SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

               |_| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                 SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]


                     FOR THE FISCAL YEAR ENDED JUNE 30, 1997

                                       OR

             |X| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

             For the transition period from __________ to __________

                         COMMISSION FILE NUMBER: 0-27106

                                RSI SYSTEMS, INC.
                 (Name of small business issuer in its charter)

                   MINNESOTA                           41-1767211
        (State or other jurisdiction of               (IRS Employer
        incorporation or organization)             Identification No.)

                         7400 METRO BOULEVARD, SUITE 475
                              MINNEAPOLIS, MN 55439
              (Address of principal executive offices and zip code)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (612) 896-3020

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:  NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:  COMMON STOCK, $.01
                                                             PAR VALUE

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

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB for any
amendment to this Form 10-KSB. |X|

The Company's revenues for its most recent fiscal year were $2,570,851.

On September 26, 1997, the Company had 4,769,765 shares of common stock, $.01
par value, outstanding, and the aggregate market value of the common stock as of
that date (based on the average of the closing bid and asked prices as of that
date as reported by the NASDAQ SmallCap Market), excluding outstanding shares
beneficially owned by directors and officers, was approximately $10,145,577.

                    DOCUMENTS INCORPORATED BY REFERENCE: None

Transitional Small Business Disclosure Format (check one):  Yes ___; No _X_

<PAGE>


                                     PART I

CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS THAT COULD CAUSE THE
COMPANY'S ACTUAL RESULTS TO DIFFER FROM THOSE PROJECTED IN FORWARD LOOKING
STATEMENTS

           In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, readers of this document and any
document incorporated by reference herein, are advised that this document and
documents incorporated by reference into this document contain both statements
of historical facts and forward looking statements. Forward looking statements
are subjects of fact and forward looking statements. Forward looking statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially from those indicated by the forward looking statements.
Examples of forward looking statements include, but are not limited to (i)
projections of revenues, income or loss, earnings or loss per share, capital
expenditures, dividends, capital structure and other financial items, (ii)
statements of the plans and objectives of the Company or its management or Board
of Directors, including the introduction of new products, or estimates or
predictions of actions by customers, suppliers, competitors or regulatory
authorities, (iii) statements of future economic performance, and (iv)
statements of assumptions underlying other statements and statements about the
Company or its business.

           This document and any documents incorporated by reference herein also
identify important factors which could cause actual results to differ materially
from those indicated by the forward looking statements. These risks and
uncertainties include price competition, the decisions of customers, the actions
of competitors, the effects of government regulation, possible delays in the
introduction of new products, customer acceptance of products and services, and
other factors which are described herein and/or in documents incorporated by
reference herein.

           The cautionary statements made pursuant to the Private Litigation
Securities Reform Act of 1995 above and elsewhere by the Company should not be
construed as exhaustive or as any admission regarding the adequacy of
disclosures made by the Company prior to the effective date of such Act. Forward
looking statements are beyond the ability of the Company to control and in many
cases the Company cannot predict what factors would cause results to differ
materially from those indicated by the forward looking statements.

ITEM 1.    DESCRIPTION OF BUSINESS

           (a)   BUSINESS DEVELOPMENT

           RSI Systems, Inc. (the "Company" or "RSI") designs, develops,
manufactures and markets telecommunications products for video conferencing. The
Company's first product, the ERIS(TM) Visual Communications System (the "ERIS
System"), was a self-contained peripheral firmware and software device that
attached directly to personal computers, Macintosh computers and laptop
computers. It provided quality desktop video conferencing over ISDN lines
between any ITU H.320 standards-based system.

           The Company was incorporated under the laws of Minnesota on December
21, 1993. Following the establishment of a business infrastructure, which
included the further development of the ERIS System and implementation of
marketing strategies, the first beta unit of the Company's ERIS System was
produced in October 1994 and the first production unit was shipped in February
1995.

           On July 25, 1995, the Company conducted a public offering of its
common stock, par value $0.01 per share (the "Common Stock"). With the net
proceeds from the public offering, including proceeds from the exercise of the
underwriter's overallotment option (approximately $7,400,000), the Company has
funded further research and development related to the enhancement of the ERIS
System.

           In July 1996, the Company brought in a new management team which
redesigned the ERIS System into a small television-based workgroup system. In
addition, the management team accelerated the Company's development of a second
generation, high performance mobile workgroup video conferencing system
product--the Video Flyer(TM). In September 1996, the Company completed a private
placement of 1,500,000 shares of Common Stock, resulting in proceeds to the
Company of approximately $3,942,892, net of offering costs.

           The first beta units of the Video Flyer came to the market in January
1997. Limited production and customer shipments began in March 1997. The system
went into full production for worldwide distribution in July 1997. The Video
Flyer is a self-contained, high performance video conferencing peripheral
component engine. The system is available in two models: the Video Flyer 384
("384") and the Video Flyer Rocket ("Rocket"). The Video Flyer 384 can
communicate simultaneously over three ISDN lines to provide a high quality
signal of up to 30 frames per second. The Rocket incorporates the same chassis,
software, external shell and electronic components as the 384 except that it
connects to only a single ISDN line and provides business quality video
conferencing of up to 15 frames per second. Both systems are designed to connect
to any size TV, projection system, PC, MAC or laptop (properly configured) and
can support most of the popular industry cameras and recording, playback and
communication devices.

           (b)   BUSINESS OF THE COMPANY

PRODUCTS

           The Company's first product, the ERIS System, consists of a
self-contained peripheral firmware-based product and application software. The
ERIS System was designed to be an external "plug and play" device easily
connected to properly configured personal computers, Macintosh computers and
laptops. The system's architecture did not require an invasive strategy on the
part of the user with their existing computer. Initially, the ERIS System
provided higher frame rate performance, image and audio quality than readily
available traditional software and interface kits.
<PAGE>


           By mid-year 1996, a number of personal computer software developers
began entering the desktop video conferencing marketplace. Though varying
degrees of transmission quality and user operability existed, the majority of
these new desktop/PC-based video conferencing products were less expensive than
the ERIS System. The Company found itself unable to reduce its manufacturing
costs accordingly so that the product could compete effectively in a PC
commodity marketplace. The initial list price of the ERIS System was $3,995.

           In October 1996, the ERIS System was redesigned to attach directly to
small televisions and LCD projection devices. This system eliminated the
previous requirement on the part of the user to understand PC or MAC software
operations in order to create a video conference. The ERIS Computer-Free
software dramatically simplified the dialing and connection activities of the
user by incorporating simple operator logic.

           During mid-summer of 1996, the Company redirected all of its primary
engineering resources into the development of a second generation video
conferencing component engine--the Video Flyer. This system was designed to
enable exceptional high quality video conferencing to occur on any commonly
available display system; i.e., television, flat screen, LCD projection, PC,
MAC, laptop, etc. The primary focus of the Video Flyer was to continue the
Company's computer-free theme by eliminating the need for computer knowledge,
keyboards, mice or additional peripheral devices other than the Video Flyer, a
camera and a display device to conduct the call.

           Four development criteria were used for the Video Flyer.

           (1) Provide high quality video image and audio output.

           (2) Enable the system to have the broadest range of connectivity.

           (3) Be as easy to use as a television set, thus eliminating the need
               for any previous video conferencing system knowledge or
               experienced supervision.

           (4) Provide performance and value at an exceptional price.

PRODUCT DEVELOPMENT

           To guarantee the highest quality video image and audio signal in the
mobile workgroup market segment where the Video Flyer has been targeted, the
product incorporates two commonly recognized industry components: a video
conferencing chip set and an echo-cancellation audio package, licensed from
DSPSE, Inc., based on technology from PictureTel, Inc.

           To achieve connectivity, the company built the Video Flyer on a
single motherboard that incorporated all of the primary and secondary electronic
components to conduct high quality video conferencing through a variety of
devices and connections. By connecting an interchangeable single daughter card
to the motherboard, the system can be made to connect to a single ISDN line
using the Video Flyer Rocket, or up to three ISDN lines to conduct 384 calls
using the Video Flyer 384. The Company is currently developing additional
daughter cards that will provide connectivity to V.35/RS449 and H.323 LAN
devices.

           Both Video Flyer Rocket and Video Flyer 384 guarantee ease of
operation and utilize universal TV-like infrared remote controllers. The Company
wrote all of the Video Flyer software to dramatically simplify the calling,
in-call and hang-up process. Recent published evaluations of the system
indicated that it may be the easiest to use, professional quality video
conferencing system currently available.

           The system's software architecture has already allowed a number of
significant new features to be added on to products in the field without any
inconvenience to the user. The software resides entirely in flash memory
eliminating the need for a hard drive and computer diskettes to perform software
updates or new add-on features. Such capabilities as near and far-end remote
camera control, extended alpha/numeric phone book, multiple language screen
faces, PowerPoint(R) connectivity and BONDING have already been added to systems
installed worldwide merely by offering unattended downloading of these new
capabilities via the ISDN connection. Customers have said this dramatically
eliminates the inconvenience and hassle associated with updating a computer-type
product.

<PAGE>


           Valuable economies have been achieved in the manufacturing and
assembly of the product because of the thoughtful and forward-thinking design
and engineering of the product. The Video Flyer Rocket (128Kbps) was introduced
with a list price in North America of $4,995. For comparison purposes, with the
addition of a high performance Sony pan/tilt/zoom camera (Model EVI-G20), the
system lists for $5,995. A recognized comparable product from the industry's
largest manufacturer of video conferencing products carries a suggested list
price of $8,995. At list price, the Video Flyer Rocket carries a lower price of
over 33%.

           The Video Flyer 384 carries a North American list price of $8,995.
Again, the largest video conferencing manufacturer markets a comparable system
in feature and video/audio quality (incorporating a similar chip set and
echo-cancellation as the Video Flyer 384 and Rocket) with a suggested list price
of $22,000 to $27,000, a price differential of at least 55%. Over time, the
Company expects the prices of many of the systems in the roll-about market
segment to decline. The Company believes that the Video Flyers are outstanding
values that will be difficult for both existing and new video conferencing
buyers to ignore.

           The Video Flyer is manufactured in Minnesota by Altron, Inc., an ISO
9002 facility that has been regionally recognized as a provider of high quality,
component-type assembly products. Currently all product development for the
Video Flyer continues to be performed in-house. A long list of no-charge and
for-fee new features are in development. The Company's management believes these
will keep the Video Flyer current in the evolving technological marketplace and
continue to enhance its price performance and value as a hedge against price
point erosion.

SALES AND DISTRIBUTION

           In 1995, the Company began to distribute its ERIS product primarily
through selected personal computer, Macintosh, network integrators, resellers
and small telecommunication service providers. In July 1996, the Company
restructured all of its distribution. Today the Company distributes its products
through a variety of channels, as follows:

      *     Authorized Distributors and Resellers. The Company now targets,
            where possible, large regionally recognized video conferencing,
            audio visual, telecommunications and selected computer-type product
            resellers. In North America, the Company has now established
            resellers to cover all states and cities where ISDN service is
            available. In Europe, distributors and resellers have been signed up
            and trained in all countries where ISDN service is generally
            available. In Asia, the Middle East, South Africa and Australia, the
            Company now has both distributor and reseller coverage for the Video
            Flyer. The Company intends to continue to add proven, results-driven
            distributors and resellers into areas where either sales opportunity
            or needs dictate.

      *     OEM and Private Label Relationships. The Video Flyer was designed to
            be distributed as an OEM (original equipment manufacturer) and/or
            private label product. The Company intends to pursue this strategy
            by establishing selected product and vertical market OEM/private
            label relationships. Certain regional and international brand name
            product manufacturers are now entering the roll-about video
            conferencing marketplace. A number of them have entered into
            discussions with the Company about reselling the Video Flyer or
            certain system key components under their label. The Company
            believes the marketplace is broad enough and selected vertical
            markets deep enough to allow for these types of additional sales
            relationships.

      *     Major Accounts. The Company has established a major and preferred
            account (MAP) program to accommodate selected direct sales
            opportunities. It is not uncommon that larger multisite,
            multinational and/or market specific organizations will not do
            business with a product reseller. Rather, they expect the
            manufacturer to offer the product directly and to guarantee regional
            or worldwide service and support. To accommodate this need, the
            Company has hired experienced, direct sale industry specialists.
            Their efforts directly benefit the distributor/reseller strategy by
            creating recognizable industry references that further support brand
            name product awareness.

           In an effort to attract and sustain its reseller interest and
on-going productivity, the Company will continue its policy of offering some of
the highest margins in the industry.

           Currently, the Company is very limited in its ability to advertise
its products and, therefore, target markets through participating in vertical
market and market specific conferences and conventions. The Company
offers to its resellers both planning materials and courseware to conduct
regular application-based user seminars. The Company 

<PAGE>


regularly conducts lead-generating mailing campaigns and offers its printed
materials as well as its expanding base of quality literature to its resellers
to support their sales efforts.

COMPETITION

           When first founded, the Company's initial product focus was on the
evolving desktop video conferencing marketplace. Its first product, the ERIS
System, was designed to connect to desktop personal computers, MACs and laptops.
By July 1996, declining price points and margins in this market segment led the
Company to reposition itself in the broader, less competitive roll-about
workgroup niche. Market experts have estimated that, by 1998, the roll-about
marketplace will account for 64% of the total market revenues, 58% by 1999 and
52% by 2000. (The roll-about system marketplace is commonly understood to mean
any system that incorporates a television or projector-type system to
accommodate group viewing of two to ten plus individuals.) In contrast, the
desktop marketplace is estimated to be only 25% of the marketplace in 1998, 32%
in 1999 and 37% in 2000.

           In the roll-about market segment, PictureTel is considered the
recognized industry leader. They offer two primary systems: the SwiftSite(TM)
128 Kbps set-top system and the Venue Model 30 and 50 (128 to 384) systems.
Though it is difficult to estimate the number of these systems that are
currently installed worldwide, the Company believes that they have created an
interest level that is triggering a broad market expansion. The Video Flyer
Rocket is a worthy opponent to the SwiftSite and at a much lower price, and the
Video Flyer 384 is a direct competitor in both video, audio and feature quality
to the Venue systems.

           In the past year, VTEL, Inc. acquired Compression Labs, Inc. Both
companies are also recognized as providers of products in the roll-about market
segment. Sony, Panasonic, Tandberg and a handful of other international systems
manufacturers also compete in this market.

           Though a majority of the manufacturers with which the Company
competes are significantly larger in their posted annual revenues and available
resources, the Company believes that the Video Flyer's design and capability
will allow it to compete effectively during the foreseeable future. Currently
the Company is unaware of any new or existing system that offers any capability
or price performance that is measurably better than the Video Flyer. The Company
expects price points to decline over time and is well positioned to absorb this
through intended cost saving manufacturing economies and bolstering of the
product's capabilities with user desired add-on software features.

           Finally, the Company has designed the Video Flyer to fully comply
with all industry video communications primary standards. This allows the Video
Flyer to communicate easily, successfully and reliably with any of its
standards-based competitors. Just like the evolution of the personal computer to
industry standards in the late 1980s, organizations are now able to purchase a
multitude of video conferencing brands based on personal or regional preference
without any concern for compatibility. This standards-based strategy and market
evolution plays well into RSI's hand. Though the Company's products may not be
thought of during an initial video conferencing product search and review, if
introduced during the selection process, the Video Flyer competes favorably on
both the feature and cost effective level.

           The Company services and supports its Video Flyer products with a
one-year manufacturer's guarantee. While under warranty, products are exchanged
in 24 to 48 hours via UPS. This consumer product-like service approach
dramatically reduces the Company's overall support structure and labor expense
and has found significant favor with both existing and potential users who
currently must choose from other products that provide traditional and often
expensive on-site service and repair personnel.

MANUFACTURING

           The Company's original product, the ERIS System, was manufactured
under contract by Lucent Technologies (formerly AT&T Custom Manufacturing
Services) ("Lucent") during fiscal year 1996 and half of fiscal year 1997.
Lucent provided substantially all purchasing and related materials inventory,
manufacturing, testing and product warranty coverage for the Company. The
Manufacturing Agreement with Lucent was terminated by the Company on August 9,
1996.

           As part of the termination of the Manufacturing Agreement with
Lucent, the Company assumed the warranty responsibilities for the ERIS units
that Lucent had built in exchange for reductions in excess inventory and other
financial obligations of the Company to Lucent. These warranty responsibilities
are considered by the Company to be

<PAGE>


insignificant since any defective units could be replaced by excess inventory
which the Company has written down to lower of cost or market as of June 30,
1997.

           On September 10, 1996, a new Manufacturing Agreement was finalized
with a new third party manufacturer, Altron, Inc. ( Altron ) for the manufacture
of the Company's video conferencing units. Altron provides substantially the
same services to the Company as Lucent has provided in the past. Pursuant to its
agreement with the Company, Altron warrants that all products will be free from
defects in material and workmanship for fifteen ( 15 ) months from the date
Altron ships to the Company, or for twelve ( 12 ) months from the date the
Company ships to the customer, whichever comes first.

           Although raw materials purchasing services are provided by Altron,
alternate suppliers have been identified by the Company for most components in
the Video Flyer product.

           A major component in the Video Flyer product family for which the
Company depends on a single source is the compression chip. If this component
becomes unavailable to the Company, the Company would redesign the Video Flyer
products to accommodate similar components from other vendors. Currently the
Company has no information which would indicate the component may become
unavailable during the product life cycle of Video Flyer.

           Alternate suppliers for ERIS components are not deemed necessary by
the Company, since the Company plans no additional manufacturing of the product.

           The Company regularly upgrades and enhances its software. To date,
the Company has supplied upgrades to its customers free of charge. The Company
expects to charge customers for substantive upgrades in the future.

           The Company believes Altron has the capacity and capability to
satisfy manufacturing requirements for the Video Flyer in the foreseeable
future. If a disruption in manufacturing were to occur, the Company believes it
could locate alternative manufacturers to satisfy production requirements.

APPROVALS AND CERTIFICATIONS

           Government and telecommunications carrier approvals, safety
certifications and Electromagnetic Compliance ( EMC ) certifications are a key
requirement for electronic systems that use the telephone network. In the United
States the ERIS and Video Flyer systems have been certified by the FCC as a
class A ( business ) device. The Company has received certification from
Underwriters Laboratories Inc. ( "UL" ) that the ERIS and Video Flyer systems
comply with the applicable requirements for U.S. and Canadian Listing. The
Company has received telephone, safety and EMC certifications for its ERIS
System in the following countries: Australia, New Zealand, the European Union,
Japan, Taiwan, Hong Kong, Singapore, Malaysia and Korea. The Company has also
received the same certifications for its Video Flyer systems in Australia, the
European Union, Switzerland and Singapore. The Company also has telephone,
safety and EMC certifications in process for its Video Flyer systems in
Malaysia, Korea and Indonesia.

           Although the Company has obtained telephone, safety and EMC
certifications for its ERIS and Video Flyer systems in these countries, the
Company cannot predict whether it will obtain necessary approvals and
certifications for Video Flyer systems or for future products in additional
countries. Also, the Company cannot predict whether applicable law or
regulations might change in a way adverse to the Company's ability to sell its
products in a particular country.

INTELLECTUAL PROPERTY AND ROYALTY AGREEMENTS

           The Company's success is dependent in part on its proprietary
information, technology and expertise. The Company relies on a combination of
patents, trade secrets, copyrights and confidentiality agreements to establish
and protect its proprietary rights. The Company's U.S. design patent application
for the ERIS System, originally filed in October 1994, was granted in May 1996.
The Company amended its U.S. utility patent application for the ERIS System,
originally filed in September 1994, to narrow and refocus the Company's claims.
The Company also applied for various foreign patents relating to both the Video
Flyer and ERIS System, none of which have been granted to date.

           The Company filed a trademark application for its intent to use the
mark "ERIS" in August 1994, and the certificate of registration was issued on
August 27, 1996. The Company was also issued certificates of registration for
the "ERIS" trademark as follows: in Australia on July 1, 1996; Germany on
January 2, 1996; and Great Britain on January 26, 1996.

<PAGE>


           With respect to its technical employees and consultants, the Company
requires these employees to sign an agreement which obligates them to keep
confidential certain trade secrets and information of the Company and to assign
to the Company any inventions arising from their work for the Company, as
permitted by law. Depending on the responsibilities of a particular employee,
the Company may also consider having such an employee sign a non-compete
agreement.

           The software embedded in the Company's Video Conferencing Systems
carries a standard license agreement for the end-user. The software license
agreement is included in the System manuals and grants the purchaser a
non-exclusive and non-transferable license to use the software program.

           The Company entered into a license agreement with DSP Software
Engineering, Inc. ("DSPSE") on February 2, 1996. Pursuant to the agreement,
DSPSE granted to the Company a non-exclusive, non-transferable license to use
and modify specific DSPSE components in the creation of the Company's Video
Flyer video conferencing systems, subject to certain limitations. License fees
payable by the Company include an initial licensing fee of $60,000 for the right
to develop a stand alone video conferencing system and an additional $30,000
upon production. In addition to these licensing and production fees, the Company
is required to pay a royalty of $40.00 on each of the first 1,000 video
conferencing systems (VC Systems) sold, $4.75 for the following 9,000 VC Systems
sold, $6.25 for the following 90,000 VC Systems sold and $5.10 for each VC
System sold in excess of 100,000. Sales of the related VC Systems ( Video Flyer
384 and Video Flyer Rocket ) began in fiscal year 1997.

           Pursuant to a license agreement with Link Technology Inc., which
provides certain ISDN software used in the Company's Video Conferencing
Systems, the Company pays a royalty of $25 on each of the first 10,000 systems
sold, $15 on each system over 10,000 up to 50,000 and $8 on each system sold in
excess of 50,000. The agreement with Link Technology Inc. was modified on August
30, 1996, to allow the use of the ISDN software in the Video Flyer products. The
Company paid a one time license fee of $9,000 for this amendment, all other
terms of the agreement regarding royalty payments remain the same.

           The Company entered into an agreement with a software development
company on January 17, 1997. This agreement provided the Company with the
required development tools to integrate a T.120 computer software program with
the Video Flyer Windows computer software application. This agreement included a
one time fee for the Software Development Kit, annual maintenance fees and
minimum bundle quantity fees for the first 100 copies. The agreement also
includes a royalty fee of up to $40 per unit for copies of the software sold by
the Company in the future.

<PAGE>


EMPLOYEES

           On September 26, 1997, the Company had 24 full-time employees; eight
in sales; four in marketing and customer support; six in product development;
and six in administration and finance.

           None of the Company's employees is represented by a labor union. The
Company believes its employee relations are good.

CERTAIN IMPORTANT FACTORS

           In addition to the factors identified above, there are several
important factors that could cause the Company's actual results to materially
differ from those anticipated by the Company or which are reflected in any
forward-looking statements of the Company. These factors, and their impact on
the success of the Company's operations and its ability to achieve its goals, as
well as those listed in the "Risk Factors" section of the Company's Registration
Statement on Form SB-2 (File No. 33-93240C), include the following:

           (1)    The history of operating losses experienced by the Company
                  since its inception and the ability of the Company to avoid
                  additional operating losses and net losses over the next year.

           (2)    The ability of the Company to achieve market acceptance of its
                  new Video Flyer products.

           (3)    The impact of competition within the mobile workgroup, private
                  office and other segments of the overall market for video
                  conferencing equipment.

ITEM 2.    DESCRIPTION OF PROPERTY

           The Company leases approximately 4,190 square feet of space at its
headquarters in Edina, Minnesota under a lease agreement which expires on May
31, 1998. Rent payments under the lease for fiscal year ending June 30, 1997,
were approximately $89,000. The Company believes its current space is sufficient
for its current and anticipated needs. The Company also leases space for a sales
office in Florida and paid approximately $1,470 in fiscal year 1997 to rent this
space. The Company also spent $24,271 in fiscal year 1997 to lease office space
in Australia. Finally, the Company leases a sales office in the Netherlands. No
payments were made in fiscal year 1997 in connection with this lease.

ITEM 3.    LEGAL PROCEEDINGS

           The Company is not a party to any legal or administrative
proceedings.

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

           None.


                                     PART II

ITEM 5.    MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

           Since July 25, 1995 (the date of the Company's initial public
offering of Common Stock), the Company's Common Stock has been traded in the
over-the-counter market and is quoted on the NASDAQ SmallCap Market System. The
following table sets forth the high and low bid prices for the Company's Common
Stock as reported by NASDAQ. Such quotations represent interdealer prices,
without retail markup, markdown or commission, and do not necessarily represent
actual transactions for the fiscal quarters indicated.

                                                          HIGH           LOW
                                                          ----           ---
             1996

             First Quarter (FROM JULY 25, 1995)         $ 9.250       $ 7.750

<PAGE>


             Second Quarter                             $ 9.250       $ 9.000
             Third Quarter                                9.250         8.875
             Fourth Quarter                               9.250         7.750


             1997

             First Quarter                                8.000         3.500
             Second Quarter                               4.750         1.500
             Third Quarter                                1.750         1.000
             Fourth Quarter                               3.625         1.000

           As of September 26, 1997, there were (a) 4,769,765 shares of Common
Stock outstanding, held of record by approximately 960 persons, (b) outstanding
options to purchase an aggregate of 670,750 shares of Common Stock, and (c)
outstanding warrants to purchase an aggregate of 712,500 shares of Common Stock.
The Company has not declared or paid any cash dividends on its Common Stock
since its inception and does not intend to pay any dividends for the foreseeable
future.

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

           The Company was organized on December 21, 1993, and it designs,
develops manufacturers and markets telecommunications products for video
conferencing. During the fiscal year ended June 30, 1997, the Company's
activities were primarily directed at building world wide distribution channels
and developing its new Video Flyer product.

           During the first half of the fiscal year ended June 30, 1996, the
Company's activities were primarily directed towards completion of the
development of the ERIS System. During the second half of fiscal year 1996, the
Company's activities included sales and sales support of the ERIS System and new
product development. The following discussion covers the fiscal years ended June
30, 1997 and 1996.

RESULTS OF OPERATIONS

FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996

           Net Sales. In fiscal year 1997, net sales increased to $2,570,851, up
58.1% from $1,625,720 in fiscal year 1996. Sales are derived primarily from
video conferencing units, but also include sales of cameras, software and other
supplies used with the systems. The increase in sales in fiscal year 1997
compared to fiscal year 1996 was a result of higher unit volume and higher
pricing associated with enhanced product configurations, new products, and
increased distribution channels. The first sales of Video Flyer occurred in the
fourth quarter of fiscal year 1997. In fiscal year 1997, the company focused on
building a network of dealers and resellers for its products in Europe,
Australia, the Pacific Rim and the United States. The Company expects volume to
increase in fiscal year 1998 over historical levels as a result its continuing
efforts to build distribution.

           The Video Flyer 384 is currently priced higher than the Company's
previous ERIS product. Although the ultimate effects of competition on future
market price points is uncertain, the Company expects its fiscal year 1998
average pricing levels to be higher than historical levels because the fiscal
year 1998 sales mix is expected to be comprised of Video Flyer and related
components. Average pricing in fiscal year 1997 was influenced by sales of lower
priced ERIS. As a result of higher expected volume, higher pricing over
historical levels and changes in product mix, the Company expects fiscal year
1998 revenues to increase compared to fiscal year 1997.

           Gross Profit (Loss). Gross loss was $(763,793) or (29.7%) of net
sales for fiscal year 1997 compared to $(396,980) or (24.4%) of net sales for
fiscal year 1996. The 1997 gross loss resulted from an inventory writedown to
lower of cost or market of $1,430,428 related to the ERIS product. The writedown
was a result of the Company's transition to its next generation product, Video
Flyer. Cost of goods sold in fiscal year 1997 amounted to $1,904,216 or 74.1% of
net sales, compared to $1,640,508 or 101.0% of net sales in fiscal year 1996.
The lower cost of goods sold relative to net sales in fiscal year 1997 resulted
from sales of the company's higher priced, lower cost Video Flyer in the fourth
quarter of fiscal year 1997, as well as changes in product configurations and
lower price discounting through the third quarter of fiscal year 1997 compared
to the prior year.

<PAGE>


           As discussed above, the Company's expects higher overall fiscal year
1998 average pricing levels and a shift in product mix to Video Flyer and
related components compared to fiscal year 1997. When combined with an overall
lower manufacturing cost for Video Flyer compared to ERIS, these trends are
expected to result in increased gross profit percentages in fiscal year 1998
compared to fiscal year 1997.

           Research and Development Expenses. Research and development expenses
were $1,528,493 or 59.5% of net sales for fiscal year 1997 compared to
$1,540,416 or 94.8% of net sales for fiscal year 1996. The decrease as
percentage of sales was due to the higher sales volume in fiscal year 1997 as
discussed above.

           Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $3,445,301 or 134.0% of net sales for fiscal year
1997 compared to $3,121,796 or 192.0% of net sales for fiscal year 1996. The
percentage decrease was primarily due to the higher sales volume in fiscal year
1997 as discussed above. Actual dollar spending during fiscal year 1997 was
higher than fiscal year 1996 primarily due to increased marketing, and an
increased sales force to correspond with expanded distribution and new product
introductions in fiscal year 1997. General and administrative salaries and
related costs also increased to correspond with the expanding business during
fiscal year 1997. In fiscal year 1998, the dollar amount of selling general and
administrative expenses is expected to increase over historical levels as the
Company focuses on marketing, sales and distribution of Video Flyer and
continues to grow.

           Other Income and Expense. Interest income was $90,324 for fiscal year
1997 compared to $180,521 for fiscal year 1996. The decrease in fiscal year 1997
was due to higher cash and cash equivalents available to the Company throughout
fiscal year 1996 due to the Company's public offering in July 1995. Interest
expense was $40,340 for fiscal year 1997 compared to $154 for the same period
last year. The increase in fiscal year 1997 was primarily due to the interest
charges on inventory procured by the Company's third party manufacturer on
behalf of the Company to support required lead times.

           As a result of the above, the net loss for fiscal year 1997 was
$(5,684,690), or $(1.30) per share, compared to the net loss of $(4,878,825), or
$(1.56) per share for fiscal year 1996.

           Net Operating Loss Carryforwards. The Company has net operating loss
carryforwards for financial and federal income tax reporting purposes of
approximately $12,500,000, which can be used to offset taxable income in future
years. Sales of the Company's equity during fiscal year 1997 and 1996 have
caused changes in ownership under Section 382 of the Internal Revenue Code of
1996, which limits the use of the Company's net operating loss carryforwards
existing as of the date of the ownership change. It is not anticipated that any
limitation would have a material adverse effect on the Company.

FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995

           Net Sales. The Company realized total net sales of $1,625,720 during
the year ended June 30, 1996, compared to $229,998 in fiscal year 1995. The
first video conferencing production units were shipped by the Company in
February 1995. Fiscal year 1996 represents the first full year of unit sales
while fiscal year 1995 had only five months of sales.

           Gross Profit (Loss). Gross loss was $(396,980) for fiscal year 1996
compared to a gross profit of $51,336 for fiscal year 1995. The gross loss in
fiscal year 1996 resulted from the termination of a third party manufacturing
agreement with Lucent. As part of the termination agreement, the Company agreed
to purchase from Lucent remaining inventory after Lucent completed its
manufacturing obligations to the Company. As a result, the Company recognized an
impairment charge to value the related inventory at the lower of cost or market
of $382,192.

           Research and Development Expenses. The Company incurred research and
development expenses of $1,540,416 or 94.8% of sales during fiscal year 1996
compared to $1,383,365 or 601.5% of sales in the prior year. The decrease in
expenses relative to sales in fiscal year 1996 resulted from increased sales
volume as discussed above. Actual dollar spending during fiscal year 1996 was
higher than the previous year due to costs associated with the Company
continuing to modify the ERIS System for market acceptability in the United
States and internationally, and development expenditures related to new products
to be released by the Company in fiscal year 1997.

           Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $3,121,796 or 192.0% of net sales for fiscal year
1996 compared to $1,180,365 or 513.2% of net sales for fiscal year 1995. The
percentage decrease was primarily due to the higher sales volume in fiscal year
1996 as discussed above. Actual dollar spending during fiscal year 1996 was
higher than the same period last year primarily due to an increased sales force,
and thus increased salaries and commissions, to correspond with the introduction
of product sales beginning in late 1995 and extending through 1996. General and
administrative salaries and related costs also increased to correspond with the
expanding business during fiscal year 1996.

<PAGE>


           Other Income and Expense. Interest income was $180,521 for fiscal
year 1996 compared to $14 for the previous year. The increase in fiscal year
1996 was due to increased cash and cash equivalents available to the Company
throughout fiscal year 1996 from the Company's public offering in July 1995.
Interest expense was $154 for fiscal year 1996 compared to $5,705 for the same
period last year. The decrease in fiscal year 1996 was primarily due to the
conversion to equity of a convertible note payable which was outstanding for
most of 1995 and for none of 1996.

           As a result of the above, the net loss for fiscal year 1996 was
$(4,878,825), or $(1.56) per share compared to the net loss of $(2,518,085), or
$(1.31) per share for fiscal year 1995.

LIQUIDITY AND CAPITAL RESOURCES

FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996

           Cash and Cash Equivalents. Cash and cash equivalents totaled
$1,152,671 on June 30, 1997, compared to $1,032,921 on June 30, 1996. The
primary reasons for the $119,750 increase in cash and cash equivalents during
fiscal year 1997 was the completion in September 1996 of a private offering of
the Company's Common Stock, netting the Company proceeds of $3,942,892, which
was largely offset by cash used in operating activities, as discussed below.

           Net Cash Used in Operating Activities. The amount of cash used in
operating activities was ($3,728,376) during fiscal year 1997 compared to
($6,037,203) during fiscal year 1996. The cash used in operating activities
resulted mainly from a net loss of $(5,684,690) which was offset by a non-cash
inventory writedown to lower of cost or market of $1,430,428, depreciation and
amortization of $239,867 and non-cash compensation of $100,000.

           Order activity and revenue increased during the fourth quarter of
fiscal year 1997 compared to fiscal year 1996. This growth in the business
resulted in increases in accounts receivable and inventory on June 30, 1997,
compared to fiscal year 1996 (after excluding inventory reserves and writedowns
to lower of cost or market valuation).

           In connection with the Company's overall business growth, increased
order activity and introduction of Video Flyer, accounts payable increased
$887,687 from June 30, 1996, to June 30, 1997.

           Accrued liabilities decreased $364,067 from June 30, 1996, to June
30, 1997, primarily as a result of payment of a $225,590 severance accrual
during fiscal year 1997. Accrued inventory commitments also declined $134,355
from June 30, 1996, to June 30, 1997.

           Net Cash Used in Investing Activities. Cash used in investing
activities decreased $359,413 in fiscal year 1997 due to a reduction in
additions to property and equipment compared to 1996.

           Net Cash Provided by Financing Activities. Cash provided by financing
activities was $3,947,317 in fiscal year 1997, compared to $7,469,229 in fiscal
year 1996. The higher amount of cash generated in fiscal year 1996 was a result
of the Company's initial public offering.

           In July 1997, the Company signed a commercial loan agreement with a
bank for a $1,000,000 discretionary revolving credit facility, and on September
5, 1997, the Company borrowed $300,000 on the line of credit. Under the terms of
the agreement, working capital funds are drawn based on a borrowing base
comprised of a percentage of eligible accounts receivable and inventory.

           The Company believes the remaining funds from the private placement
and funds from the line of credit will be sufficient to cover cash needs.
Management plans to continue to increase sales and improve operating results by

<PAGE>


expanding distribution of its products through an expanded dealer network,
enhanced dealer support services and additional emphasis on larger, national and
OEM accounts. In addition, the Company plans to initiate expanded marketing
efforts in fiscal year 1998. In the event sales do not materialize at the
expected rates, management would conserve cash by reducing administrative
expenses as well as sales, marketing efforts, and research and development
expenses. To the extent that the Company requires cash in excess of the funds
generated by the private placement, its line of credit or future operations,
management would seek additional financing, however no formal arrangements have
been made in this regard and no assurance can be made that any such financing
would be available on favorable terms or at all.

<PAGE>


ITEM 7.    FINANCIAL STATEMENTS.

           The following Consolidated Financial Statement and Independent
           Auditors' Report thereon are included herein.
                                                                            Page
                                                                            ----

           Independent Auditors' Report..................................... 

           Consolidated Balance Sheets as of June 30, 1997 and 1996......... 

           Consolidated Statements of Operations for the years ended
             June 30, 1997, 1996 and 1995................................... 

           Consolidated Statements of Stockholders' Equity for
             the years ended June 30, 1997, 1996 and 1995................... 

           Consolidated Statements of Cash Flows for the years ended
           June 30, 1997, 1996 and 1995..................................... 

           Notes to Consolidated Financial Statements....................... 

<PAGE>


                          INDEPENDENT AUDITORS' REPORT



The Stockholders and Board of Directors
RSI Systems, Inc. and Subsidiary:

We have audited the accompanying consolidated balance sheets of RSI Systems,
Inc. and Subsidiary (the Company) as of June 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended June 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RSI Systems, Inc.
and Subsidiary as of June 30, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 1997, in conformity with generally accepted accounting principles.

                                                       /s/ KPMG Peat Marwick LLP
                                                       -------------------------

Minneapolis, Minnesota
September 12, 1997

<PAGE>


                        RSI SYSTEMS, INC. AND SUBSIDIARY

                           Consolidated Balance Sheets

                             June 30, 1997 and 1996

<TABLE>
<CAPTION>

                                    Assets                                        1997               1996
-------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                    <C>
Current assets:
     Cash and cash equivalents                                              $    1,152,671         1,032,921
     Accounts receivable, net of allowance for doubtful
        accounts of $210,000 in 1997 and $49,000 in 1996                           747,427           524,433
     Inventories (note 4)                                                          544,613         1,744,222
     Prepaid expenses                                                               41,556           184,658
-------------------------------------------------------------------------------------------------------------
               Total current assets                                              2,486,267         3,486,234
-------------------------------------------------------------------------------------------------------------

Property and equipment:
     Furniture and equipment                                                       718,998           619,807
     Leasehold improvements                                                          4,818             4,818
        Less accumulated depreciation                                             (332,589)         (168,282)
-------------------------------------------------------------------------------------------------------------
               Net property and equipment                                          391,227           456,343
-------------------------------------------------------------------------------------------------------------

Other assets                                                                         2,500           316,000
     Less accumulated amortization                                                  (1,979)         (239,919)
-------------------------------------------------------------------------------------------------------------
               Net other assets                                                        521            76,081
-------------------------------------------------------------------------------------------------------------

                                                                            $    2,878,015         4,018,658
=============================================================================================================


                    Liabilities and Stockholders' Equity

-------------------------------------------------------------------------------------------------------------

Current liabilities:
     Accounts payable                                                            1,166,507           278,820
     Accrued expenses (note 8)                                                     363,165           861,586
     Deferred revenue                                                              123,989                 0
-------------------------------------------------------------------------------------------------------------
               Total current liabilities                                         1,653,661         1,140,406
-------------------------------------------------------------------------------------------------------------

Stockholders' equity (note 11):
     Common stock, par value $.01 per share, authorized 10,000,000
        shares; 4,757,265 and 3,251,015 issued and outstanding at
        June 30, 1997 and 1996, respectively                                        47,573            32,510
     Additional paid-in capital                                                 14,358,381        10,214,252
     Foreign currency translation adjustment                                             0            28,400
     Accumulated deficit                                                       (13,081,600)       (7,396,910)
     Unearned compensation--restricted stock                                      (100,000)                0
-------------------------------------------------------------------------------------------------------------
               Total stockholders' equity                                        1,224,354         2,878,252
-------------------------------------------------------------------------------------------------------------

Commitments and contingencies (notes 6 and 9)
-------------------------------------------------------------------------------------------------------------

                                                                            $    2,878,015         4,018,658
=============================================================================================================

</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>


                        RSI SYSTEMS, INC. AND SUBSIDIARY

                      Consolidated Statements of Operations

                    Years ended June 30, 1997, 1996 and 1995

<TABLE>
<CAPTION>

                                                              1997                1996               1995
-------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                    <C>                  <C>    
Net sales                                                $  2,570,851           1,625,720            229,998
Cost of goods sold                                          1,904,216           1,640,508            178,662
Inventory writedown to lower of cost or market (note 4)     1,430,428             382,192                  0
-------------------------------------------------------------------------------------------------------------
            Gross profit (loss)                              (763,793)           (396,980)            51,336

Research and development                                    1,528,493           1,540,416          1,383,365
Selling, general, and administrative                        3,445,301           3,121,796          1,180,365
-------------------------------------------------------------------------------------------------------------
            Operating loss                                 (5,737,587)         (5,059,192)        (2,512,394)

Other income (expense):
     Other income                                               2,913                   0                  0
     Interest income                                           90,324             180,521                 14
     Interest expense                                         (40,340)               (154)            (5,705)
-------------------------------------------------------------------------------------------------------------
            Other income (expense), net                        52,897             180,367             (5,691)
-------------------------------------------------------------------------------------------------------------

            Net loss                                     $ (5,684,690)         (4,878,825)        (2,518,085)
=============================================================================================================

            Net loss per common share                    $      (1.30)              (1.56)             (1.31)
=============================================================================================================

            Weighted average shares outstanding             4,378,326           3,127,189          1,928,098
=============================================================================================================

</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>


                        RSI SYSTEMS, INC. AND SUBSIDIARY

                 Consolidated Statements of Stockholders' Equity

                    Years ended June 30, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                                                   Foreign                    Unearned
                                                   Common stock      Additional   currency                  compensation--
                                                -----------------     paid-in    translation   Accumulated   restricted
                                                Shares     Amount     capital     adjustment     deficit        stock        Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>       <C>          <C>         <C>          <C>            <C>          <C>     
Balances at June 30, 1994                       700,000   $ 7,000      442,600           0      (470,829)           0       (21,229)

Common stock sold to employee/director
     [note 11(a)]                               260,000     2,600      107,900           0             0            0       110,500

Common stock sold to a director 
     [note 11(a)]                                50,000       500       49,500           0             0            0        50,000

Common stock sold to a separate
     corporation [note 11(a)]                    21,112       211       20,901           0             0            0        21,112

Common stock issued to directors                      0         0      151,000           0             0            0       151,000

Common stock issued in private placements
     [note 11(a)]                               721,015     7,210    2,126,340           0             0            0     2,133,550

Common stock warrants issued to 
     employees/directors [note 11(b)]                 0         0      165,000           0             0            0       165,000

Common stock warrant sold to
     employee/director                                0         0          100           0             0            0           100

Conversion of note payable to common stock
     (note 5)                                    88,888       889       99,111           0             0            0       100,000

Reclassification of S-corporation
     accumulated deficit to additional
     paid-in capital                                  0         0     (470,829)          0       470,829            0             0

Foreign currency translation adjustment               0         0            0       2,160             0            0         2,160

Net loss for the year ended June 30, 1995             0         0            0           0    (2,518,085)           0    (2,518,085)
====================================================================================================================================

Balances at June 30, 1995                     1,841,015    18,410    2,691,623       2,160    (2,518,085)           0       194,108

Common stock sold in public offering
     [note 11(a)]                             1,383,750    13,838    7,394,342           0             0            0     7,408,180

Exercises of stock options                       26,250       262       60,737           0             0            0        60,999

Common stock warrants issued to directors             0         0       67,500           0             0            0        67,500

Common stock warrants issued to underwriter           0         0           50           0             0            0            50

Foreign currency translation adjustment               0         0            0      26,240             0            0        26,240

Net loss for the year ended June 30, 1996             0         0            0           0    (4,878,825)           0    (4,878,825)
====================================================================================================================================

Balances at June 30, 1996                     3,251,015    32,510   10,214,252      28,400    (7,396,910)           0     2,878,252

Common stock sold in private placement
     [note 11(a)]                             1,500,000    15,000    3,927,892           0             0            0     3,942,892

Exercise of stock options                         1,250        13        4,362           0             0            0         4,375

Common stock warrant issued to underwriter            0         0           50           0             0            0            50

Shutdown of foreign subsidiary                        0         0            0     (28,400)            0            0       (28,400)

Restricted stock award [note 9(c)]                    0         0      200,000           0             0     (100,000)      100,000

Common stock issued in settlement of claim        5,000        50       11,825           0             0            0        11,875

Net loss for the year ended June 30, 1997             0         0            0           0    (5,684,690)           0    (5,684,690)
------------------------------------------------------------------------------------------------------------------------------------

Balances at June 30, 1997                     4,757,265   $47,573   14,358,381           0   (13,081,600)    (100,000)    1,224,354
====================================================================================================================================

</TABLE>

<PAGE>


                        RSI SYSTEMS, INC. AND SUBSIDIARY

                      Consolidated Statements of Cash Flows

                    Years ended June 30, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                                              1997              1996              1995
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                  <C>               <C>        
Cash flows from operating activities:
     Net loss                                                           $  (5,684,690)       (4,878,825)       (2,518,085)
     Adjustments to reconcile net loss to net cash used in
        operating activities:
            Depreciation and amortization                                     239,867           194,316           191,056
            Inventory writedown to lower of cost or market (note 4)         1,430,428           382,192                 0
            Common stock warrant issued to employees                                0                 0           165,000
            Compensation from restricted stock                                100,000                 0                 0
            Common stock issued in settlement of claim                         11,875                 0                 0
            Foreign currency translation adjustment                           (28,400)           26,240             2,160
            Changes in operating assets and liabilities:
               Accounts receivable                                           (222,994)         (453,075)          (71,358)
               Inventories                                                   (365,173)         (567,918)       (1,222,104)
               Prepaid expenses                                               143,102          (144,741)          (39,367)
               Accounts payable                                               887,687          (917,298)        1,147,490
               Accrued liabilities                                           (364,067)          321,906           199,708
               Deferred revenue                                               123,989                 0                 0
--------------------------------------------------------------------------------------------------------------------------
                      Net cash used in operating activities                (3,728,376)       (6,037,203)       (2,145,500)
--------------------------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
     Additions to furniture and equipment                                     (99,191)         (458,604)         (133,953)
--------------------------------------------------------------------------------------------------------------------------
                      Net cash used in investing activities                   (99,191)         (458,604)         (133,953)
--------------------------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
     Proceeds from issuance of common stock                                 3,947,267         7,469,179         2,315,162
     Proceeds from issuance of warrants                                            50                50               100
--------------------------------------------------------------------------------------------------------------------------
                      Net cash provided by financing
                          activities                                        3,947,317         7,469,229         2,315,262
--------------------------------------------------------------------------------------------------------------------------

                      Increase in cash and cash equivalents                   119,750           973,422            35,809

Cash and cash equivalents at beginning of year                              1,032,921            59,499            23,690
--------------------------------------------------------------------------------------------------------------------------

Cash and cash equivalents at end of year                                $   1,152,671         1,032,921            59,499
==========================================================================================================================

Supplemental disclosure of cash flow information:
     Cash paid during the year for interest                             $      39,970               154             5,716
==========================================================================================================================

</TABLE>

Supplemental schedule of noncash investing and financing activities:

     During fiscal year 1996, warrants to purchase shares of common stock were
        issued in connection with letters of credit obtained by the Company
        which were guaranteed by two stockholders/directors. The estimated value
        of the warrants $(67,500) was capitalized related to this transaction
        [note 9(d)].

     During fiscal year 1995, the Company's note payable was converted into
        88,888 shares of common stock (note 5).

     During fiscal year 1995, warrants to purchase shares of common stock were
        issued in connection with letters of credit obtained by the Company
        which were guaranteed by two stockholders/directors. The estimated value
        of the warrants $(151,000) was capitalized related to this transaction
        [note 9(d)].

     During fiscal year 1995, the Company issued warrants to two
        employees/directors of the Company for the purchase of 33,000 shares
        each of Company common stock. On the date of issuance, the Company
        recorded $165,000 as compensation expense related to these warrants
        [note 11(b)].

See accompanying notes to consolidated financial statements.

<PAGE>


                        RSI SYSTEMS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1997, 1996 and 1995


    (1)   DESCRIPTION OF BUSINESS

          RSI Systems, Inc. and Subsidiary (the Company) designs, develops and
              markets telecommunications products for videoconferencing. The
              Company was incorporated in Minnesota in 1993. Shipments of the
              Company's first product began in February 1995. Prior to that
              time, the Company was considered a development stage enterprise.
              In April 1997, the Company began selling its next generation
              product, Video Flyer.

    (2)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          PRINCIPLES OF CONSOLIDATION

          The consolidated financial statements include the accounts of the
              Company and a wholly owned subsidiary located in the United
              Kingdom, RSI Systems, Limited, which was dissolved on April 11,
              1997. All intercompany accounts and transactions are eliminated in
              consolidation.

          CASH AND CASH EQUIVALENTS

          The Company considers investments in highly-liquid debt securities
              having an initial maturity of three months or less to be cash
              equivalents. Cash equivalents amounted to $1,015,627 and
              $1,005,692 at June 30, 1997 and 1996, respectively.

          INVENTORIES

          Inventories are stated at the lower of cost or market using the
              first-in first-out (FIFO) method.

          PROPERTY AND EQUIPMENT

          Property and equipment are recorded at cost. Depreciation is provided
              using the straight-line method over their estimated useful lives
              which range from two to seven years.

          STOCK-BASED COMPENSATION

          The Company accounts for stock-based compensation under Accounting
              Principles Board Opinion No. 25 (APB No. 25), ACCOUNTING FOR
              STOCKS ISSUED TO EMPLOYEES. Accordingly, no compensation expense
              had been recognized for its stock-based compensation plans. The
              Company has adopted the disclosure requirements under Statement
              of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING AND
              DISCLOSURE OF STOCK-BASED COMPENSATION.

                                                                     (Continued)

<PAGE>


                        RSI SYSTEMS, INC. AND SUBSIDIARY

          WARRANTY ACCRUAL

          The Company's product carries a warranty from a third party custom
              manufacturer of twelve (12) months from the date the Company ships
              to the customer or fifteen (15) months from the date the third
              party manufacturer ships to the Company, whichever comes first.
              [see note 9(d)]. The cost to the Company for this warranty is
              included in the total manufacturing costs charged by the third 
              party custom manufacturer to the Company for each unit produced.
              As a result, the third party manufacturer covers warranty costs
              for defective units.

          REVENUE RECOGNITION

          The Company recognizes revenue from system sales upon shipment. Post
              sale customer support costs are insignificant and are expensed as
              incurred.

          RESEARCH AND DEVELOPMENT COSTS

          Research and development costs are charged to operations when
              incurred.

          INCOME TAXES

          The Company accounts for income taxes in accordance with Statement of
              Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME
              TAXES (FASB No. 109). Under the asset and liability method of FASB
              No. 109, deferred tax assets and liabilities are recognized for
              the future tax consequences attributable to differences between
              the financial statement carrying amount of existing assets and
              liabilities and their respective tax bases. Deferred tax assets
              and liabilities are measured using enacted tax rates expected to
              apply to taxable income in the years in which those temporary
              differences are expected to be recovered or settled. Under FASB
              No. 109, the effect on deferred tax assets and liabilities of a
              change in tax rates is recognized in income in the period that
              includes the enactment date. Deferred tax assets are subject to a
              valuation allowance based on the estimated realization of these
              assets.

          TRANSLATION OF FOREIGN CURRENCIES

          Assets and liabilities of RSI Systems, Limited were translated at the
              rate of exchange in effect on the balance sheet date; income and
              expenses were translated at the average rates of exchange
              prevailing during the period of reporting. The related translation
              adjustments were reflected in the foreign currency translation
              adjustment section of the consolidated balance sheet. Foreign
              currency transaction gains or losses are included in net loss.

          LOSS PER COMMON SHARE

          Loss per common share is determined by dividing the net loss by the
              weighted average number of shares of common stock outstanding.

                                                                     (Continued)

<PAGE>


                        RSI SYSTEMS, INC. AND SUBSIDIARY

          USE OF ESTIMATES

          The preparation of financial statements in conformity with generally
              accepted accounting principles requires management to make
              estimates and assumptions that affect the reported amounts of
              assets and liabilities, disclosure of contingent assets and
              liabilities at the date of financial statements, and the reported
              amounts of revenues and expenses during the reporting period.
              Actual results could differ from these estimates.

    (3)   LIQUIDITY

          In 1997, the Company took steps to increase sales including completion
              of its new computer free Video Flyer product, increasing 
              distribution through an expanded dealer network and sales force,
              and increasing pre-sale dealer support and training services.

          On September 30, 1996, the Company completed a private offering of its
              common stock. The Company received $3,942,892, net of offering
              costs, in exchange for 1,500,000 shares of common stock ($3.00
              per share) (note 11).

          In July 1997, the Company completed a commercial loan agreement with a
              Bank for a $1,000,000 discretionary revolving credit facility
              (note 14). The facility is secured by all corporate assets and
              provides for working capital based on a borrowing base comprised
              of accounts receivable and inventory. The facility contains
              certain covenants and conditions, including minimum net worth and
              debt to tangible net worth levels, and minimum annual interest
              payments.

          Management plans to continue to increase sales and improve operating
              results through expanded distribution of products through an
              expanded dealer network, enhanced dealer support services, and
              increased emphasis on larger national and OEM accounts. In
              addition, the Company plans to initiate expanded marketing efforts
              in fiscal year 1998. The Company believes that funds remaining
              from the private placement, funds generated from operations, and
              funds available under the line of credit will be sufficient to
              cover cash needs. In the event sales do not materialize at the
              expected rates, management would seek additional financing or
              would conserve cash by reducing administrative, product
              development, and sales and marketing expenses.

    (4)   INVENTORIES

          Inventories consisted of the following at June 30:

                                                         1997             1996
             -------------------------------------------------------------------
              
              Components                              $ 374,234          303,615
              Work in process                                 0          952,456
              Finished goods                            170,379          488,151
             -------------------------------------------------------------------
                                                      $ 544,613        1,744,222
             ===================================================================

                                                                     (Continued)

<PAGE>


                        RSI SYSTEMS, INC. AND SUBSIDIARY

          Inventory at June 30, 1997, and 1996 reflects a reduction to lower of
              cost or market valuation. The charges to operations associated
              with these inventory write downs amounted to $1,430,428 and
              $382,192 for fiscal 1997 and 1996, respectively. The 1997 write
              down was associated with excess inventory resulting from the
              Company's decision to transition to its new product, Video Flyer.
              The 1996 inventory write down charges related to the termination
              of a manufacturing agreement with the Company's third party
              manufacturer, and the Company's obligation to purchase remaining
              component inventory. [See note 9(d)].

    (5)   CONVERTIBLE NOTE PAYABLE

          In December 1993, the Company purchased equipment and teleconferencing
              codec (a data compression and decompression hardware and software
              product) from VideoLabs, Inc. (VideoLabs) in exchange for a
              convertible note payable. The 7% convertible note was secured by
              all of the assets purchased. In May 1995, VideoLabs exercised its
              right of conversion under the terms and conditions of the
              convertible note payable. The conversion resulted in VideoLabs
              receiving 88,888 shares of the Company's common stock in exchange
              for the $100,000 note payable.

    (6)   LEASES

          The Company leases office space and various equipment under
              noncancelable operating leases. Future minimum rental payments due
              under noncancelable operating leases are as follows:

                Fiscal year ending June 30:
               -----------------------------------------------------------------

                1998                                                   $ 108,094
                1999                                                      23,321
                2000                                                       5,196
                2001                                                       5,196
                Thereafter                                                 3,897

          Total rental expense was $135,901, $136,680 and $30,561 for the years
              ended June 30, 1997, 1996 and 1995, respectively.

    (7)   RELATED PARTIES

          As discussed in note 5, the Company purchased certain assets from
              VideoLabs. One of the Company's directors is also a director of
              VideoLabs. This same director holds ownership interests in both
              VideoLabs and the Company. The Company has purchased cameras from
              VideoLabs and sold them as optional equipment with the Company's
              Eris System. During the years ended June 30, 1997, 1996 and 1995,
              the Company's purchases from VideoLabs totaled approximately
              $8,972, $57,140 and $25,000, respectively.

                                                                     (Continued)

<PAGE>


                        RSI SYSTEMS, INC. AND SUBSIDIARY

    (8)   ACCRUED EXPENSES

          Accrued expenses consisted of the following at June 30:

                                                           1997           1996
             -------------------------------------------------------------------
              
              Severance [note 9(c)]                     $        0       225,590
              Inventory [note 9(d)]                        247,837       382,192
              Miscellaneous, other                         115,328       253,804
             -------------------------------------------------------------------
                                                        $  363,165       861,586
             ===================================================================

    (9)   COMMITMENTS AND CONTINGENCIES

          (a)    ROYALTY AGREEMENTS

                 During 1996, the Company entered into a royalty agreement with
                    a software development company. The agreement obligated the
                    Company to pay a royalty fee ranging from 25% (1 to 2,000
                    systems sold) to 5% (over 20,000 systems sold) of unit list
                    price depending on the volume of systems sold. The agreement
                    provided for a first year minimum royalty commitment of
                    $100,000. Sales of Eris Systems containing the software per
                    this royalty agreement were anticipated to begin in fiscal
                    year 1997. In fiscal year 1997, the Company terminated the
                    agreement.

                 During 1994, the Company entered into royalty agreements with
                    two vendors who contributed to the design and development of
                    the Company's Eris System. Under one agreement, the Company
                    paid a royalty of approximately $46,000. Under the agreement
                    with the second vendor, the Company is obligated to pay a
                    l-1/2% royalty to the vendor on net sales for up to 5,000 
                    Video Conferencing systems, 1% royalty for the next 5,000
                    systems and 1/2% royalty for the following 5,000 systems.

          (b)    SOFTWARE LICENSE AGREEMENT

                 During 1997, the Company entered into a software license
                    agreement with a software development company. Pursuant to
                    the agreement, in addition to licensing, production,
                    maintenance, and training fees, the Company is to pay a
                    royalty fee of up to $40 per unit for Video Conferencing
                    systems containing the software. Sales of the related 
                    systems began in fiscal year 1997.

                 During 1996, The Company entered into a software license
                    agreement with a separate software development company.
                    Pursuant to the agreement, in addition to licensing and 
                    production fees of $90,000, the Company is to pay a royalty
                    fee of $40 on each of the first 1,000 Video Conferencing
                    Systems sold, $4.75 for the following 9,000 systems, $6.25
                    for the following 90,000 systems and $5.10 for each system
                    sold in excess of 100,000. Sales of the related systems
                    began in fiscal year 1997.

                                                                     (Continued)

<PAGE>


                        RSI SYSTEMS, INC. AND SUBSIDIARY

                 During 1994, the Company entered into a software license
                    agreement with a software development company. Pursuant to
                    the agreement, the Company is to pay a royalty fee of $25 on
                    each of the first 10,000 systems sold, $15 on each system
                    over 10,000 up to 50,000, and $8 on each system sold in
                    excess of 50,000.

          (c)    EMPLOYMENT AGREEMENTS

                 In July 1996, the Company entered into a two-year employment
                    agreement with its President and Chief Executive Officer.
                    Pursuant to the agreement, the officer receives an annual
                    salary of $150,000. The agreement provides for payment to
                    the officer of up to twelve month's salary and benefits in
                    the event of termination without cause or the Company's
                    breach of a material term of the agreement.

                 Also, in connection with the employment agreement, on July 1,
                    1996, the Company granted 25,000 shares of the Company's
                    common stock to its President and Chief Executive Officer.
                    The stock is subject to certain restrictions which lapse at
                    a rate of 6,250 shares every six months from the date of
                    grant. As of June 30, 1997, the stock had not been issued.
                    Total compensation expense recognized in fiscal year 1997
                    related to this stock grant was $100,000.

                 During fiscal year 1995, the Company entered into employment
                    agreements with four officers. During fiscal year 1996,
                    three of these officers either resigned from the Company or
                    their employment was terminated by the Company. Based on
                    either the termination clause of the original employment
                    agreements or a separate termination letter between the
                    officer and the Company, the Company provided for severance
                    payments to these three officers at June 30, 1996. One of
                    the three officers formed a new company in which the Company
                    obtained a 20% ownership position as part of the separation
                    settlement. On September 13, 1996, the fourth officer also
                    resigned from the Company.

          (d)    MANUFACTURING AGREEMENT

                 On August 28, 1996, the Company entered into a new
                    manufacturing agreement with a third party custom
                    manufacturer (New Manufacturer). Pursuant to this agreement,
                    the New Manufacturer agreed to produce the Company's video
                    conferencing products, and warrant that all products will be
                    free from defects in material and workmanship for twelve
                    (12) months from the date the Company ships to the customer
                    or fifteen (15) months from the date the third party
                    manufacturer ships to the Company, whichever comes first.

                                                                     (Continued)

<PAGE>


                        RSI SYSTEMS, INC. AND SUBSIDIARY

                 The agreement may be terminated by either party upon failure of
                    the other party to comply with any material term of the
                    agreement after a 30 day written notice and cure period. In
                    the event of such termination, the Company would be
                    obligated to pay for any goods accepted under the terms of
                    the agreement. The Company may also terminate the agreement
                    upon 30 days written notice. In such case, the Company would
                    be obligated to pay for material and work in progress for
                    products ordered. As of June 30, 1997, the Company had
                    ordered equipment from the New Manufacturer totaling
                    $1,620,000 which had not yet been received and accepted as
                    of June 30, 1997.

                 During 1996 and 1995, the Company's video conferencing systems
                    were manufactured by a separate third party custom
                    manufacturer (the Previous Manufacturer). The Previous
                    Manufacturer provided substantially all parts and
                    manufacturing supplies for the Company's product. On August
                    9, 1996, the Company and the Previous Manufacturer
                    terminated the manufacturing agreement. Pursuant to this
                    termination agreement, the Previous Manufacturer agreed to
                    produce, and the Company agreed to purchase, 690 completed
                    Eris System units. In addition, upon the completion of the
                    690 units, the Company agreed to purchase from the Previous
                    Manufacturer any remaining component inventory. During the
                    year ended June 30, 1996, the Company recognized an
                    impairment charge of $382,192 to value the related inventory
                    at the lower of cost or market (see note 4). On February 7,
                    1997, the Company concluded all business with the Previous
                    Manufacturer.

                 At June 30, 1995, the Company had outstanding, irrevocable bank
                    letters of credit totaling $1,250,000. The letters of credit
                    could be drawn upon through September 1995 by the previous
                    Manufacturer. The letters of credit were guaranteed by two
                    stockholders/directors and collateralized by all corporate
                    assets, as defined in the underlying promissory notes.
                    Warrants to purchase a total of 225,000 shares of common
                    stock at $1.00 to $2.00 per share were issued as
                    consideration for these guarantees. The estimated value of
                    the warrants was capitalized and amortized over the terms of
                    the letters of credit.

                 In May 1996, the Company also obtained irrevocable bank letters
                    of credit totaling $600,000. The letters of credit could be
                    drawn upon through May 1997 by the Previous Manufacturer.
                    The letters of credit were also guaranteed by the same two
                    stockholders/directors and collateralized by assets pledged
                    by the two stockholders/directors. Warrants to purchase a
                    total of 15,000 shares of common stock at $3.00 per share
                    were issued as consideration for these guarantees. The
                    estimated value of the warrants was capitalized and was
                    amortized over the terms of the letters of credit.

          (e)    DISTRIBUTOR, DEALER, AND MANUFACTURER REPRESENTATIVE AGREEMENTS

                 The Company is a party to distributor or dealer agreement with
                    several companies. Each distributor or dealer has minimum
                    purchase obligations. The term of each agreement is one
                    year, renewable for additional one-year periods.
                    Distributors and dealers receive discounts depending upon
                    the number of systems ordered from the Company.

                                                                     (Continued)

<PAGE>


                        RSI SYSTEMS, INC. AND SUBSIDIARY

   (10)   INCOME TAXES

          The Company is a Subchapter C corporation for income tax reporting
              purposes beginning July 1, 1994.

          At June 30, 1997, the Company has approximately $12,500,000 of net
              operating loss carryforwards and $60,000 of tax credit
              carryforwards for federal income tax purposes, which begin to
              expire in 2010. Section 382 of the Internal Revenue Code of 1986
              limits the use of the Company's net operating loss carryforwards
              as of the date of a more than 50% change in ownership. As a result
              the public offering discussed at note 11(a), a Section 382
              ownership change occurred. As a result of prior ownership changes,
              a portion of net operating losses are limited in use in any one
              year. Future ownership changes may further limit the use of the
              net operating losses in any one year.

          The provision for income taxes differs from the expected tax benefit
              computed by applying the federal corporate tax rate for the two
              year period ended June 30, 1997, 1996 and 1995 is as follows:

                                                       1997      1996      1995
                ---------------------------------------------------------------
                 Expected federal benefit               34%        34        34
                 State taxes, net                        6          6         6
                 Change in valuation allowance         (40)       (40)      (40)
                ---------------------------------------------------------------

                        Actual tax benefit               0%         0         0
                ===============================================================

          The tax effect of items which comprise a significant portion of 
              deferred tax assets as of June 30, 1997, 1996 and 1995 is as
              follows:

                                                         1997           1996
                ---------------------------------------------------------------
                
                 Deferred tax assets:
                    Net operating loss carryforwards  $ 5,060,000     2,640,000
                    Other                                 160,000       352,000
                    Valuation allowance                (5,220,000)   (2,992,000)
                ---------------------------------------------------------------

                    Net deferred tax asset            $         0             0
                ===============================================================

          A valuation allowance is provided when there is some likelihood that
              all or a portion of a deferred tax asset may not be recognized.
              The net deferred assets at June 30, 1997 and 1996 are fully
              offset by a valuation allowance. The valuation allowance is
              reviewed annually.

                                                                     (Continued)

<PAGE>


                        RSI SYSTEMS, INC. AND SUBSIDIARY

   (11)   CAPITAL STOCK

          (a)    COMMON STOCK

                 On September 30, 1996, the Company completed a private offering
                    of its common stock. The Company received $3,942,892 net of
                    offering costs, in exchange for 1,500,000 shares of common
                    stock ($3.00 per share). A registration statement for these
                    shares has been declared effective by the Securities and
                    Exchange Commission and the shares are registered and freely
                    tradable as of June 30, 1997.

                 Effective July 25, 1995, the Company offered 1,200,000 shares
                    of common stock for sale to the public through an
                    underwriter at a price of $6.25 per share. Net proceeds to
                    the Company from the public offering, including the
                    underwriters over-allotment option of 183,750 shares, was
                    $7,408,180.

                 During the year ended June 30, 1995, the Company had two
                    private offerings of its common stock. The Company received
                    $520,000 in exchange for 260,000 shares of common stock
                    ($2.00 per share) from the first private offering and
                    $1,613,550 in exchange for 461,015 shares of common stock
                    ($3.50 per share) from the second private offering. The
                    above amounts include shares sold to directors of the
                    Company of 117,500 shares and 80,000 shares, respectively.

                 During the year ended June 30, 1995, the Company received $500
                    from an employee/director of the Company for 100,000 shares
                    of Company common stock. The Company also sold common stock
                    at fair market value to employees and directors and received
                    $160,000 for 210,000 shares of Company common stock ($.50 to
                    $3.50 per share).

                 In August 1994, the Company also sold common stock at fair
                    market value and received $21,112 from a separate
                    corporation for 21,112 shares of Company common stock ($1.00
                    per share).

          (b)    STOCK WARRANTS

                 On September 30, 1996, in connection with the Company's private
                    offering of 1,500,000 shares of its common stock, the
                    Company issued warrants to the placement agent for the
                    purchase of 150,000 shares of common stock. Such warrants
                    have a ten year term and are exercisable at $3.00 per share.

                 In July 1995, in connection with the Company's initial public
                    offering, the Company issued warrants to the underwriter for
                    the purchase of 122,500 shares of Company common stock. Such
                    warrants have a five-year term and are exercisable at $7.50
                    per share.

                                                                     (Continued)

<PAGE>


                        RSI SYSTEMS, INC. AND SUBSIDIARY

                 In May 1995, a director surrendered to the Company, the right
                    to purchase 66,000 shares at $1.00 per share of Company
                    common stock. At the same time, the Company issued warrants
                    to two employees/directors of the Company for the purchase
                    of 33,000 shares each of Company common stock. Such warrants
                    have a five-year term and are exercisable at $1.00 per
                    share. On the date of issuance, the Company recorded
                    $165,000 as compensation expense, representing the
                    difference between the exercise price and the estimated fair
                    market value of the warrants.

                 Additional warrants were issued in conjunction with guarantees
                    on standby letters of credit [see note 9(d)].

          (c)    STOCK OPTIONS

                 The Company has a stock plan which permits the granting of
                    stock options, including incentive stock options as defined
                    under Section 422 of the Internal Revenue Code of 1986,
                    nonqualified stock options and restricted stock. The
                    exercise price for options granted under the stock plan
                    shall be at a price determined at the sole discretion of the
                    compensation committee of the Company's board of directors
                    provided, however, that incentive stock options granted
                    under the plan shall be granted at exercise prices equal to
                    the fair market value on the date of grant (110% for a
                    stockholder holding 10% or more of the outstanding shares of
                    common stock).

                 The Company has reserved 600,000 shares of common stock for
                    issuance under the plan. At June 30, 1997, 39,250 shares
                    remained available for grant. Options issued become
                    exercisable over varying periods as provided in the
                    individual plan agreements and certain options are subject
                    to accelerated vesting based upon individual employment
                    agreements or changes in control of the Company. The
                    exercisable shares at June 30, 1997, and 1996 were 254,666
                    and 49,375 respectively.

                                                                     (Continued)

<PAGE>


                        RSI SYSTEMS, INC. AND SUBSIDIARY

                 A summary of changes in common stock options during the years
                    ended June 30, 1996 and 1997 is as follows:

                                                                      Weighted
                                                                       average
                                                                      exercise
                                                                      price per
                                                         Shares         share
                 ---------------------------------------------------------------

                  Outstanding at June 30, 1995           242,500        $ 3.34

                      Granted                             71,000          8.66
                      Exercised                          (26,250)         2.32
                      Canceled                           (33,750)         2.34
                 ---------------------------------------------------------------

                  Outstanding at June 30, 1996           253,500          5.06

                      Granted                            570,000          2.49
                      Exercised                           (1,250)         3.50
                      Canceled                          (151,500)         4.02
                 ---------------------------------------------------------------

                  Outstanding at June 30, 1997           670,750        $ 3.12
                 ===============================================================

                  Exercisable at June 30, 1997           254,666        $ 3.03
                 ===============================================================

                 Options outstanding at June 30, 1997, have an exercisable price
                    per share ranging between $1.125 and $9.25 and have a
                    weighted average exercisable price of $3.03 and a weighted 
                    average remaining contractual life of 7.0 years.

                 The Company applies APB No. 25 and related interpretations in
                    accounting for its stock option plans. Accordingly, no
                    compensation cost has been recognized in the accompanying
                    statements of operations. Had compensation cost been
                    recognized based on the fair values of options at the grant
                    dates consistent with the provisions of SFAS No. 123, the
                    Company's net loss and net loss per common share would have
                    been increased to the following pro forma amounts:

                                                   Fiscal year ended June 30,
                                                --------------------------------
                                                     1997               1996
                    ------------------------------------------------------------

                    Net loss:
                        As reported              $ (5,684,690)       (4,878,825)
                        Pro forma                  (5,907,444)       (4,919,115)

                    Net loss per common share:

                        As reported                     (1.30)            (1.56)
                        Pro forma                       (1.35)            (1.57)

                                                                     (Continued)

<PAGE>


                        RSI SYSTEMS, INC. AND SUBSIDIARY

                 The fair value of each option grant is estimated on the date of
                    the grant using the Black-Scholes option pricing model with
                    the following weighted average assumptions used for grants
                    in 1996 and 1997, respectively; risk-free interest rates of
                    6.70% and 6.88%, expected option lives of 10.0 years and 5.8
                    years, expected volatility of 8.4% and 65.3%, and expected
                    dividend yield of $0.

                 Because the SFAS No. 123 method of accounting has not been
                    applied to options granted prior to July 1, 1995, the
                    resulting pro forma compensation cost may not be
                    representative of that to be expected in future years.

                 The weighted average fair values of options granted in 1997 and
                    1996 were as follows:

                    Fiscal 1997 grants                        $    .71
                    Fiscal 1996 grants                            3.47

   (12)   DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

          The carrying amount of cash and cash equivalents approximates fair
              value because of the short maturity of those instruments.

   (13)   MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK

          Sales to three unaffiliated customers aggregated approximately 32% of
              net sales in fiscal 1996. In addition, accounts receivable from
              these three unaffiliated customers aggregated approximately 45% of
              total accounts receivable as of June 30, 1996. Historically, the
              Company has not experienced write-offs related to these major
              customers.

   (14)   SUBSEQUENT EVENTS

          LOAN AGREEMENT

          In July 1997, the Company entered into a commercial loan agreement
              with a bank for a $1,000,000 discretionary revolving credit
              facility. The facility is secured by all corporate assets and
              provides for working capital based on a borrowing base comprised
              of accounts receivable and inventory. Interest on outstanding
              borrowings is payable monthly at 4% above the bank's publically
              announced base rate, and the facility requires a minimum annual
              interest payment of $56,000. The facility contains certain
              covenants and conditions, including minimum net worth and debt to
              tangible net worth levels. On September 5, 1997, the Company
              borrowed $300,000 on the line of credit.

<PAGE>


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

           None.


                                    PART III

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

           (a) DIRECTORS AND EXECUTIVE OFFICERS

           Name                     Age      Position with Company
           ----                     ---      ---------------------

           Richard J. Braun         52       Chairman of the Board

           Donald C. Lies           49       Chief Executive Officer, President,
                                             and Director

           Dennis A. Leese          52       Director

           William J. Brummond      46       Director

           Richard F. Craven        54       Director

           Byron G. Shaffer         64       Director

           David W. Stassen         45       Director


           RICHARD J. BRAUN was elected as a director of the Company in June
1995. He is the Chief Executive Officer and a director of MEDTOX Scientific,
Inc., a business specializing in clinical and forensic diagnostic devices and
testing. He has served as a Managing Director of Headwaters Capital Management
LLC, a management investment company, and President of Headwaters Capital
Corporation. From 1992 to 1994, Mr. Braun was Chief Operating Officer and a
director of Employee Benefit Plans, Inc., (an NYSE Company) a provider of
managed care, benefit plans and insurance services, and Chief Executive Officer
of EBP Life Insurance Company. From 1989 to 1991, Mr. Braun was Chief Operating
Officer and a director of Reich and Tang LP. (an NYSE Company). He is also a
director of Enstar, Inc.

           DONALD C. LIES became President, Chief Executive Officer and a
director of the Company on July 1, 1996. Before joining the Company, Mr. Lies
founded CHORUS Marketing Group in May of 1989 and served as its President until
June of 1996. CHORUS specialized in both reengineering of management and
marketing and sales processes for a variety of office and factory automation
systems manufacturers and service providers. From 1987 to 1989, Mr. Lies served
as the Vice President of Marketing and Sales for Com Squared Systems, a computer
software design, manufacturing and reselling company. From 1985 to 1987, Mr.
Lies was director of Scanning Products Marketing for commercial products at
National Computer Systems. Prior to that, Mr. Lies served as General Manager and
Vice President for Norstan, Inc. in its information systems division for five
years. Before joining Norstan, Mr. Lies was in sales for the office systems
group of IBM. Mr. Lies is the brother-in-law of David W. Stassen who is also a
director of the Company.

           DENNIS A. LEESE has served as a director of the Company since
February 1995. Mr. Leese is the Chief Executive Officer and President of DBNS,
Inc., a telecommunication and software company. Mr. Leese served as President of
the Company from February 1994 to June 1996, and he served as Chief Executive
Officer of the Company from August 1994 to June 1996. From October 1991 until
December 1993 Mr. Leese was Senior Vice President of Sales and Marketing at
Augat Communications in Seattle, Washington, a subsidiary of Augat, Inc. and an
equipment supplier to telecommunication and cable television companies. From
April 1990 until October 1991, Mr. Leese was Chief Operating Officer at ALS, a
supplier of software-based training programs on telecommunications technology.

<PAGE>


           WILLIAM J. BRUMMOND has served as a director of the Company since
June 1995. Mr. Brummond served as Chief Financial Officer and Treasurer of the
Company from May 1995 until August 1996. Prior to joining the Company, Mr.
Brummond helped found Medisys, Inc., a public company which sells infusion
therapy products and services, and served as its Chief Executive Officer from
1990 until 1994 and as its Chief Operating Officer from 1987 until 1990. From
October 1994 until May 1995, Mr. Brummond served as President and a consultant
for BDC, Inc., a management consulting company.

           RICHARD F. CRAVEN, a founder of the Company, has served as a director
since its inception in December 1993. Mr. Craven is a private investor and has
been involved as a manager, owner and developer in several real estate ventures.
He has been a licensed real estate broker and a licensed insurance agent since
1965. Mr. Craven is also a director of VideoLabs, Inc.

           BYRON G. SHAFFER has served as a director of the Company since
February 1995. Mr. Shaffer has been a private investor for the last 20 years and
has also served as a director of Mentor Corporation, a medical products
manufacturer, since 1976.

           DAVID W. STASSEN was elected as a director of the Company in June
1995. He has served as President and Chief Executive Officer of Spine-Tech,
Inc., a manufacturer of spinal implants, since June 1992 and as a director since
June 1991. From January 1990 until June 1992, Mr. Stassen served as Executive
Vice President of St. Paul Venture Capital, Inc. He is also a director of Avecor
Cardiovascular, Inc., a medical products company. Mr. Stassen is the
brother-in-law of Donald C. Lies who is the Chief Executive Officer, President
and a director of the Company.

           Pursuant to the terms of the Company's Restated Articles of
Incorporation, the directors are divided into three classes with the term of one
class expiring each year. As the term of each class expires, the successors to
the directors in that class will be elected for a term of three years. The terms
of Messrs. Brummond and Braun expire at the 1997 Annual Meeting of Shareholders,
the term of Messrs. Leese and Craven expire at the 1998 Annual Meeting of
Shareholders and the terms of Messrs. Lies, Shaffer and Stassen expire at the
1999 Annual Meeting of Shareholders. Executive officers are elected by the Board
of Directors and serve until their successors are elected and appointed.

BOARD OF DIRECTORS' COMMITTEES

           The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee, which consists of Messrs. Braun,
Shaffer and Leese, supervises the financial affairs of the Company and
generally reviews the results and scope of the audit and other services provided
by the Company's independent accountants and reports the results of their review
to the full Board and to the Company's management. The Compensation Committee,
which consists of Messrs. Braun, Shaffer and Craven, has general responsibility
for management of compensation matters, including recommendations to the Board
of Directors on compensation arrangements for officers and incentive
compensation for employees of the Company.

           (b) SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

           Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers and all persons who
beneficially own more than 10% of the outstanding shares of the Company's Common
Stock to file with the Securities and Exchange Commission initial reports of
ownership and reports of changes in ownership of the Company's Common Stock.
Executive officers, directors and greater than 10% beneficial owners are also
required to furnish the Company with copies of all Section 16(a) forms they
file. To the Company's knowledge, based upon a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the year ended June 30, 1997, none of the
Company's directors or officers or beneficial owners of greater than 10% of the
Company's Common Stock failed to file on a timely basis the forms required by
Section 16 of the Exchange Act.

ITEM 10. EXECUTIVE COMPENSATION

<PAGE>


EXECUTIVE COMPENSATION

           The following table sets forth the compensation paid or accrued by
the Company for services rendered for the years ended June 30, 1995, 1996 and
1997 to (i) all persons who served as the Chief Executive Officer of the Company
during fiscal year 1997 and (ii) the other most highly compensated executive
officers of the Company whose salary and bonus exceeded $100,000 in fiscal year
1997 (the "Named Executive Officers"). Other than those individuals listed
below, no executive officer of the Company received cash compensation of more
than $100,000 in fiscal year 1997.

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                      LONG-TERM COMPENSATION
                                                                    ---------------------------
                                                                                AWARDS
                                                                                ------
                                                                    RESTRICTED                       ALL OTHER
                                                                    ----------                       ---------
NAME AND PRINCIPAL         FISCAL       ANNUAL COMPENSATION           STOCK          UNDERLYING     COMPENSATION
------------------         ------       -------------------           -----          ----------     ------------
POSITION                    YEAR       SALARY($)      BONUS($)      AWARDS($)        OPTIONS(#)          ($)
--------                   ------      ---------      --------      ---------        ----------          ---
<S>                       <C>         <C>              <C>         <C>               <C>              <C>   
Donald C. Lies             1997        $150,000         $0          $200,000          215,000          $7,800
CHIEF EXECUTIVE OFFICER                                                (1)
 AND PRESIDENT
</TABLE>
-----------------------
(1)      On July 1, 1996, the Company granted Donald C. Lies 25,000 shares of
         restricted common stock vesting in equal increments of 25% of such
         shares at each interval of six months from July 1, 1996, so long as Mr.
         Lies remains employed by the Company. On June 30, 1997, Mr. Lies owned
         18,750 shares of the restricted stock and 6,250 shares of unrestricted
         stock pursuant to the agreement, with an aggregate value of $40,625.
         Based on the June 30, 1997, closing bid price of the Company's Common
         Stock of $1.625 per share.

OPTION GRANTS AND EXERCISES

The tables below set forth information about the stock options held by the
Named Executive Officer and the potential realizable value of the options held
by such person on June 30, 1997. No stock options were exercised by the named
executive officer of the Company during fiscal year 1997.

                       OPTION GRANTS IN LAST FISCAL YEAR
                               INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
                         NUMBER OF
                         ---------
                         SECURITIES          % OF TOTAL
                         ----------          ----------
                         UNDERLYING        OPTIONS GRANTED
                         ----------        ---------------
                     OPTIONS GRANTED(#)      TO EMPLOYEES        EXERCISE       EXPIRATION
                     ------------------      ------------        --------       ----------
      NAME                  (1)           IN FISCAL YEAR 1997   PRICE($/sh)        DATE
      ----                  ---           -------------------   -----------     ----------
<S>                    <C>                      <C>               <C>        <C>
Donald C. Lies          110,000(2)               22.0%             $8.00      June 30, 2006
CHIEF EXECUTIVE           5,000(3)                1.0%             $1.38      February 5, 2007
OFFICER AND             100,000(4)               20.0%             $1.13      April 13, 2002
PRESIDENT
</TABLE>
----------------------------
(1)      During fiscal year 1997, options to acquire an aggregate of 500,000
         shares of Common Stock were granted to all employees and options to
         acquire 70,000 shares of Common Stock were granted to non-employee
         directors.
(2)      110,000 options were granted to Mr. Lies on July 1, 1996. The options
         become vested and exercisable in installments of 27,500 every six
         months commencing six months after the date of the grant.
(3)      5,000 options were granted to Mr. Lies on February 6, 1997. The options
         become vested and exercisable in quarterly installments of 1,250
         commencing three months after the date of the grant.
(4)      100,000 options were granted to Mr. Lies on April 14, 1997, and 75,000
         were vested and exercisable on the date of the grant. The remaining
         25,000 options become vested and exercisable in annual installments of
         8,333 commencing one year after the date of the grant.


       AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
                                  OPTION VALUES
<TABLE>
<CAPTION>
                          SHARES                                                              VALUE OF UNEXERCISED
                          ------                                                              --------------------
                       ACQUIRED ON       VALUE           NUMBER OF UNEXERCISED                IN-THE-MONEY OPTIONS
                       -----------       -----           ---------------------                --------------------
       NAME            EXERCISE (#)   REALIZED ($)    OPTIONS AT JUNE 30, 1997 (#)           AT JUNE 30, 1997 ($)(1)
       ----            ------------   ------------   -----------------------------        -----------------------------
                                                     EXERCISABLE     UNEXERCISABLE        EXERCISABLE     UNEXERCISABLE
                                                     -----------     -------------        -----------     -------------
<S>                        <C>           <C>          <C>              <C>                 <C>              <C>    
Donald C. Lies              0             $0           103,750          111,250             $37,812          $13,438
CHIEF EXECUTIVE
OFFICER AND
PRESIDENT
</TABLE>
----------------------------
(1)      Based on the June 30, 1997, closing bid price of the Company's Common
         Stock of $1.625 per share.

EMPLOYMENT AGREEMENTS

           The Company and Donald C. Lies have entered into an employment
agreement, dated as of July 1, 1996, which provides that Mr. Lies will receive
the following: (i) an annual salary of $150,000; (ii) a grant of 25,000 shares
of restricted Common Stock vesting in equal increments of 25% of such shares at
each interval of six months from the effective date of Mr. Lies employment, so
long as Mr. Lies remains employed by the Company; (iii) a grant of options to
purchase 110,000 shares of Common Stock at $8.00 per share, vesting in equal
increments of 25% of such options at each interval of six months from July 1,
1996, so long as Mr. Lies remains employed by the Company; and (iv) an
automobile allowance of $650 per month. In fiscal year 1997, an arrangement in
which Donald C. Lies was to purchase 110,000 shares of the Company's Common
Stock at $3.00 per share was terminated prior to it's consummation. In addition
to the foregoing,

Mr. Lies is entitled to all other benefits available generally to employees of
the Company, including vacation and health benefits.

COMPENSATION OF DIRECTORS

           The Board of Directors of the Company has established the following
compensation policies for non-employee directors of the Company. Non-employee
directors receive $100 for each meeting attended. Also, under the Company's 1994
Stock Plan, each non-employee director is granted, upon election to the Board,
an option to purchase 10,000 shares of Common Stock, exercisable at fair market
value and vesting in equal increments of 25% every three months and expiring ten
years from the date of grant. After the year of election, each non-employee
director will also receive annually an option to purchase 5,000 shares of Common
Stock. Directors who are employees of the Company receive no additional
compensation for serving as directors.

ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

           The following table sets forth, as of September 26, 1997, the number
of shares of the Company's Common Stock beneficially owned by (i) each director
of the Company; (ii) each of the Named Executive Officers; (iii) each person
known by the Company to beneficially own more than 5% of the outstanding shares
of Common Stock; and (iv) all executive officers and directors as a group.
Unless otherwise indicated, each person has sole voting and dispositive power
over such shares. Shares not outstanding but deemed beneficially owned by virtue
of the right of a person or member of a group to acquire them within 60 days are
treated as outstanding only when determining the amount and percent owned by
such group or person. The address for all directors and officers of the Company
is 7400 Metro Boulevard, Suite 475, Minneapolis, MN, 55439.

                                           NUMBER OF SHARES
NAME                                      BENEFICIALLY OWNED    OWNED PERCENTAGE
----                                      ------------------    ----------------
Richard J. Braun.....................           66,250 (1)             1.4%
Donald C. Lies.......................          147,850 (2)             3.0
Dennis A. Leese......................          299,450 (3)             6.2
William J. Brummond..................           66,750 (4)             1.4
Richard F. Craven....................          841,750 (5)            17.1
Byron G. Shaffer.....................          241,750 (6)             5.0
David W. Stassen.....................           28,750 (7)               *
All Current Executive Officers and           1,692,550 (8)            32.3
Directors as a Group (7 persons).....

----------------------------------------------------------
*        Indicates ownership of less than 1%.

(1)      Includes 53,750 shares which may be acquired within 60 days upon the
         exercise of stock options.

(2)      Includes 133,750 shares which may be acquired within 60 days upon the  
         exercise of stock options.
         
(3)      Includes 36,750 shares which may be acquired within 60 days upon the
         exercise of stock options and warrants.                             
         
(4)      Includes 36,750 shares which may be acquired within 60 days upon the
         exercise of stock options and warrants.

(5)      Includes (i) 155,250 shares which may be acquired within 60 days upon
         the exercise of stock options and warrants and (ii) 15,000 shares owned
         by Mr. Craven's three children.

(6)      Includes (i) 46,250 shares which may be acquired within 60 days upon
         the exercise of stock options and warrants and (ii) 28,000 shares owned
         by Mr. Shaffer's four children.

(7)      Includes 13,750 shares which may be acquired within 60 days upon the
         exercise of stock options.

(8)      Includes 476,250 shares which may be acquired within 60 days upon the
         exercise of stock options and warrants.

<PAGE>


ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

           Mr. Richard Craven, a director of the Company, is a director of
VideoLabs, Inc. ("VideoLabs"), a Minneapolis, Minnesota based manufacturer of
video cameras. Both Mr. Craven and Douglas Clapp, a former officer of the
Company, are beneficial owners of more than 5% of the outstanding shares of
VideoLabs. In December 1993, the Company purchased certain videoconferencing
technology from VideoLabs and issued to VideoLabs a convertible promissory note
in the amount of $100,000. In May 1995, VideoLabs converted its note into 88,888
shares, 25,000 shares of which were sold in July 1995. In addition, the Company
has purchased FlexCam cameras from VideoLabs and sold them as optional equipment
in connection with the sales of video conferencing systems. From inception until
June 30, 1995, the Company's purchases from VideoLabs totaled $22,740. Net
purchases by the Company from VideoLabs were approximately $8,972, and $57,140
during fiscal year 1997 and 1996 respectively. The Company believes its
transactions with VideoLabs have been on terms no less favorable than could have
been obtained from unaffiliated third parties on an arm's length basis.

           Mr. Richard Craven, a director of the Company, is the father-in-law
of the owner/partner of Pointe Design, which is a Minneapolis, Minnesota based
company that designs and prints advertising and other marketing tools. The
Company has used Pointe Design's services to print marketing brochures and other
advertising media. Net purchases by the Company from Pointe Design totaled
$97,500 and $28,661 during fiscal year 1997 and 1996 respectively.

           The Company was required to obtain a letter of credit in the amount
of $1,000,000 in favor of AT&T Corporation in September 1994. Richard F. Craven,
the Company's Chairman of the Board of Directors, pledged certain of his
personal assets to secure his personal guarantee in order to obtain such letter
of credit. In consideration of the personal guarantee, the Company issued Mr.
Craven warrants to purchase 200,000 shares of the Company's Common Stock at
$1.00 per share. The Company believes its transactions with Mr. Craven are on
terms no less favorable than could have been obtained from unaffiliated third
parties on an arm's length basis. The letter of credit has now expired.

           The Company was also required to obtain a letter of credit in the
amount of $250,000 in favor of AT&T Corporation in December 1994. Byron G.
Shaffer, a director of the Company, and his spouse pledged certain of their
personal assets to secure a personal guarantee in order to obtain such letter of
credit. In consideration of the personal guarantee, the Company issued Mr.
Shaffer a warrant to purchase 25,000 shares of the Company's Common Stock at
$2.00 per share. The Company believes its transactions with Mr. Shaffer are on
terms no less favorable than could have been obtained from unaffiliated third
parties on an arm's length basis. The letter of credit has now expired.

           In May 1996, the Company obtained a letter of credit in the amount of
$600,000 in favor of Lucent. Messrs. Craven and Shaffer, directors of the
Company, pledged certain personal assets to secure their personal guarantees of
this letter of credit. In consideration of these directors' guarantees, the
Company issued each of Messrs. Craven and Shaffer a warrant to purchase 7,500
shares of Common Stock with an exercise price equal to the market price of the
Common Stock on the date of the warrant, which was $8.00 per share on May 22,
1996. The warrants expire on May 22, 2000. The terms of the warrants provide
that if, during the one year term of the letter of credit, the Company secures
additional financing pursuant to a private placement or registered secondary
offering of securities, the warrant exercise price would be reduced to the price
at which such securities are offered to investors. In connection with the recent
private placement completed by the Company, on September 30, 1996, the exercise
price of the warrants was reduced to $3.00 per share. The Company believes the
foregoing transactions with Messrs. Craven and Shaffer are on terms no less
favorable than could have been obtained from unaffiliated third parties on an
arm's length basis.

<PAGE>


ITEM 13.   EXHIBITS AND REPORTS ON FORM 8-K

           (a)    EXHIBITS. See Exhibit Index which is incorporated herein
                  by reference. Exhibits that cover management contracts or
                  compensatory plans or arrangements are marked with an
                  asterisk(*) in the Exhibit Index.

           (b)    REPORTS ON FORM 8-K. The Company filed no reports on Form 8-K
                  during the fourth quarter of fiscal year 1997.

<PAGE>


                                   SIGNATURES

           Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Dated: September 26, 1997              RSI SYSTEMS, INC.


                                       By: /s/ Donald C. Lies
                                           -------------------------------------
                                           President and Chief Executive Officer

           Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on September 26, 1997.

                                POWER OF ATTORNEY

           Each person whose signature appears below constitutes and appoints
Donald C. Lies as his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any or all amendments to this Annual
Report on Form 10-KSB and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all said attorney in-fact
and agent, or his substitute or substitutes, may lawfully do or cause to be done
by virtue thereof.

              SIGNATURE                                     TITLE
              ---------                                     -----

/s/ Richard J. Braun                             Chairman of the Board
---------------------------------
Richard J. Braun

/s/ Donald C. Lies                               Director, President, Chief
---------------------------------                Executive Officer
Donald C. Lies                                   

/s/ James D. Hanzlik
---------------------------------                Chief Financial Officer
James D. Hanzlik

/s/ Richard F. Craven                            Director
---------------------------------
Richard F. Craven

/s/ Byron G. Shaffer                             Director
---------------------------------
Byron G. Shaffer

/s/ David W. Stassen                             Director
---------------------------------
David W. Stassen

/s/ William J. Brummond                          Director
---------------------------------
William J. Brummond

/s/ Dennis A. Leese                              Director
---------------------------------
Dennis A. Leese

<PAGE>


                                RSI SYSTEMS, INC.
                                EXHIBIT INDEX TO
                  FORM 10-KSB FOR THE YEAR ENDED JUNE 30, 1997

<TABLE>
<CAPTION>

Exhibit No.                    Title of Document                                Method of Filing
-----------                    -----------------                                ----------------

<S>                 <C>                                         <C> 
3.1                  Articles of Incorporation, as amended       Filed as Exhibit 3.1 to the Form SB-2 Registration
                                                                 Statement of the Company, File No. 33-93240C, (the
                                                                 "SB-2 Registration Statement") and incorporated 
                                                                 herein by reference.

3.2                  Bylaws, as amended                          Filed as Exhibit 3.2 to the SB-2 Registration
                                                                 Statement and incorporated herein by reference.

10.1                 1994 Stock Plan *                           Filed as Exhibit 10.5 to the SB-2 Registration
                                                                 Statement and incorporated herein by reference.

10.2                 Form of Inventions, Confidential            Filed as Exhibit 10.2 to the SB-2 Registration 
                     Information and Non-Competition             Statement and incorporated herein by reference.
                     Agreement 

10.3                 Letter of Credit Agreement, dated           Filed as Exhibit 10.13 to the SB-2 Registration
                     September 19, 1994                          Statement and incorporated herein by reference.

10.4                 Letter of Credit Agreement, dated           Filed as Exhibit 10.14 to the SB-2 Registration
                     December 13, 1994, as amended               Statement and incorporated herein by reference.

10.5                 Link Technology Inc. Source Code Software   Filed as Exhibit 10.15 to the SB-2 Registration
                     License Agreement                           Statement and incorporated herein by reference.

10.6                 Design Royalty Agreement between the        Filed as Exhibit 10.16 to the SB-2 Registration
                     Company and Worrell Design Inc.             Statement and incorporated herein by reference.

10.7                 License Agreement with DSP Software         Filed as Exhibit 10.15 to the Company's 1996 10-KSB
                     Engineering, Inc. dated February 1, 1996    and incorporated herein by reference.

10.8                 Addendum to License Agreement with Link     Filed as Exhibit 10.17 to the Company's 1996 10-KSB
                     Technology, Inc. dated April 29, 1996       and incorporated herein by reference.

10.9                 Employment Agreement between the            Filed as Exhibit 10.20 to the Company's 1996 10-KSB
                     Company and Donald Lies*                    and incorporated herein by reference.

10.10                Manufacturing Agreement with Altron, Inc.   Filed as Exhibit 10.21 to the Company's 1996 10-KSB
                     dated August 28, 1996                       and incorporated herein by reference.

10.11                Selling Agency Agreement with Miller        Filed as Exhibit 10.23 to the Company's 1996 10-KSB
                     Johnson & Kuehn Incorporated dated          and incorporated herein by reference.
                     August 22, 1996

10.12                Shareholder Agreement dated April 30,       Filed as Exhibit 10.24 to the Company's 1996 10-KSB
                     1996                                        and incorporated herein by reference.

10.13                New Employee Inventions, Confidentiality    Filed herewith electronically.
                     and Noncompete Agreement

10.14                Non-Qualified Stock Option Agreement with   Filed herewith electronically.
                     Donald C. Lies

10.15                Restricted Stock Agreement with Donald C.   Filed herewith electronically.
                     Lies

---------------------------
* Denotes an exhibit that covers management contracts or compensatory plans or
  arrangements.

<PAGE>


Exhibit No.                    Title of Document                                Method of Filing
-----------                    -----------------                                ----------------

10.16                Qualified Stock Option Agreement with       Filed herewith electronically.
                     Donald C. Lies

10.17                Termination of Stock Purchase and           Filed herewith electronically.
                     Subscription Agreement

10.18                Norwest Loan Agreement                      Filed herewith electronically.

21.1                 Subsidiary of the Registrant                Filed as Exhibit 21.1 to the Company's 1996 10-KSB
                                                                 and incorporated herein by reference.

23.1                 Consent of KPMG Peat Marwick LLP            Filed herewith electronically.

24.1                 Power of Attorney                           Included in signature page of this Registration
                                                                 Statement and incorporated herein by reference

27.1                 Financial Data Schedule                     Filed herewith electronically.

</TABLE>

           The exhibits referred to in this Exhibit Index will be supplied to a
shareholder at a charge of $.25 per page upon written request directed to
Secretary, RSl Systems, Inc. at the executive offices of the Company.

---------------------------
* Denotes an exhibit that covers management contracts or compensatory plans or
  arrangements.