<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, 1998
                                       
                                      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 its 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 X   No


There are 13,442,532 shares of the registrant's common stock, $.01 par value
outstanding as of July 31, 1998.

<PAGE>

                              RACOM SYSTEMS, INC.

                                  FORM 10-QSB

                                     INDEX


Part I    Financial Information                                            Page

           Item 1.   Condensed Balance Sheets as of
                     December 31, 1997 and June 30, 1998                     1

                     Condensed Statements of Operations
                     for the three and six months ended
                     June 30, 1997 and 1998                                  2

                     Condensed Statements of Cash Flows
                     for the six months ended June 30, 
                     1997 and 1998                                           3

                     Notes to Condensed Financial Statements                 4


           Item 2.   Management's Discussion and Analysis of 
                     Financial Condition and Results of Operations           6


Part II   Other Information and Signatures                                  13

<PAGE>

                             RACOM SYSTEMS, INC.
                                       
                                BALANCE SHEETS
<TABLE>
<CAPTION>
                ASSETS                                  December 31,     June 30,
                                                           1997            1998
                                                       -------------  -------------
<S>                                                    <C>            <C>
CURRENT ASSETS:
     Cash and cash equivalents                         $  1,198,567   $  1,363,773
     Accounts receivable-trade                               43,042         28,299
     Accounts receivable-related parties                     26,720          7,584
     Inventory                                              122,875        144,786
     Prepaid expenses & other                                62,833         63,160
                                                       ------------   ------------
                   TOTAL CURRENT ASSETS                   1,454,037      1,607,602

PROPERTY AND EQUIPMENT
     Machinery and equipment                                449,432        501,603
     Furniture and fixtures                                  59,404         59,404
     Leasehold improvements                                   3,328          3,328
                                                       ------------   ------------
                                                            512,164        564,335
     Less-accumulated depreciation                         (351,982)      (390,862)
                                                       ------------   ------------
                                                            160,182        173,473
OTHER ASSETS:
     Technology license from related party,
      net of accumulated amortization of
      $842,541 and $921,364, respectively                 1,557,459      1,478,636
                                                       ------------   ------------
                   TOTAL ASSETS                        $  3,171,678   $  3,259,711
                                                       ------------   ------------
                                                       ------------   ------------

         LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
     Accounts payable and accrued liabilities          $    359,069   $    302,173 
     Accounts payable-related parties                        20,780              -
     Capital lease obligation                                16,594         14,802
                                                       ------------   ------------
                   TOTAL LIABILITIES                        396,443        316,975
                                                       ------------   ------------
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, 13,222,532 and 13,442,532 shares
      issued and outstanding, respectively                  132,225        134,425
     Additional paid-in capital                          16,499,243     16,717,043
     Accumulated deficit                                (13,856,233)   (13,908,732)
                                                       ------------   ------------
                   TOTAL STOCKHOLDERS' EQUITY             2,775,235      2,942,736
                                                       ------------   ------------
          TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $  3,171,678   $  3,259,711
                                                       ------------   ------------
                                                       ------------   ------------
</TABLE>

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

                                   Page 1
<PAGE>

                             RACOM SYSTEMS, INC.

                     CONDENSED STATEMENTS OF OPERATIONS
                                 (Unaudited)
<TABLE>
<CAPTION>
                                       Three months ended June 30,    Six months ended June 30,
                                           1997            1998          1997            1998
                                        ----------      ---------     ----------     ----------
<S>                                     <C>             <C>           <C>            <C>
REVENUES  
     Product sales                      $   74,883     $   65,969     $  105,936     $   93,147
     Product sales-related parties          47,039          6,814         64,455         44,141
     License revenues                          -          500,000            -        1,500,000
     License revenues-related party        214,893            -          438,258            -  
                                        ----------     ----------     ----------     ----------
                                           336,815        572,783        608,649      1,637,288
COST OF REVENUES                           128,604         39,846        243,850         76,044
                                        ----------     ----------     ----------     ----------

GROSS MARGIN                               208,211        532,937        364,799      1,561,244

OPERATING EXPENSES
     Research and development              300,852        217,319        557,261        484,067
     General and administrative            296,557        302,896        473,736        618,502
     Sales and marketing                   278,149        220,611        489,353        466,584
     Equity in loss of Racom Japan         103,343            -          198,374            -  
     Amortization expense                   39,411         39,411         78,547         78,822
                                        ----------     ----------     ----------     ----------
                                         1,018,312        780,237      1,797,271      1,647,975

LOSS FROM OPERATIONS                      (810,101)      (247,300)    (1,432,472)       (86,731)

OTHER INCOME (EXPENSE)
     Interest expense                         (750)          (482)      (138,265)        (1,195)
     Interest expense-related parties          -              -          (17,405)           -  
     Interest income                        47,177         16,807         49,802         34,529
     Other                                     705            (82)       (54,790)           898
                                        ----------     ----------     ----------     ----------

NET LOSS                                 $(762,969)    $ (231,057)   $(1,593,130)    $  (52,499)
                                        ----------     ----------     ----------     ----------
                                        ----------     ----------     ----------     ----------

NET LOSS PER SHARE - BASIC
AND DILUTED                              $   (0.06)    $    (0.02)     $   (0.13)     $    0.00
                                        ----------     ----------     ----------     ----------
                                        ----------     ----------     ----------     ----------

WEIGHTED AVERAGE SHARES OUTSTANDING     12,407,532     13,242,949     12,407,532     13,242,949
                                        ----------     ----------     ----------     ----------
                                        ----------     ----------     ----------     ----------
</TABLE>

             The accompanying notes are an integral part of these
                       condensed financial statements.
                                       
                                    Page 2
<PAGE>
                             RACOM SYSTEMS, INC.
                                       
                      CONDENSED STATEMENTS OF CASH FLOWS
                                 (Unaudited)
<TABLE>
<CAPTION>
                                                          Six months ended June 30,
                                                             1997            1998
                                                       ---------------   ------------
<S>                                                      <C>             <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
     Net loss                                            $(1,593,130)    $  (52,499) 
     Adjustments to reconcile net loss to cash used in 
     operating activities:
          Depreciation and amortization                      129,607        117,703 
          Equity in loss of Racom Japan                      198,374            -   
          Amortization of debt offering costs                 97,799            -   
          Decrease (increase) in:                                    
               Prepaid expenses and other                    (76,047)          (327)
               Accounts receivable-trade                      (3,708)        14,743
               Accounts receivable-related parties             3,321         19,136
               License revenue receivable                    646,162            -   
               Inventory                                      50,721        (21,911)
          Increase (decrease) in:
               Accounts payable and accrued liabilities     (240,428)       (56,896)
               Accounts payable-related parties             (548,908)       (20,780)
               Deferred  license revenue                    (238,242)           -   
                                                       ------------------------------
     NET CASH USED IN OPERATING ACTIVITIES                (1,574,479)          (831)

CASH FLOWS USED IN INVESTING ACTIVITIES:
          Purchase of fixed assets                           (16,828)       (52,171)
                                                       ------------------------------
     NET CASH FLOWS USED IN INVESTING ACTIVITIES             (16,828)       (52,171)  

CASH FLOWS FROM FINANCING ACTIVITIES:                                
          Proceeds from issuance of common stock           7,125,000        220,000 
          Payment of deferred offering costs              (1,020,484)           -   
          Payment on bridge loans                         (1,040,000)           -   
          Payments on notes payable-related parties       (1,029,596)           -   
          Payments on capital lease obligation                  (551)        (1,792)
                                                       ------------------------------
     NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES       4,034,369        218,208 

NET INCREASE IN CASH AND CASH EQUIVALENTS                  2,443,062        165,206 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD               314,202      1,198,567 
                                                       ------------------------------
                                                                     
CASH AND CASH EQUIVALENTS, END OF PERIOD                 $ 2,757,264     $1,363,773 
                                                       ------------------------------
                                                       ------------------------------
Supplemental Disclosure of Cash Flow Information:
  
     Cash paid during the period for:
               Interest                                  $    39,102     $    1,195
               Interest-related parties                      287,001              -

</TABLE>

            The accompanying notes are an integral part of these 
                       condensed financial statements.
                                       
                                    Page 3
<PAGE>

                             RACOM SYSTEMS, INC.
                   NOTES TO CONDENSED FINANCIAL STATEMENTS
                                JUNE 30, 1998

Note 1 - Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared 
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission.  The condensed financial statements reflect all adjustments
(consisting of only normal recurring accruals) which, in the opinion of
management, are necessary to present fairly the financial position, results of
operations and cash flows of Racom Systems, Inc. as of June 30, 1998 and 1997
and for the periods then ended.  Operating results for the three and six month
periods ended June 30, 1998 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1998.

The unaudited condensed financial statements should be read with the complete
financial statements and footnotes thereto included in the Company's Form 10-KSB
for the year ended December 31, 1997 previously filed with the Securities and
Exchange Commission.

Note 2 - New Accounting Standards

In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128,  "Earnings Per
Share."  Under SFAS 128, primary earnings per share previously required under
Accounting Principles Board No. 15 is replaced with basic earnings per share. 
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. The adoption of SFAS No.
128 had no effect on the previously reported loss per share.

In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income," which
establishes standards for reporting and displaying comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general
purpose financial statements. SFAS 130 requires that all items that are required
to be recognized under accounting standards as components of  comprehensive
income be reported in a financial statement that is displayed  with the same
prominence as other financial statements. SFAS 130 does not require a specific
format for that financial statement but requires that the enterprise display an
amount representing total comprehensive income for the period in that financial
statement.  SFAS 130 is effective for financial statements for periods beginning
after December 15, 1997. No differences exist between comprehensive income and
net income for the Company for the period ending June 30, 1998 or 1997.

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 

                                     Page 4
<PAGE>

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 statement, 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 the impact of SFAS No. 133
will not significantly affect its financial reporting.  

In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities".  This statement is effective for financial statements for fiscal
years beginning after December 15, 1998.  In general, SOP 98-5 requires costs of
start-up activities and organization costs to 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 financial statements.

Note 3 - License of Technology to Hitachi, Ltd.

On January 15, 1998, the Company executed an agreement, in conjunction with
Ramtron International Corporation ("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 proprietary ferroelectric random access memory
("FRAM") technology.  In addition to these license rights, the Company granted
Hitachi option rights, for a predetermined option fee, to its Radio Frequency
Identification ("RFID") Technology, as defined in the agreement, 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 as
defined in the agreement.  The Company received the first payment on the license
on January 29, 1998, and the second payment on May 9, 1998.  As additional
consideration for the rights granted under the agreement, Hitachi will provide
engineering services for development of the Company's RFID Products, as defined
in the contract, and the Company and Ramtron have a certain defined percentage
call (subject to a maximum quantity) on Hitachi's production capacity of RFID
Products.  The agreement remains effective until expiration of the last of the
Company's and Ramtron's patents.  

                                     Page 5
<PAGE>

The results of operations for the quarter and six month period ended June 30,
1998 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, 1997 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'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.


                                    Page 6
<PAGE>

The Company believes it was the first to successfully develop and introduce
contactless Smart Cards using FRAM technology and batteryless, radio frequency
("RF") communications.  The Company has primarily relied on its licensed 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 costs.  Complementary to its FRAM technology, the Company 
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.  

The Company principally generates revenues from licensing, fee based custom
product development projects and sale of its Smart Card systems. In the future,
the Company anticipates that a substantial portion of its revenues will be
generated from custom product development projects, the sale of its Smart Card
systems and services. 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 project or the amount of licensing payments in a
particular quarter.

As reflected in the Company's Financial Statements, the Company has generated
substantial operating losses since inception and has yet to generate substantial
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 1997, the Company experienced significant cash flow deficits
and liquidity shortages and funded its operations primarily through licensing
transactions and proceeds from the sale of its Common Stock.  During the six
months ended June 30, 1998, the Company's operating revenues have been generated
primarily from a licensing transaction.  The Company anticipates that increased
operating revenues for the balance of 1998 will be achieved through a
combination of product sales, custom product development projects and the sale
of non-exclusive licenses. 

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 1997

Revenues. Revenues increased 70.0% to $572,783 for the three months ended June
30, 1998 ("Second Quarter 1998"), from $336,815 for the three months ended June
30, 1997 ("Second Quarter 1997"). 

     Product Sales.  Product sales decreased 40.3% to $72,783 for Second Quarter
     1998, from $121,922 for Second Quarter 1997. 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 phase often takes six to twelve
     months or longer. Product

                                    Page 7
<PAGE>

     sales in the current quarter included approximately $7,000 of sales of
     product to Racom Japan ("RJ"), of which the Company owns 19.9%, as compared
     to approximately $47,000 for the Second Quarter in 1997.

     License Revenues.  License revenues increased 132.7% to $500,000 for Second
     Quarter 1998, from $214,893 for Second Quarter 1997. In Second Quarter
     1997, license revenues included the recognition of deferred revenues on a
     license from RJ for the manufacture and sale of FRAM based radio frequency
     products in Japan of $199,010, pursuant to the reduction in ownership of RJ
     to 22.8%. The increase in license revenues reflects the execution of the
     licensing contract with Hitachi, Ltd. which closed in January 1998, and
     under which the Company received and recognized the final initial license
     fee payment in May 1998.

COST OF REVENUES AND GROSS MARGIN.  As a percentage of revenues, gross margin
increased to 93.0% in Second Quarter 1998, from 61.8% for Second Quarter 1997. 

     Product Costs. The Company has not generated significant 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 may not be sufficient to cover
     manufacturing costs which are included in Cost of Revenues.  Due to an
     increase in availability of FRAM memory chips resulting in lower component
     costs, and the use of EEPROM memory chips which are already available at
     lower component costs, the Company expects to be able to lower its prices
     while improving gross margin.  The Company anticipates that cost
     efficiencies will allow the Company to compete more effectively with
     Contacted Card products and to build sales volume for its Smart Cards. 

     License revenues. In both periods presented, gross margin is primarily a
     result of license revenues which have no direct cost of revenues.

Research and Development Expenses ("R&D").  R&D decreased $83,533 from $300,852
in Second Quarter 1997 to $217,319 in Second Quarter 1998. The decrease is
primarily due to the Company focusing on its internal engineering resources and
not utilizing the services of contractors in new product development projects
during Second Quarter 1998. During November 1997, a group of engineers
responsible for a specific project left the Company upon completion of the
project.  Additional engineers with skills necessary to complete new product
development were hired.  In Second Quarter 1997, the Company incurred
approximately $40,000 on outside engineering contractors for software and
hardware development and approximately $35,000 on contract services to develop
card packaging for its Smart Card products.

General and Administrative Expenses ("G&A").  G&A increased $6,339 from $296,557
in Second Quarter 1997 to $302,896 in Second Quarter 1998. While G&A decreased
its overall personnel expenses due to the resignation of Richard L. Horton,
President and CEO, the Company incurred $25,000 on a total contract of $37,500, 
of recruiting fees for a new President and CEO.

Sales and Marketing Expenses.  Sales and marketing expenses decreased $57,538
from $278,149 in Second Quarter 1997 to $220,611 in Second Quarter 1998. Travel

                                    Page 8
<PAGE>

expenses decreased approximately $8,000 between the Second Quarter periods.
Personnel expenses also decreased between Second Quarter periods by
approximately $75,000 due to the termination of the V.P. of Transportation and
Banking and the V.P. of Business Development, but increased approximately
$48,000 due to the hiring of a new OEM sales manager, a director of marketing
and the internal transfer of an applications support engineer. Second Quarter
1997 also included approximately $21,000 for printing and trade show expenses.

Equity in Loss of Joint Venture.  The Company currently owns 19.9% 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 cost method.  In Second Quarter 1997, the Company owned 22.8%
of RJ and accounted for its investment under the equity method, recognizing its
proportionate share of RJ's losses. 

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 1998 and 1997, the Company earned
$16,807 and $47,177, respectively, in interest income on its cash balances held
primarily in a government obligations fund with an average maturity of less than
90 days.  

Net Loss. The Company is a C Corporation under the Internal Revenue Code and for
income tax reporting purposes as of December 31, 1997, has approximately
$13,700,000 of net operating loss carryforwards that expire at various dates
through 2012.  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, 1998 COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 1997

Revenues. Revenues increased 169.0% to $1,637,288 for the six months ended June
30, 1998 ("Interim 1998"), from $608,649 for the six months ended June 30, 1997
("Interim 1997"). 

     Product Sales.  Product sales decreased 19.4% to $137,288 for Interim 1998,
     from $170,391 for Interim 1997. 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 phase often takes six to twelve months or longer.
     Product sales in Interim 1998 included approximately $44,000 of sales of
     product to RJ, of which the Company owns 19.9%, as compared to
     approximately $64,000 for the Second Quarter in 1997.

     License Revenues.  License revenues increased 242.3% to $1,500,000 for
     Interim 1998, from $438,258 for Interim 1997. 

     Interim  1997 included the recognition of deferred revenues on a license 

                                    Page 9
<PAGE>

     from RJ for the manufacture and sale of FRAM based radio frequency products
     in Japan of $238,242 pursuant to the Company's ownership being reduced to
     22.8%. 

     In 1996, pursuant to the technology license discussed above, RJ entered
     into a custom product development project with Fujitsu, Ltd. under which
     the Company is entitled to 50% of all sublicense revenue earned by RJ. This
     sublicense resulted in the Company recording and receiving sublicense
     revenue of $200,016 during Interim 1997.

     The increase in license revenues reflects the execution of the licensing
     contract with Hitachi, Ltd. which closed in January 1998, and under which
     the Company received the first installment of the initial license fee
     payment in January 1998 and the final initial license fee payment in May
     1998.

COST OF REVENUES AND GROSS MARGIN.  As a percentage of revenues, gross margin
increased to 95.4% in Interim 1998, from 59.9% for the same period in 1997. 

     Product Costs. The Company has not generated significant 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 may not be sufficient to cover
     manufacturing costs which are included in Cost of Revenues.  Due to an
     increase in availability of FRAM memory chips resulting in lower component
     costs, and the use of EEPROM memory chips which are already available at
     lower component costs, the Company expects to be able to lower its prices
     while improving gross margin.  The Company anticipates that cost
     efficiencies will allow the Company to compete more effectively with
     Contacted Card products and to build sales volume for its Smart Cards. 

     License revenues. In both periods presented, gross margin is primarily a
     result of license revenues which have no direct cost of revenues.

Research and Development Expenses ("R&D").  R&D decreased $73,194 from $557,261
in Interim 1997 to $484,067 in Interim 1998. The decrease is primarily due to
changes in the personnel responsible for the product development.  In November
1997, a group of engineers responsible for a specific project left the Company
upon completion of the project.  Additional engineers with skills necessary to
complete new product development were hired. Overall, these changes resulted in
an increase in personnel expenses for R&D of approximately $36,000.
Additionally, the changes resulted in the Company focusing on its internal
engineering resources and not utilizing the services of contractors in new
product development projects.  During Interim 1997, the Company incurred
approximately $70,000 on outside contractors.  Further, in Interim 1997 the
Company incurred approximately $35,000 on contract services to develop card
packaging for its Smart Card products.

General and Administrative Expenses ("G&A").  G&A increased $144,766 from
$473,736 in Interim 1997 to $618,502 in Interim 1998. Interim 1998 includes
increasing expenditures approximating $30,000 relating to investor relations
consulting, securities legal and Nasdaq filing expenses incurred after the
Company's initial public offering ("IPO") which was completed on March 12, 1997.
The Company also recognized approximately $17,000 of additional expense relating

                                   Page 10
<PAGE>

to the Directors and Officers Liability Insurance policy which was not effective
until March, 1997, and was renewed in March 1998. Interim 1998 also includes an
increase in consulting and office expenses of approximately $67,000 due to
increased audit fees, mergers & acquisitions research consulting and legal
consulting expenses. Interim 1998 also includes approximately $25,000 of
recruiting expenses incurred in the search for a President and CEO.

Sales and Marketing Expenses.  Sales and marketing expenses decreased $22,769
from $489,353 in Interim 1997 to $466,584 in Interim 1998. 1997 Sales &
Marketing expenses for the Second Quarter included a $20,000 recruiting fee for
the hiring of a new Product Manager. Although Sales and Marketing expenses are
comparable between Interim periods, there were various changes in personnel
resulting in an overall increase in expenses, offset by fewer expenses incurred
in general marketing expenses (trade shows, new product literature, etc.).

Equity in Loss of Joint Venture.  The Company currently owns 19.9% 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 cost method.  In Interim 1997, the Company owned 22.8% 
of RJ and accounted for its investment under the equity method, recognizing its
proportionate share of RJ's losses. 

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 1997, the Company incurred $17,405 and
$40,466 in interest expense on various notes payable to Intag International
Limited ("Intag") and Ramtron and a group of lenders, respectively.  The notes
carried interest at 10% and prime plus 2%, respectively.  The notes and accrued
interest were paid during Interim 1997 upon completion of the IPO. Interest
expense for Interim 1997 also includes $97,799 related to the amortization of
debt issuance costs associated with a bridge financing completed prior to the
IPO. Interim 1997 also included approximately $20,000 in currency exchange
losses on the sub-licensing transaction completed with RJ. During Interim 1997
and 1998 the Company earned $49,802 and $34,529, respectively, in interest
income on its cash balances held primarily in a government obligations fund with
an average maturity of less than 90 days.  

Net Loss. The Company is a C Corporation under the Internal Revenue Code and for
income tax reporting purposes as of December 31, 1997, has approximately
$13,700,000 of net operating loss carryforwards that expire at various dates
through 2012.  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. Annual product revenues growth has been limited due to limited
financial resources and an inability to expand receivables, build inventory and
effectively sell and market Smart Card products. 

                                    Page 11
<PAGE>

CASH FLOW

The Company had cash and cash equivalents of $1,198,567 and $1,363,773 as of
December 31, 1997 and June 30, 1998, respectively.  During Interim 1998, the
Company's primary source of cash was from the initial license fee payments
received under the Hitachi license agreement, and the sale of 220,000 shares of
common stock to a former employee upon the exercise of employee stock options at
$1.00 per share. 

CAPITALIZATION

The Company's capitalization of $2,775,235 as of December 31, 1997 was comprised
entirely of stockholders' equity, as compared to $2,942,736 of stockholders'
equity as of June 30, 1998. The increase is attributable to the sale of 220,000
shares of common stock to a former employee upon the exercise of employee stock
options at $1.00 per share. 

Management of the Company intends to fund its remaining 1998 operations through
a combination of product sales, technology sublicensing and possible offerings
of its common stock.  There is no assurance that sales of common stock will
occur or that additional proceeds will be received from such offerings. The
Company currently does not have an available source for short-term borrowings.

The Company must also maintain certain requirements in order to be listed on
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.  As of June 30, 1998 the Company was in compliance with the
Nasdaq listing requirements.  However, subsequent to June 30, 1998, the minimum
bid price of the stock was listed below $1.00 for three consecutive days.  As of
the date of this report, the Company had not received a delisting notification
from Nasdaq and does not anticipate that it will receive notification as the
Company is currently in compliance with the minimum bid price requirement.  
There is no assurance that the Company will continue to meet the Nasdaq listing
requirements.  

YEAR 2000

The Company utilizes software and related technologies throughout its business
and relies on many suppliers of services and materials that will be affected by
the date change in the year 2000.  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.  In addition, the
results of the internal study indicate that certain software utilized by the 

                                    Page 12
<PAGE>

Company's internal systems will be affected by the Year 2000 issue, and steps to
upgrade the software have begun.  Management believes these amounts are not
significant and such expenditures will continue through the year 1999 as
upgrades become available.  

The Company believes that there is a greater risk that its vendors, clients and
strategic partners will be affected by the Year 2000 problem. 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 clients, vendors and strategic partners, or the
impact that any such problems could have on the products and services provided
by the Company to such clients. In addition to the internal study, the Company
has begun assessing the existence of any Year 2000 problems that may reside in
the computer systems and products of its vendors, clients and strategic
partners.  The Company expects to complete the assessment phase by December 31,
1998. The Company believes, based upon the progress to date, that its suppliers
and strategic partners 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 Company plans to develop a contingency plan as a result of its
findings during this assessment phase.  The occurrence of Year 2000 related
failures in the computer and information systems of any of the Company's
significant clients, vendors or strategic partners could have a materially
adverse effect on the business, results of operations and financial condition of
the Company.


Part II. Other Information

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

Item 2.  Changes in Securities and Use of Proceeds
         -----------------------------------------
         None

Item 3.  Defaults Upon Senior Securities
         -------------------------------
         None

Item 4.  Submission of Matters to a Vote of Security Holders
         ---------------------------------------------------
         None

Item 5.  Other Information
         ------------------
              The Company hired Arthur B. Rancis as the President, CEO, CFO, and
Director effective August 3, 1998.  Mr. Rancis is a former Vice President of
Samsung Electronics of America, responsible for its Product Innovation
Laboratory. He was a senior vice president at Pluto Technologies, International,
responsible for world wide sales of their video, computer, LAN and server
products.  While at Sony Electronics Inc., Mr. Rancis held a variety of
management positions.  As vice president of business development he was
responsible for implementing the company's integrated information strategy into 

                                    Page 13
<PAGE>

its product divisions.  Mr. Rancis also held various positions in corporate
marketing, international sales, product management and engineering sales with
Masstor Systems Corporation, Storage Technology Corporation and Tektronix
Corporation respectively.   Mr. Rancis holds a BA degree in Communications from
the University of Colorado at Boulder.


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

    (a.)   Exhibits:

    Exhibit No.            Title
    -----------            ------

    27.01          Financial Data Schedule


(b)  Reports on Form 8-K

     (i) The Company filed a Report on Form 8-K, dated January 16, 1998, in
connection with the appointment of John A. Hinds to the Company's Board of
Directors.
     
     (ii) The Company filed a Report on Form 8-K, dated February 2, 1998, in
connection with announcement and filing of the "Amendment No. 3 RF/ID Products
to High-Density FRAM Cooperation Agreement between Racom Systems, Inc., Ramtron
International Corporation and Hitachi, Ltd."

     (iii) The Company filed a report on Form 8-K, dated May 11, 1998 in
connection with the announcement of the appointment of John A. Hinds as Chairman
of its Board of Directors. 
     
     (iv) The Company filed a report on Form 8-K, dated June 30, 1998 in
connection with the announcement that its President and CEO, Richard L. Horton,
had resigned. 

                                    Page 14
<PAGE>

                                   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.

Racom Systems, Inc.


/S/Arthur B. Rancis                          Date:       August 14, 1998
--------------------------------------             ---------------------------
Arthur B. Rancis 
President, Chief Executive Officer and
Chief Financial Officer


/S/ Lillian V. Burkey                        Date:       August 14, 1998
--------------------------------------             ---------------------------
Lillian V. Burkey
Controller

                                    Page 15