found in the Company's Smart Card products, or, if errors are 
discovered, corrected in a timely manner. If the Company is unable to develop 
on a timely basis existing or new Smart Card products or enhancements to 
existing products, or if its Smart Card products do not achieve market 
acceptance, the Company's business, operating results and financial condition 
may be materially adversely affected.

OBSOLESCENCE AND TECHNOLOGICAL CHANGE.  The markets for Smart Card products 
are characterized by rapidly changing technology and evolving industry 
standards which result in product obsolescence and short product life cycles. 
Accordingly, the Company's success is dependent upon its ability to 
anticipate technological changes in the industry and to continually identify, 
develop and successfully market new Smart Card products that satisfy evolving 
technologies, customer preferences and industry requirements. There can be no 
assurance that competitors will not market Smart Card products which have 
perceived 

                                       11
<PAGE>

advantages over those of the Company or which render the Company's Smart Card 
products obsolete or less marketable.
 
IMPEDIMENTS TO MARKET ACCEPTANCE OF PRODUCTS.  As with other new products 
designed to replace existing products or change product designs, potential 
customers may be reluctant to integrate the Company's Smart Card products 
into their systems unless the products are proven to be both reliable and 
available at a competitive price in an assured quantity. Even assuming 
product acceptance, the Company's customers may be required to redesign their 
systems to effectively use the Company's Smart Card products. The time and 
costs necessary for such redesign could delay or prevent market acceptance of 
the Company's Smart Card products. A lack of, or delay in, market acceptance 
of one or more of the Company's Smart Card products could adversely affect 
the Company's operations. 

DEPENDENCE ON MANUFACTURERS AND SUPPLIERS.  The Company purchases FRAM 
semiconductor chips for its Smart Card products from two affiliated 
manufacturers, Ramtron and Rohm, and purchases other components used in 
assembly of its Smart Cards from other key suppliers. The Company's reliance 
upon outside manufacturers and suppliers is expected to continue and involves 
several risks, including limited control over the availability of components, 
delivery schedules, pricing and product quality. The Company may also 
experience delays, expenses and lost sales should it be required to locate 
and qualify alternative suppliers. 

RELIANCE UPON PATENTS AND TRADE SECRETS.  The Company relies on its patents, 
trade secrets and copyrights and the patents, trade secrets and copyrights of 
its licensors to protect its Smart Card technology. Although the Company 
intends to enforce its patents, trade secrets and copyrights aggressively, 
there can be no assurance that such protection will be available in any 
particular instance or that the Company will have the financial resources 
necessary to adequately enforce its rights. The unavailability of such 
protection or the inability to enforce adequately such rights could 
materially adversely affect the Company's business and operating results. The 
Company operates in a competitive environment in which it would not be 
unlikely for a third party to claim that certain of the Company's present or 
future Smart Card products or licensed technology may infringe the patents or 
rights of such third parties. If any such infringements exist or arise in the 
future, the Company may be exposed to liability for damages and may be 
required to obtain licenses relating to technology incorporated into the 
Company's products. The Company's inability to obtain such licenses on 
acceptable terms or the occurrence of related litigation could materially 
adversely affect the Company's operations. 

DEPENDENCE UPON CUSTOM SYSTEM DEVELOPMENT PROJECTS.  The Company relies upon 
custom system development projects for a significant part of its revenues. 
The inability of the Company to replace completed projects with new projects 
would adversely affect the Company's operations. 
 
RISKS ASSOCIATED WITH GOVERNMENT REGULATIONS.  The Company's Smart Card 
products use radio frequency technologies, emit radio frequency energy 
emissions and their assembly may require the disposal of chemicals and gases 
during the assembly process. Current and future U.S. and foreign governmental 
regulations concerning radio frequency technologies, energy emissions and 
waste disposal could adversely affect the Company's business operations and 
results of operations. 
 
DEPENDENCE UPON QUALIFIED PERSONNEL.  The Company's operations depend in part 
upon its ability to retain and hire qualified personnel.  In March 1999, the 
Company announced that it is unable to continue funding its operations and, 
as of March 31, 1999, all of its employees have been furloughed for an 
indefinite period of time.  There can be no assurance that, if the Company 
does obtain financing, that the employees would be available to return to 
work for the Company or that similarly qualified personnel could be hired.  
This loss of employees could also have a material adverse effect upon the 
Company's ability to locate a strategic merger partner.

CONTROL BY PRINCIPAL STOCKHOLDERS; AUTHORIZATION AND ISSUANCE OF PREFERRED 
STOCK; PREVENTION OF CHANGES IN CONTROL.  At March 31, 1999, Ramtron and 
Intag International Limited ("Intag") together own 

                                       12
<PAGE>

approximately 77.0% of the issued and outstanding shares of common stock and 
continues to elect all of the Company's directors and control the affairs of 
the Company. The Company's Certificate of Incorporation authorizes the 
issuance of up to 10,000,000 shares of preferred stock with such rights and 
preferences as may be determined from time to time by the Board of Directors. 
Accordingly, under the Certificate of Incorporation, the Board of Directors 
may, without shareholder approval, issue preferred stock with dividend, 
liquidation, conversion, voting, redemption or other rights which could 
adversely affect the voting power or other rights of the holders of the 
common stock. The issuance of any shares of preferred stock having rights 
superior to those of the common stock may result in a decrease in the value 
or market price of the common stock and could further be used by the Board of 
Directors as a device to prevent a change in control of the Company. The 
Company has not issued any of the preferred shares to date and has no plans 
to issue preferred shares.  The Company has no other anti-takeover provisions 
in its Certificate of Incorporation or Bylaws. Holders of the preferred stock 
may have the right to receive dividends, certain preferences in liquidation 
and conversion rights.  

NO DIVIDENDS.  The Company has not paid any dividends on its common stock and 
does not intend to pay dividends in the foreseeable future.

POSSIBLE VOLATILITY OF SECURITIES PRICES.  The market price of the common 
stock and warrants may be highly volatile.  Factors such as the Company's 
operating results or public announcements by the Company or its competitors 
may have a significant effect on the market price of the securities. In 
addition, market prices for the securities of many small capitalization 
companies have experienced wide fluctuations due to variations in quarterly 
operating results, general economic conditions and other factors beyond the 
Company's control.
 
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of common stock 
in the open market or the availability of such shares for sale could 
adversely affect the market price of the securities. As of March 31, 1999, 
options to purchase 243,482 shares of common stock under the 1993 Employee 
Stock Plan may be purchased and sold in the open market without restriction 
or further registration under the 1933 Act.  An additional 2,472,174 shares 
of common stock and warrants to purchase 160,714 shares of common stock are 
"restricted securities" as that term is defined under Rule 144 of the 1933 
Act, all of which are currently eligible for resale. 

LIMITATIONS ON LIABILITY OF DIRECTORS.  The Company's Certificate of 
Incorporation substantially limits the liability of the Company's directors 
to the Company and its stockholders for breach of fiduciary or other duties 
to the Company.
 
ITEM 2.  PROPERTIES

The Company's headquarters are located in an 8,800 square foot leased 
facility in Greenwood Village, Colorado, a suburb of Denver, Colorado. The 
Company is renting the space on a month-to-month basis.  The Company has no 
rights of first refusal or purchase options under the lease. The base rental 
may be increased during the term of the lease to reflect the Company's share 
of any increases in specified operating expenses for the facility, such as 
real estate taxes, insurance, utilities and the like. As of March 31, 1999, 
the Company has furloughed most of its employees for an indefinite period of 
time and, accordingly, has closed its facility.

                                       13
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

From time to time the Company is subject to litigation incidental to its 
business.  The Company is not presently a party to any material litigation.

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

Not applicable.

                                       PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock and warrants are quoted on Nasdaq under the 
symbols "RCOM" and "RCOMW," respectively. 

The following table sets forth, for the periods indicated the range of high 
and low sales prices per share of the Company's common stock, as reported on 
Nasdaq.

<TABLE>
<CAPTION>

                                             HIGH           LOW
                                             ----           ---
<S>                                         <C>            <C>
1997
----
First Quarter (beginning March 13, 1997)     19.69          11.81
Second Quarter                               15.75           7.88
Third Quarter                                12.94           6.89
Fourth Quarter                               13.50           4.78

1998
----
First Quarter                                10.13           5.63
Second Quarter                                7.88           5.48
Third Quarter                                 5.63           2.46
Fourth Quarter                                4.50           1.13

</TABLE>

On March 1, 1999, the Company effected a reverse stock split of the Company's 
common stock on the basis of one share for each four and one-half shares.  
The number of shares of common stock, per share data and warrant and stock 
option amounts presented in this Annual Report on Form 10-K have been 
adjusted to reflect the impact of the stock split for all periods presented.

As of March 30, 1999, the last reported sale price of the Company's common 
stock was $1.00 per share.  As of March 1, 1999, there were 39 holders of 
record of the Company's common stock.  The Company estimates that the total 
number of holders of the Company's common stock is approximately 1,300.

The Company has not declared or paid dividends on its common stock since its 
formation, and the Company does not anticipate paying dividends in the 
foreseeable future. Declaration or payment of dividends, if any, in the 
future, will be at the discretion of the Board of Directors and will depend 
on the Company's then current financial condition, results of operations, 
capital requirements and other factors deemed relevant by the Board of 
Directors. 

                                       14
<PAGE>

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
RESULTS OF OPERATIONS

                              RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

REVENUES.  Total revenues increased 93.6% from $902,000 in 1997 to $1,747,000 
in 1998.  Product sales declined 34% from $305,000 in 1997 to $202,000 in 
1998. Sales of products fluctuate based on the timing of the product shipment 
or the stage of the project.  Many of the Company's product sales are for 
small scale discrete pilot projects which have the potential for 
implementation on a larger scale.  Several of these projects were completed 
during 1997 with no additional sales to those customers during 1998.  During 
1998, the Company completed a custom development project to develop firmware 
for a semiconductor company and recorded revenues of $45,000.  License 
revenues in 1998 reflect the signing of a license agreement with Hitachi in 
January 1998 (see Note 5 to the financial statements).

COST OF REVENUES AND GROSS MARGIN.  Gross margin increased from 40.0% in 1997 
to 82% in 1998 primarily due to $1,500,000 in license revenues in 1998 which 
have no associated direct costs.  In 1998, the cost of revenue also includes 
a reserve of $199,615 to write down the inventory balances to net realizable 
value.

RESEARCH AND DEVELOPMENT EXPENSES ("R&D").  R&D decreased $209,000 or 17% 
from $1,234,000 in 1997 to $1,025,000 in 1998.  In 1997, the Company spent 
over $200,000 on development of the RX series of products, including outside 
engineering services for software and hardware development and contractors to 
develop card packaging for its Smart Card products.  These costs were not 
recurring in 1998.

GENERAL AND ADMINISTRATIVE EXPENSES ("G&A").  G&A increased $342,000 or 31.9% 
from $1,070,000 in 1997 to $1,412,000 in 1998.  In 1998, the Company incurred 
expenses of $45,000 in severance costs for the former President and CEO, 
$30,000 for the current Chairman for his consulting services to the Company, 
$105,000 for recruiting costs for the new President and CEO hired in August 
1998 and $66,000 for a consultant who is assisting the Company in locating 
financing.  In 1998, the Company established a reserve for uncollectible 
accounts of $42,000 and incurred additional expenditures relating to investor 
relations consulting, legal and Directors and Officers liability insurance 
that were incurred after the Company's initial public offering in March 1997.

SALES AND MARKETING EXPENSES.  Sales and marketing expenses decreased 
$317,000 or 31.3% from $1,014,000 to $697,000 in 1998, primarily due to a 
reduction of personnel and the associated office, travel and literature 
expenses.

RACOM JAPAN ("RJ").  The Company currently owns 19.9% of Racom Japan, which 
was formed in 1993 for the purpose of marketing, distributing and supporting 
the Company's products to be sold in Japan.  In 1998, the Company accounted 
for its investment in Racom Japan on the cost method.  In 1997, the Company 
owned more than 20% of Racom Japan and accounted for the investment on the 
equity method, thus recording the Company's share of Racom Japan's losses.  
In December 1997, the Company determined that the carrying value of its 
investment in Racom Japan was impaired and accordingly wrote off its 
remaining investment.  The Company has no future requirement to provide 
funding to or on behalf of RJ.

AMORTIZATION AND LOSS ON IMPAIRMENT OF TECHNOLOGY LICENSE.  The Company's 
primary asset is a technology license related to the design and manufacture 
of its products which was amortized on a straight-line basis over the 
remaining lives of the patents protecting the licensed technology.  In 

                                       15
<PAGE>

December 1998, the Company determined that its investment in the technology 
license was impaired because of its inability to continue to fund operations 
and accordingly wrote off its remaining investment.

OTHER INCOME (EXPENSE).  During 1997, the Company incurred interest expense 
of $43,000 related to bridge loan financing completed in 1996 and $17,000 on 
notes payable to Ramtron and Intag, the Company's principal stockholders.  
This debt was repaid from the proceeds of the Company's initial public 
offering in March 1997.  Interest expense for 1997 also includes $97,000 
related to the amortization of debt issuance costs associated with the bridge 
loan financing. The decrease in interest income in 1998 is directly related 
to a decrease in the Company's average cash balance.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

REVENUES.  Revenues decreased 62.8% to $902,280 for the year ended December 
31, 1997 from $2,427,285 for the year ended December 31, 1996. 

Product Sales.  Product sales decreased 23.0% to $305,327 for the year ended 
December 31, 1997 from $396,345 for the year ended December 31, 1996. In 
1996, product sales included approximately $60,000 of product sales to 
Transmac for an automatic fare collection project and approximately $33,000 
of product sales to Impulse Enterprises, Inc.  These projects did not 
generate any additional sales during 1997.  

Custom Product Development Projects.  There were no revenues from custom 
product development projects for the year ended December 31, 1997.  1996 
revenues reflect the initial payment and completion of one milestone under a 
custom product development contract totaling $600,000.  No additional 
milestones were reached during 1997.  

License Revenues.  License revenues decreased 58.3% to $596,953 for the year 
ended December 31, 1997, from $1,430,940 for the year ended December 31, 
1996. 

In 1996, license revenues included the recognition of revenues on a license 
from RJ for the manufacture and sale of FRAM based radio frequency products 
in Japan of $537,031. The amount received for the license was $933,968. At 
the time of sale, the Company owned a 50% interest in RJ and, accordingly, 
50% of this amount (representing the Company's intercompany profit due to its 
50% equity ownership in RJ on the date of the sublicense) was deferred and 
was being recognized over the five-year life of the related technology 
license owned by RJ, commencing on the date of sale.  As of December 31, 
1996, $70,047 had been recognized. 

Also in 1996, the Company consented to RJ entering into a custom product 
development project with Fujitsu pursuant to the technology license discussed 
above, under which the Company is entitled to 50% of all sublicense revenue 
earned by RJ. This sublicense resulted in the Company recognizing $893,909 in 
additional licensing revenues in 1996. The balance of the sublicense revenue 
on this contract with Fujitsu, $200,016, was recorded as license revenues 
during 1997.

In 1997, the Company's equity ownership in RJ was reduced to 19.9% through a 
combination of a sale of shares owned in RJ to a third party and RJ's 
issuance of new shares to third parties.  As a result of these changes in 
ownership and a corresponding change to the cost method of accounting for the 
investment, the Company recognized the balance of the deferred revenue during 
1997, totaling $396,937.  

The decrease in license revenues reflects the delay in closing the licensing 
contract with Hitachi, which closed in January 1998.  The Company had 
expected to recognize the initial payment on the Hitachi contract in the 
fourth quarter of 1997.  

COST OF REVENUES AND GROSS MARGIN.  As a percentage of revenues, gross margin 
decreased to 40.0% in 1997 from 56.7% in 1996. 

                                       16
<PAGE>

Product Costs. The Company has not generated any margin on product sales in 
part because of competition with Contacted Cards which typically are sold at 
a lower price than the Company's Smart Cards. Currently, production volumes 
of the Company's products are not sufficient to cover manufacturing costs 
which are included in Cost of Revenues.  Due to an increase in availability 
of FRAM chips resulting in lower component costs, and the use of EEPROM chips 
which are already available at lower component costs, the Company expected to 
be able to lower its prices while improving gross margin in 1998.  The 
Company anticipated that cost efficiencies would allow the Company to compete 
more effectively with Contacted Card products and to build sales volume for 
its Smart Cards.  In addition to ordinary product costs, 1997 cost of 
revenues includes a write down of existing inventory of approximately 
$121,000 related to a revaluation to market value for a specific component 
part.  

Custom Product Development Projects. Custom Product Development Projects for 
1996 includes $530,337 of costs associated with a custom product development 
project.  Custom product development projects typically include research and 
development activities performed on a contract basis.  No additional costs 
were incurred related to the custom product development project during 1997.

License revenues. In any given year, gross margin is primarily a result of 
license revenues which have no direct cost of revenues.

RESEARCH AND DEVELOPMENT EXPENSES ("R&D").  R&D increased 144.2% to 
$1,234,096 in 1997 from $505,266 in 1996. R&D efforts relating to the 
Company's Smart Card Systems expanded from 1996 through 1997. During 1997, 
the Company incurred approximately $250,000 for development of the Company's 
RX Series products, not including personnel costs associated with the RX 
Series product development. 1997 expenses also include a $63,000 increase in 
wages and benefits due to the hiring of two additional engineers.  During 
1996, the Company incurred expenses related to a joint development project 
with Bull CP8. Engineering personnel resources and development costs totaling 
$388,158 were directly related to the project and are included in cost of 
revenues for 1996.

GENERAL AND ADMINISTRATIVE EXPENSES ("G&A").  G&A increased 28.4% to 
$1,070,404 for 1997 from $833,879 for 1996.  This increase was primarily 
attributable to expenses incurred to comply with the reporting obligations 
imposed on the Company as a public entity, including approximately $40,000 
for Investor Relations expenses, approximately $5,000 for securities legal 
expenses, and approximately $85,000 for D&O and Officer's life insurance 
premiums.  Travel expenses increased approximately $22,000 due to the travel 
required to attend investor conferences. Wages and benefits attributable to 
G&A increased approximately $52,000 due to the hiring of a management 
information systems specialist and salary increases for five other employees. 

SALES AND MARKETING EXPENSES.  Sales and marketing expenses increased 16.7% 
to $1,014,484 in 1997 from $869,401 in 1996. This increase was due to the 
hiring of the Vice President of Business Development and the Vice President 
of Business Solutions in June 1996, and a product manager in February 1997.  
Wages and benefits for these three individuals resulted in an increase in 
expenses for 1997 of approximately $230,000 over 1996 expenses.  Recruiting 
fees for the product manager resulted in an increase of expenses of $20,000.  
The Vice President of Sales and Marketing left the Company in December 1996, 
resulting in a corresponding decrease in expenses of approximately $140,000. 

EQUITY IN LOSS OF RACOM JAPAN.  The Company currently owns 19.9% of RJ, 
decreased from 40% as of December 31, 1996.  RJ was formed in 1993 for the 
purpose of marketing, distributing and supporting the Company's Smart Card 
products to be sold in Japan. The Company accounted for its investment on the 
equity method and had recorded its share of RJ's losses in its financial 
statements to the extent of capital invested in RJ by the Company.  During 
1997, the Company decreased its ownership in RJ through a combination of 
sales of a portion of the Company's investment to third parties and issuance 
of new shares by RJ to third parties, and the Company changed to the cost 
method of accounting for its investment. The equity in the losses of RJ were 
$209,248 in 1996 and $201,376 in 1997.  The loss in 1996 includes 

                                       17
<PAGE>

$141,953 from previous periods which were not recognized because the 
Company's investment was reduced to zero. The increase in the loss between 
years resulted from the purchase of sublicense rights from the Company which 
increased RJ's amortization expense over the five year term of the 
sublicense.  RJ's losses were primarily related to ongoing research and 
development activities as well as longer sales cycles and trial tests 
demanded by Japanese customers.  Based on RJ's continuing operating losses 
and new information obtained by the Company indicating that the carrying 
value of the Investment in RJ was not realizable, the Company wrote off the 
balance of its Investment in RJ, totaling $303,978.

AMORTIZATION EXPENSE.  The Company's primary asset is a technology license 
("Technology License") related to the design and manufacture of its Smart 
Card products. The Company originally purchased the technology from Ramtron 
pursuant to a technology license agreement for $2,000,000 in cash and 
2,000,000 shares of the Company's Common Stock. The technology license was 
recorded at the original cash acquisition cost of $2,000,000. In 1995, the 
Company acquired certain additional rights with respect to the technology. 
The net cost of obtaining the additional rights was $400,000 and was 
capitalized in 1995. The asset is amortized over its estimated useful life on 
a straight-line basis.

OTHER INCOME (EXPENSE).  During 1997, the Company incurred $43,189 in 
interest expense, primarily related to the bridge loan financing completed in 
1996.  The bridge notes carried interest at prime plus 2% and matured the 
earlier of one year from the Bridge Date or upon the closing on an IPO.  
Interest expense for 1997 also includes $96,667 related to the amortization 
of debt issuance costs associated with the bridge notes.  Additionally, 
during 1997 the Company incurred $17,405 in interest expense on various notes 
payable to Intag and Ramtron. The notes were due on demand and carried annual 
interest of 10% and prime plus 2%, respectively.  During March 1997, the 
Company completed its IPO and used $2,126,103 to repay the outstanding debt 
and interest owed on the bridge loans, to Intag and Ramtron.  The remaining 
proceeds from the IPO were held in cash equivalents during 1997 and resulted 
in interest income earned of $100,037.  Other income (expense) for 1997 also 
includes approximately $19,000 in exchange rate losses due to exchange rate 
fluctuations at various times during the year related to foreign 
transactions.   During 1996, the Company incurred $64,400 in interest expense 
on various notes payable to Intag and Ramtron. The Company also recorded 
$28,367 in exchange rate losses due to exchange rate fluctuations at the end 
of the year related to the license revenue receivable due from RJ. 

                   LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY AND CAPITAL RESOURCES.  The Company has generated substantial 
operating losses since inception and has yet to generate sufficient revenues 
to fund its operations.  To date, the Company has completed a series of pilot 
projects; however, the Company has not yet completed a significant number of 
substantial sales transactions to third parties at prices and volumes 
sufficient to fund its operations.  During 1998, the Company experienced 
significant cash flow deficits and liquidity shortages and funded its 
operations through the sale of a non-exclusive sublicense of its technology 
and a capital contribution from a related party, which was received in 
consideration of the Company reconveying to the related party its rights to 
sublicense the ferroelectric technology to two additional licensees.  In the 
fourth quarter of 1998, the Company reduced its administrative, sales and 
engineering costs through personnel reductions; however, the Company was not 
able to generate sufficient margins to fund its operations.  In March 1999, 
the Company announced that it was unable to continue to fund its operations 
and, as of March 31, 1999, most of its employees have been furloughed for an 
indefinite period of time.  The Company will enter a period whereby its 
primary function will be to collect future royalties if and when receivable 
pursuant to the Company's existing Radio Frequency Identification ("RFID") 
technology licenses to three multinational semiconductor companies. There can 
be no assurance that royalties will become due in the future.

The Company is in the process of identifying sources of debt or equity 
financing to fund its operations until royalty revenue is received or until a 
strategic merger partner is located.  To date, no financing has been made 
available under terms acceptable to the Company.  There can be no assurance 
that the Company will be successful in obtaining acceptable financing.

                                       18
<PAGE>

These factors, among, others, raise substantial doubt about the ability of 
the Company to continue as a going concern.  The carrying value of the 
Company's assets have been adjusted to reflect the Company's estimates of net 
realizable value at December 31, 1998.  The financial statements do not 
include any adjustments relating to the carrying amounts of liabilities that 
might be necessary should the Company be unable to continue as a going 
concern.

NASDAQ LISTING.  The Company must maintain certain requirements to remain 
listed on Nasdaq.  These requirements include maintaining a specified level 
of net tangible worth, as defined, market capitalization or net income. 
Additionally, the Company must maintain a specified level of publicly traded 
shares, market value of the publicly traded shares, minimum bid price, number 
of market makers and shareholders.  In October 1998, the Company received 
notification from Nasdaq regarding the continued listing of its stock because 
the Company's common stock failed to maintain a closing bid price greater 
than or equal to $1.00.  The Company attended a hearing with Nasdaq officials 
on March 5, 1999.  The Company has demonstrated compliance with the minimum 
bid price since the Company effected a reverse stock split on March 1, 1999 
until April 1, 1999 when the stock price once again fell below $1.00 per 
share.  The Company has not yet received a response from Nasdaq concerning 
its listing.

On March 8, 1999, the Company received another notification from Nasdaq 
regarding its continued listing because the Company has failed to maintain 
the minimum required market value of the public float of $1,000,000.  The 
Company has until June 8, 1999 to demonstrate compliance with this 
requirement.

There can be no assurance that the Company's efforts to maintain its Nasdaq 
listing will be successful or that a delisting will not adversely effect its 
efforts to obtain financing.

YEAR 2000 DISCLOSURE

The Year 2000 issue exists because many computer systems and applications 
currently use two-digit fields to designate a year.  As the century date 
change occurs, date-sensitive systems will recognize the year 2000 as 1900, 
or not at all.  This inability to recognize or properly treat the Year 2000 
may cause systems to process critical financial and operational information 
incorrectly. The Company has completed an internal study to determine the 
full scope and related costs to insure that the Company's systems continue to 
meet its internal needs and those of its customers.  The results of the 
internal study indicate that its products are not affected by the Year 2000 
issue.  As of March 31, 1999, the major system utilized by the Company is its 
personal computer accounting system.  The Company does not believe that the 
Year 2000 issue will have a material effect on this system.

The Company believes that there is a greater risk that its vendors and 
customers will be affected by the Year 2000 issue.  The Company is currently 
unable to assess, and may be unable to accurately determine, the magnitude of 
any Year 2000 problems that may reside in the computer and information 
systems of its vendors and customers, or the impact that any such problems 
could have on the products and services provided by the Company to such 
customers.  The Company believes, based upon the progress to date, that its 
suppliers and customers are either Year 2000 compliant, or are themselves in 
an assessment phase.  However, there can be no assurance that all such 
problems will be resolved.  The occurrence of Year 2000 related failures in 
the computer and information systems of any of the Company's significant 
customers or vendors could have a material adverse effect on the business, 
results of operations and financial position of the Company.

DISCLOSURES REGARDING MARKET RISK

Market risk represents the risk of loss that may impact the Company's 
financial position, operating results or cash flows due to adverse changes in 
financial and commodity market prices and rates.

                                       19
<PAGE>

The Company has exposure to interest rate risk regarding its cash and cash 
equivalents and capital lease obligation.  Cash and cash equivalents are 
invested in highly-liquid instruments and the interest rate on the capital 
lease approximates current interest rates.  There should not be a material 
effect on the Company's future earnings, fair values or cash flows if 
interest rates change in the near future.

The Company owns 19.9% of Racom Japan.  Changes in the Japanese to U.S. 
dollar exchange rate may positively or negatively affect the fair value of 
the Company's investment in RJ.  However, because the Company carries its 
investment in RJ at zero and has no obligation to provide future funding to 
or on behalf of RJ, changes in the Japanese to U.S. dollar exchange rate will 
not have a significant affect on the Company's financial position, future 
earnings or cash flows.

FOURTH QUARTER ADJUSTMENTS

In March 1999, the Company determined that it was unable to continue to fund 
operations and it will enter a period whereby its primary function will be to 
collect future royalties if and when receivable.  The Company reviewed its 
assets to determine whether their carrying values were recoverable from 
future cash flows.  The Company recorded the following adjustments to the 
carrying value of assets in the fourth quarter of 1998:

<TABLE>

     <S>                                                    <C>
     Loss on impairment of technology license (Note 4)      $1,399,816
     Depreciation of fixed assets (Note 3)                     115,000
     Provision for uncollectible accounts                        9,504
     Provision for inventories                                 177,615
                                                            ----------
               Total                                        $1,701,935

</TABLE>

Assumptions underlying future cash flows are subject to risks and 
uncertainties. Any differences between the assumptions and actual market 
conditions and/or the Company's performance could have a material effect on 
the Company's financial position and results of operations.

ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's financial statements, which are included in this report on 
pages F-1 through F-21, are incorporated herein by reference.

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

There have been no disagreements with accountants on any accounting or 
financial disclosure matters during the applicable period.

                                       PART III

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

Information regarding executive officers and directors of the Company as of 
March 15, 1999 is set forth below:

MARK DAVISON (Director of the Company since May 1996 ) has been a director of 
Intag International Limited, a principal stockholder of the Company, since 
July 1992.  In December 1991, Mr. Davison 

                                       20
<PAGE>

founded the AusAsean Group, which provides investment banking, development 
and venture capital funds management.  Mr. Davison is also a director of BRL 
Hardy Limited, Intag International Limited and other Australian public and 
private companies.  Mr. Davison is an investment banker.  He is 49.

CHAS YAP HOCK ENG (Director of the Company since October 1997) is currently, 
and has been for seven years, the Technology Development Director of IRIS 
Technologies Sdn. Bhd. in Kuala Lumpur, Malaysia.  As Technology Development 
Director, his principal responsibilities include developing smart card 
technology, integrating disparate technologies to result in security 
solutions and to enhance contact and contactless smart card technology 
enabling technologies in the area of biometrics.  Mr. Yap also serves on the 
Board of Directors of TL Technology Research (Malaysia, Hong Kong and the 
United Kingdom), Power Metric Consultants (Malaysia), Summit Technology Ltd. 
(Hong Kong) and MCS Ltd. (United Kingdom).  Prior to his position at IRIS, 
Mr. Yap founded three companies in the United Kingdom, including MCS, Ltd., 
Supply Technology Ltd. and Peripherals Connection Ltd., which specialized in 
the import, assembly and sale of personal computers and associated 
peripherals.  He is 53.

JOHN A. HINDS (Director of the Company since December 1997, Chairman of the 
Board of Directors since April 1998) has provided consulting services to 
various domestic and international business, cultural, and educational 
organizations. Mr. Hinds served as the Company's Acting President and CEO in 
July 1998.  Mr. Hinds, an executive vice president of VeriFone, Inc. until 
July 1996, was responsible for all field operations worldwide, including 
engineering, marketing, and sales for products in the United States and in 
more than 80 countries internationally.  He joined VeriFone in March 1993 
from AT&T, where he served as senior vice president, international of the 
parent company and president of AT&T International.  Prior to AT&T, Mr. Hinds 
spent 11 years with the General Electric company in a variety of management 
positions.  Mr. Hinds was also president of the Geneva-based International 
Organization for Standardization for the 1992-1994 term and he is a director 
of Salu, Inc.  He is 62.

ARTHUR B. RANCIS (President, Chief Executive Officer, Chief Financial Officer 
and Director since August 1998) is a former vice president of Samsung 
Electronics of America, responsible for its Product Innovation Laboratory. 
While at Sony Electronics Inc., Mr. Rancis held a variety of executive 
management positions including that of Vice President of Business Development 
and Technology Coordination where he was responsible for implementing the 
company's integrated information strategy into Sony's product divisions.  Mr. 
Rancis also held various positions in corporate marketing, international 
sales, product management and engineering with Masstor Systems Corporation, 
Storage Technology Corporation and Tektronix Corporation, respectively.  He 
is 44. 

RICHARD L. MOHR (Director of the Company since January 1999) has been the 
Executive Vice President and Chief Financial Officer of Ramtron International 
Corporation ("Ramtron"), a principal stockholder of the Company since 1995.  
He previously served as Controller (1991-1994) and as Vice President and 
Controller (1994-1995) of Ramtron.  He is 39.

ROGER BERTMAN (Director of the Company since July 1998) was the Vice 
President, Corporate Development for Verifone, Inc. from 1992 to 1998 where 
he was responsible for identifying, developing and implementing new 
opportunities through investments, acquisitions and strategic alliances.  
From 1989 until 1991, Mr. Bertman was a marketing executive for 
Ungermann-Bass.  He is 55. 

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934:  
Section 16(a) of the Securities Exchange Act of 1934, as amended, and 
regulations of the Securities and Exchange Commission ("SEC") thereunder, 
require the Company's executive officers, directors and persons who own more 
than ten percent of the Company's common stock, as well as affiliates of such 
persons, to file reports or ownership and changes in ownership of the 
Company's stock with the SEC and the National Association of Securities 
Dealers, Inc.  Executive officers, directors and persons owning more than ten 
percent of the Company's stock are required by SEC regulations to furnish the 
Company with copies of all Section 16(a) reports that they file.

                                       21
<PAGE>

Based solely upon a review of the copies of such reports, the Company 
believes that during the year ended December 31, 1998, its executive 
officers, directors and persons owning more than ten percent of the Company's 
stock complied with all applicable Section 16(a) filing requirements.

ITEM 10.  EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE.  The following table summarizes the compensation 
paid or accrued during the three fiscal years ended December 31, 1998, to 
those individuals who served as the Company's Chief Executive Officer.  There 
were no executive officers of the Company during 1998 whose compensation 
exceeded $100,000.

                              SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>


                                                                                          LONG-TERM
                                                                                        COMPENSATION
                                                                                            AWARDS
                                                                                        -------------
                                                  ANNUAL COMPENSATION ($)                 SECURITIES
                                -----------------------------------------------------     UNDERLYING
          NAME AND                                                    OTHER ANNUAL         OPTIONS/         ALL OTHER
     PRINCIPAL POSITION           YEAR       SALARY       BONUS       COMPENSATION        SAR'S (3)      COMPENSATION ($)
-----------------------------   --------   ----------   ---------   -----------------   -------------   -------------------
<S>                              <C>         <C>          <C>         <C>                 <C>            <C>
Arthur B. Rancis                 1998       $70,833        --          --                  133,333           30,000 (1)
President, Chief Executive       1997            --        --          --                   --                 --     
Officer and Chief Financial      1996            --        --          --                   --                 --     
Officer

Richard L. Horton                1998      $100,528        --          --                   --               45,000 (2)
Former President, Chief          1997      $180,000        --          17,877              122,222             --     
Executive Officer and Chief      1996      $179,122        --          --                   --                 --     
Financial Officer

</TABLE>

(1)  Mr. Rancis received a sign-on bonus upon employment with the Company in
     August 1998.
(2)  Mr. Horton received severance upon his resignation from the Company
     effective June 30, 1998.
(3)  Options include limited Stock Appreciation Rights which may be exercised
     within 90 days of a change of control as defined in the 1993 Employee Stock
     Plan.


STOCK OPTION PLAN.  The Company maintains the 1993 Employee Stock Plan (the 
"Plan") to attract and retain key executive personnel and advisors, and to 
encourage their continued employment with and service to the Company.

                                       22
<PAGE>

The following table sets forth the information regarding (1) the number of 
shares of the Company's common stock underlying stock options granted during 
1998 to each named executive officer, (2) the percent the grants represent to 
total options granted to all employees and consultants during the fiscal 
year, (3) the per share exercise price of the options and (4) the expiration 
dates of the options.

                                     OPTION GRANTS IN 1998
<TABLE>
<CAPTION>

                                    Number of     % of Total
                                   Securities       Options
                                   Underlying     Granted to      Exercise
                                     Options      Employees       Price Per
               Name                Granted (#)     in 1998       Share ($/sh)     Expiration Date
------------------------------   --------------  -------------  --------------  -------------------
<S>                                <C>            <C>               <C>           <C>
Arthur B. Rancis                   133,333 (1)       44.0%          $4.50            July 13, 2003

</TABLE>


(1)  These options vest in equal amounts annually over a four-year period
     beginning July 1999.


AGGREGATED OPTION EXERCISES IN 1998 AND YEAR END VALUES.  During 1998, no 
stock options were exercised by executive officers.  The following table sets 
forth information as of December 31, 1998 with respect to the number of 
shares covered by options by each executive officer named in the Summary 
Compensation Table.

                                AGGREGATED OPTION EXERCISES IN LAST YEAR
                                      AND YEAR END OPTION VALUES
<TABLE>
<CAPTION>

                                      Number of Securities            Value of Unexercised
                                     Underlying Unexercised           In-The-Money Options
                                      Options at 12/31/98                  at 12/31/98
                                 -----------------------------  -----------------------------------
               Name                Exercisable    Unexercisable  Exercisable       Unexercisable
------------------------------   --------------  -------------  --------------  -------------------
<S>                                <C>            <C>               <C>           <C>
Arthur B. Rancis                        --           133,333          --                  --

Richard L. Horton                       122,222      --               --                  --

</TABLE>


DIRECTOR COMPENSATION.  The Company's independent directors do not receive 
compensation for Board meetings but are reimbursed for out-of-pocket expenses 
incurred therewith.  Independent directors are granted stock options from 
time to time for services to the Company.

In 1998, the Company paid or accrued $31,350 payable to Mr. John Hinds, 
Chairman of the Board of Directors, for consulting services to the Company.

                                       23
<PAGE>

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information concerning the holdings of common 
stock by each person who, as of March 15, 1999, holds of record or is known 
by the Company to hold beneficially or of record, more than 5% of the 
Company's common stock, by each director, and by all directors and executive 
officers as a group.  All shares are owned beneficially and of record.

<TABLE>
<CAPTION>


Name                                                        Beneficially Owned (1)          Percent of Class
----------------------------------------------------        ----------------------        ----------------------
<S>                                                         <C>                           <C>
Intag International Limited (2)                                        1,264,178                    41.3%
52 Phillip Street
Sydney NSW Australia

Ramtron International Corporation (3)                                  1,122,546                    36.9%
1850 Ramtron Drive
Colorado Springs, Colorado

John A. Hinds (4)                                                         32,593                     1.1%
Mark R. Davison (5)                                                       10,000                      (8)
Chas Yap Hock Eng (6)                                                      5,556                      (8)
Roger Bertman (7)                                                         13,778                      (8)
Arthur B. Rancis                                                              --                      (8)
Richard L. Mohr                                                               --                      (8)
All officers and directors as a group (6 persons)                         61,927

</TABLE>

_______________________________

(1)  Beneficial ownership as reported in the table has been determined in
     accordance with applicable federal regulations and includes (a) shares of
     the Company's common stock as to which a person possess sole or shared
     voting and/or investment power and (b) shares of the Company's common stock
     which may be acquired within sixty days upon the exercise of outstanding
     stock options and warrants.

(2)  Includes 71,504 common stock purchase warrants.

(3)  Includes 55,878 common stock purchase warrants.

(4)  Includes 2,223 shares and options to purchase 30,371 shares of common
     stock.

(5)  Includes options to purchase 10,000 shares of common stock.  Does not
     include 1,192,674 shares or 71,504 common stock purchase warrants held by
     Intag International Limited, a publicly-held Australian company for which
     Mr. Davison serves as a director.

(6)  Includes 5,556 options to purchase shares of common stock.

(7)  Includes 1,556 shares and 12,223 options to purchase shares of common
     stock.

(8)  Less than 1% of class.

                                       24
<PAGE>

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

As consideration for Intag advancing a working capital facility in June 1994, 
the Company granted Intag 44,444 warrants to purchase the Company's common 
stock at an exercise price of $11.25 per share, which vested immediately and 
are exercisable over a five-year term.  The Company determined that these 
warrants had a nominal value at the date of issuance.  As of December 31, 
1998, none of the warrants have been exercised.

In October 1996, the Company issued 27,060 and 55,878 warrants to purchase 
the Company's common stock at an exercise price of $11.25 per share to Intag 
and Ramtron, respectively.  The warrants were approved in consideration of 
approximately $933,000 of short-term loans made to the Company in 1995 and 
1996 from Ramtron and Intag and deferred payment terms on product purchases 
from Ramtron made to the Company, which were repaid with proceeds from the 
Company's IPO.  The warrants, which vested immediately, are exercisable for a 
period of five years after the date of issuance.  The Company determined that 
these warrants had a nominal value at the date of issuance.  As of December 
31, 1998, none of the warrants have been exercised.

During 1997, the Company issued 35,556 common shares to Intag for 
consideration previously received related to amendments to the Technology 
License and Supply Agreements

On April 15, 1997, the Company signed an agreement (the "Tripartite 
Agreement") with Ramtron and Intag to significantly increase the availability 
of Ramtron's FRAM technology for use in RFID markets and applications. The 
Tripartite Agreement replaced all existing licensing and supply agreements 
between the related parties.  Under the Tripartite Agreement, the Company 
retained the rights to sublicense Ramtron's ferroelectric technology for use 
in ferroelectric RFID products to no more than five (5) parties pursuant to 
Ramtron's approval. As of December 31, 1998, the Company has sublicensed the 
technology to three companies.  Ramtron has agreed to coordinate its own 
licensing of FRAM technology, including the licensing of FRAM technology for 
use in RFID applications with the Company, until such time as the Company 
completes its five sublicensing agreements.  The parties to the Tripartite 
Agreement have agreed to share, with certain limitations, future licensing 
and royalty revenues associated with such ferroelectric licensing activities. 
 In addition, Ramtron granted the Company the right to purchase certain 
agreed upon percentages of its FRAM product manufacturing capacity.  As of 
December 31, 1998, the Company had not received or paid any royalties under 
the Tripartite Agreement as there were no sales of product through December 
31, 1998.  The Tripartite Agreement remains effective until expiration of the 
last of Ramtron's patents.  For the years ended December 31, 1998 and 1997, 
the Company made purchases from Ramtron of approximately $72,000 and $34,000, 
respectively.

On December 11, 1998, the Company, Ramtron and Intag signed an amendment to 
the Tripartite Agreement, whereby, the Company reconveyed to Ramtron its 
rights to sublicense the ferroelectric technology to two additional 
sublicensees.  In consideration for this and other amendments, Ramtron paid 
the Company $350,000 which was recorded as an increase in the Company's 
paid-in capital.  If Ramtron sells the remaining two sublicenses, the Company 
will receive 50% of the license fees paid to Ramtron less $350,000.

The Company believes the terms of the above transactions were fair, 
reasonable and consistent with terms that could be obtained from 
nonaffiliated third parties.  Any future transactions with affiliates of the 
Company will be approved by the disinterested members of the Company's Board 
of Directors.

During 1998, the Company paid or accrued $31,350 to Mr. John Hinds, Chairman 
of the Board of Directors, for consulting services to the Company.

                                       25
<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 

(a). EXHIBITS:

  Exhibit No.                        Title
  -----------                        -----
     3.01      Restated Certificate of Incorporation of the Registrant (1)

     3.02      Restated Bylaws of the Registrant (1)

     4.01      1993 Employee Stock Plan (5)

     4.02      Form of 1993 Employee Stock Agreement
               under the 1993 Employee Stock Plan (5)

     4.03      Form of Representative's Warrant (1)

     4.04      Form of Warrant Agreement (1)

     4.05      Form of Lock-Up Agreement (2)

     10.01     Lease Agreement - Greenwood Village Office Facility (1)

     10.02     Joint Venture Agreement (Racom Japan) (1)

     10.03     Exclusive Distributor Agreement (Racom Japan) (1)

     10.04     Technology License Agreement (Racom Japan) (1)

     10.05     Exclusive Distributor Agreement (Racom Japan) (1)

     10.06     Development and Supply Agreement (Bull CP-8) (1)

     10.07     Agreement regarding ferroelectric RFID products (Rohm) (1)

     10.08     Stock Purchase Agreement (Rohm) (1)

     10.09     Settlement Agreement (Intag) (1)

     10.10     Assignment and Security Agreement (Intag) (1)

     10.11     Technology License Agreement (Ramtron) (1)

     10.12     Amendment to Technology License Agreement (Ramtron) (1)

     10.13     Second Amendment to Technology License Agreement (Ramtron) (1)

     10.14     Tripartite Technology Agreement entered into April 15, 1997
               between Racom Systems, Inc., Ramtron International Corporation
               and Intag International Limited (3)

     10.15     Amendment No. 3 RF/ID Products to High-Density FRAM Cooperation
               Agreement between Racom Systems, Inc., Ramtron International
               Corporation and Hitachi, Ltd. (4)

     27.01     Financial Data Schedule (filed herewith)

                                       26
<PAGE>

     (1) Incorporated by reference to the Company's Registration Statement on
     Form SB-2 (SEC File No. 333-18351), as filed with the Securities and
     Exchange Commission on December 20, 1996.

     (2) Incorporated by reference to Amendment No. 1 to the Company's
     Registration Statement on Form SB-2 (SEC File No. 333-18351), as filed with
     the Securities and Exchange Commission on February 5, 1997.

     (3) Incorporated by reference to the Company's Form 10-QSB (SEC File No.
     000-21907), as filed with the Securities and Exchange Commission on May 15,
     1997.

     (4) Incorporated by reference to the Company's Form 8-K (SEC File 
     No. 000-21907), as filed with the Securities and Exchange Commission on 
     February 2, 1998.

     (5) Incorporated by reference to the Company's Registration Statement on
     Form S-8 (SEC File No. 333-38645), as filed with the Securities and
     Exchange Commission on October 15, 1997.


(b).   REPORTS ON FORM 8-K.

     None  

                                       27

<PAGE>

                                      SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Company has 
duly caused this Report to be signed on its behalf by the undersigned, 
thereunto duly authorized, in Greenwood Village, Colorado on April 7, 1999.

                         RACOM SYSTEMS, INC., a Delaware corporation


                         By: /s/ Arthur B. Rancis
                         ------------------------
                         Arthur B. Rancis
                         Chief Executive Officer, President, Chief Financial
                         Officer and Director (PRINCIPAL EXECUTIVE OFFICER AND
                         PRINCIPAL FINANCIAL OFFICER)

Pursuant to the requirements of the Securities Act of 1933, as amended, this 
Report has been signed below by the following persons on the dates indicated.

<TABLE>
<CAPTION>


     SIGNATURE                                 TITLE                                DATE
     ---------                                 -----                                ----
<S>                                <C>                                         <C>
/s/ John A. Hinds
------------------------------
John A. Hinds                      Chairman of the Board of Directors           April 14, 1999


/s/ Arthur B. Rancis               President, Chief Executive Officer and
------------------------------     Chief Financial Officer and Director         April 7, 1999
Arthur B. Rancis


------------------------------     Director                                     April__, 1999
Mark R. Davison


/s/ Chas Yap Hock Eng              Director                                     April 12, 1999
------------------------------
Chas Yap Hock Eng 


/s/ Roger Bertman                  Director                                     April 12, 1999
------------------------------
Roger Bertman

/s/ Richard L. Mohr
------------------------------     Director                                     April 14, 1999
Richard L. Mohr 

</TABLE>

                                                                     28
<PAGE>

                                 RACOM SYSTEMS, INC.

                            INDEX TO FINANCIAL STATEMENTS





                                                                           Page
                                                                           ----

Report of Independent Public Accountants                                    F-2

Balance Sheets as of December 31, 1998 and 1997                             F-3

Statements of Operations for the Years Ended December 31, 1998 and 1997     F-4

Statements of Stockholders' Equity for the Years Ended December 31, 1998
 and 1997                                                                   F-5

Statements of Cash Flows for the Years Ended December 31, 1998 and 1997     F-6

Notes to Financial Statements                                               F-8

                                       F-1
<PAGE>

                       REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To Racom Systems, Inc.:


We have audited the accompanying balance sheets of RACOM SYSTEMS, INC. (a 
Delaware corporation) as of December 31, 1998 and 1997, and the related 
statements of operations, stockholders' equity 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 audit 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 financial statements referred to above present fairly, in 
all material respects, the financial position of Racom Systems, Inc. as of 
December 31, 1998 and 1997, and the results of its operations and its cash 
flows for the years then ended in conformity with generally accepted 
accounting principles.

The accompanying financial statements have been prepared assuming that the 
Company will continue as a going concern.  As discussed in Note 2 to the 
financial statements, the Company has not generated sufficient funds to 
continue operations and has furloughed most of its employees for an indefinite 
period of time.  Management plans to continue the existence of the Company 
in order to collect future royalties if and when receivable pursuant to the 
Company's existing RFID technology licenses to three multinational 
semiconductor companies.  The accompanying financial statements do not 
include any adjustments relating to the recoverability and classification of 
asset carrying amounts or the amounts of liabilities that might result should 
the Company be unable to continue as a going concern.

                              ARTHUR ANDERSEN LLP
Denver, Colorado,
March 26, 1999. 

                                       F-2
<PAGE>

                                 RACOM SYSTEMS, INC.
                             BALANCE SHEETS - DECEMBER 31


                                        ASSETS


<TABLE>
<CAPTION>

                                                                                            1998            1997
                                                                                        ------------    -------------
<S>                                                                                     <C>             <C>
CURRENT ASSETS
  Cash and cash equivalents                                                             $    383,866     $  1,198,567
  Accounts receivable, net of allowance for uncollectibles of $41,504
   and -0- in 1998 and 1997, respectively
     Trade                                                                                    34,947           43,042
     Related parties (Note 8)                                                                  1,027           26,720
  Inventory, net of reserve of $199,615 and -0- in 1998 and 1997,                              4,176          122,875
     respectively (Note 3)
  Prepaid expenses and other                                                                  40,675           62,833
                                                                                          ------------   -------------
            Total current assets                                                             464,691        1,454,037
                                                                                          ------------   -------------
PROPERTY AND EQUIPMENT, at cost (Note 3)
  Machinery and equipment                                                                    467,448          449,432
  Furniture and fixtures                                                                      58,227           59,404
  Leasehold improvements                                                                       3,328            3,328
                                                                                          ------------   -------------
                                                                                             529,003          512,164
  Less-Accumulated depreciation                                                             (488,470)        (351,982)
                                                                                          ------------   -------------
                                                                                              40,533          160,182
                                                                                          ------------   -------------

TECHNOLOGY LICENSE, from related party, net of provision for
  impairment and accumulated depreciation of $2,400,000 and $842,541,
  in 1998 and 1997, respectively (Note 4)                                                         --        1,557,459
                                                                                          ------------   -------------
                                                                                             505,224        3,171,678
                                                                                          ------------   -------------
                                                                                          ------------   -------------

                                        LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
  Accounts payable and accrued liabilities                                                   247,532          359,069
  Accounts payable - related parties (Note 8)                                                 72,800           20,780
  Capital lease obligation                                                                    13,341           16,594
                                                                                          ------------   -------------
             Total current liabilities                                                       333,673          396,443
                                                                                          ------------   -------------

COMMITMENTS AND CONTINGENCIES
  (Notes 2, 11 and 12)

STOCKHOLDERS' EQUITY (Notes 4 and 7)
  Common stock, $.01 par value, 40,000,000 and 20,000,000
     shares authorized, 2,987,230 and 2,938,341 shares issued
     and outstanding, respectively                                                            29,872           29,383
  Additional paid-in capital                                                              17,210,296       16,602,085
  Accumulated deficit                                                                    (17,068,617)     (13,856,233)
                                                                                          ------------   -------------
                                                                                             171,551        2,775,235
                                                                                          ------------   -------------
                                                                                        $    505,224     $  3,171,678
                                                                                          ------------   -------------
                                                                                          ------------   -------------
</TABLE>

          The accompanying notes to financial statements are an integral part
                               of these balance sheets.
                                       F-3
<PAGE>

                                 RACOM SYSTEMS, INC.
                               STATEMENTS OF OPERATIONS
                           FOR THE YEARS ENDED DECEMBER 31


<TABLE>
<CAPTION>

                                                                        1998                1997   
                                                                     -----------         ----------
<S>                                                                  <C>                <C>     
REVENUES:
  Product sales                                                      $   135,390         $   210,694
  Product sales - related parties (Note 8)                                66,813              94,633
  Custom product development projects                                     45,000                  --
  License revenues (Note 5)                                            1,500,000                  --
  License revenues - related parties (Notes 4 and 6)                          --             596,953
                                                                     -----------          ----------
                                                                       1,747,203             902,280


COST OF REVENUES:
  Product costs                                                          113,514             419,884
  Provision for inventories                                              199,615             121,382
                                                                     -----------          ----------
                                                                         313,129             541,266 
                                                                     -----------          ----------

GROSS MARGIN                                                           1,434,074             361,014
                                                                     -----------          ----------

EXPENSES:
  Research and development                                             1,024,984           1,234,096
  General and administrative                                           1,411,676           1,070,404
  Sales and marketing                                                    697,096           1,014,484
  Equity in loss of Racom Japan (Notes 3 and 6)                               --             201,376
  Loss on write off of investment in Racom Japan (Notes 3 and 6)              --             303,978
  Loss on impairment of technology license                             1,399,816                  --
  Amortization expense                                                   157,643             157,643
                                                                     -----------          ----------
                                                                       4,691,215           3,981,981
                                                                     -----------          ----------

LOSS FROM OPERATIONS                                                  (3,257,141)         (3,620,967)


OTHER INCOME (EXPENSE):
  Interest expense                                                        (2,036)           (140,714)
  Interest expense - related parties                                          --             (17,405)
  Interest income                                                         50,334             100,037
  Other                                                                   (3,541)            (23,532)
                                                                     -----------          ----------

NET LOSS                                                             $(3,212,384)        $(3,702,581)
                                                                     -----------          ----------
                                                                     -----------          ----------
NET LOSS PER SHARE (Note 3)

BASIC AND DILUTED                                                    $     (1.08)        $     (1.30)
                                                                     -----------          ----------
                                                                     -----------          ----------
WEIGHTED AVERAGE SHARES OUTSTANDING                                    2,973,421           2,844,642
                                                                     -----------          ----------
                                                                     -----------          ----------

</TABLE>

         The accompanying notes to financial statements are an integral part
                                 of these statements.

                                       F-4
<PAGE>

                                 RACOM SYSTEMS, INC.
                          STATEMENTS OF STOCKHOLDERS' EQUITY
                    FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>


                                                                                   Additional
                                                                                    Paid-In         Accumulated
                                                      Shares           Amount       Capital           Deficit          Total
                                                     ---------        -------      -----------      -------------   ----------
<S>                                                 <C>              <C>           <C>              <C>             <C>
BALANCES, December 31, 1996                          2,562,785        $25,628      $10,362,288      $(10,153,652)   $  234,264

  Issuance of common stock in conjunction
     with initial public offering (net of
     offering expenses of ($1,182,432)
     (Note 7)                                          333,333          3,333        5,939,235                --     5,942,568
  Common stock issued to related party
     (Note 7)                                           35,556            355             (355)               --            --
  Gain from Racom Japan equity
     transactions (Note 6)                                  --             --          255,984                --       255,984
  Issuance of common stock upon exercise
     of employee stock options                           6,667             67           44,933                --        45,000
  Net loss                                                  --             --               --        (3,702,581)   (3,702,581)
                                                     ---------        -------      -----------      -------------   -----------

BALANCES, December 31, 1997                          2,938,341         29,383       16,602,085       (13,856,233)    2,775,235

  Issuance of common stock upon exercise
     of employee stock options                          48,889            489          219,511                --       220,000
  Capital contribution by related party
     (Notes 4 and 7)                                        --             --          350,000                --       350,000
  Nonemployee stock options (Note 13)                       --             --           38,700                --        38,700
  Net loss                                                  --             --               --        (3,212,384)   (3,212,384)
                                                     ---------        -------      -----------      -------------   -----------

BALANCES, December 31, 1998                          2,987,230        $29,872      $17,210,296      $(17,068,617)   $  171,551
                                                     ---------        -------      -----------      -------------   -----------
                                                     ---------        -------      -----------      -------------   -----------
</TABLE>

     The accompanying notes to financial statements are an integral part
                                 of these statements.

                                       F-5
<PAGE>

                                 RACOM SYSTEMS, INC.
                               STATEMENTS OF CASH FLOWS
                           FOR THE YEARS ENDED DECEMBER 31


<TABLE>
<CAPTION>


                                                                  1998                  1997 
                                                              ------------         ------------
<S>                                                            <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

  Net loss                                                     $(3,212,384)         $(3,702,581)
  Adjustments to reconcile net loss to net cash used  in
   operating activities-
    Depreciation and amortization                                  349,059              252,551 
    Equity in loss of Racom Japan                                       --              201,376 
    Loss on write off of investment in Racom Japan                      --              303,978 
    Loss on impairment of technology license                     1,399,816                   --
    Provision to write down inventory to market                    199,615              121,382 
    Reserve for uncollectible accounts                              41,504                   --
    Amortization of debt issuance costs                                 --               97,799 
    Non-employee stock option expense                               38,700                   --
    Loss on disposal of assets                                       1,540                  430 
    Decrease (increase) in-                                                        
      Accounts receivable - trade                                  (27,633)              36,159 
      Accounts receivable - related parties                         19,917                6,838 
      Inventory                                                    (80,916)             184,144 
      License revenue receivable - related party                        --              646,162 
      Prepaid expenses and other                                    22,158              (62,833)
    Increase (decrease) in-                                                        
      Accounts payable and accrued liabilities                    (111,537)            (272,356)
      Accounts payable - related parties                            52,020             (531,518)
      Deferred license revenue - related party                          --             (396,937)
                                                              ------------         ------------
          Net cash used in operating activities                 (1,308,141)          (3,115,406)
                                                              ------------         ------------
CASH FLOWS FROM INVESTING ACTIVITIES:                                          
                                                                               
  Purchase of property and equipment                               (74,565)             (84,004)
  Proceeds from sale of property and equipment                       1,258                   --
  Proceeds from sale of investment in Racom Japan                       --                7,936
                                                              ------------         ------------ 
  Net cash used in investing activities                            (73,307)             (76,068)
                                                              ------------         ------------

CASH FLOWS FROM FINANCING ACTIVITIES:                                          
                                                                               
  Proceeds from issuance of common stock                           220,000            7,170,000 
  Capital contribution by related party                            350,000                   --
  Payment of common stock offering costs                                --           (1,020,484)
  Payments on bridge loans                                              --           (1,040,000)
  Payments on notes payable - related parties                           --           (1,029,596)
  Payments on capital lease obligation                              (3,253)              (4,081)
                                                              ------------         ------------
          Net cash provided by financing activities                566,747            4,075,839 
                                                              ------------         ------------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS              (814,701)             884,365 


CASH AND CASH EQUIVALENTS, beginning of period                   1,198,567              314,202 
                                                              ------------         ------------
CASH AND CASH EQUIVALENTS, end of period                       $   383,866          $ 1,198,567 
                                                              ------------         ------------
                                                              ------------         ------------
</TABLE>

          (Continued on next page)

                                       F-6
<PAGE>

                                 RACOM SYSTEMS, INC.
                               STATEMENTS OF CASH FLOWS
                           FOR THE YEARS ENDED DECEMBER 31


<TABLE>
<CAPTION>

  (Continued from previous page)                                   1998               1997
                                                              ------------         ------------
<S>                                                            <C>                 <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

  Cash was paid during the year for:
    Interest                                                       $ 2,036            $  44,649
    Interest-related parties                                            --              287,001
    Income taxes                                                        --                   --

</TABLE>

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

  During 1997, the Company purchased equipment under a capital lease totaling 
  $19,344.

  During 1997, the Company recognized, as additional paid-in capital, a
  $255,984 gain on its investment in Racom Japan as a result of the investee's
  issuance of additional shares (Note 6).

  During 1997, the Company issued 35,556 common shares to Intag (Notes 4 and 7)
  related to consideration received in 1995.


         The accompanying notes to financial statements are an integral part
                                 of these statements.

                                       F-7
<PAGE>

                                 RACOM SYSTEMS, INC.


                            NOTES TO FINANCIAL STATEMENTS

(1) ORGANIZATION AND BUSINESS

Racom Systems, Inc. ( the "Company") is a developer and marketer of 
contactless smart cards and radio frequency identification ("RFID") 
contactless smart card systems.  The Company was initially formed as a joint 
venture between Intag International Limited ("Intag"), AWA Limited ("AWA") 
and Ramtron International Corporation ("Ramtron").  In June 1993, Intag 
acquired AWA's 444,444 shares of common stock.

The Company was incorporated in the State of Delaware on June 3, 1991 and 
commenced operations in February 1992.  Sales of the Company's initial two 
products utilizing ferroelectric random access memory ("FRAM") commenced in 
1993.

In March of 1999, the Company announced that it was unable to continue to fund 
operations at its previous levels.  Effective March 1999, the Company entered 
a period whereby its primary function will be to collect future royalties if 
and when receivable pursuant to the Company's existing RFID technology 
licenses.

(2) GOING CONCERN

As reflected in the accompanying financial statements, the Company has 
generated substantial operating losses since inception and has yet to 
generate sufficient revenues to fund its operations.  To date, the Company 
has completed a series of pilot projects; however, the Company has not yet 
completed a significant number of substantial sales transactions to third 
parties at prices and volumes sufficient to fund its operations.  During 
1998, the Company experienced significant cash flow deficits and liquidity 
shortages and funded its operations through the sale of a non-exclusive 
sublicense of its technology and a capital contribution from a related party, 
which was received in consideration of the Company reconveying to the related 
party its rights to sublicense the ferroelectric technology to two additional 
licensees.  In the fourth quarter of 1998, the Company reduced its 
administrative, sales and engineering costs through personnel reductions; 
however, the Company was not able to generate sufficient margins to fund its 
operations.  In March 1999, the Company announced that it was unable to 
continue to fund operations and that most of its employees had been 
furloughed for an indefinite period of time.  The Company will enter a period 
whereby its primary function will be to collect future royalties if and when 
receivable pursuant to the Company's existing RFID technology licenses to 
three multinational semiconductor companies.  There can be no assurance that 
royalties will become due in the future.

The Company is in the process of identifying sources of debt or equity 
financing to fund its operations until royalty revenue is received or until a 
strategic merger partner is located.  To date, no financing has been made 
available under terms acceptable to the Company.  There can be no assurance 
that the Company will be successful in obtaining acceptable financing.

These factors, among others, raise substantial doubt about the ability of 
the Company to continue as a going concern.  The carrying value of the 
Company's assets have been adjusted to reflect the Company's estimates of net 
realizable value at December 31, 1998.  The financial statements do not 
include any adjustments relating to the carrying amounts of liabilities that 
might be necessary should the Company be unable to continue as a going 
concern.

The Company must also maintain certain requirements in order to be listed on 
The Nasdaq SmallCap Market ("Nasdaq").  These requirements include 
maintaining a specified level of net tangible worth, as defined, market 

                                       F-8
<PAGE>

capitalization or net income.  Additionally, the Company must maintain a 
specified level of publicly traded shares, market value of the publicly 
traded shares, minimum bid price, number of market makers and shareholders.  
In October 1998, the Company received notification from Nasdaq regarding the 
continued listing of its stock because the Company's common stock failed to 
maintain a closing bid price greater than or equal to $1.00.  The Company 
attended a hearing with Nasdaq officials on March 5, 1999.  The Company has 
demonstrated compliance with the minimum bid price since the Company effected 
a reverse stock split on March 1, 1999.  The Company has not yet received a 
response from Nasdaq concerning its listing. 

On March 8, 1999, the Company received another notification from Nasdaq 
regarding its continued listing because the Company has failed to maintain 
the minimum required market value of the public float of $1,000,000.  The 
Company has until June 8, 1999 to demonstrate compliance with this 
requirement. 

There can be no assurance that the Company's efforts to maintain its Nasdaq 
listing will be successful or that a delisting will not adversely effect its 
efforts to obtain financing.

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH AND CASH EQUIVALENTS.  Cash and cash equivalents include investments in 
highly liquid investments with original maturities of three months or less. 

INVENTORY.  Inventory is stated at the lower of cost or market using the 
first-in, first-out ("FIFO") method of accounting.  Inventories at December 
31, 1998 and 1997 consisted of the following:

<TABLE>
<CAPTION>

                                              December 31
                                       -------------------------
                                            1998         1997
                                       ------------   ----------
          <S>                           <C>            <C>
          Raw materials                  $  151,667    $  50,200
          Work in process                    35,769       48,944
          Finished goods                     16,355       23,731
                                       ------------   ----------
                                            203,791      122,875
          Inventory reserves               (199,615)       --
                                       ------------   ----------
                                         $    4,176    $ 122,875
                                       ------------   ----------
                                       ------------   ----------
</TABLE>

PROPERTY AND EQUIPMENT.  Property and equipment are stated at cost and 
depreciation is provided using the straight-line method over the estimated 
useful lives of three to five years for the respective assets.  Leasehold 
improvements are amortized over the lease term or estimated useful life of 
the improvements, whichever is shorter.   Maintenance and repairs are 
expensed as incurred and improvements are capitalized.  In March 1999, the 
Company sold all of its property and equipment.  The 1998 financial 
statements reflect an additional $115,000 of depreciation expense recorded to 
write down the property and equipment to estimated net realizable value.  
Total depreciation expense, including amortization of assets held under 
capital leases, was $191,416 and $103,057 in 1998 and 1997, respectively.

                                       F-9
<PAGE>

INVESTMENT IN RACOM JAPAN.  During the majority of 1997, the Company's 
investment in  Racom Japan, Inc. ("RJ") was accounted for under the equity 
method.  In December 1997, the Company reduced its ownership interest in RJ 
to 19.9% and prospectively adopted the cost method.  The investment is 
carried at zero as of December 31, 1998 and 1997 (Note 6).

INTANGIBLE ASSETS.  Intangible assets are recorded at cost and are amortized 
using the straight-line method over the following estimated useful lives:

<TABLE>
<CAPTION>

                                                    Estimated
                                                  Useful Lives
                                                   (In Years)
                                                  ------------
          <S>                                     <C>
          Technology license                          10-17

</TABLE>

The amortization lives assigned to the technology license are based on the 
remaining lives of the patents protecting the licensed technology.  The 
Company reviews its amortization lives on a periodic basis.

In 1998, as further discussed in Note 4, the Company determined that the 
carrying value of its technology license was impaired and, accordingly, wrote 
off the remaining balance of $1,399,816.

REVENUE RECOGNITION.  Revenue from product sales to direct customers is 
recognized upon shipment.

Royalty revenue is recognized upon the Company's fulfillment of its 
contractual obligations and determination of a fixed royalty amount, or, in 
the case of ongoing unit royalties, upon sales by the licensee of 
royalty-bearing products, as estimated by the Company.

Revenue from the sale of licenses of technology which are nonrefundable and 
for which no significant future obligations exist, is recognized when the 
license is signed.  Revenue from the sale of licenses which are refundable or 
for which future obligations exist, is recognized when the Company has 
completed its obligations under the license.

Revenue from certain research and development activities conducted for third 
parties is recognized as the services are performed.

RESEARCH AND DEVELOPMENT.  Research and development costs are charged to 
operations when incurred and are included in operating expenses.

NET LOSS PER SHARE.  Net loss per share has been computed based upon the 
weighted average number of common shares.

Basic earnings per share is computed by dividing reported earnings available 
to common stockholders by weighted average shares outstanding.  No dilution 
for any potentially dilutive securities is included.  Diluted earnings per 
share reflects the potential dilution assuming the issuance of common shares 
for all dilutive potential common shares outstanding during the period.  As a 
result of the Company's net losses, all potentially dilutive securities, 
417,081 options and 551,825 warrants in 1998, and 348,222 options and 551,825 
warrants in 1997, would be antidilutive and thus, diluted earnings per share 
is not presented.

                                       F-10
<PAGE>

FAIR VALUE OF FINANCIAL INSTRUMENTS.  The Company's financial instruments 
consist of cash and cash equivalents, short-term trade receivables and 
payables, the carrying values of which approximate fair value.

USE OF ESTIMATES.  The preparation of financial statements in conformity with 
generally accepted accounting principles requires management to make 
estimates and assumptions.  These estimates may affect the reported amounts 
of assets and liabilities, 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 those 
estimates.

LONG-LIVED ASSETS.  Long-lived assets and intangibles held and used by the 
Company are reviewed for impairment whenever events or changes in 
circumstances indicate that the carrying amount of an asset may not be 
recoverable. If impaired, long-lived assets and intangibles are adjusted 
downward to their estimated fair value.

CONCENTRATION OF CREDIT RISK/TRANSACTIONS DENOMINATED IN FOREIGN CURRENCIES. 
The Company does not enter into hedging or speculative derivative contracts 
and has no off balance sheet risk from foreign exchange contracts, options 
contracts or other hedging arrangements.  Further, the Company has no 
obligation denominated in foreign currencies nor has it guaranteed the 
obligations of other parties.

The Company enters into sales and sublicense contracts denominated in foreign 
currency.  Transaction gains and losses are included in income (loss) in the 
period in which the exchange rate changes.  During 1998 and 1997, the Company 
recorded foreign exchange (gains)/losses of $(452) and $21,934, respectively, 
which is included in other income (expense) in the accompanying statements of 
operations.

The Company performs ongoing evaluations of its customers' financial 
condition and generally does not require collateral, but often requires 
deposits on certain international product orders.  Its trade accounts 
receivable balances are primarily domestic and are concentrated among 
companies within the high-technology industry.

INCOME TAXES.  The Company recognizes deferred income tax assets and 
liabilities for the expected future income tax consequences, based on enacted 
tax laws, of temporary differences between the financial reporting and tax 
bases of assets, liabilities, and for carryforwards.  Deferred tax assets are 
reduced, if deemed necessary, by a valuation allowance for the amount of any 
tax benefits which, more likely than not, based on current circumstances, are 
not expected to be realized (Note 12).

NEW ACCOUNTING STANDARDS.  Effective January 1, 1998, the Company adopted the 
provisions of the Financial Accounting Standards Board ("FASB") Statement of 
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive 
Income", which establishes standards for reporting comprehensive income and 
its components in financial statements.  Comprehensive income, as defined, 
includes all changes in equity (net assets) during a period from non-owner 
sources.  For the years ended December 31, 1998 and 1997, there has been no 
difference between comprehensive loss and net loss.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an 
Enterprise and Related Information."  This statement establishes standards 
for the way companies report information about operating segments in annual 
financial statements.  It also establishes standards for related disclosures 
about products and services, geographic areas and major customers.  In 
accordance with the provisions of SFAS No. 131, the Company has determined 
that it has one reportable operating segment at December 31, 1998 and 1997.

                                       F-11
<PAGE>

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative 
Instruments and Hedging Activities" effective for fiscal years beginning 
after June 15, 1999.   SFAS No. 133 establishes accounting and reporting 
standards requiring that every derivative instrument (including certain 
derivative instruments embedded in other contracts) be recorded in the 
balance sheet as either an asset or liability measured at its fair value.   
It also requires that changes in the derivative's fair value be recognized 
currently in earnings unless specific hedge accounting criteria are met.  
Special accounting for qualifying hedges allows a derivative's gains and 
losses to offset related results on the hedged item in the income statements, 
and requires that a company must formally document, designate and assess the 
effectiveness of transactions that receive hedge accounting.  SFAS No. 133 
may not be applied retroactively, and must be applied to (a) derivative 
instruments and (b) certain derivative instruments embedded in hybrid 
contracts that were issued, acquired or substantively modified after December 
31, 1997 ( and, at the Company's election, before January 1, 1998).  
Management believes that  implementation of SFAS No. 133 will not have a 
material impact on the Company's financial statements.

In 1998, the American Institute of Certified Public Accountants ("AICPA") 
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of 
Computer Software Developed or Obtained for Internal Use" which is effective  
for fiscal years beginning after December 15, 1998.  The SOP requires 
capitalization of certain costs incurred in the development of internal-use 
software, including external direct material and service costs, employee and 
payroll-related costs, and capitalized interest.  Management believes that 
implementation of SOP 98-1 will not have a material impact on the Company's 
financial statements.

In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up 
Activities" which is effective for fiscal years beginning after December 15, 
1998.  In general, SOP 98-5 requires that the costs of start-up activities 
and organization costs be expensed as incurred.  Initial application of SOP 
98-5 should be reported as the cumulative effect of a change in accounting 
principle. Management believes that SOP 98-5 will not have a material impact 
on the Company's financial statements.

(4) TECHNOLOGY LICENSE AND SUPPLY AGREEMENTS

The Company's primary asset is a technology license related to the design and 
manufacture of its products. In October 1991, the Company originally 
purchased the technology from Ramtron pursuant to a technology license 
agreement (the "Technology License"), for $2,000,000 in cash and 444,444 
shares of the Company's common stock.  The Company also entered into a supply 
agreement in connection with the Technology License (collectively, the 
"Technology License and Supply Agreements").  The Technology License is 
protected by patents owned by Ramtron and is further protected by the 
Company's own patents.

The Technology License was recorded at the original cash acquisition cost of 
$2,000,000.  The Technology License and Supply Agreements were amended in 
March 1994 and  February and March 1995.  In connection with the March 1994 
amendment, the Company issued an additional 444,444 shares of common stock to 
Ramtron.  In connection with the February 1995 amendment, the Company issued 
222,222 shares of common stock to Ramtron and caused Ramtron to be paid cash 
of $1,000,000. The common shares issued to Ramtron were assigned no value 
because the amendments were viewed as a modification of the original transfer 
by a principal stockholder of intangible rights for which Ramtron had no 
capitalized historical cost basis.  Intag paid $600,000 of the cash 
consideration directly to Ramtron, which has been reflected as an addition to 
the Company's paid-in capital. The remaining $400,000 balance paid to Ramtron 
was loaned to the Company by Intag and was payable contingent upon Intag 
generating sufficient sublicense revenue. During 1995, Intag and the Company 
agreed that the amount would no longer bear interest and may be converted, at 
Intag's option, into shares of the Company's common stock at a rate of $11.25 
per share, no later than June 1997.  Intag simultaneously paid the Company 
$200,000 for a sublicense.  The Company had netted the $400,000 contingent 
payable and the $200,000 sublicense payment against the $1,000,000 paid to 
Ramtron, resulting in a net increase of $400,000 to the amount capitalized as 
the 

                                       F-12
<PAGE>

Technology License.  During 1997, the Company issued 35,556 common shares to 
Intag for consideration received related to the amendments to the Technology 
License and Supply Agreements.

In April 1997, the Company signed an agreement (the "Tripartite Agreement") 
with Ramtron and Intag to significantly increase the availability of 
Ramtron's FRAM technology for use in RFID markets and applications. The 
Tripartite Agreement replaced all existing licensing and supply agreements 
between the related parties.  Under the Tripartite Agreement, the Company 
retained the rights to sublicense Ramtron's ferroelectric technology for use 
in ferroelectric RFID products to no more than five (5) parties pursuant to 
Ramtron's approval.  As of December 31, 1998, the Company has sublicensed the 
technology to three companies.  Ramtron has agreed to coordinate its own 
licensing of FRAM technology, including the licensing of FRAM technology for 
use in RFID applications with the Company, until such time as the Company 
completes its five sublicensing agreements.  The parties to the Tripartite 
Agreement have agreed to share, with certain limitations, future licensing 
and royalty revenues associated with such ferroelectric licensing activities. 
 In addition, Ramtron granted the Company the right to purchase certain 
agreed upon percentages of its FRAM product manufacturing capacity.  As of 
December 31, 1998, the Company had not received or paid any royalties under 
the Tripartite Agreement as there were no sales of product through December 
31, 1998.  The Tripartite Agreement remains effective until expiration of the 
last of Ramtron's patents.

The Company recovers the cost of its Technology License through product sales 
and sublicensing agreements.  In the fourth quarter of 1998, sales of 
products utilizing the Company's technology were not adequate to recover the 
cost of the Technology License and no further sublicense agreements were 
executed since the agreement with Hitachi in January 1998 (Note 5).  
Furthermore, there is no assurance that the Company will generate sufficient 
royalty revenues to recover the carrying amount of its technology.  Due to 
the Company's current financial position and its inability to continue to 
fund operations, the Company determined that its investment in the Technology 
License was impaired. Accordingly, in 1998, the Company wrote off the 
remaining book value of the Technology License of $1,399,816, which is 
recorded as loss on impairment of technology license in the accompanying 
statements of operations. 

In December 1998, the Company, Ramtron and Intag signed an amendment to the 
Tripartite Agreement, whereby, the Company reconveyed to Ramtron its rights 
to sublicense the ferroelectric technology to two additional sublicensees.  
In consideration for this and other amendments, Ramtron paid the Company 
$350,000 which was recorded as an increase in the Company's paid-in capital.  
If Ramtron sells the remaining two sublicenses, the Company will receive 50% 
of the license fees paid to Ramtron less $350,000.

(5) SUBLICENSE AGREEMENTS

ROHM.  In June 1995, the Company entered into a Cooperative Agreement for 
Licensed Manufacturing of Ferroelectric RFID Products with Rohm Co., Ltd. of 
Japan ("Rohm").  The license gives Rohm a non-exclusive, non-sublicenseable, 
non-transferable right and license to use the RFID technology in connection 
with the design, development, manufacture and sale of custom ferroelectric 
RFID products for use in Japan.  In consideration for this agreement, Rohm 
purchased 111,111 shares of the Company's common stock for $13.50 per share.  
The agreement also calls for Rohm to pay the Company a $1,000,000 license fee 
in four equal installments when the Company reaches certain sales milestones. 
As of December 31, 1996, the Company had received $500,000 in license fees.  
No further milestones have been reached through December 31, 1998.

FUJITSU.  In October 1996, the Company consented to allow RJ to enter into a 
custom product development project with Fujitsu Limited of Japan ("Fujitsu"), 
pursuant to the technology license and supply agreement granted to RJ in 
March 1996, under which the Company is entitled to 50% of all sublicense 
revenue earned by RJ.  The sublicense was for a specified amount, as defined 
in the contract, a portion of which was due upon execution of the agreement 

                                       F-13
<PAGE>

and the remainder to be paid upon RJ meeting certain performance criteria.  
Under the agreement with Fujitsu, RJ will be entitled to royalties, as 
defined in the contract, through 2001.  During 1997, $215,000 of revenue 
related to the agreement between RJ and Fujitsu was recognized. No further 
revenue has been recorded through December 31, 1998.

HITACHI.  In January 1998, the Company executed an agreement, in conjunction 
with Ramtron, granting Hitachi Ltd. ("Hitachi") a worldwide, non-exclusive 
license to design, manufacture and sell smart card products based on the 
Company's contactless, ferroelectric smart card technology and Ramtron's FRAM 
technology.  In addition, the Company granted Hitachi an option to secure 
rights to its RFID technology for an additional predetermined fee, for a 
period up to December 31, 1999.  As consideration for the rights granted 
under the agreement, Hitachi will pay certain license fees and royalties to 
the Company.  The Company received license fees of $1,500,000 from Hitachi 
during 1998.  As additional consideration for the rights granted under the 
agreement, Hitachi will provide engineering services for development of the 
Company's RFID products, and the Company and Ramtron have a certain defined 
percentage call on Hitachi's production capacity of RFID products.  The 
agreement remains in effect until the expiration of the last of the Company's 
and Ramtron's relevant patents.

(6) RACOM JAPAN

INVESTMENT.  In July 1993, the Company entered into a joint venture agreement 
with Nittetsu Shoji Co. Ltd. ("NS") pursuant to which NS and the Company each 
received a 50% ownership interest in RJ, a Japanese corporation.  RJ was 
formed for the purpose of marketing, distributing and supporting the 
Company's RFID products in Japan.  RJ had the exclusive right to distribute 
the Company's products in Japan for two years commencing August 1995.  In 
1997, the Company extended RJ's distribution rights to worldwide, 
nonexclusive rights.  In March 1996, the Company purchased an additional 
1,000 shares of common stock in RJ at a purchase price of 50,000 Japanese yen 
($466.98 per share, or $466,984). Additionally, in March 1996, NS and third 
parties purchased additional shares of common stock, decreasing the Company's 
ownership of RJ to 40%.  In May 1997, RJ sold 3,020 shares of its stock (at 
50,000 yen per share) to third parties, reducing the Company's ownership to 
22.8%.  The Company recognized a gain on its investment in RJ as a result of 
the investee's issuance of additional shares. Due to RJ's history of 
continuing operating losses and questions regarding RJ's ability to continue 
in existence, the Company recognized the increase in the investment as an 
increase to additional paid-in capital.  During December 1997, the Company 
sold 40 shares of its investment in RJ to a third party and RJ sold 800 
shares of its stock to third parties.  These two transactions resulted in a 
decrease in ownership from approximately 22.8% to 19.9%.  Effective December 
1997, the Company changed its method of accounting for its investment in RJ 
from the equity method to the cost method.

The investment in RJ was accounted for using the equity method through 
December 1997.  The Company recorded its share of RJ's loss in 1997 of 
$201,376 as equity in loss of RJ in the accompanying financial statements.  
During 1997, the Company determined that the carrying value of its investment 
in RJ was impaired and accordingly wrote off its remaining investment of 
$303,978.  The investment is carried at zero at December 31, 1998 and 1997.  
The Company has no obligation to provide additional funding to or on behalf 
of RJ.

TECHNOLOGY LICENSE.  In March 1996, the Company entered into a technology 
license agreement with RJ for the common purpose of more fully developing the 
Japanese market for ferroelectric RFID products.  RJ paid $933,968 in cash to 
the Company for the non-exclusive right and license to use its patented 
ferroelectric RFID technology and all improvements, for the limited right to 
design, develop and manufacture ferroelectric RFID products for sale and use 
in Japan only.  This license excludes the right to use the ferroelectric RFID 
technology in conveyer fed, airline, postal and courier applications (as the 
rights to this technology were previously licensed to Intag).  Under the 
agreement, RJ is obligated to pay the Company 50% of all sublicense revenues 
and royalties, as defined in the 

                                       F-14
<PAGE>

agreement, on net sales of ferroelectric RFID products which are sold to 
third parties.  RJ is also obligated to pay the Company a 4% royalty on RJ's 
net sales of ferroelectric RFID products.  In 1997, the Company renegotiated 
the license rights granted to RJ, which granted RJ worldwide non-exclusive 
rights to the technology in exchange for RJ relinquishing its limited 
exclusive rights to sublicense the technology in Japan. The agreement remains 
in effect until the expiration of the last of the Company's and Ramtron's 
relevant patents.

(7) STOCKHOLDERS' EQUITY

STOCK SPLIT.  On March 1, 1999, the Company effected a reverse stock split of 
the Company's common stock on the basis of one share for each four and 
one-half shares.  The outstanding and weighted average number of shares of 
common stock, per share data and warrant and stock option amounts in these 
financial statements have been adjusted to reflect the impact of the stock 
split for all periods presented.  The authorized number of shares was not 
split.

INITIAL PUBLIC OFFERING.  In March 1997, the Company completed its Initial 
Public Offering ("IPO") of common stock resulting in net proceeds of 
$5,942,568. The Company sold 333,333 units (consisting of one share of common 
stock and one common stock purchase warrant) for $21.38 per unit.  Each 
warrant is exercisable to purchase one share of common stock for $26.73 per 
share for a period of two years.  The warrants may be redeemed by the Company 
for $.05 per warrant if the closing price of the common stock is at least 
$32.09 per share for 20 consecutive trading days, ending not earlier than 
five days before the warrants are called for redemption.  Also in conjunction 
with the IPO, the underwriters received the option to purchase an additional 
33,333 units at $33.12 per unit at any time beginning 12 months from the 
effective date of the IPO and continuing for four years thereafter.  The 
Company determined that the warrants had a nominal value at the date of 
issuance.  As of December 31, 1998, none of the warrants have been exercised.

TRANSACTIONS WITH RELATED PARTIES.  As consideration for Intag advancing a 
working capital facility in June 1994, the Company granted Intag 44,444 
warrants to purchase the Company's common stock at an exercise price of 
$11.25 per share, which vested immediately and are exercisable over a 
five-year term.  The Company determined that these warrants had a nominal 
value at the date of issuance.  As of December 31, 1998, none of the warrants 
have been exercised.

In October 1996, the Company issued 27,059 and 55,878 warrants to purchase 
the Company's common stock at an exercise price of $11.25 per share to Intag 
and Ramtron, respectively.  The warrants were approved in consideration of 
approximately $933,000 of short-term loans made to the Company in 1995 and 
1996 from Ramtron and Intag and deferred payment terms on product purchases 
from Ramtron made to the Company, which were repaid with proceeds from the 
Company's IPO.  The warrants, which vested immediately, are exercisable for a 
period of five years after the date of issuance.  The Company determined that 
these warrants had a nominal value at the date of issuance.  As of December 
31, 1998, none of the warrants have been exercised.

During 1997, the Company issued 35,556 common shares to Intag for 
consideration previously received related to amendments to the Technology 
License and Supply Agreements (Note 4).  During 1998, the Company received a 
$350,000 capital contribution from Ramtron (Note 4) which was recorded as 
additional paid-in capital in the accompanying statement of stockholders' 
equity.

                                       F-15
<PAGE>

WARRANTS.  The Company has granted warrants for the purchase of common stock 
to its stockholders and lenders principally for providing financing to the 
Company. The Company has also granted warrants in conjunction with the IPO.  
The following warrants are outstanding at December 31, 1998:

<TABLE>
<CAPTION>

                                                     Remaining
                                      Exercise        Life in
                      Quantity         Price           Years
                      --------        --------       ---------
                     <S>              <C>            <C>
                       333,333         $26.73           0.25
                        33,333          33.12           2.25
                        44,444          11.25           0.50
                        27,059          11.25           2.80
                        55,878          11.25           2.80
                        57,778          26.73           0.25
                      --------
                       551,825
                      --------
                      --------
</TABLE>

CAPITAL CONTRIBUTION. During 1998, the Company received a $350,000 capital 
contribution from Ramtron, a principal stockholder of the Company, in 
consideration of the Company reconveying to Ramtron its rights to sublicense 
the ferroelectric technology to two additional licensees.

(8) OTHER RELATED PARTY TRANSACTIONS

For the years ended December 31, 1998 and 1997, the statements of operations 
include the following related party transactions:

<TABLE>
<CAPTION>

                                                     Years Ended December 31,
                                                  -----------------------------
                                                      1998             1997
                                                  -------------  --------------
<S>                                               <C>            <C>
Product sales
   Sales to Intag                                 $       --     $        1,425
                                                  -------------  --------------
                                                  -------------  --------------
   Sales to Racom Japan                           $   66,813     $       92,968
                                                  -------------  --------------
                                                  -------------  --------------
   Sales to Ramtron                               $       --     $          240
                                                  -------------  --------------
                                                  -------------  --------------
Purchases of inventory from Ramtron               $   72,000     $       34,000
                                                  -------------  --------------
                                                  -------------  --------------
License revenues from Racom Japan                 $       --     $      596,953
                                                  -------------  --------------
                                                  -------------  --------------
General and administrative expenses
   Director consulting fees                       $   31,350     $           --
                                                  -------------  --------------
                                                  -------------  --------------
Other income and expense
   Interest expense on notes payable to Intag     $       --     $       15,108
                                                  -------------  --------------
                                                  -------------  --------------
   Interest expense on notes payable to Ramtron   $       --     $        2,297
                                                  -------------  --------------
                                                  -------------  --------------
</TABLE>

                                       F-16
<PAGE>

(9) BRIDGE FINANCING

In December 1996, the Company completed a private offering of $1,040,000 of 
promissory notes (the "Bridge Notes").  The Bridge Notes carried interest at 
prime plus 2% per annum, computed as of the date of issuance (the "Bridge 
Date"), and thereafter on a quarterly basis beginning December 31, 1996. 

The Bridge Notes matured the earlier of one year from the Bridge Date or upon 
the closing date of any IPO of the Company's securities.  The Bridge Notes 
were repaid during 1997 from the proceeds of the IPO.  On the Bridge Date, 
the Company also granted warrants (the "Bridge Warrants") entitling the 
holder to purchase shares of the Company's common stock at 125% of the IPO 
price per unit, beginning on the effective date of the IPO and continuing for 
two years thereafter.  The holders of the Bridge Notes received one warrant 
for every $18.00 of Bridge Note principal purchased, resulting in 57,778 
Bridge Warrants being issued in connection with the offering of the Bridge 
Notes.  The Company determined that these warrants had a nominal value at the 
date of issuance.  As of December 31, 1998, none of the warrants have been 
exercised.

(10) MAJOR CUSTOMERS AND SUPPLIERS

The Company's product sales from third-party customers in excess of 10% of 
third-party product sales for the years ended December 31, 1998 and 1997 are 
as follows:

<TABLE>
<CAPTION>

                                               Years Ended
                                               December 31
                                             ----------------
                                              1998      1997
                                             ------   -------
          <S>                                <C>       <C>
          Customer A                            3%       12%
          Customer B                            3%       11%
          Customer C                            1%       15%
          Customer D                           --        26%
          Customer E                           40%       --
          Customer F                           23%       --

</TABLE>

The Company's accounts receivable balances from third-party customers in 
excess of 10% of the accounts receivable balance from third-parties for the 
years ended December 31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>

                                               December 31
                                             ----------------
                                              1998      1997
                                             ------   -------
          <S>                                <C>       <C>
          Customer C                           --        19%
          Customer D                           28%       46%
          Customer F                           14%       --
          Customer G                            3%       12%

</TABLE>

The Company relies on certain vendors for purchasing raw materials used in 
its manufacturing process.  No assurance can be made that these vendors will 
be able to continue to supply the Company.  However, the Company believes 
adequate alternative vendors can be located for the necessary materials.

                                       F-17
<PAGE>

(11) LEASES

Total rent expense on noncancelable, cancelable and month-to-month operating 
leases for the years ended December 31, 1998 and 1997 was $117,558 and 
$116,706, respectively.

At December 31, 1998, the Company was leasing its facility on a 
month-to-month basis.  Minimum future annual lease payments under 
noncancelable leases are not material.  The Company leases office equipment 
under a capital lease which commenced in January 1997 and bears interest at a 
rate of 10%.

(12) INCOME TAXES

For income tax return reporting purposes, the Company has approximately 
$15,900,000 and $203,000 of net operating loss and research and development 
tax credit carryforwards, respectively, that expire at various dates through 
2013. The net operating loss for tax purposes differs from that for financial 
reporting purposes due to differences primarily relating to the Technology 
License.

The Tax Reform Act of 1986 contains provisions which may limit the net 
operating loss carryforwards available to be used in any given year if 
certain events occur, including significant changes in ownership interest.

The Company has determined that approximately $8,753,000 and $7,547,000 of 
deferred tax assets as of December 31, 1998 and 1997, respectively, did not 
satisfy the realization criteria set forth in SFAS No. 109 "Accounting for 
Income Taxes."  Accordingly, a valuation allowance was recorded against the 
entire net deferred tax asset.

<TABLE>
<CAPTION>


                                           1997                           1998
                                       -----------     -----------    ------------
<S>                                    <C>             <C>            <C>       
Technology license                     $ 1,787,000      $  326,000      $2,113,000
Net operating loss carryforwards         5,196,000         844,000       6,040,000
Research and development tax credits       221,000         (18,000)        203,000
Investment in Racom Japan                  286,000              --         286,000
Other                                       57,000          84,000         141,000
Less-Valuation allowance                (7,547,000)     (1,236,000)     (8,783,000)
                                       -----------     -----------    ------------
                                       $        --     $        --     $        --
                                       -----------     -----------    ------------
                                       -----------     -----------    ------------
</TABLE>

                                       F-18
<PAGE>

The provision for income taxes includes the following for the years ended 
December 31, 1998 and 1997:

<TABLE>
<CAPTION>

                                      1998                 1997
                                  -----------         -----------
<S>                                <C>                 <C>
Current:
    Federal                       $        --         $        --
    State                                  --                  --
                                  -----------         -----------
                                           --                  --
                                  -----------         -----------
Deferred:
    Federal                        (1,130,000)         (1,221,000)
    State                            (106,000)           (144,000)
                                  -----------         -----------
      Total deferred benefit       (1,236,000)         (1,365,000)
                                  -----------         -----------
Increase in valuation allowance     1,236,000           1,365,000
                                  -----------         -----------
Total provision                   $        --         $        --
                                  -----------         -----------
                                  -----------         -----------
</TABLE>

The difference between the statutory rate and the effective rate for the 
years ended December 31, 1998 and 1997 is a result of the following:

<TABLE>
<CAPTION>

                                         1998              1997
                                     -----------       -----------
<S>                                  <C>                 <C>
Statutory rate                          (35.0)%             (35.0)%
State taxes, net of federal benefit      (3.3)%              (3.3)%
Valuation allowance                      38.5%               36.9%
Other                                    (0.2)%               1.4%
                                     -----------       -----------
                                            0%                  0%
                                     -----------       -----------
                                     -----------       -----------
</TABLE>

(13) EMPLOYEE BENEFIT PLANS

STOCK OPTION PLAN.  In May 1993, the Company adopted the 1993 Employee Stock 
Plan which authorized the granting of incentive and nonqualified stock 
options and restricted stock (collectively, the "stock options") to acquire 
up to 377,778 shares of the Company's common stock.  In September 1998, the 
stockholders of the Company approved an increase in the authorized shares 
under the Plan to 711,111, of which 238,474 are available to be granted as of 
December 31, 1998.  The exercise terms for the stock options granted are 
determined by the Board of Directors at the time the stock options are 
granted.  Stock options may be granted at an exercise price not less than the 
fair market value on the date of grant with a maximum term of ten years.  The 
1993 Employee Stock Plan also permits the granting of limited stock 
appreciation rights ("SAR's") which, upon a change in control, as defined, 
entitle the holders to exercise SAR's in an amount equal to the number of 
stock options held and at terms similar to the terms of the related stock 
options.  Upon exercise of the stock options or SAR's, the corresponding SAR 
or stock option is cancelled.  As of December 31, 1998 and 1997, the Company 
has issued 255,556 and 222,222 SAR's respectively, in conjunction with stock 
options, none of which have been exercised.

The Company accounts for the 1993 Employee Stock Plan under Accounting 
Principles Board ("APB") Opinion No. 25, under which no compensation cost has 
been recognized for employee stock options.  The Company 

                                       F-19
<PAGE>

accounts for options issued to nonemployees under SFAS No. 123, "Accounting 
for Stock Based Compensation."  In June 1998, the Company granted 8,333 
options to purchase common stock at $5.90 per share to a consultant for 
recruiting services.  In October 1998, the Company granted 4,444 options to 
purchase common stock at $2.52 per share to a financial consultant.  The 
options issued to consultants expire five years from the date of grant.  The 
Company has recognized $38,700 of expense related to these options based on 
the value of the services provided. 

Had compensation cost for the 1993 Employee Stock Plan been determined 
consistent with SFAS No. 123, the Company's net loss and net loss per share 
would have been increased to the following pro forma amounts:

<TABLE>
<CAPTION>

                                           1998                     1997
                                        -----------              ------------
<S>                                     <C>                      <C>
Net Loss:
      As Reported                       $(3,212,384)             $(3,702,581)
                                        -----------              ------------
                                        -----------              ------------
      Pro Forma                         $(4,057,833)             $(4,370,696)
                                        -----------              ------------
                                        -----------              ------------
Net Loss Per Share:
      Basic and diluted - As Reported   $     (1.08)             $     (1.30)
                                        -----------              ------------
                                        -----------              ------------
      Basic and diluted - Pro Forma     $     (1.36)             $     (1.54)
                                        -----------              ------------
                                        -----------              ------------
</TABLE>

A summary of the status of the company's 1993 Employee Stock Plan at December 
31, 1998 and 1997 and changes during the years then ended is presented in the 
table and narrative below:

<TABLE>
<CAPTION>


                                                   1998                          1997  
                                          ------------------------      ------------------------ 
                                                         Weighted                       Weighted
                                                         Average                        Average 
                                                         Exercise                       Exercise
                                            Shares         Price         Shares           Price
                                          --------       --------       ---------       --------
<S>                                       <C>            <C>            <C>              <C>   
Outstanding at beginning of year           348,222          $7.20        346,444          $7.52

  Granted                                  441,766          $5.40        184,000          $6.03
  Exercised                                (48,889)         $4.50         (6,667)         $6.75
  Cancelled                               (201,507)         $7.04       (125,555)         $4.68
  Forfeited                               (122,511)         $8.24        (50,000)        $10.04
                                          ---------                     --------

Outstanding at end of year                 417,081          $5.51        348,222          $7.20
                                          ---------                     --------
                                          ---------                     --------
Exercisable at end of year                 249,482          $6.17        246,722          $6.35
                                          ---------                     --------
                                          ---------                     --------
Weighted average fair value of options
  granted during year                                       $4.65                         $4.59

</TABLE>

                                       F-20
<PAGE>

The fair values of the options were determined using a Black-Scholes 
option-pricing model with the following assumption:

<TABLE>
<CAPTION>

                                      1998        1997
                                   ----------   ---------
<S>                                <C>          <C>
Dividend yield                        None          None
Volatility                             95%          103%
Risk-free interest rate            4.09-5.42%      6.13%
Expected life                       5 years      5 years

</TABLE>

The following table summarizes information concerning outstanding and 
exercisable options at December 31, 1998:

<TABLE>
<CAPTION>


                                     Options Outstanding                        Options Exercisable
                    ----------------------------------------------------  ---------------------------------
                                    Weighted Average
    Range of          Number           Remaining       Weighted Average      Number       Weighted Average
Exercise Prices     Outstanding    Contractual Life     Exercise Price     Exercisable     Exercise Price
---------------     ----------------------------------------------------  ---------------------------------
<S>                 <C>            <C>                 <C>                 <C>            <C>
 $2.52-$6.75           364,192        3.77 years             $4.84          203,260             $5.20
$7.29-$11.25            52,889        3.01 years            $10.25           46,222            $10.43

</TABLE>

DEFINED CONTRIBUTION PLAN.  The Company has a defined contribution plan (the 
"Plan") intended to qualify under Section 401(k) of the Internal Revenue Code 
of 1986, as amended (the "Code"), in which substantially all full-time 
employees are participants.  Participants in the Plan may make pre-tax 
contributions subject to limitations imposed by the Code.  The Company may 
make, at the discretion of the Board of Directors, an annual contribution on 
behalf of each participant.  To date, no amounts have been contributed by the 
Company under the Plan.

(14) SIGNIFICANT FOURTH QUARTER ADJUSTMENTS

In March 1999, the Company determined that it was unable to continue to fund 
operations and it will enter a period whereby its primary function will be to 
collect future royalties if and when receivable. The Company reviewed its 
assets to determine whether their carrying values were recoverable from future 
cash flows. The Company recorded the following adjustments to the carrying 
value of assets in the fourth quarter of 1998:

<TABLE>
     <S>                                                        <C>
     Loss on impairment of technology license (Note 4)          $1,399,816
     Depreciation of fixed assets (Note 3)                         115,000
     Provision for uncollectible accounts                            9,504
     Provision for inventories                                     177,615
                                                                ----------
       Total                                                    $1,710,935
</TABLE>

Assumptions underlying future cash flows are subject to risks and 
uncertainties. Any differences between the assumptions and actual market 
conditions and/or the Company's performance could have a material effect on 
the Company's financial position and results of operations.

(15) SUBSEQUENT EVENTS:

On January 29, 1999, the stockholders of the Company approved an amendment to 
the Company's Certificate of Incorporation authorizing the Board of Directors 
to issue up to 10,000,000 shares of preferred stock, $0.01 par value per 
share. The Board of Directors is authorized to issue the preferred stock in 
series, establish the number of shares in each series and fix the 
designation, voting power, other powers, preferences, rights, limitations and 
restrictions of each series.

                                       F-21