July 1, 1996

Mr. Donald Lies
9425 Toledo Avenue South
Bloomington, MN 55437

Dear Don:

         This letter will serve to confirm our agreement and understanding
regarding the terms of your employment by RSI Systems, Inc. ("RSI").

         You will be employed by RSI as RSI's President and Chief Executive
Officer. We are offering you employment on the following terms and conditions.

1.       TITLE. RSI hereby employs you, and you hereby accept employment, as the
         President and Chief Executive Officer of RSI. As RSI's Chief Executive
         Officer, you will report to the Chairman of the Company's Board of
         Directors.

2.       DUTIES. You must devote your full time and best efforts to the
         performance of those duties and responsibilities associated with the
         positions of President and Chief Executive Officer in a company of
         RSI's size, as that size may evolve during the term of this agreement,
         and as determined by RSI's Board of Directors.

3.       TERM OF EMPLOYMENT. The term of this Agreement is for a period of two
         years commencing as of July 1, 1996 and ending on June 30, 1998, unless
         sooner terminated in accordance with the terms of this Agreement. If
         your employment continues beyond this original term, it will continue
         "at will" and may be terminated by either you or RSI at any time
         without reason or cause. If RSI elects to so terminate this Agreement,
         neither you nor RSI will thereafter have any further obligations under
         this Agreement.

4.       COMPENSATION AND OTHER BENEFITS. RSI must pay and provide the following
         compensation and other benefits to you:

         4.1.     Base Salary. RSI will pay you a base salary of $12,500 per
                  month, payable in accordance with RSI's normal payroll
                  practices. At the beginning of each fiscal year during your
                  employment, your base salary will be reviewed and you will
                  receive such increases as may be deemed appropriate by the
                  Board of Directors, based upon your performance.

         4.2.     Fringe Benefits. You are entitled to participate in all fringe
                  benefit programs maintained by RSI which are available to its
                  executive officers upon the same terms as all other executive
                  officers except that you will

                  (A)      receive a $650 per month car allowance; and

                  (B)      be entitled, at your option,

                           (1)      to participate in either RSI's health plan;
                                    or

                           (2)      request that RSI pay the premiums for the
                                    health plan your were participating in
                                    immediately prior to July 1, 1996.

         4.3.     Incentive Plan; Stock Option Plan. You are entitled to
                  participate in RSI's management incentive plan and, as a key
                  employee, you are eligible to receive stock option grants
                  under RSI's Stock Plan. Whether and to what extent you are
                  granted any incentive compensation or stock options during the
                  terms of this Agreement is, and will continue to be, subject
                  to the discretion of RSI's Board of Directors.

5.       DEATH; DISABILITY. This Agreement will terminate in the event of your
         death or disability. You will be deemed disabled if, for a period of 90
         consecutive days in any six month period or 120 days in any twelve
         month period, you are unable, by reason of physical or mental illness
         or injury, to fully perform your duties under this Agreement. The
         existence of such a continuous period of disability may only be
         determined by RSI's Board of Directors in its reasonable discretion.

6.       TERMINATION FOR CAUSE; RESIGNATION.

         6.1.     Salary and Benefits. If, prior to the expiration of the term
                  of this Agreement, your employment is terminated for "Cause",
                  or if you resign your employment, you will be paid your base
                  salary through the date of termination. Upon any such
                  termination for Cause or resignation, you will not be entitled
                  to receive any base salary or benefits for any period after
                  the termination date except for the right to receive benefits
                  which have become vested under any plan.

         6.2.     "Cause". For purposes of this Agreement, "Cause" means any of
                  the following:

                  (A)      The failure or neglect by you to materially perform
                           your duties and responsibilities assigned to you from
                           time to time by the Board of Directors or to comply
                           with any material policy or directive of RSI which is
                           in effect from time to time; provided you have
                           received written notice of the same and fail to cure
                           any such deficiency within a period of 30 days after
                           receipt of that notice;

                  (B)      Any gross or willful conduct which is materially
                           harmful to RSI, including but not limited to, conduct
                           which is inconsistent with federal or state laws
                           respecting harassment of, or discrimination against,
                           any of RSI's employees, provided you have received
                           written notice of the same and fail to immediately
                           cease such conduct upon receipt of that notice;

                  (C)      A material breach of your fiduciary responsibilities
                           to RSI, including without limitation embezzlement or
                           misappropriation of RSI funds or property;

                  (D)      Your conviction of, or guilty plea or nolo contendere
                           plea to, a felony or any crime involving fraud or
                           misrepresentation; or

                  (E)      Any act or omission on your part which constitutes a
                           failure to comply with a material provision of this
                           Agreement, provided you have received written notice
                           of the same and fail to cure any such deficiency
                           within a period of 30 days after receipt of that
                           notice.

7.       TERMINATION WITHOUT CAUSE; RESIGNATION DUE TO BREACH OF AGREEMENT.

         7.1.     Events. RSI may terminate this Agreement, at any time without
                  Cause, upon 30 days written notice to you, and you may
                  terminate this Agreement if RSI breaches any material term of
                  this Agreement and does not cure the same within 30 days after
                  receipt of written notice from you. If RSI should
                  substantially reduce your salary (other than as part of any
                  overall plan which is applicable to you to the same extent as
                  to other senior executives of RSI), or require you to relocate
                  outside the Minneapolis metropolitan area, any such action
                  will be considered a material breach of this Agreement for
                  purposes of the preceding sentence.

         7.2.     Salary and Benefits. If, prior to the expiration of the term
                  of this Agreement, either RSI or you terminate your employment
                  under the provisions of Section 7.1, you will be entitled to
                  receive, and RSI must continue to pay you, in accordance with
                  its normal payroll practices, your base salary for the lesser
                  of (i) a period of 12 months or (ii) the remaining term of
                  this Agreement and, during such lesser period, must continue
                  to pay that portion of the monthly premium previously paid by
                  RSI for health, life, and any other insurance previously
                  provided for your benefit by RSI.

8.       CONFIDENTIAL INFORMATION.

         8.1.     Non-Disclosure. You agree not to directly or indirectly use or
                  disclose "Confidential Information" for the benefit of anyone
                  other than RSI, either during or after your employment by RSI.
                  In this regard, you must not directly or indirectly render
                  services to any person or business organization in connection
                  with the design, development, manufacturing, marketing or sale
                  of any product where your service would involve the use or
                  disclosure of Confidential Information. You must not disregard
                  your obligations of confidence by using any trade secret or
                  other Confidential Information to guide you in a search of
                  publications or other publicly available information,
                  selecting a series of items of knowledge from unconnected
                  sources and fitting them together to claim that you did not
                  violate any undertakings set forth in this Agreement.

         8.2.     "Confidential" Information. "Confidential Information" means
                  information not generally known, including trade secrets,
                  about RSI's methods, processes, and products, including but
                  not limited to, information relating to such matters as
                  computer software and hardware technology, research and
                  development, manufacturing methods, processes, techniques,
                  chemical composition of materials, applications for particular
                  technologies, materials or designs, vendor names, customer
                  lists, management systems, and sales and marketing plans. All
                  information disclosed to you or to which you have access
                  during your employment which you have a reasonable basis to
                  believe is Confidential Information or which is treated by RSI
                  as Confidential Information, will be presumed to be
                  Confidential Information.

9.       INVENTIONS AND COPYRIGHTS.

         9.1.     Ownership. You agree that all Inventions made during your
                  employment by RSI are the exclusive property of RSI unless
                  released to you in writing by the President of RSI.
                  "Invention" means any invention, discovery, improvement,
                  concept or idea, whether patentable or not (including those
                  which may be subject to copyright protection), including but
                  not limited to computer software and hardware technology,
                  machines, devices, processes, methods, techniques and
                  formulae, generated, conceived or reduced to practice by you
                  alone or in conjunction with others, during or after working
                  hours, while employed by RSI.

         9.2.     Assistance. You further agree that you will:

                  (A)      Promptly and fully disclose and describe all
                           Inventions in writing to an officer of, or anyone
                           else designated by, RSI; such disclosure must
                           include, if requested, a detailed report of the
                           procedures employed and the results achieved by you;
                           and

                  (B)      Give RSI all assistance it requires to perfect,
                           protect and use its worldwide rights to Inventions,
                           including, but not limited to, signing all documents,
                           doing all things and supplying all information that
                           RSI may deem necessary or desirable to: (i) transfer
                           or record the transfer of your entire right, title
                           and interest in Inventions to RSI, and (ii) enable
                           RSI to obtain and maintain patent, copyright or
                           trademark protection for Inventions anywhere in the
                           world.

         9.3.     Post Employment. The obligations of this paragraph will
                  continue beyond the termination of your employment with
                  respect to Inventions conceived or made by you during the
                  period of your employment.

         9.4.     Exclusions. Section 9.1 does not apply to any invention for
                  which no equipment, supplies, facility or trade secret
                  information of RSI was used and which was developed entirely
                  on your own time, and (1) which does not relate (a) directly
                  to the business of RSI, or (b) to RSI's actual or demonstrably
                  anticipated research or development; or (2) which does not
                  result from any work performed by you for RSI.

10.      RESTRICTIONS ON EMPLOYMENT.

         10.1.    Non-Competition. You agree that during your employment by RSI
                  and for a period two years immediately following the
                  termination of such employment, you will not directly or
                  indirectly render services (including consulting or research)
                  to any person or business organization that is engaged in the
                  design, development, assembly, manufacture, marketing or sale
                  of a Competitive Product. However, you may work for a
                  competitor of RSI whose business is diversified (and which has
                  separate and distinct divisions) provided (i) that such
                  employment does not include any responsibilities for, or in
                  connection with, a Competitive Product for the two-year period
                  of this restriction, (ii) that such employment will not at any
                  time involve the use or disclosure of Confidential
                  Information, and (iii) that RSI receives written assurances
                  satisfactory to it from such competitor and you that your
                  employment will not violate the two conditions described in
                  this sentence and that such competitor has received a copy of
                  this Agreement.

         10.2.    Non-Solicitation. In addition to observing the restrictions
                  contained in Section 10.1, if you are or have been employed by
                  RSI in a primarily sales or marketing capacity, you must not,
                  for a period of two years after the termination of your
                  employment, render services, directly or indirectly, to any
                  person or business organization in connection with the sale,
                  marketing, or promotion of any Competitive Product to any
                  person or business organization which was a customer on whom
                  you called or whose account you supervised on behalf of RSI,
                  at any time during the last 12 months of your employment by
                  RSI.

         10.3.    Loyalty. You further agrees that during your employment with
                  RSI you will not plan, organize or engage in any business
                  involving the design, development, manufacture, marketing or
                  sale of any Competitive Product or conspire with others to do
                  so.

         10.4.    Other Employees. You also agree that during your employment
                  and for two years thereafter, you will not solicit or employ
                  any RSI employee, either directly or indirectly, for
                  employment by any person or business organization to engage in
                  any activity prohibited by any agreement between such employee
                  and RSI.

         10.5.    Competitive Product. "Competitive Product" means any product,
                  process or service (including any component thereof or
                  research to develop information useful in connection with a
                  product or service) that is being designed, developed,
                  assembled, manufactured, marketed or sold by anyone other than
                  RSI and which is of the same general type, performs similar
                  functions, competes with or is used for the same purposes as a
                  RSI Product.

         10.6.    Insolvency. In the event that RSI ceases to conduct its
                  business for a period of more than 180 days, makes an
                  assignment for the benefit of its creditors, or in the event
                  of the bankruptcy (either voluntary or involuntary) of RSI,
                  then you may, upon ten days prior written notice to RSI,
                  terminate your employment with RSI and the provisions of this
                  Section 10 will be of no force or effect with respect to you.

         10.7.    Special Circumstance. If RSI does not pay you the base salary
                  described in Section 7.2 when you are entitled to receive such
                  payments, you will not be bound by the provisions of Sections
                  10.1 and 10.2 of this Agreement. If you violate the provisions
                  of Section 8, 9, or 10 of this Agreement, RSI will not
                  thereafter be required to make any further payments to you
                  under Section 7.2 and you must repay to RSI all such payments
                  previously received by you.

11. REMEDIES. RSI and you acknowledge that RSI will suffer irreparable harm if
you breach any of the provisions of Sections 9 or 10, of this Agreement, either
during or after its term. Accordingly, RSI will be entitled to enforce the
covenants contained in those sections by an injunction enjoining or restraining
you, and any other person concerned, from any such violation, it being
understood that both damages and an injunction will be proper modes of relief
and are not to be considered as alternative remedies.

12. SURVIVAL OBLIGATIONS. The obligations of the parties under Sections 9, 10,
11, 12, 13, 14 and 15 and under any other section which by its terms is intended
to continue in effect after the termination of this Agreement will survive the
termination, for any reason, of this Agreement or your employment hereunder and
will remain in full force and effect.

13. NOTICES. All notices and other communications under this Agreement must be
in writing and will be deemed given if personally delivered by hand or mailed by
registered or certified mail, return receipt requested, postage prepaid, to the
party entitled or required to receive the same, as follows:

         13.1.    If to RSI, to the attention of the Chairman of RSI's Board of
                  Directors, at its principal business office.

         13.2.    If to Donald Lies, at his residence address as it then appears
                  on the records of RSI.

or at such other address as either party may designate to the opposite party by
notice similarly given. Notice will be deemed to have been given upon receipt
thereof in the case of delivery by hand and upon the date of receipt indicated
on the return receipt in the case of mail.

14. ARBITRATION. All disputes or claims arising out of or in any way related to
this Agreement, or the breach thereof, including the making of this Agreement,
must be submitted to and determined by final and binding arbitration under the
Rules of the American Arbitration Association. Arbitration proceedings may be
initiated by either of us upon notice to the other and to the American
Arbitration Association, and must be conducted by three arbitrators under the
Rules of the American Arbitration Association in Minneapolis, Minnesota, unless
we agree to have the arbitration proceedings conducted by a single arbitrator.
If we are unable to agree upon the person or persons to serve as arbitrators
within 30 days of delivery of the list of proposed arbitrators by the American
Arbitration Association, then, at the request of either of us, the three
arbitrators must be selected at the discretion of the American Arbitration
Association.

15. GENERAL. This Agreement represents the entire agreement between us and
supersedes all previous communications, representations, understandings and
agreements, either oral or written, between us with respect to your employment
by RSI. No modifications of this Agreement or waiver of its terms will be
binding upon either of us unless in writing, signed by both of us. This
Agreement will enure to the benefit of, be binding upon, and be enforceable
against us, our respective heirs, legal representatives, successors and assigns.
This Agreement must be governed and construed under the substantive laws of the
State of Minnesota, without regard to the laws or rules of any jurisdiction with
respect to conflict of laws. The waiver or failure of either of us to enforce
the terms of this Agreement in one instance will not constitute a waiver of that
party's rights under this Agreement with respect to other violations. If any
portion of this Agreement is held invalid by the final judgment of any court of
competent jurisdiction, the remaining provisions will remain in full force and
effect as if such invalid provision had not been included in this Agreement.

         If this letter accurately sets forth our agreement and understanding
with respect to the terms of your employment by RSI, will you please so indicate
by executing two copies of this letter in the space provided below for that
purpose and returning one copy to me for our files.

                                      Sincerely,

                                      RSI SYSTEMS, INC.



                                      By /s/ R.J. Braun
                                      Richard J. Braun, Chairman of the Board



                                      /s/ Donald Lies
                                      Donald Lies