<PAGE>

                                    UNITED STATES
                          SECURITIES AND EXCHANGE COMMISSION
                                 Washington, DC 20549
                                           
                                     Form 10-QSB

(Mark One)

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

                    For the Quarterly period ended June 30, 1997

                                       or

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

                  For the transition period from _______ to _______
                                           
                           Commission File number 000-21907
                                           
                                 Racom Systems, Inc.
            --------------------------------------------------------------
           (Exact name of small business issuer as specified in it charter)
                                           
                      Delaware                              84-1182875
           -----------------------------              ---------------------
             (State or other jurisdiction                 (I.R.S. Employer
          of incorporation or organization)           Identification Number)
                                           
                              6080 Greenwood Village, CO
                             Greenwood Village, CO  80111
                       (Address of principal executive offices)
                                           
                                    (303) 771-2077
                              (Issuer's telephone number)
                                           
     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 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   No   X
                                                                      ---    ---

     There are 13,032,532 shares of the registrant's common stock, no par 
value outstanding as of July 31, 1997.

<PAGE>
                                 RACOM SYSTEMS, INC.
                                     FORM 10-QSB
                                        INDEX
                                          
       Part I   Financial Information                              Page
                                                                   ----
              Item 1.   Condensed Balance Sheets as of
                        December 31, 1996 and 
                        June 30, 1997                                1

                        Condensed Statements of Operations
                        for the three and six months ended 
                        June 30, 1996 and 1997                       3

                        Condensed Statements of Cash Flows
                        for the six months ended 
                        June 30, 1996 and 1997                       4
 
                        Notes to Condensed Financial Statements      6

              Item 2.   Management's Discussion and Analysis of
                        Financial Condition and Results of 
                        Operations                                   8

Part II  Other Information and Signatures                           14
<PAGE>
                                           
                                           
                                 RACOM SYSTEMS, INC.
                               CONDENSED BALANCE SHEETS
                                           

                    ASSETS                         December 31,      June 30,
                                                      1996            1997
                                                   ----------      -----------
                                                                   (Unaudited)
Current Assets:
  Cash and cash equivalents                        $  314,202      $2,757,264
  Accounts receivable                                  79,201          82,909
  Accounts receivable-related party                    33,558          30,237
  Inventory                                           428,401         377,680
  License revenue receivable-related party            646,162               -
  Prepaid expenses and other                                -          76,047
                                                   ----------      ----------
Total Current Assets                                1,501,524       3,324,137
Property and Equipment :
  Machinery and equipment                             351,120         365,993
  Furniture and fixtures                               56,801          58,756
  Leasehold improvements                                3,328           3,328
                                                   ----------      ----------
                                                      411,249         428,077
  Less accumulated depreciation                      (260,364)       (310,292)
                                                   ----------      ----------
                                                      150,885         117,785
     
Investment in joint venture                           257,736         315,346
Other Assets:
  Technology license from related party, 
       net of accumulated amortization of
       $684,898 and $763,720, respectively          1,715,102       1,636,280
  Organization costs, net of accumulated
       amortization of $24,873 and $25,730,
       respectively                                       857               -
  Debt issuance costs, net of accumulated
       amortization of $8,788 and $106,587,
       respectively                                    97,799               -
  Deferred offering costs                             161,948               -
                                                   ----------      ----------
                                                    1,975,706       1,636,280
                                                   ----------      ----------
                                                   $3,885,851      $5,393,548
                                                   ----------      ----------
                                                   ----------      ----------

                   The accompanying notes are an integral part 
                     of these condensed financial statements.
                                        Page 1

<PAGE>
                                 RACOM SYSTEMS, INC.
                               CONDENSED BALANCE SHEETS
                                           
LIABILITIES AND STOCKHOLDERS' EQUITY
              
                                                  December 31,      June 30,
                                                     1996            1997    
                                                 ------------    ------------
                                                                 (Unaudited)
Current Liabilities:
  Accounts payable  and 
    accrued liabilities                          $    631,425        $390,997
  Accounts payable-related parties                    552,298           3,390
  Notes and interest payable-related party          1,029,596               -
  Bridge notes payable                              1,040,000               -
  Capital lease obligation                              1,331             780
  Deferred license revenue-related party               93,397          93,397
                                                 ------------    ------------
Total Current Liabilities                           3,348,047         488,564
Deferred license revenue-related party                303,540          65,298
                                                 ------------    ------------
Total Liabilities                                   3,651,587         553,862

Stockholders' Equity:
  Preferred stock, no par value, 5,000,000
    shares authorized, no shares issued
    or outstanding                                          -               -
  Common Stock, $.01 par value, 20,000,000 
    shares authorized, 13,032,532 shares
    issued and outstanding                            115,325         130,325
  Additional paid-in capital                       10,272,591      16,456,143
  Accumulated deficit                             (10,153,652)    (11,746,782)
                                                 ------------    ------------
Total Stockholders' equity                            234,264       4,839,686
                                                 ------------    ------------
Total Liabilities and Stockholders' Equity       $  3,885,851    $  5,393,548
                                                 ------------    ------------
                                                 ------------    ------------
                                           
                     The accompanying notes are an integral part 
                       of these condensed financial statements.
                                        Page 2
<PAGE>
                                 RACOM SYSTEMS, INC.
                          CONDENSED STATEMENTS OF OPERATIONS
                                     (Unaudited)

<TABLE>
                                                     Three months ended              Six months ended 
                                                          June 30,                       June 30,
                                                 -------------------------     --------------------------
                                                     1996         1997             1996          1997
                                                 -------------------------     --------------------------
<S>                                              <C>            <C>            <C>            <C>
Revenues:
    Product sales                                $   64,699     $   74,883     $  212,474     $   105,936
    Product sales-related parties                    34,318         47,039         40,629          64,455
    Custom product development projects             100,000              -        600,000               -
    License revenues-related party                   23,349        214,893        490,333         438,258
                                                 ----------     ----------     ----------     -----------
                                                    222,366        336,815      1,343,436         608,649
Cost of revenues                                    307,000        128,604        615,496         243,850
                                                 ----------     ----------     ----------     -----------
Gross margin                                        (84,634)       208,211        727,940         364,799

Operating Expenses:
    Research and development                         81,207        300,852        178,201         557,261
    General and administrative                      225,104        296,557        465,921         473,736
    Sales and marketing                             207,172        278,149        431,545         489,353
    Equity in loss of joint venture                 100,214        103,343        425,194         198,374
    Amortization expense                             40,697         39,411         91,003         176,346
                                                 ----------     ----------     ----------     -----------
                                                    654,394      1,018,312      1,591,864       1,895,070
                                                 ----------     ----------     ----------     -----------
Loss from operations                               (739,028)      (810,101)      (863,924)     (1,530,271)

Other expenses:
    Interest expense                                      -           (750)             -         (40,466)
    Interest expense-related parties                (13,349)             -        (26,251)        (17,405)
    Interest income                                   3,208         47,177          6,909          49,802
    Other                                                 -            705           (875)        (54,790)
                                                 ----------     ----------     ----------     -----------
Net loss                                         $ (749,169)    $ (762,969)    $ (884,141)    $(1,593,130)
                                                 ----------     ----------     ----------     -----------
                                                 ----------     ----------     ----------     -----------
Net loss per share                               $    (0.06)    $     (.06)    $    (0.07)    $      (.13)
Weighted average common and common
    equivalent shares outstanding                11,844,793     12,407,532     11,844,793      12,407,532
                                                 ----------     ----------     ----------     -----------
                                                 ----------     ----------     ----------     -----------
</TABLE>
                       The accompanying notes are an integral part 
                        of these condensed financial statements.
                                         Page 3
<PAGE>
                               RACOM SYSTEMS, INC
                       CONDENSED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
                                        
<TABLE>
                                                                   Six months ended 
                                                                       June 30,
                                                                -----------------------
                                                                   1996          1997
                                                                ---------    -----------
<S>                                                             <C>          <C>
Cash Flows From Operating Activities:
  Net loss                                                      $(884,141)   $(1,593,130)
  Adjustments to reconcile net loss
    to net cash provided by (used in) operating activities:
       Depreciation and amortization                              141,388        129,607
       Equity in loss of joint venture                            425,194        198,374
       Amortization of debt offering costs                              -         97,799
       Decrease (Increase) in:
          Prepaid expenses                                              -        (76,047)
          Accounts receivable-trade                               (52,539)        (3,708)
          Accounts receivable-related party                         3,198          3,321
          Inventory                                              (112,444)        50,721
          License revenue receivable                                    -        646,162
       Increase (decrease) in:
          Accounts payable and accrued liabilities                466,514       (240,428)
          Accounts payable-related parties                       (342,753)      (548,908)
          Deferred license revenue                                443,635       (238,242)
          Accrued interest                                              -         39,102
          Accrued interest-related party                           25,068         17,405
                                                                ---------    -----------
Net cash provided by (used in) operating activities               113,120     (1,517,972)

Cash Flows From Investing Activities:
       Purchase of fixed assets                                   (22,877)       (16,828)
       Investment in joint venture                               (466,984)             -
                                                                ---------    -----------
Net cash used in investing activities                            (489,861)       (16,828)

Cash Flows From Financing Activities:
       Proceeds from issuance of common stock                           -      7,125,000
       Payment of offering costs                                        -     (1,020,484)
       Repayment on notes payable-related party                         -     (2,126,103)
       Payments on capital lease liability                           (361)          (551)
                                                                ---------    -----------
Net cash (used in) provided by financing activities                  (361)     3,977,862
</TABLE>

                   The accompanying notes are an integral part
                     of these condensed financial statements.
                                     Page 4

<PAGE>

Net (Decrease) Increase in Cash and Cash Equivalents      (377,102)    2,443,062
                                                          --------    ----------

Cash and Cash Equivalents at Beginning of Period           512,435       314,202
                                                          --------    ----------

Cash and Cash Equivalents at End of Period                $135,333    $2,757,264
                                                          --------    ----------
                                                          --------    ----------

Supplemental Disclosure of Cash Flow Information:
  
    Cash paid during the period for:
       Interest                                                  -       $39,852
       Interest-related parties                                  -      $287,001
       Income taxes                                              -             -


Supplemental Schedule of Noncash Investing and Financing Activities:

During Second Quarter 1997, the Company recognized a $255,984 gain on its 
investment in Racom Japan ("RJ") as a result of the investee's issuance of 
additional shares in accordance with SAB 51.  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 a 
corresponding increase to additional paid in capital.

                   The accompanying notes are an integral part
                     of these condensed financial statements.
                                     Page 5
                                        
<PAGE>

                              RACOM SYSTEMS, INC.
                    NOTES TO CONDENSED FINANCIAL STATEMENTS
                                 JUNE 30, 1997
                                        

Note 1 - Basis of Presentation
    
    The  accompanying  financial  information  of the  Company at June
    30, 1997 and for the period then ended and have been prepared from
    the books and records of the Company without audit.  The information
    is  prepared  in accordance with the rules prescribed for filing
    condensed Second Quarter financial statements and,  accordingly, 
    does not include all disclosures that may be necessary for complete 
    financial  statements  prepared in accordance  with generally
    accepted  accounting  principles.  The disclosures  presented are
    sufficient,  in  management's  opinion,  to make  the  Second
    Quarter  information presented not misleading.  All adjustments, 
    consisting of normal recurring adjustments,  which are necessary so
    as to make the Second Quarter information not misleading, have been
    made. Results of operations for the three months ended or the six
    months ended June 30, 1997 are not necessarily  indicative of
    results of operations that  may be  expected  for  the  year  ending 
    December  31,  1997.  It is recommended  that this  financial 
    information  be read  with the  complete financial  statements
    included in the Company's Form 10-KSB for the year ended December
    31, 1996 previously filed with the Securities and Exchange
    Commission.
     
Note 2 - Net Loss Per Common and Common Equivalent Share

    Net loss per common and common equivalent share has been computed
    based upon the weighted average number of common shares and common
    share equivalents outstanding.  Pursuant to Securities and Exchange
    Commission Staff Accounting Bulletin No. 83, common stock and common
    stock equivalent shares issued by the Company at prices below the
    initial public offering price during the twelve month period prior
    to the offering (using the treasury stock method for common stock 
    equivalents at an assumed offering price of $4.75 per unit) have
    been included in the calculation as if they were outstanding for all
    periods presented regardless of whether they were antidilutive.

Note 3 - New Accounting Standard

    In February 1997, the Financial Accounting Standards Board ("FASB")
    issued Statement of Financial Accounting Standards ("SFAS") No. 128,
    "Earnings per Share", which supersedes Accounting Principles Board
    Opinion No. 15, "Earnings per Share".  SFAS No. 128 is effective for
    annual and interim periods ending after December 15, 1997 and
    simplifies the computation of earnings per share by replacing the
    presentation of primary earnings per share with a presentation of
    basis earnings per share.  SFAS No. 128 requires dual presentation
    of basic and diluted earnings per share by entities with complex
    capital structures.  Basic earnings per share includes no dilution
    and is computed by dividing income available to common stockholders
    by the weighted average number of common shares outstanding for the
    period.  Diluted earnings per share reflects the potential dilution 
                                        
                                     Page 6
<PAGE>

    of securities that could share in the earnings of an entity.  The
    Company does not believe that its loss per share calculations will be 
    materially affected as a result of adopting SFAS No. 128.

Note 4 - Tripartite Agreement

    On April 15, 1997, the Company signed an agreement with Ramtron
    International Corporation ("Ramtron") and Intag International
    Limited ("Intag") to significantly increase the availability of
    Ramtron's ferroelectric random access memory (FRAM) technology for
    use in radio frequency identification (RFID) markets and
    applications.  The agreement replaces all existing licensing, supply
    and memorandum of understanding agreements between the parties. 
    Under the 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.  The Company has, to date, sublicensed such technology to
    two separate 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 agreement have agreed to share, with certain
    limitations, future licensing and royalty revenues associated with
    such ferroelectric RFID licensing activities.  In addition, Ramtron
    granted the Company the right to purchase certain agreed upon
    percentages of its FRAM product manufacturing capacity.

Note 5 - Equity Investee

    On May 7, 1997, Racom Japan ("RJ") sold 3,020 shares of its stock to
    third parties reducing the Company's ownership to 22.8%.  In
    conjunction with a prior license sale to RJ, the Company recognized
    its proportionate share of previously deferred revenue  of $199,010
    as a result of its decreased ownership percentage.  The underlying
    basis difference of $255,984 as a result of the sale by RJ to third
    parties was treated as a capital transaction in accordance with SAB
    51.
    
                                   Page 7
<PAGE>

  The results of operations for the quarter ended June 30, 1997 are not 
necessarily indicative of the Company's  expected performance  for  any  
future  period. Information contained herein is supplemental to the 
Company's annual report on Form 10-KSB for the year ended December 31, 
1996 and the Company's Prospectus filed effective March 12, 1997.

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

GENERAL

    Investors should carefully consider the following information as well as 
other information contained in this Report before making an investment in the 
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. No assurance can be given that the future results 
covered by the forward-looking statements will be achieved. The following 
matters constitute 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.

    The Company is a leading developer and marketer of contactless smart 
card systems ("Smart Card(s)") used primarily in electronic commerce. 
Generally the size of a credit 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 and the like), (iii) point of sale purchases (replacing 
cash or 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, etc.). Smart Card technology 
is also used in industrial applications by attaching a "tag" containing 
the Smart Card technology to the manufactured product in order to track 
the product from the assembly line through quality control, warehousing, 
inventory control, distribution and warranty.
     
    The Company principally generates revenues from licensing, fee based 
custom product development projects and sale of its Smart Card products. In 
the future, the Company anticipates that a substantial portion of its 
revenues will be generated from custom product development projects and the 
sale of its Smart Card products. If the Company is unable to continually 
replace larger custom product development projects as these projects are 
completed, its operations will be adversely affected. Custom product 
development projects are billed in stages based on certain agreed upon 
performance milestones. Accordingly, financial results for any calendar 
quarter may fluctuate widely depending on the stage of a custom product 
development project or the amount of licensing payments in a particular 
quarter.
                                     Page 8
<PAGE>

    As reflected in the Company's 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 smaller scale projects; however, the 
Company has not yet completed a significant number of larger projects, 
and as a result, it is uncertain whether the Company will be able to 
successfully market and sell its Smart Card products in sufficient 
quantities and at sufficient prices and volumes to fund its operations. 
During 1995 and 1996, the Company experienced significant cash flow 
deficits and liquidity shortages and funded its operations primarily 
through the sale of nonexclusive sublicenses to its technology, through 
proceeds from the sale of its Common Stock, through bridge loan 
borrowings and through borrowings from affiliates.    
 
    During 1997, the Company anticipates that increased operating 
revenues will be achieved through a combination of product sales, custom 
product development projects and the sale of non-exclusive licenses. In 
addition, the Company anticipates incurring increased operating and 
research and development expenditures in order to further develop and 
market its Smart Card products.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED  JUNE 30, 1997 COMPARED 
TO THE THREE MONTHS ENDED JUNE 30, 1996

    REVENUES. Revenues increased $114,449 from $222,366 for the three months 
    ended June 30, 1996 ("Second Quarter 1996") to $336,815 for the three 
    months ended June 30, 1997 ("Second Quarter 1997"). Product revenues 
    increased slightly from $99,017 in Second Quarter 1996 to $121,922 in 
    Second Quarter 1997.  Second Quarter 1996 revenues reflect the second 
    payment under a custom product development contract of $100,000 and 
    recognition of revenues on a license from RJ, the Company's joint 
    venture with Nittetsu Shoji Co., Ltd. for the manufacture and sale of 
    FRAM based radio frequency products in Japan of $23,349.  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 is being 
    recognized over the life of the related technology license asset owned 
    by RJ, which is five years, commencing on the date of sale. Second 
    Quarter 1997 reflects the recognition of $199,010 of the previously 
    deferred revenue upon the completion of the issuance of common stock of 
    Racom Japan to third parties, thereby reducing the Company's ownership 
    to 22.8%.

         COST OF REVENUES AND GROSS MARGIN.  As a percentage of revenues, 
    gross margin increased from (38%) in Second Quarter 1996 to 62% in 
    Second Quarter 1997.  The gross margin is primarily a result of license 
    revenues which have no associated cost of revenues.  The Company has not 
    generated high profit margins on product sales in part because of 
    competition the Company encounters with Contacted Cards which typically 
    are sold at a 
                                     Page 9
<PAGE>

    lower price than the Company's Contactless Smart Cards.  Cost of
    revenues in Second Quarter 1996 included $140,633 of costs
    associated with a custom product development project.  Second
    Quarter 1997 did not include any costs associated with a custom
    development project.  
    
    RESEARCH AND DEVELOPMENT EXPENSES ("R&D").  R&D increased $219,645
    from $81,207 in Second Quarter 1996 to $300,852 in Second Quarter
    1997.  R&D efforts relating to the Company's Smart Card products
    expanded significantly during 1996 and  1997.  In January 1996, the
    Company began work on a joint development project with Bull CP8. 
    Engineering personnel resources and development costs totaling
    $97,677 were directly related to the project and are included in
    cost of revenues for Second Quarter 1996.  Wages and benefit costs
    for Second Quarter 1997 are approximately $20,000 higher than Second
    Quarter 1996 due to annual wage increases which went into effect in
    July 1996, combined with the hiring of a software engineer.  Second
    Quarter 1997 also includes approximately $100,000 in additional
    engineering consulting/contract services over Second Quarter 1996
    required to develop card packaging for the Company's new product
    line and to further develop software applications to be used with
    the Smart Card Systems.  

    GENERAL AND ADMINISTRATIVE EXPENSES ("G&A").  G&A increased $71,453
    from $225,104 in Second Quarter 1996 to $296,557 in Second Quarter
    1997. Second Quarter 1997 includes increasing expenditures
    approximating $45,000 relating to investor relations consulting,
    securities legal and NASDAQ filing expenses incurred after the
    Company's IPO.  The Company also recognized approximately $22,000
    relating to the Directors and Officers Liability Insurance policy
    which was paid upon the Company completing its IPO in March 1997.    

    SALES AND MARKETING EXPENSES.  Sales and marketing expenses
    increased $70,977 from $207,172 in Second Quarter 1996 to $278,149
    in Second Quarter 1997.  Wages and benefits between the Second
    Quarter periods increased by approximately $43,000 due to 
    the hiring of the Vice President of  Business Development in June
    1996 and the hiring of a product line marketing director in February
    1997.  Approximately $14,000 of the Vice President of Operations'
    wages and benefits were allocated to marketing expenses as a result
    of his increased efforts in marketing one of the Company's major
    product lines.  Second Quarter 1997 also includes approximately
    $16,000 of travel, printing and trade show expenses related to the
    Company's participation in the CardTech/SecureTech show in Orlando
    in April 1997.  The Company participated in a similar show in First
    Quarter 1996.

    EQUITY IN LOSS OF JOINT VENTURE.  The Company currently owns 22.8%
    of RJ.  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 accounts for its investment on the
    equity method and has recorded its share of RJ's losses in its
    financial statements to the extent of capital invested in RJ by the
    Company.  The equity in the losses of RJ were consistent between
    the Second Quarter periods. RJ's losses were primarily related to
    ongoing research 

                             Page 10
<PAGE>

    and development activities as well as longer sales cycles and trial
    tests demanded by 
    Japanese customers.
    
    AMORTIZATION EXPENSE.  The Company's primary asset is a technology
    license related to the design and manufacture of its Smart card
    products. The asset is amortized over its estimated useful life on a
    straight line basis.

    OTHER INCOME (EXPENSE).  During Second Quarter 1996, the Company
    incurred $13,349 in interest expense on various notes payable to
    Intag.  The notes were due on demand and carried annual interest of
    10%.  The notes and accrued interest were paid during First Quarter
    1997 upon completion of the initial public offering ("IPO").  
    During Second Quarter 1997 the Company earned $47,177 in interest
    income.  The Company invested the proceeds from the IPO in a
    Government Obligations Fund which earned an average of 5.00% for the
    quarter.  The Fund has an average maturity of 42 days.
    
    NET LOSS. The Company is a C Corporation under the Internal Revenue
    Code and for income tax reporting purposes as of December 31, 1996,
    has approximately $9,600,000 of net operating loss carryforwards
    that expire at various dates through 2011.  The Tax Reform Act of
    1986 contains provisions which may limit the net operating loss
    carryforwards available to the Company in any given year if certain
    events occur, including significant changes in ownership interests.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED  JUNE 30, 1997 COMPARED TO
THE SIX MONTHS ENDED JUNE 30, 1996

    REVENUES. Revenues decreased $734,787 from $1,343,436 for the six
    months ended June 30, 1996 ("Interim 1996") to $608,649 for the six
    months ended June 30, 1997 ("Interim 1997").  Interim 1996 revenues
    reflect the initial payment and the first milestone completed under
    a custom product development contract totaling $600,000 and
    recognition of revenues on a license from RJ, the Company's joint
    venture with Nittetsu Shoji Co., Ltd. for the manufacture and sale
    of FRAM based radio frequency products in Japan of $466,984.  The
    amount received for the license was $933,968.  At the time of the
    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 is being recognized over the life of the related
    technology license asset owned by RJ, which is five years,
    commencing on the date of sale.  Interim 1996 product revenues
    reflected a shipment of products totaling $59,000 to one customer
    for the installation of an automatic fare collection system in
    Macau.  Interim 1997 revenues reflect the final installment owed on
    a sublicense granted by RJ to Fujitsu Limited, a Japanese Company, under
    which the Company is entitled to 50% of all sublicense revenue
    earned by RJ.  The sublicense resulted in the Company recognizing
    $200,016 in licensing revenues.  Interim 1997 revenues also include
    $238,242 of licensing revenues recognized from the deferral of the
    RJ license in 1996 as discussed above pursuant to the Company's
    ownership percentage being reduced to 22.8%.

    COST OF REVENUES AND GROSS MARGIN.  As a percentage of revenues,
    gross margin   
    
                                    Page 11
<PAGE>

    increased from 54% in Interim 1996 to 60% in Interim 1997.  The gross 
    margin is primarily a result of license revenues which have no 
    associated cost of revenues.  The Company has not generated high profit 
    margins on product sales in part because of competition the Company 
    encounters with Contacted Cards which typically are sold at a lower 
    price than the Company's Contactless Smart Cards.  Cost of revenues in 
    Interim 1996 included $254,073 of costs associated with a custom product 
    development project. Interim 1997 did not include any costs associated 
    with a custom development project.  
        
    RESEARCH AND DEVELOPMENT EXPENSES ("R&D").  R&D increased $379,060
    from $178,201 in Interim 1996 to $557,261 in Interim 1997.  R&D
    efforts relating to the Company's Smart Card products expanded
    significantly during 1996 and  1997.  In January 1996, the Company
    began work on a joint development project with Bull CP8. 
    Engineering personnel resources and development costs totaling
    $192,571 were directly related to the project and are included in
    cost of revenues for Interim 1996.  Wages and benefit costs for
    Interim 1997 are approximately $20,000 higher than Interim 1996 due
    to annual wage increases which went into effect in July 1996,
    combined with the hiring of a software engineer.  Interim 1997 also
    includes approximately $153,000 in additional engineering
    consulting/contract services over Interim 1996 required to develop
    card packaging for the Company's new product line and to further
    develop software applications to be used with the Smart Card
    Systems.  

    GENERAL AND ADMINISTRATIVE EXPENSES ("G&A").  G&A increased $7,815
    from $465,921 in Interim 1996 to $473,736 in Interim 1997. Interim
    1996 included approximately $68,000 for consulting on several
    projects, including the development of the Tran$Cash Group, one
    vertical marketing approach currently being pursued by the Company
    which focuses on full, turn-key, entrepreneurial solutions for
    electronic fare and toll collection and e-ticketing in major
    transportation markets. These consulting arrangements did not
    continue into 1997. Interim 1997 includes increasing expenditures
    approximating $45,000 relating to investor relations consulting,
    securities legal and NASDAQ filing expenses incurred after the
    Company's IPO.  The Company also recognized approximately $22,000
    relating to the Directors and Officers Liability Insurance policy
    which was paid upon the Company completing its IPO in March 1997.    

    SALES AND MARKETING EXPENSES.  Sales and marketing expenses
    increased $57,808 from $431,545 in Interim 1996 to $489,353 in
    Interim 1997. Interim 1996 included approximately $21,000 for
    consulting fees related to developing the Company's products for use
    in the airline industry.  Interim 1996 also included the cost of
    approximately $18,000 of demonstration equipment used in sales and
    marketing activities.  Wages and benefits between the Interim
    periods increased by approximately $82,000 due to the hiring of the
    Vice President of  Business Development in June 1996 and the hiring
    of a product line marketing director in February 1997. 
    Approximately $14,000 of the Vice President of Operations' wages and
    benefits were allocated to marketing expenses in Interim 1997 as a
    result of his increased efforts in marketing one of the Company's
    major product lines.

    EQUITY IN LOSS OF JOINT VENTURE.  The Company currently owns 22.8%
    of RJ.  RJ was 

                                            Page 12
<PAGE>

    formed in 1993 for the purpose of marketing, distributing and
    supporting the Company's Smart Card products to be sold in Japan. 
    The Company accounts for its investment on the equity method and
    has recorded its share of RJ's losses in its financial statements to
    the extent of capital invested in RJ by the Company.  The equity
    in the losses of RJ decreased $226,820 between the Interim periods
    from $425,194 during Interim 1996 to $198,374 during Interim 1997.
    Interim 1996 included $141,953 of previously unrecognized losses
    from the prior year in excess of its investment through December 31,
    1995.  During Interim 1996, the Company recognized 40%-50% of RJ's
    losses based on its ownership interest at that time, which was later
    reduced to 22.8% during Interim 1997.  RJ's losses decreased between
    the Interim periods due to its completion of a sublicense agreement
    with Fujitsu Limited of Tokyo, Japan, during Interim 1997.  RJ's 
    continuing losses are primarily related to ongoing research and 
    development activities as well as longer sales cycles and trial tests 
    demanded by Japanese customers.
    
    AMORTIZATION EXPENSE.  The Company's primary asset is a technology
    license related to the design and manufacture of its Smart card
    products. The asset is amortized over its estimated useful life on a
    straight line basis.

    OTHER INCOME (EXPENSE).  During Interim 1996 the Company incurred
    $26,251 in interest expense on various notes payable to Intag.  The
    notes were due on demand and carried annual interest of 10%.  During
    Interim 1997, the Company incurred $57,871 in interest expense on
    various notes payable to Intag, Ramtron and a group of lenders. The
    notes to Intag carried interest at 10% and the notes to Ramtron and
    the group of lenders carried interest at prime plus 2%.  The notes
    and accrued interest were paid during Interim 1997 upon completion
    of the initial public offering ("IPO").   During Interim 1997 the
    Company earned $49,802 in interest income.  The Company invested the
    proceeds from the IPO in a Government Obligations Fund which earned
    an average of 5.00% for the quarter.  The Fund has an average
    maturity of 42 days.  Other expenses during Interim 1997 included
    $29,126 withheld from the proceeds of the license revenue earned on
    the sublicense to Fujitsu for Japanese taxes, $7,110 for bad debt
    expense and approximately $20,000 in currency exchange losses.
    
    NET LOSS. The Company is a C Corporation under the Internal Revenue
    Code and for income tax reporting purposes as of December 31, 1996,
    has approximately $9,600,000 of net operating loss carryforwards
    that expire at various dates through 2011.  The Tax Reform Act of
    1986 contains provisions which may limit the net operating loss
    carryforwards available to the Company in any given year if certain
    events occur, including significant changes in ownership interests.

LIQUIDITY AND CAPITAL RESOURCES

    The Company's primary need for capital has been to finance expansion
of research and development of new Smart Card products, sales and
marketing of its products and operations.  Substantial growth of the
Company's revenues has been limited due to limited financial resources  

                                    Page 13
<PAGE>

and an inability to expand receivables, build inventory and effectively
sell and market Smart Card products.  The Company has financed its
liquidity needs primarily through completion of its recent initial public
offering.

    At June 30, 1997, the Company's cash position was $2,757,264, an 
increase of $2,443,062 from $314,202 as of December 31, 1996. During 
March 1997 the Company completed its IPO.  Gross proceeds from the IPO 
were $7,125,000. Net proceeds from the offering were $6,104,516.  The 
Company used proceeds from the IPO to repay outstanding debt and accrued 
interest of $2,126,103 and pay down accounts payable by approximately 
$550,000.  The company received $646,162 of license revenues receivable 
outstanding at December 31, 1996.  The remaining proceeds from the IPO 
will be used to fund working capital, expand sales and marketing of the 
Smart Card products and continue research and development activities of 
new Smart Card products.  

    Based on management's current projections, the Company believes that
its financial resources and cash flows from operations will be sufficient
to finance its current and planned operations for at least the next
twelve months. There can be no assurance, however, that the Company will
not require additional working capital and, if it does require such
capital, that such capital will be available to the Company on acceptable
terms, if at all.

Part II. Other Information

Item 1.  Legal Proceedings
         -----------------
         None

Item 2.  Changes in Securities
         ---------------------
         None

Item 3.  Defaults Upon Senior Securities 
         -------------------------------
         None
                                        
Item 4.  Submission of Matters to a Vote of Security Holders
         ---------------------------------------------------
         None

Item 5.  Other
         -----
         None

Item 6.  Exhibits and Reports on Form 8-K
         --------------------------------

      (a.)  Exhibits:

                                   Page 14
<PAGE>

    Exhibit No.              Title
    -----------              -----
    27.01          Financial Data Schedule


    (b)  Reports on Form 8-K

    The Company filed a Report on Form 8-K, dated May 22, 1997, in 
connection with the announcement that it had allowed Racom Japan, Inc. 
("RJ") a Japanese corporation of which the Company owns 22.8%, to enter 
into a custom product development project with Fujitsu Limited 
("Fujitsu") of Tokyo, Japan, to jointly develop, manufacture and market 
contactless smart card systems for use in Electronic Commerce.  

                                        
                                        
                                   SIGNATURES


In accordance with the  requirements of the Exchange Act, the registrant 
caused this  report to be  signed on its  behalf  by the  undersigned, 
thereunto  duly authorized in Greenwood Village, Colorado on August 14, 
1997.

Racom Systems, Inc.




---------------------------
Richard L. Horton
President and Chief Executive Officer


August 14, 1997

                                       
                                       
                                       
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